SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange of 1934
Filed by Registrant [ X ]
Filed by Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec.240.14a-11(c) or 240.14a-12 [ ]
Confidential, for Use of the Commission Only (as permitted by Rule 14-6(e)(2)
CERBCO, INC.
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock and Class B Common Stock
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction compute
pursuant to Exchange Act Rule 0-11 (Set forth the amount
on which the filing fee is calculated and state how it was
determined):
Cash Consideration to be received
4) Proposed maximum aggregate value of transaction: $22,000,000.00
5) Total fee paid: $ 4,400.00
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing by registration for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date of
its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
FRIDAY, JUNE 20, 1997
To the Stockholders of CERBCO, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
CERBCO, Inc., a Delaware corporation (the "Company"), will be held at the
Holiday Inn, US Air Arena, 9100 Basil Court, Landover, Maryland, on Friday, June
20, 1997 at 10:00 a.m. (the "Meeting").
At the Meeting, you will be asked to consider and to vote, in person or
by proxy, for or against the sale by the Company of its two-thirds stake in
Capitol Office Solutions, Inc. ("COS") held by the Company's wholly-owned
subsidiary CERBERONICS, Inc. ("Cerberonics"), for the consideration of a sales
price of $19 million and two-thirds of an approximately $5 million pre-sale
distribution of excess cash from COS (the "Transaction").
The Board of Directors has fixed the close of business on April 21,
1997, as the record date for determining stockholders entitled to notice of, and
to vote at, the Meeting.
The accompanying Proxy Statement provides detailed information
concerning the Transaction and certain additional information. You are urged to
read and carefully consider this information.
THE BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS FAIR TO AND IN THE BEST
INTEREST OF THE COMPANY. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE TRANSACTION.
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 and Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996 accompany this Notice.
WHETHER OR NOT YOU EXPECT TO BE PRESENT IN PERSON AT THE MEETING, PLEASE SIGN,
DATE AND PROMPTLY MAIL THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED. NO POSTAGE
IS REQUIRED IF MAILED IN THE UNITED STATES. A PROMPT RESPONSE WILL ASSURE YOUR
VOTE AND REDUCE THE COMPANY'S EXPENSE IN SOLICITING PROXIES. IF YOU ARE PRESENT
AT THE MEETING, YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE YOUR SHARES
PERSONALLY.
By Order of the Board of Directors,
/s/ Robert F. Hartman
Secretary
Landover, Maryland
April 24, 1997
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CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
Special Meeting of Stockholders
Friday, June 20, 1997
PROXY STATEMENT
SOLICITATION AND REVOCABILITY OF PROXIES
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of CERBCO, Inc., a Delaware corporation
("CERBCO" or the "Company"), for use at the Special Meeting of Stockholders to
be held at the Holiday Inn, US Air Arena, 9100 Basil Court, Landover, Maryland,
on Friday, June 20, 1997 at 10:00 a.m., and at any adjournments thereof (the
"Meeting").
At the Meeting, you will be asked to consider and to vote, in person or
by proxy, for or against the sale by the Company of its two-thirds stake in
Capitol Office Solutions, Inc. ("COS") held by the Company's wholly-owned
subsidiary CERBERONICS, Inc. ("Cerberonics"), for the consideration of a sales
price of $19 million and two-thirds of an approximately $5 million pre-sale
distribution of excess cash from COS (the "Transaction").
The Board of Directors (the "Board") has fixed the close of business on
April 21, 1997, as the record date (the "Record Date") for the determination of
stockholders who are entitled to notice of, and to vote at, the Meeting.
Stockholders are requested to complete, sign and date the accompanying
proxy and return it promptly to the Company in the enclosed envelope. If the
enclosed proxy is executed and returned, it may be revoked at any time before it
is voted at the Meeting by a written notice of revocation to the Secretary of
the Company, or by executing a proxy bearing a later date, or by voting in
person at the Meeting.
Shares of Common Stock and shares of Class B Common Stock represented
by valid proxies received in time for the Meeting, and not revoked, will be
voted as specified therein. If no instructions are given, the respective shares
of common stock will be voted FOR the Transaction; and, if authority is given to
them, at the discretion of the proxy holders, on any other matters that may
properly come before the Meeting.
The cost of solicitation will be borne by the Company. Additional
solicitations may be made by mail, telephone, telegraph, personal contact or
other means by the Company or by its directors or regular employees. The Company
may make arrangements with brokerage houses and other custodians, nominees and
fiduciaries to send proxies and proxy statements to the beneficial owners of
shares of the Company's common stock and to reimburse them for their reasonable
expenses in so doing.
This Proxy Statement and form of proxy and the accompanying Notice of
Special Meeting, Form 10-K and Form 10-Q are first being mailed to the Company's
stockholders of record on or about April 24, 1997.
OUTSTANDING SHARES AND VOTING RIGHTS
Each share of Common Stock is entitled to one vote, and each share of
Class B Common Stock is entitled to ten votes, except with respect to any matter
requiring the vote of Common Stock or Class B Common Stock voting separately as
a class. As of the Record Date, there were outstanding ---------- shares of
Common Stock, $.10 par value (the "Common Stock") and ---------- shares of Class
B Common Stock, $.10 par value (the "Class B Common Stock"), which are the only
classes of stock of the Company outstanding. A quorum shall be constituted by
the presence at the Meeting, in person or by proxy, of one-third (1/3) of the
stock and issued and outstanding and entitled to vote.
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Your vote is very important, as approval of the Transaction is
conditioned upon the affirmative vote of a majority of the votes cast by
stockholders other than the Company's controlling stockholders (the "Non-Erikson
Stockholders"). The controlling stockholders of the Company are Robert W.
Erikson and George Wm. Erikson. As of the Record Date, the Non-Erikson
Stockholders held ----------- shares of outstanding Common Stock, entitling them
to cast ----------- votes, and ----------- shares of outstanding Class B Common
Stock, entitling them to cast ----------- votes, for a total of -----------
votes eligible to be cast by the Non-Erikson Stockholders.
Approval of the Transaction for purposes of Section 271 of the Delaware
Corporation ("Section 271") Law requires a favorable vote of a majority of votes
entitled to be cast by all the stockholders of the Company. As of the Record
Date, the Eriksons held 117,302 shares of Common Stock and 247,564 shares of
Class B Common Stock, entitling them to cast 2,592,942 votes with respect to the
Transaction, bringing to ----------- the total number of votes entitled to be
cast by all stockholders with respect to the Transaction. Therefore, at least
- ----------- affirmative votes are required to approve the Transaction for
purposes of Section 271. Provided that a majority of the votes cast by the
Non-Erikson Stockholders are cast in favor of the Transaction, the Eriksons have
agreed pursuant to the terms of the Transaction to vote substantially all (at
least 2,568,486 votes) of their shares in favor of the Transaction. As a
consequence, the affirmative vote of a majority of the votes cast by the
Non-Erikson Stockholders will result in at least 2,568,487 votes being cast in
favor of the Transaction, an amount in excess of the number of votes required by
Section 271 for approval.
Since the Transaction is conditioned on a majority of votes cast by
Non-Erikson Stockholders, votes withheld by Non-Erikson Stockholders, including
abstentions and broker non-votes, will not be counted as either votes for or
against the Transaction. However, for purposes of Section 271, which requires a
favorable vote of a majority of votes entitled to be cast by all the
stockholders of the Company, votes withheld by Non-Erikson Stockholders,
including abstentions and broker non-votes, will be counted as votes against the
Transaction.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith,
files periodic reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information concerning the
Company may be inspected and copied at the public reference facilities of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC
20549. Copies of such material also can be obtained by mail from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, DC 20549, at prescribed rates. The Company's Common
Stock is listed on the NASDAQ National Market. Reports and other information
concerning the Company can be inspected at the offices of the NASDAQ Stock
Market, Inc. 1735 K Street, NW, Washington, DC 20006-1506. The Commission also
maintains a world wide web site that contains reports, proxy and information
statements and other information regarding the Company.
The world wide web site address is http://www.sec.gov.
ABSENCE OF DISSENTERS' APPRAISAL RIGHTS
Under Delaware law, the Company's stockholders are not entitled to
dissenters' rights of appraisal with respect to the Transaction.
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TABLE OF CONTENTS
SOLICITATION AND REVOCABILITY OF PROXIES............................. 1
OUTSTANDING SHARES AND VOTING RIGHTS................................. 1
AVAILABLE INFORMATION................................................ 2
ABSENCE OF DISSENTERS' APPRAISAL RIGHTS.............................. 2
TABLE OF CONTENTS.................................................... 3
PROPOSAL - THE TRANSACTION........................................... 4
Summary.............................................................. 4
The Transaction...................................................... 7
General..................................................... 7
Background and Reasons for the Transaction.................. 7
Certain Material Negotiations............................... 8
Fairness Opinion ........................................... 11
Recommendation of the Board of Directors.................... 14
Principal Terms of the Transaction.......................... 14
Recapitalization. ................................. 14
Financing. ........................................ 14
Redemption. ....................................... 14
Investment. ....................................... 15
Stock Purchase. .................................. 15
Escrow Arrangements................................ 15
Redemption Price and Stock Purchase Price Adjustments 15
Representations and Warranties..................... 16
Covenants of the Parties........................... 17
Conditions to Closing.............................. 17
Indemnification.................................... 18
Break-Up Fees...................................... 18
Related Agreements................................. 18
Erikson Consulting and Non-Competition Agreement 18
Erikson Voting Agreement.................. 19
Manoogian Executive Agreement............. 19
Other Related Agreements.................. 20
Interests of Certain Persons in the Transaction............. 20
Federal Income Tax Consequences............................. 20
Regulatory Requirements..................................... 20
Accounting Treatment........................................ 20
USE OF PROCEEDS...................................................... 20
SELECTED FINANCIAL DATA.............................................. 21
PRO FORMA FINANCIAL INFORMATION...................................... 22
SECURITY OWNERSHIP................................................... 27
INDEPENDENT PUBLIC ACCOUNTANTS....................................... 28
STOCK PRICE.......................................................... 28
Common Stock................................................ 28
Class B Common Stock........................................ 29
Holders..................................................... 29
Dividends................................................... 29
OTHER MATTERS........................................................ 29
INCORPORATION BY REFERENCE........................................... 29
STOCKHOLDER PROPOSALS................................................ 30
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PROPOSAL - THE TRANSACTION
SUMMARY
The following is a summary of certain information relating to the
Transaction. This summary is not intended to be a complete description of these
matters and is subject to and qualified in its entirety by reference to the more
detailed information regarding the Transaction described in this Proxy Statement
and contained in the Investment, Redemption and Stock Purchase Agreement dated
March 7, 1997, and certain other agreements dated as of the same date or to be
entered into in connection with the Transaction, including the Escrow Agreement,
the Erikson Voting Agreement, the Erikson Consulting and Non-Compete Agreement
and the Manoogian Executive Agreement, copies of which are included as Exhibits
A, B, C, D, and E, respectively, to this Proxy Statement. Subject to stockholder
approval and certain other conditions, the Transaction is expected to close (the
"Closing") on or before June 30, 1997.
The Company's principal executive offices are located at 3421 Pennsy
Drive, Landover, Maryland 20785, and the Company's phone number at such offices
is (301) 773-1784. The Company's stockholders are urged to read and carefully
consider the entire Proxy Statement.
The Company has entered into a definitive Investment, Redemption and
Stock Purchase Agreement dated March 7, 1997 (the "Redemption Agreement")
pursuant to which COS will redeem the Company's entire two-thirds stake in COS
held by the Company's wholly-owned subsidiary, CERBERONICS, Inc.
("Cerberonics"), for approximately $19 million. COS is a provider of copier and
fax equipment, service and supplies in the Washington, D.C. and Baltimore,
Maryland metropolitan areas. Under the Redemption Agreement, the Company,
through Cerberonics, will also receive a two-thirds share of an approximately $5
million pre-redemption distribution of excess cash from COS. The approximately
$22 million to be received by Cerberonics for the redemption and the
pre-redemption distribution will be subject to adjustment based upon audited
financial statements at the time of Closing. After Closing, the Company intends
to declare and distribute promptly a dividend of $1.50 per share to the holders
of Common Stock and Class B Common Stock as of a record date proximate to
Closing.
The Company's controlling interest in Insituform East, Incorporated,
its other principal operating subsidiary which provides excavationless sewer and
pipeline rehabilitation services and which is also held through Cerberonics,
will not be affected by the Transaction.
Other parties to the Redemption Agreement include Armen A. Manoogian,
President, a director and one-third owner of COS ("Mr. Manoogian"), and Golder,
Thoma, Cressey, Rauner Fund IV ("GTCR") of Chicago, Illinois. GTCR is the
controlling stockholder of Global Imaging Systems, Inc. of Tampa, Florida, a
consolidator of copier dealerships ("Global"). The Redemption Agreement provides
that GTCR and certain other investors to be named at Closing (the "Investors")
will acquire from Mr. Manoogian a portion (5/8s) of his current one-third
interest in COS for approximately $5 million and that Mr. Manoogian will
participate ratably in the $5 million pre-redemption distribution by COS.
Pursuant to the Redemption Agreement, the Investors are to acquire newly issued
COS common stock in consideration of a $1 million investment, and GTCR is to
arrange the additional estimated $24 million financing that COS will need to
fund the redemption of COS stock held by Cerberonics and purchase of COS stock
from Mr. Manoogian. After such redemption and stock purchase, the Investors will
have a two-thirds interest and Mr. Manoogian will have a one-third interest in
the recapitalized and newly leveraged COS.
For the Transaction, the parties assigned a value of $27 million to
COS, excluding the approximately $5 million pre-redemption distribution. The
Company's $19 million share of the total $27 million value is comprised of
two-thirds of the total valuation ($18 million), plus a $1 million control
premium in light of the Company's controlling interest in COS. Consequently, Mr.
Manoogian's minority interest is being valued at
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$8 million, exclusive of his one-third interest in the $5 million pre-redemption
distribution. The Investors are to acquire 5/8 of that interest for $5 million.
The Redemption Agreement provides that COS and each of the Eriksons
will enter into a three year consulting and non-competition agreement pursuant
to which the Eriksons are to serve as advisors and consultants to COS after the
Transaction. The Eriksons are each to receive $150,000 for the non-competition
agreement and $50,000 for consulting services promptly after Closing, and
$50,000 on each of the first and second anniversaries thereof, if available and
able to perform the consulting services. Similarly, the Redemption Agreement
provides that COS and Mr. Manoogian will enter into an Executive Agreement
pursuant to which Mr. Manoogian will serve as the President of COS after
Closing, at an initial annual base salary of $200,000 (subject to periodic
increase at the discretion of the COS Board), with the potential for earning an
annual bonus of up to one-half of his annual base salary beginning in the fiscal
year ending June 30, 1998.
The Transaction is conditioned, among other things, upon the Company's
receipt from an investment banker of an opinion stating that the consideration
to be received for the sale of the Company's two-thirds stake in COS is fair to
the Company from a financial point of view. As a consequence, the Company
retained Merrill Lynch Business Advisory Services ("MLBAS"), a division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, to render an opinion as to
the fairness to the Company, from a financial point of view, of the
consideration to be received by Cerberonics pursuant to the Redemption
Agreement. At a meeting of the Board held on April 3, 1997, MLBAS delivered its
oral opinion to the Board to the effect that the proposed consideration to be
received by Cerberonics pursuant to the Redemption Agreement was fair to the
Company from a financial point of view and subsequently confirmed such opinion
by delivery of its written opinion dated as of April 4, 1997. The full text of
MLBAS's opinion dated as of April 4, 1997, which sets forth, among other things,
assumptions made, procedures followed, matters considered and limitations on the
scope of review undertaken is attached as Exhibit F to this Proxy Statement and
is incorporated herein by reference. The Company's stockholders are urged to
read the MLBAS opinion in its entirety.
The Transaction is also conditioned upon the separate approval by a
majority of the votes cast by the Eriksons, and by a majority of the votes cast
by the Non-Erikson Stockholders. In connection therewith, the Eriksons have
entered into a voting agreement pursuant to which each of them agrees to vote
substantially all of the shares of the Company's Common Stock and Class B Common
Stock held by each of them in favor of the Transaction, provided a majority of
the votes cast by the Non-Erikson Stockholders are voted in favor of the
Transaction. As of the Record Date, the Non-Erikson Stockholders held shares of
outstanding Common Stock, entitling them to cast votes, and shares of
outstanding Class B Common Stock, entitling them to cast votes, for a total of
votes eligible to be cast by the Non-Erikson Stockholders.
The Company acquired its two-thirds stake in COS in 1987 for an
investment of $500,000. The Company also loaned COS $2.75 million, which loan
was subsequently repaid by COS with interest. Though COS struggled early on, in
recent years COS has performed well, contributing on average in excess of 20%
pre-tax earnings on revenues during the last three years.
In recent years, there has been an accelerated consolidation of copier
dealers nationwide, principally by IKON Office Solutions, Inc. ("Ikon") and
Danka Business Systems, PLC. ("Danka"), and more recently by Global. Public
reports indicate that Ikon and Danka both have grown via industry consolidation
to sales volumes in excess of $3 billion each.
As a result of the industry consolidation, the Board expects that COS
will face increasing and intensifying competition from these large national
networks, each of which have the benefit of substantially larger marketing and
distribution resources, and potential preferential pricing from manufacturers
via higher volume purchasing levels, resulting in the risk for decreases in COS'
pre-tax margins. The Board believes that the present strong performance of COS,
taken together with the continuing industry consolidation, makes this a
favorable time for the Company to sell its interest in COS.
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Over the last three years, the Company received expressions of interest
from Ikon and Danka, the industry's two principal consolidators, regarding the
possible sale of COS, but neither company appeared willing to pay a price
acceptable to the Board.
Global first approached the Company in October of 1994 about acquiring
COS, and the Company engaged in three separate rounds of negotiations with
Global since that date. The first round was terminated in March of 1995 when
Global lost its planned source of financing. The price then under discussion was
$24 million for 100% of COS. Global approached the Company a second time in
December of 1995, again offering a $24 million purchase price. The issue of a
control premium for the Company was unresolved, and the Board then felt that the
purchase price was inadequate.
The third round commenced in March of 1996 when Global made yet another
approach. Over the next eight months, basic terms generally acceptable to the
Company were agreed upon. The price to the Company increased from $16 million to
$19 million reflecting both an increased transaction value and a $1 million
control premium to the Company. Concerns about Global's ability to obtain
financing were resolved by the substitution of GTCR, Global's principal
stockholder, as the buyer. But significant unresolved issues remained.
The Board desired to obtain an investment banker's opinion regarding
the fairness of the price prior to executing the Redemption Agreement.
Ultimately the Company agreed to obtain the opinion after the Redemption
Agreement was executed and to pay a break-up fee of $250,000 if the Company
terminated the Transaction as a result of an unfavorable opinion.
During negotiations GTCR requested that the Eriksons enter into and the
Eriksons ultimately agreed to enter into a voting agreement pursuant to which
they agreed to cast substantially all their votes in favor of the Transaction so
long as a majority of all votes cast by the Non-Erikson Stockholders were cast
in favor of the Transaction. The Eriksons objected to the extent that the voting
agreement required them to give up certain rights related to their stock for an
extended period, including "no shop" provisions and a prohibition on selling or
pledging their stock, among other things. The Eriksons asked for compensation
from the Company in the amount of $300,000 each for giving up these rights in
furtherance of the Transaction. The Board was concerned about the reduction in
the net proceeds from the Transaction if it paid this amount to the Eriksons.
Ultimately, GTCR agreed to pay the Eriksons, without reducing the proceeds to
the Company, a total of $300,000 each for agreeing not to compete with COS and
for providing consulting services to COS for three years following Closing. The
Company agreed to reimburse the Eriksons as stockholders for their costs in
reviewing and negotiating the voting agreement and to indemnify the Eriksons as
stockholders in connection with the Transaction.
Because GTCR's request for the Eriksons to enter into a voting
agreement raised issues involving the Eriksons personally, including
indemnification as stockholders, and because the Redemption Agreement
contemplates the Eriksons entering into a consulting and non-competition
agreement through which they are to receive compensation, the Board believes
that it is appropriate for the Non-Erikson Stockholders to have a meaningful
voice in approving the Transaction. Ultimately GTCR agreed that the Redemption
Agreement would provide that the Transaction would not be deemed approved unless
a majority of all votes cast by the Non-Erikson Stockholders were cast in favor
of the Transaction, provided that the Company will pay a $250,000 break-up fee
if the stockholders fail to approve the Transaction.
THE BOARD OF DIRECTORS BELIEVES THAT THE TRANSACTION IS FAIR TO AND IN THE BEST
INTEREST OF THE COMPANY. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
TRANSACTION AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE TRANSACTION.
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THE TRANSACTION
The following information describes certain information relating to the
Transaction. This description does not purport to be complete and is qualified
in its entirety by reference to the Investment, Redemption and Stock Purchase
Agreement dated March 7, 1997, and certain other agreements dated as of the same
date or to be entered into in connection with the Transaction, including the
Escrow Agreement, the Erikson Voting Agreement, the Erikson Consulting and
Non-Compete Agreement and the Manoogian Executive Agreement, copies of which are
included as Exhibits A, B, C, D, and E, respectively, to this Proxy Statement.
The Company's principal executive offices are located at 3421 Pennsy Drive,
Landover, Maryland 20785, and the Company's phone number at such offices is
(301) 773-1784.
General
Holders of the Company's Common Stock and Class B Common Stock are
being asked to consider and to approve the Transaction. The terms of the
Transaction are set forth in the Redemption Agreement and certain related
agreements entered into in connection therewith. The Redemption Agreement
provides for (i) the $19 million redemption by COS of the entire two-thirds
equity interest of COS held by Cerberonics, the Company's wholly-owned
subsidiary, in conjunction with the recapitalization of COS, (ii) payment to the
Company of a two-thirds share of an approximately $5 million pre-redemption
distribution of excess cash from COS, (iii) the arrangement of $24 million in
additional financing for COS, (iv) a $1 million investment in COS by GTCR and
the Investors, and (v) the purchase for $5 million by the Investors from Armen
A. Manoogian ("Mr. Manoogian") of a majority of the remaining one-third equity
interest of COS held by Mr. Manoogian. The Redemption Agreement was executed on
March 7, 1997, subject to stockholder approval and certain other conditions. The
Transaction is expected to close on or before June 30, 1997.
Background and Reasons for the Transaction
During 1987 the Company was phasing out of defense work and was looking
for new opportunities. In October of that year, the Company joined with Mr.
Manoogian in the acquisition of COS for a purchase price of $3.5 million. The
Company invested $500,000 for its ultimate two-thirds share, and Mr. Manoogian
invested initially and upon later exercise of an option $250,000 to end up
owning the other one-third. The Company loaned COS the remaining $2.75 million
to complete the leveraged buy-out, which loan was subsequently repaid by COS
with interest.
Though COS struggled somewhat in the early years after the Company's
investment, financial performance improved gradually until COS became the strong
performer that it is today. COS has now delivered on average in excess of 20%
pre-tax earnings on revenues during the last three years.
Mr. Manoogian has been the President of COS since October of 1987.
Throughout this period, Mr. Manoogian, as well as the Eriksons, have
participated in the Copier Dealers Association to help them stay informed of
developments in the copier market. Through this connection, and the numerous
copier business owners and professionals it has enabled them to meet, they have
acquired information about the performance and valuation of copier businesses
and have observed a substantial consolidation of copier dealers, principally by
Danka or Ikon, both of which are public companies with annual sales in excess of
$3 billion. Available information shows that Danka has acquired over 100 copier
business over the last three years, and in calender 1996 alone Ikon has acquired
in excess of 80 copier businesses.
As a result of the industry consolidation, the Board expects that COS
will face increasing and intensifying competition from these large national
dealer networks owned by Ikon and Danka, both of which have the benefit of
substantially larger marketing and distribution resources, and potential
preferential pricing from their manufacturers via higher volume purchasing
levels resulting in the risk for decreases in COS' pre-tax margins.
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The Board believes that the present strong performance of COS, taken
together with the continuing industry consolidation, makes this a favorable time
for the Company to sell its interest in COS.
The lead buyer, GTCR, is the controlling stockholder of Global, a third
nationally recognized consolidator in the copier industry. The Company believes
GTCR views COS as a highly profitable business with a prestigious product line
located in the fourth largest market in the country, making COS an important
addition to its growing national portfolio of copier businesses.
Additionally, because the Transaction is structured such that Mr.
Manoogian will sell only a portion of his COS stock and will remain COS'
President, GTCR will have the benefit of his industry experience and management
skills after Closing.
Certain Material Negotiations
Ikon first approached the Company in July of 1993 to explore the
Company's willingness to sell COS. The Board considered Ikon's offer of $12
million for 100% of COS to be inadequate, and nothing further developed at that
time. Ikon approached the Company again in the spring of 1994 with an offer
substantially similar to its first. The Board still believed that the price
offered was inadequate, particularly in light of the then recent improvements in
COS' profitability.
In the fall of 1993, a Danka representative informally contacted Mr.
Manoogian to explore whether there was an interest in selling COS. General price
ranges were discussed, but they were unable to find sufficient common ground to
continue discussions. Danka contacted Mr. Manoogian again in the fall of 1996,
suggesting that it may be willing to acquire 100% of COS for a price in the
range of $20-$22 million. Nothing developed from these discussions because the
contemplated price was well below a $24 million price proffered by Global.
Global approached the Company about acquiring COS in the fall of 1994,
and offered to purchase 100% of COS stock for $24 million. Though the Board
believed such price might fall within an acceptable range, certain essential
issues were not resolved. Among other things, Mr. Manoogian was unwilling to
accept anything other than a pro rata split of the sales proceeds, which failed
to accord the Company any value for its control position. During the course of
discussions, Global advised the Company that it had lost its planned source of
financing and negotiations were subsequently discontinued.
In March of 1995, Mr. Manoogian offered to purchase the Company's share
of COS for $16 million. This was equivalent to Global's offer, but similarly
failed to provide a control premium for the Company and lacked committed
financing. Nothing further developed in connection with that offer.
In December of 1995, Global approached the Company a second time, again
offering a $24 million purchase price and claiming new financing. The control
premium issue remained unresolved, and the Board felt that the purchase price
had become inadequate in light of improved earnings and growth possibilities
available to COS as a result of its recent expansion into the Baltimore,
Maryland market. In addition, questions remained about the certainty of Global's
new financing, and discussions were suspended.
In March of 1996, Global made a new offer to purchase COS, which
commenced the round of negotiations that ultimately led to the execution of the
Redemption Agreement one year later. The new offer for 100% of COS stock
consisted of $16 million to the Company, $8 million to Mr. Manoogian,
distribution of COS' cash in excess of $800,000 and $1.75 million to the
Eriksons for income continuation/consulting over seven years. Global was
informed that (i) the purchase price was now inadequate considering COS'
improved earnings, (ii) the offer accorded the Company no control premium, and
(iii) Global would have to adequately prove its ability to obtain financing.
Further, the Eriksons would not discuss any possible payments to them while
Global was negotiating the sales price with the Company.
Over the next eight months, these issues were resolved. The transaction
value of COS was increased to $27 million, and Mr. Manoogian agreed to a $1
million control premium for the Company, resulting in $19
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million to the Company for its two-thirds interest. Mr. Manoogian also agreed to
accept $5 million for five- eighths of his one-third interest and to retain the
remainder of his interest, thus limiting the buyer's required investment to
approximately $24 million. Finally, to ensure committed financing Global's
principal stockholder, GTCR, was substituted as the buyer.
On December 5, 1996, the Board convened to discuss the status of the
negotiations. A draft of the proposed agreement prepared by GTCR was under
review by Company counsel, but there were a number of significant unresolved
issues. To further assure itself that the price under consideration was
appropriate and fair to the Company, the Board determined that it was desirable
for the Company to have the Transaction reviewed by an independent investment
banking firm. The Board directed the officers to contact investment banking
firms to determine availability and cost of a fairness opinion and directed
counsel to inform GTCR that the Company desired to obtain advice from an
investment banker before proceeding further.
At the December 5 meeting, counsel advised the Board that although
Delaware corporation law probably required a stockholder vote to approve the
proposed transaction, the Erikson votes alone would be enough for such approval.
Because GTCR's request for the Eriksons to enter into a voting agreement raised
issues involving the Eriksons personally, the Board considered whether it might
be appropriate for the Non-Erikson Stockholders of each class of stockholders to
have a meaningful voice in approving the Transaction. That voting requirement
was later modified to provide that the Transaction would not be deemed approved
unless a majority of all votes cast by the Non-Erikson Stockholders were cast in
favor of the Transaction, with the holders of Class B Common Stock being
accorded the required and usual ten votes per share. This requirement was
acceptable to GTCR, and is an integral part of the Transaction as now presented
to the stockholders.
At a meeting on December 16, 1996, the Board reviewed the status of the
search for an investment banker, and discussed various aspects of the
Transaction, including GTCR's insistence on a $1 million breakup fee.
On January 7, 1997, GTCR informed the Company that, given the length of
time that the parties had been negotiating, GTCR would withdraw its proposal
unless the Company signed a definitive agreement prior to the Company retaining
an investment bank. GTCR also insisted that any compensation arrangement with an
investment bank not be contingent on the success of this or any alternative
transaction.
The Board convened to discuss this development on January 15, 1997. The
Board felt that as a one-third stockholder of COS as well as its President for
the last nine years, and as an employee of Xerox for seventeen years where he
rose to a Senior Marketing Executive level, Mr. Manoogian could provide
additional reliable information regarding the fairness of the price under
consideration.
Mr. Manoogian reported orally and in a followup memorandum that copier
dealers like COS typically sold for cash at five to six times earnings before
interest and taxes ("EBIT") and approximately 40% to 50% of sales revenue. By
comparison, the price offered for COS by GTCR was six times EBIT and 134% of
sales revenue. Mr. Manoogian's report further confirmed the Board's belief that
the price under consideration was appropriate.
The Board faced the choice of risking the possible loss of the
prospective sale by insisting upon a fairness opinion before approving the
transaction, or of risking an unfavorable fairness opinion after execution of a
binding agreement. Given GTCR's position on the timing of an investment banker
opinion, the Board determined that it had sufficient information about the
fairness of the price to place a modest break-up fee at risk pending receipt of
a formal fairness opinion. The Company then offered GTCR a break-up fee of
$250,000 in the event that the Company terminated the transaction as a result of
an unfavorable investment banker opinion obtained after execution of the
Redemption Agreement. GTCR ultimately agreed to this amount.
The initial draft of the proposed Redemption Agreement prepared by GTCR
and transmitted to the Company in November 1996 included a requirement that the
Eriksons execute a voting agreement requiring
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them to vote their shares in favor of the transaction. GTCR provided a draft of
the proposed voting agreement in early December of 1996. Upon reviewing this
draft, the Eriksons were concerned with the extent to which the agreement
required them to give up certain rights related to their Common Stock and Class
B Common Stock for the entire period from execution of the Redemption Agreement
until closing of the transaction. Specifically, the Eriksons were personally
being asked to execute an agreement which contained a "no shop" provision which
would prohibit or restrict during the pendency of the transaction the Eriksons'
ability to sell or pledge their stock or to solicit a sale of their stock to
anyone other than GTCR, would require that they vote their stock in favor of the
transaction and/or grant GTCR an irrevocable proxy to vote the stock with
respect to the transaction, and would commit the Eriksons to recommend the
transaction to the Non-Erikson Stockholders.
Although the Eriksons believed that the proposed transaction was in the
Company's best interest, they also felt that the proposed voting agreement
required them individually to forfeit valuable rights as controlling
stockholders of the Company and might subject them personally to certain risks,
including the risk of litigation. They believed that they could personally
suffer a considerable financial detriment as a result of the prohibition on
marketing their stock of the Company, the value of which might rise upon
announcement of the transaction. They also felt that the timing of this
prohibition on selling their stock was inopportune, as the Eriksons may desire
to sell some of their stock to fund a potentially substantial obligation to the
Company stemming from a judgment in certain litigation (currently on appeal)
arising from the Erikson's 1990 attempt to effect a sale of their controlling
interest in the Company to Insituform Technologies, Inc. The Eriksons noted that
no other stockholders would be required to agree to such restrictions on their
stockholder rights.
To help the Eriksons measure the financial detriment they might suffer,
the Eriksons engaged Puglisi & Associates to determine the cost of put options
on the Eriksons shares of the Company's stock at a series of exercise prices if
those put options were part of a protective put strategy employed by the
Eriksons. Using the Black-Scholes Option Pricing Model, Puglisi & Associates
determined that the cost of put options on the Erikson's stock purchased for a
ninety-day period would be between $427,000 (at the then current market price)
and $960,000 (at a market price of $14.00). The cost would be greater if the
options extended for a longer period.
At a Board meeting on January 15, 1997, citing the Puglisi & Associates
analysis, the Eriksons asked the Company to compensate them in the amount of
$300,000 each for agreeing to enter into the voting agreement. The Eriksons also
asked for indemnification for any suits brought against them as stockholders in
connection with the transaction and for their attorney fees incurred in
connection with negotiating a voting agreement. Although the Board understood
the Eriksons' concerns, it was concerned about the reduction in the net proceeds
of the transaction to the Company if the Company paid this amount to the
Eriksons.
At the same meeting and after considerable discussion, the Board
directed counsel to ask GTCR to either (i) eliminate the requirement for a
voting agreement in exchange for the Company agreeing to a break-up fee of
$250,000 in the event of an unfavorable investment banker opinion or the
Company's stockholders not approving the transaction, or (ii) pay the Eriksons
the $600,000 out of GTCR funds. GTCR subsequently offered to eliminate the
voting agreement entirely, but only if the break-up fee amount remained at
$500,000 for the stated events.
The Board discussed GTCR's offer at a meeting on January 20, 1997. At
that time, the Eriksons informed the Board that given the course of the
negotiations and their obligations as directors and controlling stockholders,
including insider trading restrictions and requirements to disclose their voting
intentions, they believed their rights as stockholders might be impaired or
restricted even if the transaction proceeded without the voting agreement, and
without compensation. The Eriksons further informed the Board that there was a
possibility that the Eriksons could ultimately decide to vote against the
transaction as stockholders, after voting in favor of the transaction as
directors.
At a meeting on January 23, 1997, the Board determined that with
respect to any matter in connection with the possible sale of COS for which the
Company's counsel advised the Eriksons could be considered interested, a special
committee consisting of Messrs. Kincheloe and Hayes, as disinterested directors,
would
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determine the Company's position. After conferring separately, Messrs. Kincheloe
and Hayes determined and the Board resolved that the Company should offer a
break-up fee of $500,000 in the event of an unfavorable investment banker
opinion or disapproval by the Non-Erikson stockholders, but to propose no
break-up fee in the event that the Eriksons did not approve the transaction as
stockholders.
Further negotiations and consideration of the Board's most recent offer
resulted in GTCR making a proposal on January 27, 1997. GTCR suggested that COS
would benefit from engaging the Eriksons as consultants for a period of two
years and for the Eriksons agreeing not to compete with COS. GTCR then proposed
compensation to each of the Eriksons of $150,000 per year for two years for a
consulting and non-compete agreement (later changed to three years with $150,000
paid to each promptly after Closing for non-compete, $50,000 each promptly after
Closing for consulting services, and $50,000 each for consulting services on
each of the first and second anniversaries thereafter, if available and able to
provide consulting services). GTCR further proposed (i) a return to a voting
agreement with the Eriksons with no compensation, (ii) a breakup fee of $250,000
in the event of an unfavorable investment banker opinion or disapproval by the
Non-Erikson Stockholders, and (iii) an increase in the minimum cash to be left
in COS at closing from $800,000 to $1.2 million.
This proposal was considered by the Board at a meeting on January 30,
1997. As a result of the reinstatement of the requirement for a voting
agreement, the Eriksons again asked to be indemnified as stockholders in
connection with the transaction, and to be reimbursed for their legal fees in
drafting and negotiating the voting and, consulting agreements. The Board
discussed the Eriksons' request and was amenable to the Eriksons' request as to
the voting agreement so long as legal counsel could be satisfied with the terms
of the indemnification. (See "Related Agreements -- Erikson Voting Agreement").
Messrs. Kincheloe and Hayes met separately, then again with the full Board.
While the Board felt that GTCR's proposal was satisfactory in most respects, it
did not find satisfactory the increase in minimum cash left in COS from $800,000
to $1.2 million, as it was equivalent to decreasing the purchase price to the
Company by $400,000. While meeting separately, Messrs. Kincheloe and Hayes
contacted Mr. Manoogian and advised him the Board strongly opposed reducing the
sales price and that he and GTCR could not reduce the Company's proceeds to
offset all or part of what COS would pay the Eriksons for the consulting and
non-competition agreement. The meeting ended without a formal decision on
whether to accept or reject GTCR's most recent proposal.
After considering the Company's concerns, on February 3, 1997 GTCR
offered to drop the cash requirement back to $800,000, thus offering the Company
the full price that it had negotiated; and with a voting agreement as part of
the transaction, it was also clear that the Eriksons would vote in favor of the
transaction as stockholders so long as there is an affirmative vote of a
majority of votes cast by the Non-Erikson Stockholders. Counsel then proceeded
to negotiate the terms of the various ancillary documents concerning the
Transaction.
By March 6, 1997, it appeared to counsel for the Company that all terms
of the proposed transaction were satisfactory to the Company. On March 7, 1997,
the Board met to consider the Transaction in the final form represented in this
Proxy Statement, and found it to be in a form sufficient for recommendation to
the Company's stockholders. The Board then voted to approve the Transaction.
Fairness Opinion
At the April 3, 1997 meeting of the Board, Merrill Lynch Business
Advisor Services, a division of Merrill Lynch, Pierce, Fenner and Smith
Incorporated ("MLBAS') delivered its opinion to the Board to the effect that, as
of such date, the proposed consideration to be received by Cerberonics pursuant
to the Redemption Agreement was fair from a financial point of view to the
Company. MLBAS subsequently delivered to the Board its written opinion dated as
of April 4, 1997 to the foregoing effect.
The full text of MLBAS's opinion dated as of April 4, 1997, which sets
forth, among other things, assumptions made, procedures followed, matters
considered, and limitations on the scope of review undertaken, is attached as
Exhibit F to this Proxy Statement and is incorporated herein by reference. The
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Company's stockholders are urged to read the MLBAS opinion in its entirety. This
summary of the opinion of MLBAS set forth in this Proxy Statement is qualified
in its entirety by reference to the full text of such opinion.
MLBAS'S OPINION IS DIRECTED TO THE COMPANY'S BOARD OF DIRECTORS AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY CERBERONICS PURSUANT TO THE REDEMPTION
AGREEMENT. THE OPINION DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO
PROCEED WITH THE TRANSACTION AND DOES NOT CONSTITUTE, NOR SHOULD IT BE CONSTRUED
AS, A RECOMMENDATION TO ANY HOLDER OF THE COMPANY'S COMMON STOCK OR CLASS B
COMMON STOCK AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE MEETING ON THE
TRANSACTION OR ANY OTHER MATTER IN CONNECTION THEREWITH.
In arriving at its opinion, among other things, MLBAS has: (i) reviewed
the Redemption Agreement and the proposed financial terms of the Transaction;
(ii) reviewed audited financial information for the five fiscal years ended June
30, 1992 through 1996 for the Company and COS, as well as various other
unaudited financial information for the Company and COS; (iii) compared COS'
historical results of operations with that of certain public companies which
MLBAS considered relevant for its analysis; (iv) visited COS' headquarters and
conducted discussions with COS' senior management concerning the history and
past performance of COS' current business operations, and reviewed certain
forecasts provided to MLBAS in the course of such discussions relating to the
business, earnings, cash flow, assets and prospects of COS; (v) reviewed such
other financial studies and analyses and performed such other investigations and
took into account such accepted financial and valuation procedures and
considerations and such other matters as MLBAS deemed relevant, including its
assessment of general and local economic, market and financial conditions which
have an impact on the industry in which COS operates.
While MLBAS reviewed the financial terms of certain transactions
involving the acquisition of companies in industries comparable to COS'
operations, MLBAS did not identify a sufficient number of acquisitions with
adequate available information that it deemed to be relevant for the purpose of
its analysis and, accordingly, did not undertake any analysis comparing the
financial terms of the Transaction with other acquisitions.
In preparing its opinion, MLBAS relied on the accuracy and completeness
of all financial and other information supplied or otherwise made available to
it by the Company and COS, or which are publicly available, and did not
independently verify such information or undertake an independent appraisal or
valuation of the assets or liabilities of COS. With respect to any financial
forecasts and projected expense reductions provided to MLBAS by and discussed
with COS' management, MLBAS assumed that such financial forecasts and projected
expense reductions (together with the assumptions and bases therefor) have been
reasonably prepared and reflect the best currently available estimates and
judgment of COS' management as to the expected future financial performance of
COS.
MLBAS's opinion is also given on the assumption that there are no
undisclosed or unexpected conditions which would affect the value of COS' assets
or the financial condition or operations of COS or the expected future financial
performance of COS. MLBAS's opinion is necessarily based upon market and general
economic conditions existing as of the date of its opinion.
The terms of MLBAS's engagement are limited to expressing an opinion as
to whether the consideration to be received by Cerberonics pursuant to the
Redemption Agreement is fair to the Company from a financial point of view and
MLBAS was not requested to assist and did not participate in structuring or
negotiating the terms of the Transaction. In addition, MLBAS's opinion does not
address the relative merits of the Transaction and alternative business
strategies involving COS, including the sale of COS to third parties.
In connection with rendering its opinion, MLBAS performed certain
financial analyses, consisting of those summarized below. The summary set forth
below does not purport to be a complete description of the analyses performed by
MLBAS in this regard, although it describes all material analyses performed by
MLBAS. The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant
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methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly,
notwithstanding the separate factors summarized below, MLBAS believes that its
analyses must be considered in their entirety and that selecting portions of its
analyses and factors considered by it, without considering all analyses and
factors, or attempting to ascribe relative weights to some or all such analyses
and factors, could create an incomplete view of the evaluation process
underlying MLBAS's opinion.
In performing its analyses, MLBAS made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, all of which are beyond the control of MLBAS, the Company and
GTCR. The analyses performed by MLBAS are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, the analyses do not
purport to be appraisals or to reflect the prices which may be obtained for COS
or its securities or assets at the present time or at any time in the future.
Such analyses were prepared solely as part of MLBAS's analysis of the fairness
of the consideration to be received by Cerberonics pursuant to the Redemption
Agreement and were provided to the Board in connection with the delivery of
MLBAS's opinion. With respect to the comparison of selected companies analysis
summarized below, no public company utilized as a comparison, of course, is
identical to COS and such analyses necessarily involve complex considerations
and judgments concerning the differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading values of the companies concerned.
The following is a summary of the material analyses presented by MLBAS
to the Board in connection with its April 3, 1997 opinion.
Discounted Cash Flow Analysis. MLBAS performed discounted cash flow
analyses (i.e., an analysis of the present value of the projected cash flows of
the periods and at the discount rates indicated) for COS based on projections
prepared using assumptions supplied by COS' management of COS' net cash flows
for the period commencing on December 31, 1997 through June 30, 2006, inclusive,
using discount rates ranging from 16% through 18%, inclusive, and a terminal
multiple of earnings before interest and taxes of 8x. MLBAS's calculations
indicated a range of values based on discounted cash flows of $28.7 million to
$24.8 million, without giving effect to potential synergies that may result from
the Transaction. After giving effect to such potential synergies, as well as to
COS' available cash, outstanding debt and off-balance sheet liabilities, MLBAS
estimated an indicated range of values based on a discounted cash flow analysis
of $32.0 million to $27.7 million.
Comparison of Selected Companies. MLBAS reviewed and compared certain
ratios and public market multiples relating to publicly available data compiled
by Institutional Brokers Estimate System for a group of selected companies which
MLBAS deemed to be relevant, consisting of Danka Business Systems PLC, IKON
Office Solutions, Inc., Pitney Bowes, Inc. and Xerox Corp. (collectively, the
"COS Selected Companies"). Based on a review of such information for the COS
Selected Companies, MLBAS determined that the relevant range based on the mean
and median for the latest twelve months available earnings before interest,
taxes, depreciations and amortization ("LTM EBITDA") to be 12.3x to 13.7x.
MLBAS then observed that as a result of, among other factors, (i) the
higher publicly available estimated earnings growth rates for the COS Selected
Companies as compared with the growth rate estimated by COS management for COS,
(ii) the substantially smaller size of COS as compared to the COS Selected
Companies and (iii) the diversification of the COS Selected Companies into
businesses with higher margins, the application of a discount estimated at 60%
to the foregoing multiples would be necessary to render the foregoing range of
LTM EBITDA meaningful for comparative purposes. This adjustment yielded a range
of adjusted LTM EBITDA of 4.9 x to 5.5x, which resulted in an implied valuation
range of $24.1 million to $26.9 million. After giving effect to the potential
synergies that may result from the Transaction, as well as to COS' available
cash, outstanding debt and off-balance sheet liabilities, MLBAS estimated an
indicated range of implied values based on adjusted LTM EBITDA multiples of the
COS Selected Companies of $26.9 million to $30.0 million.
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MLBAS has been retained by the Board as an independent contractor to
express an opinion to the Board with respect to the Transaction and will receive
a fee for its services. MLBAS, among other things, regularly engages in the
valuation of business and securities in connection with mergers and
acquisitions. In addition, in the ordinary course of its securities business,
affiliates of MLBAS may actively trade debt and/or equity securities of the
Company for its own account and the accounts of its customers, and MLBAS,
therefore, may from time to time hold a long or short position in such
securities.
The Company and MLBAS have entered into a letter agreement dated
February 28, 1997 relating to the services to be provided by MLBAS in connection
with the Transaction. The Company has paid MLBAS a cash fee of $75,000 and has
agreed to pay MLBAS an additional cash fee of $75,000 payable at the time MLBAS
delivered its opinion. In such letter, the Company also agreed to reimburse
MLBAS for its reasonable out-of-pocket expenses incurred in connection with its
advisory work, including the reasonable fees and disbursements of its legal
counsel, and to indemnify MLBAS against certain liabilities relating to or
arising out of the Transaction, including liabilities which might arise under
the federal securities laws.
In choosing MLBAS to render services in connection with the
Transaction, the Company contacted several investment banking firms and
discussed with them their relevant experience, their ability to perform the such
services within the required time frame and the fee they would charge. Based on
the foregoing, the Company decided that MLBAS was the best candidate to provide
the required fairness opinion.
Recommendation of the Board of Directors
THE BOARD OF DIRECTORS BELIEVES THAT THE REDEMPTION TRANSACTION IS FAIR TO AND
IN THE BEST INTEREST OF THE COMPANY. THE BOARD OF DIRECTORS HAS UNANIMOUSLY
APPROVED THE REDEMPTION TRANSACTION AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE REDEMPTION TRANSACTION.
Principal Terms of the Transaction
The terms of the Transaction are set forth in the Redemption Agreement.
The principal terms of the Transaction are summarized below.
Recapitalization. The entire outstanding equity interest of COS is
represented by 1,200 shares of a single class of common stock, two-thirds (800
shares) of which are held by Cerberonics and one-third (400 shares) of which are
held by Mr. Manoogian. Prior to Closing, COS will amend its certificate of
incorporation to authorize the issuance of three classes of common stock,
Classes A, B and C. The Redemption Agreement then provides that each share of
COS' existing common stock will be exchanged for .61875, .37125 and .01 shares
of the new Class A, B and C common stock, respectively (the "Recapitalization"),
after which Cerberonics will hold two-thirds and Mr. Manoogian will hold
one-third of each of COS' three classes of stock, respectively.
Financing. The Redemption Agreement provides that COS will enter into
commercially reasonable credit facilities to be arranged by GTCR to provide for
up to approximately $24 million in loans in connection with the Transaction (the
"Financing"). The arrangement of such financing is not a condition to Closing.
If the Financing is not arranged prior to Closing and all other conditions to
Closing are met, the Redemption Agreement provides that the Investors will be
responsible for funding on commercially reasonable terms the sums necessary to
consummate the Transaction.
Redemption. At Closing, and after the Recapitalization and the
Financing (or alternatively, a financing by the Investors), COS will redeem (the
"Redemption") all the shares of COS Class A (495), Class B (297) and Class C(8)
common stock held by Cerberonics at a price of $23,750 per share for a total
redemption price of $19 million (the "Redemption Price"). The Redemption Price,
net of certain holdbacks and adjustments as discussed below, shall be paid to
Cerberonics by wire transfer or cashier's check at Closing. After the
Redemption, neither Cerberonics nor the Company will hold any interest in the
capital stock of COS.
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The $19 million Redemption Price includes the Company's $18 million pro
rata share of the $27 million value of COS negotiated by the parties to the
Redemption Agreement, plus a $1 million control premium for the Company's
two-thirds controlling interest. Such amounts were negotiated exclusive of the
Company's pro rata interest in the approximately $5 million distribution to be
made by COS prior to the Redemption.
Investment. Contemporaneous with the Redemption, the Investors shall
purchase from COS 49.5 shares and .5 shares of COS Class A and Class C common
stock, respectively, at a price of $20,000 per share for a total purchase price
of $1 million (the "Investment").
Stock Purchase. Contemporaneous with the Redemption and the Investment,
the Investors shall purchase (the "Stock Purchase") from Mr. Manoogian 247.5 and
2.5 shares of COS Class A and Class C common stock, respectively, at a price of
$20,000 per share for a total purchase price of $5 million (the "Stock Purchase
Price"). The Stock Purchase Price, net of certain holdbacks and adjustments as
discussed below, shall be paid to Mr. Manoogian by wire transfer or cashier's
check at Closing. After the Stock Purchase, Mr. Manoogian will hold 148.5 shares
(100%) of the COS Class B common stock outstanding and 1.5 shares (33.33%) of
the COS Class C common stock outstanding, while the Investors will hold 297
shares (100%) of the COS Class A common stock outstanding and 3.0 shares
(66.67%) of the COS Class C common stock outstanding.
The Stock Purchase Price represents that portion (5/8) of the value
ascribed to Mr. Manoogian's one-third interest in COS that the Investors are to
acquire. The value ascribed to Mr. Manoogian's interest in COS is $8 million,
which equals one-third of COS' negotiated $27 million value, less the Company's
$1 million control premium. The Investors are to acquire 250 of the 400
post-Recapitalization shares of COS Class A, B and C common stock to be held by
Mr. Manoogian, for which they are to pay $5 million (250/400 x $8 million). Such
amounts were negotiated exclusive of Mr. Manoogian's pro rata interest in the $5
million distribution to be made by COS prior to the Redemption.
Escrow Arrangements. The Redemption Agreement requires Cerberonics and
Mr. Manoogian to place a total of $1.5 million in escrow (the "Escrow Sum") at
Closing to cover certain indemnity obligations that may arise under the
Redemption Agreement (the "Escrow Arrangement"). The Escrow Sum is to be
comprised of $1,055,556 from Cerberonics, which amount will be deducted from the
Redemption Price otherwise payable to Cerberonics; $277,778 from Mr. Manoogian,
which amount will be deducted from the Stock Purchase Price otherwise payable to
Mr. Manoogian; and $166,666, which amount Mr. Manoogian shall satisfy by
delivering 8.33 shares of COS Class B common stock to the escrow agent. Claims
arising from indemnity obligations exclusive to either Cerberonics or Mr.
Manoogian shall be satisfied from that portion of the Escrow Sum contributed by
the respective party whose obligation gives rise to the claim. Claims arising
from mutual indemnity obligations shall be allocated 19/27ths to Cerberonics and
8/27ths to Mr. Manoogian and satisfied from the respective portion of the Escrow
Sum contributed by each. Amounts shall be paid out of the Escrow Sum to either
COS or the Investors, depending on which party suffers the economic loss giving
rise to the respective indemnity claim. The balance of the portion of the Escrow
Sum contributed by Cerberonics and Mr. Manoogian that is not paid or claimed in
satisfaction of indemnity obligations within 365 days after Closing shall be
returned to Cerberonics or Mr. Manoogian, respectively. A more complete
description of the escrow arrangements can be found in the copy of the Escrow
Agreement included as Exhibit B to this Proxy Statement.
Redemption Price and Stock Purchase Price Adjustments. The Redemption
Agreement provides that the Redemption Price to be paid Cerberonics shall be
reduced by 19/27ths and the Stock Purchase Price to be paid Mr. Manoogian shall
be reduced by 8/27ths of the amount of certain indebtedness of COS to be paid at
Closing ("Paid Indebtedness") and certain working capital deficiencies of COS.
As of the date of the Redemption Agreement, March 7, 1997, the Redemption
Agreement anticipates that there will be no Paid Indebtedness.
The Redemption Agreement provides that a preliminary working capital
deficiency adjustment ("Preliminary Adjustment") shall be made at Closing if
COS' estimated working capital at Closing as reflected
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on a preliminary closing balance sheet to be delivered within 3 to 7 days prior
to Closing ("Preliminary Working Capital") is less than the amount of COS'
month-end average working capital for the six full calendar months prior to the
month in which the Closing occurs, less $50,000 (the "Six Month Average"). The
Six Month Average shall be calculated assuming that the cash component of
working capital at the end of each month is the lesser of COS' actual cash or
$800,000.
The Redemption Agreement further provides for an audit, within 90 days
of Closing, of the preliminary closing balance sheet used to calculate
Preliminary Working Capital. If such audit results in a working capital
determination ("Audited Working Capital") lower than both the Six Month Average
and Preliminary Working Capital, the Redemption and Stock Purchase Prices are to
be further reduced (allocated 19/27ths and 8/27ths to Cerberonics and Mr.
Manoogian, respectively) by the lesser of the difference between Audited Working
Capital and the Six Month Average or the difference between Audited Working
Capital and Preliminary Working Capital. If Audited Working Capital exceeds
Preliminary Working Capital, the Redemption and Stock Purchase Prices are to be
increased (allocated 19/27ths and 8/27ths to Cerberonics and Mr. Manoogian,
respectively) by the lesser of the difference between Audited Working Capital
and Preliminary Working Capital or the difference between the Six Month Average
and Preliminary Working Capital. Any adjustments to the Redemption and Stock
Purchase Prices based on the audit (either up or down) are to be paid by the
respective parties in immediately available funds within 10 days of delivery of
the audited balance sheet.
The Redemption Agreement also provides that if the Transaction closes
after July 4, 1997 and COS retains its cash flow after such date, Cerberonics
and Mr. Manoogian shall earn interest, beginning July 5, 1997, on their
respective Redemption Price and Stock Purchase Price, calculated at the prime
rate announced by The Chase Manhattan Bank on July 5, 1997.
Representations and Warranties. The Redemption Agreement contains
various representations and warranties of the parties thereto. With respect to
COS and its stockholders, the Redemption Agreement contains representations and
warranties as to, among other things, the following: (i) COS' capitalization and
rights of others to acquire COS capital stock; (ii) due authorization of the
shares to be issued to Investors pursuant to the investment; (iii) COS'
corporate organization, good standing, qualification and corporate power to do
business; (iv) absence of subsidiaries, except as set forth on schedule(s) to
the Redemption Agreement; (v) subject to the required approval by the Company's
stockholders, power and authority and due and valid authorization to execute,
deliver and perform the Redemption Agreement; (vi) that the execution, delivery
and performance of the Redemption Agreement do not violate or conflict with
laws, agreements or articles of incorporation and bylaws or permit acceleration
of the maturity of indebtedness; (vii) the fair presentation of the financial
condition, results of operations and cash flows of COS within certain financial
statements delivered to the Investors; (viii) except as set forth on schedule(s)
to the Redemption Agreement, the absence of certain actions since December 31,
1996; (ix) completeness of the schedule of real property attached to Redemption
Agreement and title and encumbrances related thereto; (x) compliance with
certain licenses and permits; (xi) intellectual property owned by COS or in
which it has rights, title thereto and noninfringement on the intellectual
property of others; (xii) compliance with material laws, permits and orders and
conduct of business in accordance with environmental laws and regulations;
(xiii) maintenance of insurance; (xiv) maintenance of and compliance with
applicable laws and regulations of employee benefit plans and arrangements; (xv)
the validity and enforceability of certain contracts; (xvi) absence of claims
and legal proceedings, except as set forth on schedule(s) to the Redemption
Agreement; (xvii) the adequacy and accuracy of tax returns and tax filings,
except as set forth on schedule(s) to the Redemption Agreement; (xviii) identity
and continuing employment of certain personnel, summary of certain employment
agreements and compliance with labor laws; (xix) continuation of business
relationships; (xx) validity of accounts receivables and lack of encumbrances on
inventory and accounts receivable, except as set forth on schedule(s) to the
Redemption Agreement; (xxi) list of bank accounts; (xxii) lack of agents, except
as set forth on schedule(s) to the Redemption Agreement; (xxiii) absence of
warranty claims or knowledge of facts giving rise to such claims, except as set
forth on schedule(s) to the Redemption Agreement; (xxiv) absence of brokers,
finders or sales agents; (xxv) absence of interest by management and
stockholders in competitors, suppliers and customers; (xxvi) description of
management or employee indebtedness to or from COS; (xxvii) absence of
unreported liabilities. except as set forth on schedule(s) to the Redemption
Agreement; (xxviii) completeness of records made available to the Investors
16
<PAGE>
and the absence of any material untrue statement in the Redemption Agreement or
in any document delivered to Investors pursuant to the Redemption Agreement;
(xxix) absence of liens or encumbrances on the COS capital stock to be redeemed
from Cerberonics or purchased from Mr. Manoogian; and (xxx) the corporate
organization, good standing, qualification and corporate power to do business of
the Company and Cerberonics.
With respect to the Investors, the Redemption Agreement contains
various representations and warranties as to, among other things, the following:
(i) the due organization, valid existence and good standing of GTCR and its
power and authority to enter into and perform the Redemption Agreement; (ii) the
due authorization by each of the Investors to execute, deliver and perform the
Redemption Agreement; (iii) the due and valid execution by the Investors of the
Redemption Agreement; (iv) the validity and enforceability of the Redemption
Agreement against the Investors; (v) that the execution, delivery and
performance of the Redemption Agreement do not violate or conflict with laws,
agreements or articles of incorporation and bylaws or permit acceleration of the
maturity of indebtedness; (vi) absence of brokers, finders or sales agents;
(vii) investment representations with respect to the private placement of the
COS capital stock to be acquired by the investors; and (viii) absence of
undisclosed agreements.
Covenants of the Parties. The Redemption Agreement provides that the
Company shall promptly take action to convene a meeting of its stockholders to
vote upon the Transaction. The Redemption Agreement further provides that the
Board shall recommend approval by the Company's stockholders of the Transaction
and take all lawful action to solicit such approval. The Redemption Agreement
contemplates that the Board shall seek and condition approval of the Transaction
on approval by a majority of the votes cast by the Non-Erikson Stockholders, and
that such a majority vote, coupled with the vote of the Eriksons pursuant to the
Voting Agreement, shall be sufficient to approve the Transaction.
The Redemption Agreement also provides that COS will not, and that the
Company, Cerberonics and Mr. Manoogian shall cause COS not to, solicit, initiate
or knowingly encourage submissions of offers or proposals from others to acquire
COS' assets or capital stock, except that COS, and others on its behalf, may
respond to alternative proposals by third parties, other than the Investors, and
negotiate a binding definitive agreement relating thereto, if required to do so
to discharge the fiduciary duty of the Board to the Company's stockholders.
In addition, the Redemption Agreement provides that from March 7, 1997
to Closing, COS will not, and that the Company, Cerberonics and Mr. Manoogian
shall cause COS not to, engage in any material activity or engage in any
material transaction outside the ordinary course of business. The Redemption
Agreement also provides that through Closing, COS shall and/or the Company,
Cerberonics and Mr. Manoogian shall cause COS to (i) record transactions and
prepare financial statements in accordance with generally accepted accounting
principles, consistent with past practice, (ii) promptly notify the Investors of
material defaults under agreements or of any material adverse changes; (iii)
terminate activities, discussions and negotiations with anyone other than the
Investors regarding the sale of COS' assets or capital stock or the merger or
other business combination relating to COS; and (iv) notify the Investors of
alternative proposals from third parties and update the Investors as to the
status of any actions relating thereto.
Conditions to Closing. Closing of the Transaction is subject to, among
other conditions, the vote in favor of the Transaction of a majority of the
votes cast by the Non-Erikson Stockholders. As of the record date, the
Non-Erikson Stockholders held ----------- shares of outstanding Common Stock,
entitling them to cast ----------- votes, and ----------- shares of outstanding
Class B Common Stock, entitling them to cast ----------- votes, for a total of
votes eligible to be cast by the Non-Erikson Stockholders.
In addition, the Transaction is subject to the vote in favor of the
Transaction of a majority of the votes entitled to be cast by all stockholders
of the Company. With respect thereto, the Eriksons have entered into a voting
agreement (See "Related Agreements -- Erikson Voting Agreement") pursuant to
which each of them agrees, so long as a majority of votes cast by the
Non-Erikson Stockholders are voted in favor of the Transaction, to vote in favor
of the Transaction all of the shares of the Company's Common Stock and Class B
Common Stock held by each of them, exclusive of 2,246 shares of Common Stock and
2,246 shares of Class B Common Stock held jointly by George Wm. Erikson with his
spouse. Pursuant to such voting
17
<PAGE>
agreement, in the event a majority of votes cast by the Non-Erikson Stockholders
are voted in favor of the Transaction, the Eriksons have agreed to cast at least
2,568,486 votes in favor of the Transaction, which number of affirmative votes
alone would satisfy Section 271 of the Delaware Corporation Law requiring the
affirmative vote of at least a majority of all votes entitled to be cast for
approval of the Transaction.
Indemnification. The Redemption Agreement sets forth the Company's,
Cerberonics', and Mr. Manoogian's obligations to indemnify the Investors and
their officers, directors and affiliates from and against costs arising out of:
their misrepresentation, breach or default of or under any of the covenants,
agreements or other provisions set forth in the Redemption Agreement or other
agreements related thereto; claims or liability arising out of litigation or
potential litigation for which COS should have but did not establish a reserve
within its financial statements; and tortious acts or omissions of COS, the
Company, Cerberonics or Mr. Manoogian that occurred prior to Closing. The
indemnification obligations are generally borne jointly and severally by the
Company and Mr. Manoogian, except with respect to liability assigned to each
based on, among other factors, the knowledge of the respective parties. There is
no indemnification obligation until the aggregate indemnification obligation
exceeds $50,000. Thereafter, except with respect to liability arising from the
breach of certain representations and warranties, there is liability only for
amounts in excess of $50,000 up to an amount equal to 10% of the total combined
Redemption and Stock Purchase Prices (i.e. an approximate limit of $2.4
million). With respect to liability arising from the breach of representations
and warranties relating to (i) COS' capitalization and rights of others to
acquire COS capital stock, (ii) due authorization of shares to be issued to the
Investors pursuant to the Investment, (iii) the adequacy and accuracy of tax
returns and tax filings, and (iv) the absence of liens or encumbrances on the
COS capital stock to be redeemed from Cerberonics or purchased from Mr.
Manoogian, the indemnify obligation of the Company and Mr. Manoogian shall be
unlimited.
Break-Up Fees. The Redemption Agreement provides for the payment of
certain fees in the event the Redemption Agreement is terminated under certain
circumstances. If the Investors terminate the Redemption Agreement other than
(i) upon mutual consent of the parties to the Redemption Agreement, (ii) in
response to litigation, pending or threatened, restraining or seeking to
restrain the transactions contemplated by the Redemption Agreement, (iii)
because certain conditions to Closing were not satisfied, (iv) upon withdrawal
by the Board of its approval of the Redemption Agreement, (v) upon issuance of
an unfavorable fairness opinion from an investment banker, or (vi) rejection by
the Company's stockholders of the Transaction, or the Company's failure to close
the Transaction after satisfaction of the conditions thereto, the Redemption
Agreement provides for the payment by the Investors of $1 million to Cerberonics
and Mr. Manoogian (to be allocated 19/27ths to Cerberonics and 8/27ths to Mr.
Manoogian). Similarly, if the Company terminates the Redemption Agreement upon
entering into a definitive agreement with a third party for the sale of either
the assets or capital stock of COS, or the Board withdraws its approval of the
Redemption Agreement, the Redemption Agreement provides for the payment by the
Company of $1 million to the Investors. The Redemption Agreement also provides
that the Company shall pay a fee of $250,000 to the Investors if the Company's
stockholders fail to approve the Transaction, or if the Company does not proceed
with the Transaction because an investment banker issues an unfavorable fairness
opinion regarding the Redemption Agreement. In such case, if the Company enters
into a definitive agreement with a third party for the sale of either the assets
or capital stock of COS within one year thereafter, the Redemption Agreement
provides for the payment by the Company of an additional $750,000 to the
Investors.
Related Agreements.
Erikson Consulting and Non-Competition Agreement. In connection with
the Transaction, the Redemption Agreement contemplates that each of the Eriksons
shall enter into a three-year consulting and non-competition agreement
("Consulting Agreement") with COS effective as of Closing. Pursuant to and
during the term of the Consulting Agreement, the Eriksons shall at all
reasonable times be available to COS on a mutually agreeable "as needed" basis
to serve as an advisor and consultant to COS, its management and its Board of
Directors in connection with the operation of COS' business. The Consulting
Agreement provides that each of the Eriksons shall be available to COS to render
such services at least one and up to three days each month, which services are
to be scheduled and performed in a manner that will not detract from their
18
<PAGE>
performance as directors and officers of the Company. The Consulting Agreement
also provides that the Eriksons will keep confidential certain information
relating to COS and the operation of its business which they may obtain while
rendering services pursuant to the Consulting Agreement. In addition, the
Consulting Agreement provides that the Eriksons shall not, during the term of
the Consulting Agreement and for up to two years thereafter, engage in any
manner (except through ownership of less than 5% of a publicly traded company)
in any business that competes with COS or solicit for employment elsewhere the
employees of COS.
In return for the Eriksons' non-disclosure and non-compete agreements,
the Consulting Agreement provides for the payment of $150,000 to each of the
Eriksons promptly after Closing. In contemplation of the consulting services to
be rendered by the Eriksons, the Consulting Agreement provides for the payment
of $150,000 to each of the Eriksons. Unless COS and the Eriksons agree
otherwise, such amount is scheduled to be paid to each of the Eriksons in three
annual $50,000 payments, the first of which is due promptly after Closing and
the remaining two of which are due, respectively, on the first and second
anniversaries thereof, if the Eriksons are available and able to provide such
services. The Consulting Agreement contemplates that late payments of amounts
due thereunder shall bear interest at the rate of eight percent per annum until
paid. A copy of the Consulting Agreement is included as Exhibit D to this Proxy
Statement.
Erikson Voting Agreement. In connection with the condition to Closing
that a majority of the votes entitled to be cast by all stockholders of the
Company be cast in favor of the Transaction, the Eriksons have entered into a
voting agreement (the "Voting Agreement") pursuant to which each of them agrees
to vote in favor of the Transaction all of the shares of the Company's Common
Stock and Class B Common Stock held by each of them, exclusive of 2,246 shares
of Common Stock and 2,246 shares of Class B Common Stock held jointly by George
Wm. Erikson with his spouse. The Voting Agreement provides that such obligation
is contingent upon a majority of the votes cast by the Non-Erikson Stockholders
being cast in favor of the Transaction. Pursuant to the Voting Agreement, the
Eriksons have also granted to GTCR an irrevocable proxy to vote such shares with
respect to certain matters which may arise relating to, or which may impede, the
Transaction.
The Voting Agreement provides that to the extent the Company's
directors other than the Eriksons were permitted in the proper exercise of their
fiduciary duties to commit the Company to indemnify the Eriksons in their
capacities as stockholders, the Company shall indemnify and hold harmless the
Eriksons in their capacities as stockholders with respect to the review and
negotiation of the Voting Agreement and, with certain exceptions and limitations
with respect to litigation by other stockholders of the Company, other parties
to the agreement and third parties. In addition, the Voting Agreement provides
that the Eriksons shall indemnify the Company's directors, other than the
Eriksons, to the extent that they are not otherwise indemnified by the Company
or under policies of insurance maintained by the Company, against costs
reasonably incurred by them arising from the Company's entering into the
agreement to indemnify the Eriksons under the Voting Agreement. A copy of the
Voting Agreement is included as Exhibit C to this Proxy Statement.
Manoogian Executive Agreement. In connection with the Transaction, the
Redemption Agreement contemplates that COS and Mr. Manoogian will enter into an
Executive Agreement (the "Executive Agreement") pursuant to which Mr. Manoogian
will serve as the President of COS for an initial three year term. The Executive
Agreement renews automatically for additional successive one year terms, at the
end of the initial three year term and each anniversary thereafter, unless
either COS or Mr. Manoogian terminates the Executive Agreement in writing at
least 30 days prior to the end of any such term.
The Executive Agreement provides for Mr. Manoogian to receive an
initial annual base salary of $200,000, subject to periodic increases at the
discretion of the COS Board of Directors (the "COS Board"). In addition, the
Executive Agreement provides that Mr. Manoogian may earn, beginning in the
fiscal year ending June 30, 1998, an annual bonus of up to one-half of his then
base annual salary, if COS meets certain yearly business targets established by
the COS Board. Mr. Manoogian is also entitled, pursuant to the Executive
Agreement, to certain other fringe benefits approved by the COS Board and made
available to other COS senior executives. In addition, the Executive Agreement
sets forth certain non-competition and confidentiality
19
<PAGE>
agreements of Mr. Manoogian relating to his employment by COS. A copy of the
Executive Agreement is included as Exhibit E to this Proxy Statement.
Other Related Agreements. The Redemption Agreement contemplates that
the parties to the Transaction and others will enter into various other
agreements relating thereto. Such agreements include, but are not limited to:
(i) an agreement among the Investors and Mr. Manoogian as post-Redemption COS
stockholders with respect to establishing COS' board of directors, assuring
continuity of COS' management and ownership, limiting stock transfers and
providing for supermajority voting for certain matters; and (ii) a registration
agreement between COS and the Investors granting investors certain registration
rights relating to the COS stock they are to receive.
Interests of Certain Persons in the Transaction
Other than as described herein, no director or executive officer of the
Company, and no associate of such persons, has any substantial interest, direct
or indirect, in the Transaction, other than in the interest arising from the
ownership of the Company's Common Stock and Class B Common Stock, in which case
the director or officer receives no extra or special benefit not shared on a pro
rata basis by all other holders of such stock.
The Redemption Agreement contemplates that effective as of Closing each
of the Eriksons shall enter into a three-year consulting and non-competition
agreement with COS pursuant to which each is scheduled to receive $200,000
promptly after Closing, $50,000 one year after Closing and $50,000 two years
after Closing. See "Erikson Consulting and Non-Competition Agreement" under
"Related Agreements" above.
Federal Income Tax Consequences
The Transaction will be a taxable transaction to the Company. The
Company will recognize gain measured by the difference, if any, between the
amount realized from the Redemption and the Company's adjusted tax basis in the
COS stock being redeemed. The Transaction will not be a taxable transaction to
the Company's stockholders.
Regulatory Requirements
To the Company's knowledge, there are no federal or state regulatory
requirements which must be complied with, nor are there any such governmental
consents or approvals that must be obtained, in connection with the Transaction.
Accounting Treatment
The Transaction, if approved by the stockholders, will be accounted for
as a disposal of a segment of a business. In accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), the
results of operations of COS will be removed from the consolidated results of
operations of the Company and shown separately as discontinued operations on the
Company's Statement of Earnings as of the measurement date, which will be the
date of the Meeting. The expected gain from the Transaction will be recognized
when realized on the date of the Closing. In accordance with APB 30, the
recognized gain will include any income or loss of generated by COS between the
measurement date and Closing.
USE OF PROCEEDS
The Company anticipates receiving approximately $22,000,000
($19,000,000 purchase price plus two-thirds of an approximate $5,000,000
pre-Closing dividend) as a consequence of the Transaction, before
20
<PAGE>
transaction expenses. Promplty after Closing, the Company intends to declare and
distribute a dividend of $1.50 per share to the holders of Common Stock and
Class B Common Stock, as of a record date proximate to Closing. Based on shares
outstanding as of the Record Date for the Meeting, the Company estimates such
dividend to total $2,211,000. The balance of the proceeds from the Transaction
will be used for general corporate purposes and for potential acquisitions of
businesses, technologies or products. The Company currently has no
understanding, commitment or agreement with respect to any such acquisitions.
Pending such uses, the Company intends to invest the proceeds from the
Transaction in short term, investment grade, interest bearing securities.
SELECTED FINANCIAL DATA
Set forth below is Selected Financial Data for the Company. The
Selected Financial Data is derived from the Company's Annual Report on Form 10-K
for the year ended June 30, 1996 and the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, copies of which are included with this
Proxy Statement. The pro forma selected financial data has been derived from the
pro forma financial statements included herein. The following information should
be read in conjunction with such reports.
<TABLE>
(in thousands, except per share information and return on equity amounts)
Statement of Earnings Information
<CAPTION>
Historical Pro Forma
Six Six
Months Year Months
Ended Ended Ended
Years Ended June 30, Dec.31, June30, Dec.31,
1996(1) 1995 1994 1993 1992 1996(1) 1996(1) 1996(1)
------- ---- ---- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales...................... $ 50,680 $ 39,143 $ 29,846 $ 24,774 $ 28,984 $ 23,459 $ 30,471 $ 11,958
Operating profit (loss).... $ 7,013 $ 5,583 $ 2,234 $ (657) $ 2,120 $ 1,749 $ 2,551 (662)
Earnings (loss) before
income taxes and non-
owned interests......... $ 7,614 $ 6,602 $ 2,526 $ (308) $ 1,962 $ 2,031 $ 3,121 $ (450)
Earnings (loss) before
non-owned interests... $ 4,760 $ 3,637 $ 1,246 $ (237) $ 1,220 $ 1,303 $ 2,047 (303)
Earnings from continuing
operations............ $ 2,055 $ 1,391 $ 588 $ 19 $ 430 $ 750 $ 247 $ (321)
Net earnings (loss)........ $ 2,055 $ 1,542 $ 1,319 $ (290) $ 340 $ 750 $ 247 $ (321)
Net earnings (loss) per
share:
Continuing operations.. $ 1.40 $ 0.96 $ 0.40 $ 0.01 $ 0.29 $ 0.51 $ 0.17 $ (0.22)
Net earnings (loss).... $ 1.40 $ 1.06 $ 0.90 $ (0.20) $ 0.23 $ 0.51 $ 0.17 $ (0.22)
Weighted average number
of shares.............. 1,465 1,460 1,457 1,457 1,457 1,468 1,465 1,468
Dividends declared per
share.................. $ 0.05 $ 0 $ 0 $ 0 $ 0 $ 0 N/A N/A
- ------------------------------------
(1) Includes the accounts of MIDSOUTH Partners. For periods ending prior to
June 30, 1996, the Company accounted for its investment in MIDSOUTH
Partners using the equity method. See Note 6 to the Company's
consolidated financial statements included in the Company's Form 10-K
for the year ended June 30, 1996 which is incorporated herein by
reference.
</TABLE>
21
<PAGE>
<TABLE>
Balance Sheet Information
<CAPTION>
June 30, December 31,
-------------------------------------------------------------- -------------------------------
1996(1) 1995 1994 1993 1992 1996(1) 1996(1)
---- ---- ---- ---- ---- ---- ----
Historical Pro Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Accounts receivable.......... $ 8,497 $ 6,386 $ 6,675 $ 3,641 $ 5,423 $ 8,997 $ 6,140
Working capital.............. $ 17,886 $ 12,152 $ 9,480 $ 7,313 $ 8,044 $ 18,688 $ 27,683
Total assets................. $ 39,451 $ 32,980 $ 29,507 $ 27,559 $ 29,452 $ 42,132 $ 51,970
Short-term debt.............. $ 55 $ 53 $ 611 $ 962 $ 816 $ 44 $ 30
Long-term debt............... $ 136 $ 42 $ 96 $ 458 $ 813 $ 170 $ 154
Non-owned interests.......... $ 16,509 $ 12,367 $ 10,318 $ 9,809 $ 10,749 $ 16,951 $ 13,507
Stockholders' equity......... $ 17,002 $ 15,000 $ 13,445 $ 12,127 $ 12,492 $ 7,799 $ 27,812
Average stockholders' equity
(Weighted average equity
during year exclusive of
current earnings)........ $ 15,010 $ 13,452 $ 12,127 $ 12,454 $ 12,152 $ 17,025 $ 27,414
Return on equity
(Current earnings divided by
average stockholders'
equity as defined above). 13.7% 11.5% 10.9% (2.3%) 2.7% 8.8% (2.3%)
Book value per share......... $ 11.58 $ 10.26 $ 9.23 $ 8.32 $ 8.57 $ 12.08 $ 18.40
- ------------------------------------
(1) Includes the accounts of MIDSOUTH Partners. For periods ending prior to
June 30, 1996, the Company accounted for its investment in MIDSOUTH
Partners using the equity method. See Note 6 to the Company's
consolidated financial statements included in the Company's Form 10-K
for the year ended June 30, 1996 which is incorporated herein by
reference.
</TABLE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet
represents the Company's financial position at December 31, 1996 as if the
Transaction had occurred on that date. The unaudited pro forma condensed
consolidated statements of operations represent the results of the Company's
operations for the year ended June 30, 1996 and the six months ended December
31, 1996 as if the Transaction had occurred on July 1, 1995. The unaudited pro
forma adjustments are based upon available information and certain assumptions
and estimates that the Company believes are reasonable under the circumstances.
The unaudited pro forma results do not purport to be indicative of the results
that would have obtained had the Transaction occurred at the beginning of the
periods presented, nor are they intended to be a projection of future results.
The unaudited pro forma financial information should be read in conjunction with
the notes thereto.
22
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<CAPTION>
Pro Forma
Entries Pro Forma Pro Forma
to Reverse Entries As Adjusted
($ in thousands) CERBCO, Inc. Consolidation to Dispose for COS
Consolidated of COS of COS Disposition
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $10,814 (a) ($4,456) (c) $22,000 $28,358
Accounts receivable 8,997 (a) (2,857) 0 6,140
Inventories 3,538 (a) (2,143) 0 1,395
Deferred income taxes 133 (a) (133) 0 0
Prepaid expenses and other 1,022 (a) (131) 0 891
----- ---- - ---
TOTAL CURRENT ASSETS 24,504 (9,720) 22,000 36,784
Property, Plant and Equipment -
net of accumulated depreciation 12,051 (a) (181) 0 11,870
Other Assets:
Investment in COS 0 (b) 6,887 (c) (6,887) 0
Excess of acquisition cost over
value of net assets acquired - net 4,649 (a) (2,196) 0 2,453
Deferred income taxes 41 (a) (41) 0 0
Deposits and other 887 (a) (24) 0 863
--- --- - ---
TOTAL ASSETS $42,132 ($5,275) $15,113 $51,970
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $5,047 (a) ($1,106) $0 $3,941
Income taxes payable 198 (a) (168) (c) 5,100 5,130
Deferred revenue 527 (a) (527) 0 0
Current portion of capital lease obligations 44 (a) (14) 0 30
-- --- - --
TOTAL CURRENT LIABILITIES 5,816 (1,815) 5,100 9,101
Long-Term Liabilities:
Capital lease obligations 170 (a) (16) 0 154
Deferred income taxes 1,032 0 0 1,032
Other 364 0 0 364
--- - - ---
TOTAL LIABILITIES 7,382 (1,831) 5,100 10,651
----- ------ ----- ------
Non-Owned Interests 16,951 (a) (3,444) 0 13,507
------ ------ - ------
Stockholders' Equity:
Common stock 117 0 0 117
Class B common stock 31 0 0 31
Additional paid-in capital 7,478 0 0 7,478
Retained earnings 10,173 0 (c) 10,013 20,186
------ - ------ ------
TOTAL STOCKHOLDERS' EQUITY 17,799 0 10,013 27,812
------ - ------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $42,132 ($5,275) $15,113 $51,970
======= ======= ======= =======
See notes to unaudited pro forma condensed consolidated financial information.
</TABLE>
23
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<CAPTION>
Pro Forma
Entries Pro Forma Pro Forma
to Reverse Entries As Adjusted
($ in thousands) CERBCO, Inc. Consolidation to Dispose for COS
Consolidated of COS of COS Disposition
<S> <C> <C> <C> <C> <C>
SALES $23,459 (d) ($11,501) $0 $11,958
------- -------- -- -------
COSTS AND EXPENSES:
Cost of sales 16,753 (d) (7,146) 0 9,607
Selling, general and administrative
expenses 4,957 (d) (1,944) 0 3,013
----- ------- -----
Total Costs and Expenses 21,710 (9,090) 0 12,620
------ ------ - ------
Operating Profit (Loss) 1,749 (2,411) 0 (662)
Investment Income 301 (d) (108) 0 193
Interest Expense (17) (d) 2 0 (15)
Other Income (Expense) - net (2) (d) 36 0 34
-- -- - --
Earnings (Loss) Before Income Taxes and
Non-Owned Interests 2,031 (2,481) 0 (450)
Provision (Credit) for Income Taxes 728 (d) (875) 0 (147)
--- ---- - ----
Earnings (Loss) Before Non-Owned Interests 1,303 (1,606) 0 (303)
Non-Owned Interests in Earnings of
Consolidated Subs 553 (d) (535) 0 18
--- ---- - --
NET EARNINGS (LOSS) $750 ($1,071) $0 ($321)
==== ======= == =====
NET EARNINGS (LOSS)
PER SHARE $0.51 ($0.73) $0.00 ($0.22)
===== ====== ===== ======
See notes to unaudited pro forma condensed consolidated financial information.
</TABLE>
24
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<CAPTION>
Pro Forma
Entries Pro Forma Pro Forma
to Reverse Entries As Adjusted
($ in thousands) CERBCO, Inc. Consolidation to Dispose for COS
Consolidated of COS of COS Disposition
<S> <C> <C> <C> <C> <C>
SALES $50,680 (e) ($20,209) $0 $30,471
------- -------- -- -------
COSTS AND EXPENSES:
Cost of sales 34,325 (e) (12,037) 0 22,288
Selling, general and administrative
expenses 9,342 (e) (3,710) 0 5,632
----- ------ - -----
Total Costs and Expenses 43,667 (15,747) 0 27,920
------ ------- - ------
Operating Profit 7,013 (4,462) 0 2,551
Investment Income 380 (e) (89) 0 291
Interest Expense (28) (e) 11 0 (17)
Other Income - net 248 (e) 48 0 296
--- -- - ---
Earnings Before Income Taxes and
Non-Owned Interests 7,613 (4,492) 0 3,121
Provision for Income Taxes 2,854 (e) (1,780) 0 1,074
----- ------ - -----
Earnings Before Non-Owned Interests 4,759 (2,712) 0 2,047
Non-Owned Interests in Earnings of
Consolidated Subs 2,704 (e) (904) 0 1,800
----- ---- - -----
NET EARNINGS $2,055 ($1,808) $0 $247
====== ======= == ====
NET EARNINGS PER SHARE $1.40 ($1.23) $0.00 $0.17
===== ====== ===== =====
See notes to unaudited pro forma condensed consolidated financial information.
</TABLE>
Description of Unaudited Pro Forma Entries
(a) represents COS' historical amounts at December 31, 1996.
(b) represents the Company's investment in COS at December 31, 1996 using the
equity method.
(c) represents the disposition transaction.
(d) represents COS' historical amounts for the six months ended December 31,
1996.
(e) represents COS' historical amounts for the year ended June 30, 1996.
25
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
1. Basis of Presentation
The unaudited pro forma financial information presented is based on the
Company's financial position and results of operations as of December 31, 1996
and for the periods ended June 30, 1996 and December 31, 1996, showing the
effect of the deletion of COS from the consolidated entity and the receipt of
the cash proceeds from the transaction. The pro forma statements do not show any
interest income that might have been earned on the cash proceeds. The unaudited
pro forma financial information has been prepared in accordance with the
instructions to Article 11, Regulation S-X.
2. Earnings Per Share
Earnings per share data have been computed based upon the weighted average
number of common shares outstanding and common share equivalents during each
period. The following numbers of shares have been used in the computations.
Six Months Ended Year Ended
December 31, 1996 June 30, 1996
----------------- -------------
1,468,445 1,465,169
========= =========
3. Tax Effects of Pro Forma Adjustments
The tax effects of the stock redemption transaction and the pre-redemption
dividend are calculated at the statutory rates in effect at December 31, 1996.
26
<PAGE>
SECURITY OWNERSHIP
The following information is furnished with respect to each person or
entity who is known to the Company to be a beneficial owner of more than five
percent of any class of the Company's voting securities as of the Record Date:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Beneficial Ownership
Beneficial Owner Title of Class Owned Outright Percent of Class
<S> <C> <C> <C> <C>
Robert W. Erikson Common Stock 59,200 1/ 5.1%
3421 Pennsy Drive Class B Common Stock 131,750 1/ 42.4%
Landover, MD
George Wm. Erikson Common Stock 58,102 2/ 5.0%
3421 Pennsy Drive Class B Common Stock 115,814 2/ 37.3%
Landover, MD
Koonce Securities, Inc. Common Stock 230,588 3/ 19.8%
6550 Rock Spring Drive
Bethesda, MD
- ------------------------------------
1/ Record and beneficial ownership, sole voting and sole investment power.
2/ Record and beneficial ownership. Includes 2,246 shares of each class of
stock owned jointly with Mr. Erikson's spouse, as to which there is
shared voting and investment power.
3/ Beneficial ownership, sole voting and sole investment power as publicly
disclosed in current Schedule 13G Beneficial Ownership Report,
reporting securities acquired by such financial institution in the
ordinary course of its business.
</TABLE>
The following information is furnished with respect to all directors of
the Company who were the beneficial owners of any shares of Common Stock and/or
Class B Common Stock as of the Record Date, and with respect to all directors
and officers of CERBCO as a group:
<TABLE>
<CAPTION>
Name of Amount & Nature of Beneficial Ownership
Beneficial Owner Title of Class Owned Outright Exercisable Options Percent of
Class
<S> <C> <C> <C> <C>
Robert W. Erikson Common Stock 59,200 1/ 1,500 5.2%
Class B Common Stock 131,750 1/ 0 42.4%
Stock
George Wm. Erikson Common Stock 58,102 2/ 1,500 5.1%
Class B Common Stock 115,814 2/ 0 37.3%
Webb C. Hayes, IV Common Stock 4,500 3,000 0.6%
Paul C. Kincheloe, Jr. Common Stock 4,500 3,000 0.6%
All Directors and Officers Common Stock 126,302 9,000 11.5%
as a Group (6 persons Class B Common Stock 247,564 0 79.6%
including those named
above) 3/ 4/
- ------------------------------------
1/ Record and beneficial ownership, sole voting and sole investment power.
27
<PAGE>
2/ Record and beneficial ownership. Includes 2,246 shares of each class of
stock owned jointly with Mr. Erikson's spouse, as to which there is
shared voting and investment power.
3/ Mr. George Erikson also is the beneficial owner of 16,500 shares of
Common Stock (less than 1% of such class) of Insituform East,
Incorporated, a subsidiary of the Company. In addition, Messrs. George
Erikson and Robert Erikson each are the beneficial owners of
exercisable options on 75,000 shares of the Common Stock (approximately
1.8% of such class) of Insituform East, Incorporated, pursuant to the
Insituform East 1989 and 1994 Board of Directors' Stock Option Plans.
4/ Mr. Armen Manoogian, President and Director of COS, a subsidiary of the
Company, is the beneficial owner of 400 shares (33 1/3%) of the Class B
Stock of COS.
</TABLE>
RELATIONSHIP WITH
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche, LLP were the Company's independent auditors for the
year ended June 30, 1996 and are the Company's independent auditors for the
current fiscal year. The appointment of the Company's auditors is approved
annually by the Board.
Representatives of Deloitte & Touche, LLP will be present at the
Meeting and will be given an opportunity to respond to appropriate questions
from stockholders.
STOCK PRICE
Common Stock
The Company's Common Stock is traded in the over-the-counter market and
is included in the National Association of Securities Dealers ("NASD") National
Market System ("NMS"). Quotations for such shares are reported in the National
Association of Securities Dealers Automated Quotations ("NASDAQ") System under
the trading symbol CERB. Holders of Common Stock have one vote per share on all
matters on which stockholders are entitled to vote together. The following table
shows the range of bid quotations for the period indicated as reported by
NASDAQ:
<TABLE>
Common Stock
<CAPTION>
Fiscal Year Ended June 30, 1995 High Low
---- ---
<C> <C> <C>
1st Quarter 3 7/8 2 5/8
2nd Quarter 5 1/4 3 3/8
3rd Quarter 5 4
4th Quarter 5 1/8 4 1/4
Fiscal Year Ended June 30, 1996 High Low
---- ---
1st Quarter 8 1/4 4 7/8
2nd Quarter 7 5/8 6
3rd Quarter 7 1/2 5 7/8
4th Quarter 8 1/8 6
28
<PAGE>
Fiscal Year Ended June 30, 1997 High Low
---- ---
1st Quarter 7 3/8 5 3/8
2nd Quarter 7 1/4 5 1/4
3rd Quarter 9 3/4 6 1/8
</TABLE>
The quotations in the above table represent prices between dealers,
without retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
On March 6, 1997, the last trading day prior to the public announcement
of the Transaction, the last sale price for the Company's Common Stock was $
6.375.
Class B Common Stock
There is no public trading market for shares of Class B Common Stock.
Holders of shares of Class B Common Stock have ten votes per share on all
matters with the exception of the election of directors and any other matter
requiring the vote of stockholders separately as a class. Holders of Class B
Common Stock are entitled to elect the remaining directors after election of not
less than 25% of the directors by the holders of Common Stock, voting separately
as a class. Shares of Class B Common Stock are convertible at any time to shares
of Common Stock on a share-for-share basis.
Holders
As of --------------- 1997, the approximate number of record holders of
each class of common equity of the Company was as follows:
Common Stock [ ]
Class B Common Stock [ ]
Dividends
On June 18, 1996, the Company declared cash dividends of five cents per
share on its shares of Common Stock and five cents per share on its shares of
Class B Common Stock to its stockholders of record at the close of business on
June 30, 1996, payable July 15, 1996. No dividends were declared in 1995 or
1994.
OTHER MATTERS
The Board is not aware of any other matters which are likely to be
brought before the Meeting. However, if any other matters are properly brought
before the Meeting, it is the intention of the individuals named in the enclosed
form of Proxy to vote the proxy in accordance with their judgment on such
matters.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents of the Company, which have been filed with the
U.S. Securities and Commission, are hereby incorporated by reference in this
Proxy Statement and made a part hereof:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996;
29
<PAGE>
(b) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996;
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996;
(d) the Company's Current Report on Form 8-K filed March 12, 1997;
(e) the Company's Current Report on Form 8-K filed March 24, 1997; and
(f) all other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the Annual
Report referred to in (a) above;
DEADLINE FOR SUBMITTING STOCKHOLDER PROPOSALS
FOR INCLUSION IN THE BOARD'S PROXY STATEMENT IN
CONNECTION WITH THE FISCAL YEAR 1997 ANNUAL MEETING
A proposal submitted by a stockholder for action at the Company's
Annual Meeting of Stockholders for the fiscal year ending June 30, 1997 must be
received no later than June 30, 1997, in order to be included in the Company's
Proxy Statement for that meeting. It is suggested that proponents submit their
proposals by certified mail-return receipt requested.
A proponent of a proposal must be a record or beneficial owner entitled
to vote at the next Annual Meeting on the proposal and must continue to be
entitled to vote through the date on which that meeting is held.
By Order of the Board of Directors,
/s/ Robert F. Hartman
Secretary
Landover, Maryland
April 24, 1997
30
<PAGE>
APPENDIX A
TEXT OF COMMON STOCK PROXY CARD:
COMMON STOCK
CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
(301) 773-1784
SPECIAL MEETING OF STOCKHOLDERS - JUNE 20, 1997
PROXY - COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Paul C. Kincheloe, Jr. and Webb C.
Hayes, IV, and each of them, with full power of substitution, the Proxies of the
undersigned to represent and to vote, as designated on the reverse side of this
proxy card, all the shares of Common Stock of CERBCO, Inc. held of record by the
undersigned on April 21, 1997, at the Special Meeting of Stockholders to be held
on June 20, 1997 or any adjournments thereof.
(TO BE SIGNED ON REVERSE SIDE)
- -----------------------------------------------------
[ X ] Please mark your votes as in this example.
1. To approve the sale by the Company of its two-thirds stake in Capitol
Office Solutions, Inc. held by the Company's wholly-owned subsidiary
CERBERONICS, Inc. pursuant to the terms of an Investment, Redemption and Stock
Purchase Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their own discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
PLEASE SIGN, DATE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
- ------------------------------------- --------------------------------
SIGNATURE SIGNATURE (IF HELD JOINTLY)
Dated: --------------------, 1997
NOTE: Signature(s) should be exactly as name(s) appearing on your
certificate. If stock is held jointly, each holder should sign. If
signing is by attorney, executor, administrator, trustee, guardian or
corporate officer, etc., please give your full title as such.
31
<PAGE>
APPENDIX B
TEXT OF CLASS B COMMON STOCK PROXY CARD:
CLASS B COMMON STOCK
CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
(301) 773-1784
SPECIAL MEETING OF STOCKHOLDERS - JUNE 20, 1997
PROXY - CLASS B COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Paul C. Kincheloe, Jr. and Webb C.
Hayes, IV, and each of them, with full power of substitution, the Proxies of the
undersigned to represent and to vote, as designated on the reverse side of this
proxy card, all the shares of Class B Common Stock of CERBCO, Inc. held of
record by the undersigned on April 21, 1997, at the Special Meeting of
Stockholders to be held on June 20, 1997 or any adjournments thereof.
(TO BE SIGNED ON REVERSE SIDE)
- -----------------------------------------------------
[ X ] Please mark your votes as in this example.
1. To approve the sale by the Company of its two-thirds stake in Capitol
Office Solutions, Inc. held by the Company's wholly-owned subsidiary
CERBERONICS, Inc. pursuant to the terms of an Investment, Redemption and Stock
Purchase Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their own discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
PLEASE SIGN, DATE AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
- ----------------------------------- ----------------------------------
SIGNATURE SIGNATURE (IF HELD JOINTLY)
Dated: -------------------------, 1997
NOTE: Signature(s) should be exactly as name(s) appearing on your
certificate. If stock is held jointly, each holder should sign. If
signing is by attorney, executor, administrator, trustee, guardian or
corporate officer, etc., please give your full title as such.
32
<PAGE>
EXHIBIT A EXECUTION COPY
INVESTMENT, REDEMPTION
AND STOCK PURCHASE AGREEMENT
By and Among
GOLDER, THOMA, CRESSEY, RAUNER FUND IV
and certain other Investors
to be listed on the Schedule 1,
CAPITOL OFFICE SOLUTIONS, INC.
(f/k/a Capitol Copy Products, Inc.),
CERBERONICS, INC.
CERBCO, INC.
and
ARMEN MANOOGIAN
Dated March 7, 1997
33
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Definitions....................................................... 3
ARTICLE II
THE REDEMPTION, FINANCING, INVESTMENT
AND STOCK PURCHASE
2.1 Recapitalization.................................................. 9
2.2 The Financing..................................................... 9
2.3 The Redemption; Redemption Price.................................. 9
2.4 The Investment.................................................... 9
2.5 The Stock Purchase................................................ 9
2.6 Allocation Among the Investors.................................... 10
2.7 Escrow Arrangements............................................... 10
2.8 Redemption Price and Stock Purchase Price Adjustments............. 11
(a) Funded Indebtedness Adjustment........................... 11
(b) Working Capital Adjustment............................... 11
(c) Adjustment if Closing Occurs After the Transaction Date.. 11
(d) Allocation............................................... 11
2.9 Payment of Net Redemption Price and Net Stock Purchase Price
to Stockholders................................................. 11
2.10 Closing Audit..................................................... 12
2.11 Post-Closing Redemption Price and Stock Purchase Price Adjustment. 12
2.12 Example........................................................... 13
2.13 Closing........................................................... 13
(a) Deliveries............................................... 13
(b) Time and Place........................................... 13
2.14 Consequence of Delay in Closing.................................. 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND STOCKHOLDERS
3.1 Capitalization.................................................... 14
3.2 Issuance of the Investment Shares................................. 14
3.3 Other Rights to Acquire Capital Stock............................. 14
3.4 Due Organization.................................................. 15
3.5 No Subsidiaries................................................... 15
3.6 Due Authorization................................................. 15
3.7 Financial Statements.............................................. 15
3.8 Certain Actions................................................... 16
3.9 Properties........................................................ 17
3.10 Licenses and Permits.............................................. 17
3.11 Intellectual Property............................................. 18
3.12 Compliance with Laws.............................................. 18
3.13 Insurance......................................................... 18
3.14 Employee Benefit Plans............................................ 19
(a) Employee Welfare Benefit Plans........................... 19
i
<PAGE>
(b) Employee Pension Benefit Plans........................... 19
(c) Employment and Non-Tax Qualified Deferred Compensation
Arrangements........................................... 19
3.15 Contracts and Agreements.......................................... 19
3.16 Claims and Proceedings............................................ 20
3.17 Taxes............................................................. 20
3.18 Personnel......................................................... 21
3.19 Business Relations................................................ 22
3.20 Accounts Receivable............................................... 22
3.21 Bank Accounts..................................................... 22
3.22 Agents............................................................ 22
3.23 Warranties........................................................ 22
3.24 Brokers........................................................... 23
3.25 Interest in Competitors, Suppliers, Customers, Etc................ 23
3.26 Indebtedness To and From Officers, Directors, Stockholders, and
Employees....................................................... 23
3.27 Undisclosed Liabilities........................................... 23
3.28 Information Furnished............................................. 23
3.29 No Liens on Shares................................................ 23
3.30 Due Organization.................................................. 24
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
4.1 Due Organization of GTCR IV....................................... 24
4.2 Due Authorization................................................. 24
4.3 No Brokers........................................................ 24
4.5 No Undisclosed Agreement.......................................... 25
ARTICLE V
COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
5.1 Conduct of Business Pending Closing............................... 25
(a) Negative Covenants....................................... 25
(b) Conduct of Business...................................... 26
(c) Nature of Breach......................................... 26
(d) No Solicitation.......................................... 26
(e) Access to Information.................................... 27
(f) Transfers or Restrictions................................ 27
5.2 Cerbco Stockholders Meeting....................................... 27
5.3 Consents of Others................................................ 28
5.4 Stockholders' Efforts............................................. 28
5.5 Powers of Attorney................................................ 28
5.6 Transfer Taxes.................................................... 28
5.7 Notice of Developments; Update of Disclosure Schedules............ 28
ARTICLE VI
POST-CLOSING COVENANTS
6.1 General........................................................... 29
6.2 Litigation Support................................................ 29
6.3 Transition........................................................ 29
6.4 Confidentiality................................................... 29
ARTICLE VII
CONDITIONS TO OBLIGATION OF PARTIES TO CONSUMMATE CLOSING
ii
<PAGE>
7.1 Conditions to the Investors' Obligations.......................... 30
(a) Satisfaction with Due Diligence.......................... 30
(b) Covenants, Representations and Warranties................ 30
(c) Hart-Scott-Rodino; Other Consents........................ 31
(d) Cash on Balance Sheet.................................... 31
(e) Discharge of Indebtedness and Encumbrances............... 31
(f) Material Adverse Change.................................. 31
(g) Recapitalization Documents............................... 31
(h) Erikson Voting Agreement................................. 31
(i) Cerbco and Cerberonics Stockholder Approval.............. 32
(j) Deliveries by the Stockholders and the Company........... 32
(i) Opinion of Stockholders' Counsel................ 32
(ii) Certificates.................................... 32
(iii) Escrow Agreement................................ 32
(iv) Resignation of Directors........................ 32
(v) Release......................................... 32
(vi) Stock Certificates.............................. 32
(k) Ancillary Documents...................................... 33
7.2 Conditions to the Company's and the Stockholders' Obligations..... 33
(a) Covenants, Representations and Warranties................ 33
(b) Consents................................................. 33
(c) Deliveries by the Investors.............................. 33
(i) Opinion of the Investors' Counsel............... 33
(ii) Escrow Agreement................................ 33
(iii) Purchase Price for GTCR Shares.................. 34
(iv) Ancillary Documents............................. 34
(d) Deliveries in Connection With the Redemption............. 34
(e) Deliveries in Connection With the Stock Purchase......... 34
ARTICLE VIII
INDEMNIFICATION
8.1 Indemnification by the Stockholders............................... 34
8.2 Defense of Claims................................................. 35
8.3 Escrow Claim...................................................... 35
8.4 Tax Audits, Etc................................................... 35
8.5 Indemnification of the Stockholder................................ 36
8.6 Limits on Indemnification......................................... 36
ARTICLE IX
TERMINATION
9.1 Termination....................................................... 36
(a) Mutual Consent........................................... 37
(b) Litigation............................................... 37
(c) Conditions to the Investors' Obligations................. 37
(d) Conditions to the Stockholders' and the Company's
Obligations............................................ 37
(e) Alternative Transaction.................................. 37
(f) Withdrawal of Cerbco Board Approval...................... 37
(g) Lack of Favorable Fairness Opinion....................... 37
(h) Rejection by Cerbco Stockholders......................... 37
9.2 Effect of Termination............................................. 38
9.3 Fees and Expenses................................................. 38
ARTICLE X
iii
<PAGE>
MISCELLANEOUS
10.1 Modifications..................................................... 38
10.2 Notices........................................................... 38
10.3 Counterparts...................................................... 41
10.4 Expenses.......................................................... 41
10.5 Binding Effect; Assignment........................................ 41
10.6 Entire and Sole Agreement......................................... 41
10.7 Governing Law..................................................... 41
10.8 Survival of Representations, Warranties and Covenants............. 42
10.9 Invalid Provisions................................................ 42
10.10 Public Announcements.............................................. 42
10.11 Remedies Cumulative............................................... 42
10.12 Waiver............................................................ 42
10.13 Further Assurances................................................ 42
10.14 Headings.......................................................... 43
10.15 Joinder by Additional Investors................................... 43
iv
<PAGE>
LIST OF EXHIBITS*
Exhibit A Escrow Agreement
Exhibit B December 31, 1996 Balance Sheet
Exhibit C-1 Opinion of Company's Counsel
Exhibit C-2 Opinion of Cerbco's Counsel
Exhibit C-3 Opinion of Manoogian's Counsel
Exhibit D-1 Company's Certificates
Exhibit D-2 Cerbco's Certificates
Exhibit D-3 Cerberonics' Certificate
Exhibit E Opinion of Investors' Counsel
Exhibit F Amendment to Certificate of Incorporation of Capitol
Exhibit G Erikson Voting Agreement
Exhibit H Stockholders' Release
Exhibit I Erikson Consulting and Non-Compete Agreement
Exhibit J Stockholders Agreement (Investors/Manoogian)
Exhibit K Registration Rights Agreement
Exhibit L Manoogian Executive Agreement
Exhibit M Global Consulting Agreement
Exhibit N GTCR Placement Fee Agreement
*NOTE: At the time of this Agreement, Exhibits A and B, D-1, D-2, D-3 and
F through N are attached. On the other hand, the forms of Exhibits
C-1 through C-3 and E will be mutually agreed prior to Closing.
v
<PAGE>
LIST OF SCHEDULES
Schedule 1 Schedule of Investors
Schedule 2 Transactions and Capitalization Summary
Schedule 2.8 Funded Indebtedness
Schedule 2.9 Stockholder Accounts
Schedule 2.12 Example of Redemption Price and Stock Purchase Price
Adjustments, Escrow Arrangements and Funding Mechanics
Schedule 3.4A Certificate and Bylaws
Schedule 3.4B Due Organization
Schedule 3.5 Subsidiaries
Schedule 3.7 Financial Statements
Schedule 3.8A Certain Actions
Schedule 3.8B Material Changes
Schedule 3.9 Properties
Schedule 3.10 Licenses and Permits
Schedule 3.11 Intellectual Property
Schedule 3.13 Insurance
Schedule 3.14 Employee Benefit Plans
Schedule 3.15 Contracts and Agreements
Schedule 3.16 Claims and Proceedings
Schedule 3.18 Personnel
Schedule 3.20 Accounts Receivable; Inventory
Schedule 3.21 Bank Accounts
Schedule 3.22 Agents
Schedule 3.23 Warranties
Schedule 3.25 Interest in Competitors, Suppliers, Customers, Etc.
Schedule 3.26 Indebtedness with Officers, Directors and Stockholders
Schedule 3.27 Undisclosed Liabilities
Schedule 3.28 Information Furnished
Schedule 7.1(e) Funded Indebtedness
vi
<PAGE>
INVESTMENT, REDEMPTION AND
STOCK PURCHASE AGREEMENT
THIS INVESTMENT, REDEMPTION AND STOCK PURCHASE AGREEMENT (this
"Agreement") is entered into as of March 7, 1997, by and among GOLDER, THOMA,
CRESSEY, RAUNER FUND IV, L.P., a Delaware limited partnership ("GTCR IV"), on
behalf of itself and certain other investors who may execute a joinder hereto
and shall be listed on Schedule 1 of this Agreement (GTCR IV and the other
signatory investors shall be referred to herein individually as an "Investor"
and collectively as the "Investors"), CAPITOL OFFICE SOLUTIONS, INC. (f/k/a
Capitol Copy Products, Inc.), a Delaware corporation (the "Company"), CERBCO,
INC., a Delaware corporation ("Cerbco"), CERBERONICS, INC., a Delaware
corporation and a wholly-owned subsidiary of Cerbco ("Cerberonics")
(collectively, Cerbco and Cerberonics are referred to herein as the "Cerberonics
Parties"), and ARMEN MANOOGIAN ("Manoogian"; collectively, the Cerberonics
Parties and Manoogian are sometimes referred to herein as the "Stockholders" and
individually as a "Stockholder").
Recitals
Pursuant to this Agreement, the Company, which is engaged in the office
equipment dealer and service industry in the Washington, D.C. metropolitan area
(the "Business"), will be recapitalized in a series of contemporaneous
transactions. Due to the complexity of these transactions, they will be briefly
described in the following recitals:
a. THE CURRENT CAPITALIZATION OF THE COMPANY
On the date of this Agreement, the Company's capitalization consists of
40,000 shares of Common Stock, $.10 par value, of which no shares are issued and
outstanding, and 10,000 shares of Class B Common Stock, $.10 par value, of which
1,200 shares are issued and outstanding. No preferred stock is authorized or
outstanding. Cerberonics owns 800 shares of the Class B Common Stock (i.e.,
two-thirds of the outstanding equity) and Manoogian owns the remaining 400
shares of the Class B Common Stock (i.e., one-third of the outstanding equity).
A chart showing the details of the Company's current capitalization is set forth
in Part 1 of Schedule 2 attached hereto.
b. THE RECAPITALIZATION
Prior to the closing of the transactions described in Recitals C through F
below (collectively, the "Transactions"), the Company will recapitalize itself
(the "Recapitalization"), by amending its Certificate of Incorporation to
authorize three classes of common stock, Class A Common Stock, $.01 par value
(the "Class A Common"), Class B Common Stock, $.01 par value (the "Class B
Common"), and Class C Common Stock, $.01 par value (the "Class C Common,"
together with the Class A Common and the Class B Common, the "Common Stock").
Pursuant to the Recapitalization, each share of the Company's currently issued
and outstanding Class B Common Stock will be exchanged for .61875 shares of
Class A Common, .37125 shares of Class B Common and .01 shares of Class C
Common. A chart showing the details of the Recapitalization is set forth in Part
2 of Schedule 2 attached hereto.
c. THE FINANCING
It is anticipated that the Company will enter into a credit agreement or
agreements with a financial institution or institutions (the "Financing") to be
arranged by GTCR IV (the "Credit Facilities"), which Credit Facilities shall
provide for a loan or loans to the Company on commercially reasonable terms in
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connection with the Transactions in the principal amount of up to approximately
$24,000,000 (the "Loan Proceeds"). The closing of the Credit Facilities is not a
condition precedent to the closing of the Transactions, and if for any reason
the Financing is not fully consummated, such that some or all of the Loan
Proceeds are not received by the Company, but all of the remaining closing
conditions to this Agreement are satisfied, then the Investors will be
responsible for funding on commercially reasonable terms the sums necessary to
consummate the Transactions (any such other funds, together with any Loan
Proceeds as necessary to consummate the Transactions, shall be referred to
herein as the "Financing Proceeds").
d. THE REDEMPTION
Following the Recapitalization and, if it occurs, the closing of the Credit
Facilities, and subject to the terms and conditions of this Agreement, all of
the shares of Class A Common, Class B Common and Class C Common of the Company
held by Cerberonics (the "Cerberonics Shares") will be redeemed by the Company
for a purchase price of $23,750 per share and an aggregate purchase price of
$19,000,000 subject to adjustment and escrow holdbacks as provided herein) (the
"Redemption").
e. THE INVESTMENT
Contemporaneously with the Redemption, and subject to the terms and
conditions of this Agreement, the Investors will purchase from the Company 49.5
shares of Class A Common and .5 shares of Class C Common for a purchase price of
$20,000 per share and an aggregate purchase price of $1,000,000 (the
"Investment").
f. THE STOCK PURCHASE
Contemporaneously with the Redemption and the Investment, and subject to
the terms and conditions of this Agreement, the Investors will purchase from
Manoogian all 247.5 shares of Class A Common held by him and 62.5% of the Class
C Common (2.5 shares) held by him for a purchase price of $20,000 per share and
an aggregate purchase price of $5,000,000 (subject to adjustment and escrow
holdbacks as provided herein) (the "Stock Purchase"). In connection with the
Transactions, Manoogian, the Investors and the Company will enter into various
stockholder agreements, registration rights agreements and employment
agreements, all as provided herein. A chart showing the effect of the
Transactions on the Company's capitalization is set forth in Part 6 of Schedule
2 attached hereto.
g. SUMMARY OF THE TRANSACTIONS
In sum, in the context of the Transactions the Company is being valued at
$27,000,000. Cerberonics is receiving $19,000,000 for redeeming its two-thirds
interest, which is equal to two-thirds of $27,000,000 plus a $1,000,000 control
premium. Manoogian's one-third interest is therefore valued at $8,000,000. He
will receive $5,000,000 in conjunction with the Transactions for a portion of
his interest in the Company and will end up with a one-third interest in the
newly leveraged Company, with the remaining two-thirds interest being held by
the Investors. The foregoing valuation and payments are subject to adjustment
and holdbacks as provided herein. In addition to the foregoing, immediately
prior to the Closing, the Company will distribute to Cerberonics and Manoogian
(in proportion to their respective two-thirds/one-third interest in the Company)
all but approximately $800,000 of the Company's cash.
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Agreement
Accordingly, in consideration of the mutual premises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto covenant and agree
as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. When used in this Agreement, and in addition to those terms
defined in the Preamble and the Recitals above, the following terms have
the meanings specified or referred to in this Section 1.1 and shall be
equally applicable to both the singular and plural forms. Any agreement
referred to below shall mean such agreement as amended, supplemented and
modified from time to time to the extent permitted by the applicable
provisions thereof and by this Agreement.
"Affiliate" means, with respect to any Person, any other Person which
directly or indirectly controls, is controlled by or is under common
control with such Person.
"Ancillary Documents" means the Erikson Consulting and Non-Compete
Agreement, the Global Consulting Agreement, the GTCR Placement Fee
Agreement, the Manoogian Executive Agreement, the Registration Rights
Agreement and the Stockholders Agreement.
"Cash Flow" has the meaning specified in Section 2.14.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act, 42 U.S.C. ss.ss. 9601 et seq., any amendments thereto,
any successor statutes, and any regulations promulgated thereunder.
"Closing" has the meaning specified in Section 2.11.
"Closing Balance Sheet" has the meaning specified in Section 2.8.
"Closing Date" has the meaning specified in Section 2.11.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means all confidential information and
trade secrets of the Company including, without limitation, the identity,
lists or descriptions of any customers, referral sources or organizations;
financial statements, cost reports or other financial information; contract
proposals, or bidding information; business plans and training and
operations methods and manuals; personnel records; fee structure; and
management systems, policies or procedures, including related forms and
manuals. Confidential Information shall not include any information (i)
which is disclosed pursuant to subpoena or other legal process, (ii) which
has been publicly disclosed, (iii) which subsequently becomes known to a
third party not subject to a confidentiality agreement with the Company, or
(iv) which is subsequently disclosed by any third party not in breach of a
confidentiality agreement.
"Contracts" has the meaning specified in Section 3.15.
"Court Order" means any judgment, order, award or decree of any
foreign, federal, state, local or other court or tribunal and any award in
any arbitration proceeding.
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"Encumbrance" means any lien, claim, charge, security interest,
mortgage, pledge, easement, conditional sale or other title retention
agreement, defect in title, covenant or other restrictions of any kind,
other than a Permitted Exception.
"Environmental Obligations" has the meaning specified in Section 3.12.
"Eriksons" means Robert W. Erikson and George Wm. Erikson, who in the
aggregate own approximately 9.8% of the total issued and outstanding common
stock and 79.7% of the total issued and outstanding Class B common stock of
Cerbco, and together control approximately 60.6% of the total voting power
of Cerbco.
"Erikson Consulting and Non-Compete Agreement" means the agreement
entered into as of the Closing Date between the Company and the Eriksons,
in substantially the form set forth in Exhibit I attached hereto, and
pursuant to which the Eriksons have agreed to provide consulting services
to the Company and be restricted in certain competitive activities.
"Erikson Voting Agreement" means the Voting Agreement of even date
herewith between the Investors and the Eriksons, in the form of Exhibit G,
and pursuant to which the Eriksons have agreed to support the Redemption
and vote their Cerbco shares in the same proportion as the non-Erikson
stockholders of Cerbco vote their shares, subject to the "fiduciary outs"
provided therein.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Ernst & Young" means Ernst & Young, independent public accountants.
"Escrow Agent" means that certain escrow agent as is mutually
acceptable by the parties hereto to serve as such under the Escrow
Agreement.
"Escrow Agreement" means the Escrow Agreement to be executed by and
among the Stockholders, the Company, the Investors and the Escrow Agent in
the form of Exhibit A.
"Escrow Period" has the meaning specified in Section 2.7.
"Escrow Sum" has the meaning specified in Section 2.7.
"Financial Statements" has the meaning specified in Section 3.7.
"Financing Proceeds" has the meaning specified in Section 2.2.
"Funded Indebtedness" means all (i) indebtedness of such Person for
borrowed money or other interest-bearing indebtedness; (ii) capital lease
obligations of such Person other than those set forth on Schedule 2.8;
(iii) obligations of such Person to pay the deferred purchase or
acquisition price for goods or services, other than trade accounts payable
or accrued expenses in the ordinary course of business; (iv) indebtedness
of others guaranteed by such Person or secured by an Encumbrance on such
Person's property other than those set forth on Schedule 2.8; or (v)
extended credit terms from manufacturers provided to such Person.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
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"Global Consulting Agreement" means that certain consulting agreement
to be entered into as of the Closing Date between the Company and Global
Imaging Systems, Inc., in substantially the form of Exhibit M attached
hereto.
"Governmental Body" means any foreign, federal, state, local or other
governmental authority or regulatory body.
"Governmental Permits" has the meaning specified in Section 3.10.
"GTCR Placement Fee Agreement" means that certain placement fee
agreement to be entered into as of the Closing Date between the Company and
GTCR IV, in substantially the form of Exhibit N attached hereto.
"Indemnifiable Costs" has the meaning specified in Section 8.1.
"Indemnified Parties" has the meaning specified in Section 8.1.
"Intellectual Property" has the meaning specified in Section 3.11.
"Inventory" has the meaning specified in Section 3.20(b).
"Investment Price" has the meaning specified in the Section 2.4.
"Investment Shares" means the Shares being purchased by the Investors
from the Company pursuant to the Investment.
"IRS" means the Internal Revenue Service.
"Loan Proceeds" has the meaning specified in Section 2.2.
"Manoogian Shares" means the Shares being purchased by the Investors
from Manoogian pursuant to the Stock Purchase.
"Manoogian Executive Agreement" means that certain executive
employment agreement to be entered into as of the Closing Date between the
Company and Manoogian, in substantially the form of Exhibit L attached
hereto.
"Material Adverse Change" or "Material Adverse Effect" means a
material adverse change or effect on the assets, properties, Business or
the operations, liabilities, or conditions (financial or otherwise) of the
Company; provided, however, that when such terms are used in Article III
hereof, they shall have the meaning set forth in the preamble to Article
III.
"Net Redemption Price" has the meaning specified in Section 2.9.
"Net Stock Purchase Price" has the meaning specified in Section 2.9.
"OSHA" means the Occupational Safety and Health Act, 29 U.S.C. Section
651 et seq., any amendment thereto, and any regulations promulgated
thereunder.
"Permitted Exception" means (a) liens for Taxes and other governmental
charges and assessments which are not yet due and payable, (b) liens of
landlords and liens of carriers,
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warehousemen, mechanics and materialmen and other like liens arising
in the ordinary course of business for sums not yet due and payable, (c)
other liens or imperfections on property which are not material in amount
or do not materially detract from the value of or materially the existing
use of the property affected by such lien or imperfection and (d) such
statement of facts shown on any title insurance policies delivered to the
Investors. In respect of Inventory, the term "Permitted Exception" also
includes liens arising out of vendor financing in the ordinary course of
business for the deferred purchase price of Inventory, provided that an
aggregate of 80% of the obligations secured by such liens is paid within 45
days of the incurrence of the obligations giving rise to such liens.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company,
trust, unincorporated organization or Governmental Body.
"Preliminary Closing Balance Sheet" shall mean the Company's best
estimate of the Company's balance sheet as of the Closing Date. The
Preliminary Closing Balance Sheet shall be delivered to the Investors and
Stockholders not less than three (3) nor more than seven (7) days prior to
the Closing Date.
"RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.
ss.ss. 6901 et seq., and any successor statute, and any regulations
promulgated thereunder.
"Redemption Price" has the meaning specified in Section 2.3.
"Registration Rights Agreement" means the Registration Rights
Agreement to be entered into as of the Closing Date between the Investors,
Manoogian and the Company, in substantially the form of Exhibit K attached
hereto.
"Requirements of Laws" means any federal, state and local laws,
statutes, regulations, rules, codes or ordinances enacted, adopted, issued
or promulgated by any Governmental Body (including, without limitation,
those pertaining to electrical, building, zoning, environmental and
occupational safety and health requirements) or common law.
"Restricted Securities" means the Shares issued to or purchased by the
Investors hereunder, and any securities issued with respect thereto by way
of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization. As
to any particular Restricted Securities, such securities will cease to be
Restricted Securities when they have (a) been effectively registered under
the Securities Act and disposed of in accordance with the registration
statement covering them, (b) become eligible for sale and have actually
been sold to the public pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act or (c) been otherwise transferred and
new certificates for them not bearing the Securities Act legend set forth
in Section 6.7 have been delivered by the Company in accordance with
Section 6.6(b). Whenever any particular securities cease to be Restricted
Securities, the holder thereof will be entitled to receive from the
Company, without expense, new securities of like tenor not bearing a
Securities Act legend of the character set forth in Section 6.7.
"Schedule of Investors" means that certain Schedule 1 attached hereto
and to be updated prior to the Closing pursuant to Section 2.6, setting
forth the list of Investors who, in addition to GTCR IV, shall be parties
hereto.
"SEC" means the United States Securities and Exchange Commission and
any Governmental Body succeeding to the functions thereof.
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"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Shares" means any of the Company's shares being redeemed pursuant to
the Redemption or purchased pursuant to the Investment or the Stock
Purchase.
"Stockholders" means, collectively, the Cerberonics Parties and
Manoogian.
"Stockholders Agreement" means the Stockholders Agreement to be
entered into as of the Closing Date between the Investors and Manoogian in
substantially the form of Exhibit J attached hereto, and governing certain
of their relative rights as stockholders of the Company following the
Closing Date.
"Stock Purchase Price" has the meaning specified in Section 2.5.
"Tax" or "Taxes" means any federal, state, local or foreign income,
alternative or add-on minimum, gross income, gross receipts, windfall
profits, severance, property, production, sales, use, transfer, gains,
license, excise, employment, payroll, withholding or minimum tax, transfer,
goods and services, or any other tax, custom, duty, governmental fee or
other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by
any Governmental Body.
"Tax Return" means any return, report or similar statement required to
be filed with respect to any Taxes (including any attached schedules),
including, without limitation, any information return, claim for refund,
amended return and declaration of estimated Tax.
"Transaction Date" has the meaning specified in Section 2.8(c).
"Working Capital" shall mean the difference between the Company's
current assets and its current liabilities as such items are calculated in
accordance with GAAP, consistent with the Company's past practices.
ARTICLE II
THE REDEMPTION, FINANCING, INVESTMENT
AND STOCK PURCHASE
2.1 Recapitalization. Prior to the Closing Date, the Company shall amend its
Certificate of Incorporation to authorize the issuance of the three classes
of the Common Stock (i.e., Class A Common Stock, Class B Common Stock and
Class C Common Stock) each having the rights and preferences set forth in
the Amendment to the Company's Certificate of Incorporation in
substantially the form of Exhibit F attached hereto and as set forth in
more detail in the chart in Part 2 of Schedule 2, and as necessary to
effect the Transactions.
2.2 The Financing. On the Closing Date, assuming such facilities have been
arranged, the Company shall consummate the Financing by entering into the
Credit Facilities. The closing of the Credit Facilities is not a condition
precedent to the closing of the Transactions, and if for any reason the
Company is unable to borrow a sufficient amount of Loan Proceeds, but all
of the other conditions precedent to the consummation of the Transactions
have been satisfied, then the Investors shall be required to provide or
otherwise arrange sufficient Financing Proceeds to consummate the
Transactions.
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2.3 The Redemption; Redemption Price. On the Closing Date, subject to the terms
and conditions set forth herein, the Company shall consummate the
Redemption by redeeming all of the Cerberonics Shares (i.e., the 495 shares
of Class A Common, 297 shares of Class B Common and 8 shares of Class C
Common) held by the Cerberonics Parties following the Recapitalization (see
Part 2 of Schedule 2). Subject to the terms of Sections 2.7, 2.8 and 2.11,
which provisions require certain holdbacks and adjustments prior to the
distribution of such price to Cerberonics, the Cerberonics Shares shall be
redeemed at a price of $23,750 per share, for an aggregate gross redemption
price of $19,000,000 (the "Redemption Price").
2.4 The Investment. On the Closing Date, contemporaneously with consummation of
the Redemption and subject to the terms and conditions set forth herein,
the Company and the Investors shall consummate the Investment by the
Investors purchasing from the Company, and the Company issuing and selling
to the Investors, 49.5 shares of Class A Common and .5 shares of Class C
Common at a price of $20,000 per share, for an aggregate purchase price of
$1,000,000 (the "Investment Price") (see Part 4 of Schedule 2).
2.5 The Stock Purchase. On the Closing Date, contemporaneously with the
consummation of the Redemption and the Investment and subject to the terms
and conditions set forth herein, the Investors and Manoogian shall
consummate the Stock Purchase by Manoogian selling to the Investors, and
the Investors purchasing from Manoogian, 247.5 shares of Class A Common and
2.5 shares of Class C Common (the "Manoogian Shares") (see Part 5 of
Schedule 2). Subject to the terms of Sections 2.7, 2.8 and 2.11, which
provisions require certain holdbacks and adjustments prior to the
distribution of the stock purchase price to Manoogian, the Manoogian Shares
shall be purchased at a price of $20,000 per share, for an aggregate gross
purchase price of $5,000,000 (the "Stock Purchase Price").
2.6 Allocation Among the Investors. GTCR IV is the sole Investor as of the date
that this Agreement is executed; provided, however, that on or before ten
(10) days prior to the Closing Date, GTCR IV will present the Company and
the Stockholders with an updated Schedule 1 (the "Schedule of Investors"),
and each additional Investor shown thereon shall execute a counterpart of
this Agreement on or prior to the Closing Date in accordance with Section
10.15. Allocation as among the Investors of the Shares purchased by the
Investors pursuant to the Investment and the Stock Purchase shall be as set
forth on the Schedule of Investors, and the overall capitalization of the
Company following the consummation of all of the Transactions, shall be as
set forth in Part 6 of Schedule 2.
2.7 Escrow Arrangements. Pursuant to the Escrow Agreement (in substantially the
form of Exhibit A) to be entered into among the Stockholders, the Company,
the Investors and the Escrow Agent, the Stockholders shall cause to be
delivered to the Escrow Agent at Closing $1,500,000, which amount shall be
allocated as follows: (i) in respect of the Cerberonics Parties, $1,055,556
(19/27 x $1,500,000) shall be deducted from the Redemption Price; and (ii)
in respect of Manoogian, (A) $277,778 (= 8/27 x $1,500,000 x 5/8) shall be
deducted from the Stock Purchase Price, and (B) Manoogian will deliver to
the Escrow Agent pursuant to the Escrow Agreement 8.33 shares of Class B
Common Stock (=(8/27 x $1,500,000 x 3/8) / $20,000). (The cash portions of
such escrowed amounts, together with interest accrued thereon and the Class
B Common Stock escrowed by Manoogian shall be referred to as the "Escrow
Sum.") The Escrow Sum shall be held pursuant to the terms of the Escrow
Agreement for payment of amounts, if any, owing by the Stockholders to the
Company or the Investors in accordance with Article VIII below. The Escrow
Agreement shall provide for the proper allocation of claims made against
the Escrow Sum by the Investors as among the Cerberonics Parties and
Manoogian, as well as the priority as between the cash and stock portion of
the Escrow Sum contributed by Manoogian. Where the indemnification
obligations are mutual (as between the Cerberonics Parties and Manoogian),
the proper allocation of responsibility under such provisions shall be
19/27ths, the Cerberonics Parties and 8/27ths, Manoogian. Where the
indemnification obligations are separate (e.g., where Manoogian has an
indemnification obligation under this Agreement, but the Cerberonics
Parties do not), the
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Investors or the Company shall proceed separately under the Escrow Agreement
against the Stockholder(s) which has the obligation to indemnify the Investors
or the Company . Where the indemnification is a result of a claim involving an
economic loss to or of the Company, the relevant Escrow Sum shall be delivered
to the Company, and where the claim involves a direct (as opposed to derivative)
economic loss to the Investors, such funds shall be delivered to the Investors
on a pro-rata basis. At the conclusion of the period ending on the 365th day
after the Closing Date (such period being referred to herein as the "Escrow
Period"), such portion of the Escrow Sum not theretofore claimed by or paid to
the Company or the Investors, as the case may be, in accordance with the terms
of the Escrow Agreement and this Agreement shall be disbursed to the
Stockholders as provided in the Escrow Agreement. The Stockholders, the Company
and the Investors agree that each will execute and deliver such instruments and
documents as are reasonably furnished by any other party to enable such
furnishing party to receive those portions of the Escrow Sum to which the
furnishing party is entitled under the provisions of the Escrow Agreement and
this Agreement.
2.8 Redemption Price and Stock Purchase Price Adjustments.
(a) Funded Indebtedness Adjustment. The Redemption Price shall be
reduced by an amount equal to 19/27ths, and the Stock Purchase Price
shall be reduced by an amount equal to 8/27ths, of the total amount of
any Funded Indebtedness paid at the Closing to satisfy the Company's
Funded Indebtedness as at the Closing Date; provided, however, that
the term "Funded Indebtedness" shall not include borrowings of the
Company under the Credit Facilities (if any), it being anticipated
that the Financing Proceeds will be used at the Closing, in accordance
with the terms of Section 7.1(e) hereof, to satisfy, discharge and
refinance the Company's Funded Indebtedness (if any) existing as at
the Closing Date.
(b) Working Capital Adjustment. The Redemption Price will be
further reduced by an amount equal to 19/27ths, and the Stock Purchase
Price shall be further reduced by an amount equal to 8/27ths, of the
total amount, if any, by which the Working Capital as reflected on the
Preliminary Closing Balance Sheet is less than that amount which is
$50,000 less than the average of the working capital balances of the
Company at the end of each of the six full calendar months prior to
the month in which the Closing occurs, assuming for purposes of each
such average, that the cash component of Working Capital shall be the
actual cash for each such month or $800,000, whichever is the lesser
amount.
(c) Adjustment if Closing Occurs After the Transaction Date. In
the event the Closing does not occur prior to a date which is 120 days
after the date of this Agreement (the "Transaction Date"), and the
Company's Cash Flow (as defined in Section 2.14) subsequent to the
Transaction Date shall be retained by the Company pursuant to Section
2.14, then the Redemption Price and the Stock Purchase Price shall
each be adjusted upward in accordance with the last sentence of this
Section 2.8(c), on a dollar-for dollar basis, by the amount of
interest earned on the Net Redemption Price and the Net Stock Purchase
Price during the period commencing on the Transaction Date and ending
on the Closing Date, calculated at the prime rate of interest per
annum as at the Transaction Date publicly announced by The Chase
Manhattan Bank. Any adjustment made under this Section 2.8(c) shall be
allocated 19/27ths to the Redemption Price and 8/27ths to the Stock
Purchase Price.
(d) Allocation. Any reduction to the Stock Purchase Price
pursuant to paragraphs (a) or (b) of this Section 2.8 shall be
allocated pro-rata among the Investors.
2.9 Payment of Net Redemption Price and Net Stock Purchase Price to
Stockholders. On the Closing Date, following the establishment of the
escrow under Section 2.7 and the Redemption Price and Stock Purchase Price
adjustments required under Section 2.8, the remaining Redemption Price (the
"Net Redemption Price") shall be paid to Cerberonics and the remaining
Stock Purchase Price (the "Net Stock Purchase Price") shall be paid to
Manoogian. The Net Redemption Price and the
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Net Stock Purchase Price shall each be paid in cash by wire transfer of
funds or by cashier's checks to the accounts of Cerberonics and Manoogian,
as the same are specified in Schedule 2.9.
2.10 Closing Audit. Within ninety (90) days following the Closing Date, there
shall be delivered to the Investors, the Company and the Stockholders an
audit, prepared by Ernst & Young in accordance with generally accepted
auditing standards (and consistent with the Company's audited financial
statements for the 1994, 1995 and 1996 fiscal years), of the Preliminary
Closing Balance Sheet of the Company at and as of the Closing Date. In
connection with such audit, the Preliminary Closing Balance Sheet shall be
adjusted in accordance with GAAP (as so audited and adjusted, the "Audited
and Adjusted Closing Balance Sheet"). The cost of the Audited and Adjusted
Closing Balance Sheet shall be paid by the Company. In the event that a
Stockholder disputes any item(s) on the Audited and Adjusted Closing
Balance Sheet within ten days after the Stockholders' receipt thereof, the
disputing Stockholder or Stockholders shall select and retain an
independent "Big Six" accounting firm (the "Independent Accountants") to
review the disputed item(s) on the Audited and Adjusted Closing Balance
Sheet. The final determination of such disputed item(s) by the Independent
Accountants shall be reflected on the Audited and Adjusted Closing Balance
Sheet. The cost of retaining the Independent Accountants shall be borne by
the Stockholders; provided, however, that the Investors shall reimburse the
Stockholders for 100% of the cost of the Independent Accountants in the
event that such review results in an increase of more than $25,000 in the
Company's Working Capital as reflected on the Audited and Adjusted Closing
Balance Sheet prepared by Ernst & Young.
2.11 Post-Closing Redemption Price and Stock Purchase Price Adjustment. In the
event that the Working Capital as reflected on the Audited and Adjusted
Closing Balance Sheet is $50,000 less than the average of the working
capital balances on the Company's monthly financial statements for the six
full calendar months prior to the month in which the Closing occurs
(assuming for the purposes of such average that the cash component of
Working Capital shall be the actual cash for such period or $800,000,
whichever is the lesser amount), then the Redemption Price and the Stock
Purchase Price will each be adjusted downward in accordance with the last
sentence of this Section 2.11, on a dollar-for-dollar basis, to reflect the
lesser of (i) the decrease, if any, in the total Working Capital as
reflected on the Audited and Adjusted Closing Balance Sheet from the amount
of Working Capital reflected on the Preliminary Closing Balance Sheet or
(ii) the amount, if added to the Working Capital reflected on the Audited
and Adjusted Closing Balance Sheet, which would sum to that number which is
$50,000 less than the average of the working capital balances on the
Company's monthly financial statements for the six full calendar months
prior to the month in which the Closing occurs. Conversely, the Redemption
Price and the Stock Purchase Price will be adjusted upward in accordance
with the last sentence of this Section 2.11, on a dollar-for dollar basis,
to reflect the increase, if any, in the total Working Capital as reflected
on the Audited and Adjusted Closing Balance Sheet from the amount of
Working Capital reflected on the Preliminary Closing Balance Sheet;
provided, however, that in no event shall such upward adjustment exceed the
total amount of any adjustment to the Redemption Price and the Stock
Purchase Price made pursuant to Section 2.8(b) above. The post-closing
adjustment to the Redemption Price and the Stock Purchase Price, if any,
shall be paid by the Stockholders to the Company or by the Company to the
Stockholders, as the case may be, in immediately available funds within ten
(10) days of delivery of the Audited and Adjusted Closing Balance Sheet.
Any adjustment made under this Section 2.11 shall be allocated 19/27ths to
the Redemption Price and 8/27ths to the Stock Purchase Price.
2.12 Example. An example of the foregoing Redemption Price and Stock Purchase
Price adjustments, escrow arrangements and funding mechanics is attached
hereto as Schedule 2.12.
2.13 Closing.
(a) Deliveries. In the event that all of the conditions to
Closing (as defined in paragraph (b) below) set forth in Sections 7.1
and 7.2 have been satisfied or waived, the parties hereto shall
deliver to the appropriate other parties all certificates, documents,
exhibits, schedules and other instruments reasonably
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required to be delivered at Closing by the parties or their
respective counsel pursuant to this Agreement, each of which shall be fully
executed and completed, as appropriate, and (i) the Financing Proceeds
shall be remitted in immediately available funds to the Company to be
utilized to fund the Redemption, (ii) the Company shall remit or cause to
be remitted to Cerberonics the Net Redemption Price, (iii) the Investors
shall remit or cause to be remitted in immediately available funds to the
Company the Investment Price for the purchase and sale of the Investment
Shares, (iv) the Investors shall remit or cause to be remitted in
immediately available funds to Manoogian the Net Stock Purchase Price for
the purchase and sale of the Manoogian Shares, and (v) the Escrow Account
shall be funded.
(b) Time and Place. The closing (the "Closing") of the
Transactions shall occur at the offices of Arent Fox Kintner Plotkin &
Kahn at 10:00 a.m., local time, on a date which is no later than one
(1) business day after the Cerbco stockholders' meeting is convened to
vote on the Redemption in accordance with Section 5.2, provided that
as of said date all of the conditions to Closing set forth in Sections
7.1 and 7.2 have been satisfied by the responsible party or waived by
the party benefitted thereby and thus entitled to waive the same (the
"Closing Date"), or such other time as the Investors, the Company and
the Stockholders may mutually agree.
2.14 Consequence of Delay in Closing. Notwithstanding anything to the contrary
in this Agreement, in the event the Closing occurs after the Transaction
Date, and such delay is not caused by an act or omission of the Investors,
then the effective date of the Closing shall be the Transaction Date, such
that the Preliminary Closing Balance Sheet shall be based on the
Transaction Date and the Cash Flow (as defined below) of the Company
subsequent to the Transaction Date shall be retained by the Company for the
benefit of its stockholders (post-Closing). For purposes hereof, "Cash
Flow" shall be defined as the Company's net income (after tax) plus
non-cash expenses such as depreciation and amortization, less any increases
in Working Capital and any capital expenditures.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND STOCKHOLDERS
In making the representations and warranties set forth below, the term
"material" shall be deemed to mean an amount of money greater than $50,000, the
terms "material adverse change," "material adverse trend," "material adverse
effect," or any other term of like import shall mean the occurrence of any
single event, or any series of related events, or set of related circumstances,
which proximately causes an actual, direct economic loss to the Company, taken
as a whole, in excess of $50,000 per occurrence or $100,000 in the aggregate.
The term "knowledge," as used in connection with any representation made by the
Cerberonics Parties, shall (i) mean actual knowledge of the Eriksons,
Cerberonics or Cerbco after reasonable investigation and (ii) be deemed to exist
with respect to any matter for which a reserve was provided for in the Company's
financial statements, regardless of whether the reserve is sufficient to cover
any loss in respect of such matter. Subject to the foregoing, in connection with
the Transactions, the Company and the Stockholders jointly and severally (except
as set forth in Sections 3.29 and 3.30) represent and warrant to the Investors
as set forth in this Article III:
3.1 Capitalization. Immediately prior to the Closing, the authorized capital
stock of the Company is as described in Recital A above; provided, however,
that as of the Closing Date and pursuant to Section 2.1 hereof, prior to
the consummation of the Transactions, the Company will consummate the
Recapitalization so as to have 10,000 shares of Class A Common, 10,000
shares of Class B Common and 100 shares of Class C Common authorized, of
which 742.5, 445.5 and 12 shares, respectively, will be issued and
outstanding. All of the outstanding shares of capital stock of the Company
are duly authorized, validly issued, fully paid, and nonassessable. All of
the outstanding shares of capital stock of the Company are owned of record
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and beneficially by the Stockholders, with Cerberonics owning
two-thirds and Manoogian owning one-third of such shares, as set forth
in Part 1 (pre-Recapitalization) and Part 2 (post-Recapitalization) of
Schedule 2. None of the outstanding shares of capital stock of the
Company was issued or will be transferred pursuant to the transactions
contemplated by this Agreement in violation of any preemptive or
preferential rights of any Person.
3.2 Issuance of the Investment Shares. The issuance, sale and delivery of
the Investment Shares in accordance with this Agreement have been duly
authorized by all necessary corporate action on the part of the
Company, and the Investment Shares when so issued, sold and delivered
against payment therefor in accordance with this Agreement will be
duly and validly issued, fully paid and nonassessable. Except as
provided in this Agreement, there are no statutory or contractual
stockholders preemptive rights with respect to the issuance of the
Investment Shares hereunder. Based in part on the investment
representations of the Investors in Section 4.4, the Company has not
violated any applicable federal or state securities laws in connection
with the offer, sale or issuance of any of its capital stock, and the
offer, sale and issuance of the Investment Shares hereunder do not
require registration under the Securities Act or any applicable state
securities laws.
3.3 Other Rights to Acquire Capital Stock. Except as set forth in this
Agreement, there are no authorized or outstanding warrants, options,
or rights of any kind to acquire from the Company any equity or debt
securities of the Company, or securities convertible into or
exchangeable for equity or debt securities of the Company, and there
are no shares of capital stock of the Company reserved for issuance
for any purpose nor any contracts, commitments, understandings or
arrangements which require the Company to issue, sell or deliver any
additional shares of its capital stock.
3.4 Due Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Delaware
and has full corporate power and authority to carry on the Business as
now conducted and as proposed to be conducted through Closing.
Complete and correct copies of the Certificate of Incorporation and
Bylaws of the Company, and all amendments thereto, have been
heretofore delivered to the Investors and are attached hereto as
Schedule 3.4A. Set forth in Schedule 3.4B hereto is a list of each
jurisdiction in which the Company is qualified to do business. The
Company is qualified to do business in Maryland, Virginia, the
District of Columbia and in each jurisdiction in which the nature of
the Business or the ownership of its properties requires such
qualification except where the failure to be so qualified does not and
would not have a Material Adverse Effect.
3.5 No Subsidiaries. Except as set forth in Schedule 3.5, the Company does
not directly or indirectly have any subsidiaries or any direct or
indirect ownership interests in any Person.
3.6 Due Authorization. Subject to the approval of Cerbco's stockholders as
contemplated by Section 5.2 hereof, the Company and each Stockholder
has full power and authority to execute, deliver and perform this
Agreement and to carry out the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action of the Company and the Cerberonics
Parties, including the approval by the Company's and, subject to the
provisions of Section 5.2, by Cerbco's stockholders, all in accordance
with applicable law. Subject to the approval of Cerbco's stockholders
as contemplated by Section 5.2 hereof, this Agreement has been duly
and validly executed and delivered by the Company and the Stockholders
and constitutes the valid and binding obligations of each of the
Company and the Stockholders, enforceable in accordance with its
terms. The execution, delivery, and performance of this Agreement (as
well as all other instruments, agreements, certificates, or other
documents contemplated hereby) by the Company and the Stockholders,
and the execution, delivery, and performance of the Escrow Agreement,
do not (a) violate any Requirements of Laws or any Court Order of any
Governmental Body applicable to the Company or the Stockholders, or
any of their properties, (b) violate or conflict with, or permit the
cancellation of, or constitute
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a default under, any agreement to which the Company or the
Stockholders are a party, or by which they or any of their properties
are bound, (c) permit the acceleration of the maturity of any
indebtedness of, or indebtedness secured by the property of, the
Company or the Stockholders, or (d) violate or conflict with any
provision of the Certificate of Incorporation or Bylaws of the Company
or the Cerberonics Parties.
3.7 Financial Statements. The balance sheets of the Company, income
statements, statements of retained earnings and cash flows of the
Company as of and for the years ended June 30, 1994, June 30, 1995 and
June 30, 1996, as audited by Deloitte & Touche the Company's outside
accountants, have been delivered to the Investors by the Stockholders.
In addition, it is anticipated that prior to the Closing, the
Stockholders and the Company will provide the Investors with the
unaudited profit and loss statements and balance sheets of the
Company, as of and for the three months ended September 30, 1996, the
six months ended December 31, 1996 and the nine months ended March 31,
1997 (collectively, the audited June 30, 1996 and the unaudited
September 30, 1996, December 31, 1996 and March 31, 1997 financial
statements shall be referred to herein as the "Financial Statements").
Except as disclosed on Schedule 3.7, the Financial Statements have been prepared
in accordance with GAAP throughout the periods indicated and fairly present the
financial position, results of operations and changes in cash flows of the
Company as of the indicated dates and for the indicated periods, subject (in the
case of the interim Financial Statements) to year end accruals made in the
ordinary course of the Business which are not adversely material and which are
consistent with past practices. Except to the extent reflected or provided for
in the balance sheets included in the Financial Statements or as disclosed in
Schedule 3.7, the Company has no liabilities, nor any obligations (whether
absolute, contingent, or otherwise) which are (individually or in the aggregate)
material (in amount or to the conduct of the Business); and neither the Company
nor the Stockholders have knowledge of any basis for the assertion of any such
liability or obligation. Since December 31, 1996, there has been no Material
Adverse Change.
3.8 Certain Actions. Since December 31, 1996, the Company has not, except
as disclosed on Schedule 3.8A hereto: (a) discharged or satisfied any
Encumbrance or paid any obligation or liability, absolute or
contingent, other than current liabilities incurred and paid in the
ordinary course of the Business; (b) paid or declared any dividends or
distributions, or purchased, redeemed, acquired, or retired any stock
or indebtedness from any stockholder; provided, however, that
dividends or distributions of cash may be made subject to the minimum
cash threshold closing condition contained in Section 7.1(d); (c) made
or agreed to make any loans or advances or guaranteed or agreed to
guarantee any loans or advances to any party whatsoever; (d) suffered
or permitted any Encumbrance to arise or be granted or created against
or upon any of its assets, real or personal, tangible or intangible;
(e) cancelled, waived, or released or agreed to cancel, waive, or
release any of its debts, rights, or claims against third parties in
excess of $10,000 individually or $50,000 in the aggregate; (f) sold,
assigned, pledged, mortgaged, or otherwise transferred, or suffered
any damage, destruction, or loss (whether or not covered by insurance)
to, any assets (except in the ordinary course of the Business); (g)
amended its Certificate of Incorporation or Bylaws; (h) paid or made a
commitment to pay any severance or termination payment to any employee
or consultant other than commitments or payments in the ordinary
course of business which do not, in the aggregate, exceed $25,000; (i)
made any material change in its method of management or operation or
method of accounting; (j) made any capital expenditures, including,
without limitation, replacements of equipment in the ordinary course
of the Business, or entered into commitments therefor, except for
capital expenditures or commitments therefor which do not, in the
aggregate, exceed $100,000; (k) made any investment or commitment
therefor in any Person; (l) made any payment or contracted for the
payment of any bonus, gratuity, or other compensation, other than (A)
wages, salaries and bonuses paid in the ordinary course of the
Business, and (B) wage and salary adjustments made in the ordinary
course of the Business for employees who are not officers, directors,
or stockholders of the Company; (m) made, amended, or entered into any
written employment contract or created or made any material change in
any bonus, stock option, pension, retirement, profit sharing or other
employee benefit plan or arrangement; (n) amended or experienced a
termination of any material contract, agreement, lease, franchise or
license to which
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the Company is a party, except in the ordinary course of the
Business; or (o) entered into any other material transactions except
in the ordinary course of the Business. Since September 30, 1996,
except as disclosed on Schedule 3.8B hereto, there has not been (a)
any Material Adverse Change including, but not limited to, the loss of
any material customers or suppliers of the Company, or in any material
assets of the Company, (b) any extraordinary contracts, commitments,
orders or rebates, (c) any strike, material slowdown, or demand for
recognition by a labor organization by or with respect to any of the
employees of the Company, or (d) any shutdown, material slow-down, or
cessation of any material operations conducted by, or constituting
part of, the Company, nor has the Company agreed to do any of the
foregoing.
3.9 Properties. Attached hereto as Schedule 3.9 is a list containing a
description of all interests in real property (including, without
limitation, leasehold interests) and personal property utilized by the
Company in the conduct of the Business having a book value in excess
of $25,000 as of the date hereof. Except as expressly set forth on
Schedule 3.9 (or in respect of the Company's accounts receivable or
Inventory, on Schedule 3.20), such real and personal properties are
free and clear of Encumbrances. The Investors have reviewed the
results of a lien search covering all of the Company's real and
personal property in the States of Virginia and Maryland and the
District of Columbia. All of the properties and assets necessary in
the Business as currently conducted (including, without limitation,
all books, records, computers and computer software and data
processing systems) are owned, leased or licensed by the Company and
are suitable for the purposes for which they are currently being used.
The material physical properties of the Company, including the real
properties leased by the Company, are in good operating condition and
repair, normal wear and tear excepted, and are free from any defects
of a material nature. Except as otherwise set forth on Schedule 3.9,
the Company has full and unrestricted legal and equitable title to all
such properties and assets. The operation of the properties and
Business of the Company in the manner in which they are now and have
been operated does not violate any zoning ordinances, municipal
regulations, or other Requirements of Laws, except for any such
violations which would not, individually or in the aggregate, have a
Material Adverse Effect. Except as set forth on Schedule 3.9, no
covenants, easements, rights-of-way, or regulations of record impair
the uses of the properties of the Company for the purposes for which
they are now operated. All leases of real or personal property by the
Company are legal, valid, binding, enforceable and in full force and
effect and will remain legal, valid, binding, enforceable and in full
force and effect on identical terms immediately following the Closing.
The Company has obtained all required material approvals of any
Governmental Body (including Governmental Permits) required to be
obtained by the Company in connection with the operation thereof, and
the facilities owned or leased by the Company have been operated and
maintained by the Company in accordance with all Requirements of Laws.
3.10 Licenses and Permits. Attached hereto as Schedule 3.10 is a list of
all material licenses, certificates, privileges, immunities,
approvals, franchises, authorizations and permits held or applied for
by the Company from any Governmental Body (herein collectively called
"Governmental Permits") the absence of which could have a Material
Adverse Effect. The Company has complied in all material respects with
the terms and conditions of all such Governmental Permits, and no
violation of any such Governmental Permit or the Requirements of Laws
governing the issuance or continued validity thereof has occurred
other than violations (if any) which would not individually or in the
aggregate have a Material Adverse Effect. No additional Government
Permit is required from any Governmental Body thereof in connection
with the conduct of the Business which Governmental Permit, if not
obtained, would have a Material Adverse Effect.
3.11 Intellectual Property. Attached hereto as Schedule 3.11 is a list and
brief description of all patents, trademarks, tradenames, copyrights,
licenses, computer software or data (other than general commercial
software), trade secrets, or applications therefor owned by or
registered in the name of the Company or in which the Company has any
rights, licenses, or immunities (collectively, the "Intellectual
Property"). The Company has furnished the Investors with copies of all
license agreements to which the Company is a party, either as licensor
or licensee, with respect to any Intellectual Property. Except as
described on Schedule 3.11 hereto, the Company has good and marketable
title to or the right to use such Intellectual Property
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and all inventions, processes, designs, formulae, trade secrets
and know-how necessary for the conduct of its Business, in its
Business as presently conducted without the payment of any royalty or
similar payment, and the Company is not infringing on any patent
right, tradename, copyright or trademark right or other Intellectual
Property right of others, and neither the Company nor the Stockholders
are aware of any infringement by others of any such rights owned by
the Company.
3.12 Compliance with Laws. The Company has (i) complied in all material
respects with all Requirements of Laws, Governmental Permits and Court
Orders applicable to the Business and has filed with the proper
Governmental Bodies all statements and reports required by all
Requirements of Laws, Governmental Permits and Court Orders to which
the Company or any of its employees (because of their activities on
behalf of the Company) are subject and (ii) conducted the Business and
is in compliance in all material respects with all federal, state and
local energy, public utility, health, safety and environmental
Requirements of Laws, Governmental Permits and Court Orders including
the Clean Air Act, the Clean Water Act, RCRA, the Safe Drinking Water
Act, CERCLA, OSHA, the Toxic Substances Control Act and any similar
state, local or foreign laws (collectively "Environmental
Obligations") and all other federal, state, local or foreign
governmental and regulatory requirements, except, in the case of both
(i) and (ii) above, where any such failure to comply would not, in the
aggregate, have a Material Adverse Effect. No claim has been made by
any Governmental Body (and, to the knowledge of the Company and the
Stockholders, no such claim is anticipated) to the effect that the
Business fails to comply, in any respect, with any Requirements of
Laws, Governmental Permit or Environmental Obligation or that a
Governmental Permit or Court Order is necessary in respect thereto.
3.13 Insurance. Attached hereto as Schedule 3.13 is a list of all policies
of fire, liability, business interruption or other forms of insurance
and all fidelity bonds held by or applicable to the Company, which
Schedule sets forth in respect of each such policy the policy name,
policy number, carrier, term, type of coverage, deductible amount or
self-insured retention amount, limits of coverage and annual premium.
Copies of all such insurance policies have been delivered to the
Investors. No event relating to the Company has occurred which will
result in (i) cancellation of any such insurance policies; (ii) a
retroactive upward adjustment of premiums under any such insurance
policies; or (iii) any prospective upward adjustment in such premiums.
All of such insurance policies will remain in full force and effect
following the Closing.
3.14 Employee Benefit Plans.
(a) Employee Welfare Benefit Plans. Except as disclosed on
Schedule 3.14, the Company does not maintain or contribute to any
"employee welfare benefit plan" as such term is defined in Section
3(1) of ERISA. With respect to each such plan: (i) the plan is in
material compliance with ERISA; (ii) the plan has been administered in
accordance with its governing documents; (iii) neither the plan, nor
any fiduciary with respect to the plan, has engaged in any "prohibited
transaction" as defined in Section 406 of ERISA other than any
transaction subject to a statutory or administrative exemption; (iv)
except for the processing of routine claims in the ordinary course of
administration, there is no material litigation, arbitration or
disputed claim outstanding; and (v) all premiums due on any insurance
contract through which the plan is funded have been paid.
(b) Employee Pension Benefit Plans. Except as disclosed in
Schedule 3.14, the Company does not maintain or contribute to any
arrangement that is or may be an "employee pension benefit plan"
relating to employees, as such term is defined in Section 3(2) of
ERISA. With respect to each such plan: (i) the plan is qualified under
Section 401(a) of the Code, and any trust through which the plan is
funded meets the requirements to be exempt from federal income tax
under Section 501(a) of the Code; (ii) the plan is in material
compliance with ERISA; (iii) the plan has been administered in
accordance with its governing documents as modified by applicable law;
(iv) the plan has not suffered an "accumulated funding deficiency" as
defined in Section 412(a) of the Code; (v) the plan has not engaged
in, nor has any fiduciary with
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respect to the plan engaged in, any "prohibited transaction" as
defined in Section 406 of ERISA or Section 4975 of the Code other than
a transaction subject to statutory or administrative exemption; (vi)
the plan has not been subject to a "reportable event" (as defined in
Section 4043(b) of ERISA), the reporting of which has not been waived
by regulation of the Pension Benefit Guaranty Corporation; (vii) no
termination or partial termination of the plan has occurred within the
meaning of Section 411(d)(3) of the Code; (viii) all contributions
required to be made to the plan or under any applicable collective
bargaining agreement have been made to or on behalf of the plan; (ix)
there is no material litigation, arbitration or disputed claim
outstanding; and (x) all applicable premiums due to the Pension
Benefit Guaranty Corporation for plan termination insurance have been
paid in full on a timely basis.
(c) Employment and Non-Tax Qualified Deferred Compensation
Arrangements. Except as disclosed in Schedule 3.14, the Company does
not maintain or contribute to any retirement or deferred or incentive
compensation or stock purchase, stock grant or stock option
arrangement entered into between the Company and any current or former
officer, consultant, director or employee of the Company that is not
intended to be a tax qualified arrangement under Section 401(a) of the
Code.
3.15 Contracts and Agreements. Attached hereto as Schedule 3.15 is a list
and brief description of all written or oral contracts, commitments,
leases, and other agreements (including, without limitation,
promissory notes, loan agreements, and other evidences of
indebtedness, guarantees, agreements with distributors, suppliers,
dealers, franchisors and customers, and service agreements) to which
the Company is a party or by which the Company or its properties are
bound pursuant to which the obligations thereunder of either party
thereto are, or are contemplated as being, $50,000 or greater
(collectively, the "Contracts"). The Company is not and, to the best
knowledge of the Company and the Stockholders, no other party thereto
is in default (and no event has occurred which, with the passage of
time or the giving of notice, or both, would constitute a default)
under any of the Contracts, and the Company has not waived any right
under any of the Contracts. Subject to the foregoing, all of the
Contracts to which the Company is a party are legal, valid, binding,
enforceable and in full force and effect and will remain legal, valid,
binding, enforceable and in full force and effect on identical terms
immediately after the Closing. Except as set forth in Schedule 3.15,
the Company has not guaranteed any obligations of any other Person.
3.16 Claims and Proceedings. Attached hereto as Schedule 3.16 is a list and
brief description of all material claims, actions, suits, proceedings,
or investigations pending (or, to the Company's knowledge, threatened
against) or affecting the Company or any of its properties or assets,
at law or in equity, or before or by any court, municipality or other
Governmental Body. Except as set forth on Schedule 3.16, none of such
claims, actions, suits, proceedings, or investigations will result in
any material liability or loss to the Company. The Company has not
been, and the Company is not now, subject to any Court Order,
stipulation, or consent of or with any court or Governmental Body. No
inquiry, action or proceeding has been asserted, threatened or
instituted to restrain or prohibit the carrying out of the
transactions contemplated by this Agreement or to challenge the
validity of such transactions or any part thereof or seeking damages
on account thereof. Except as set forth on Schedule 3.16, there is no
basis for any such valid claim or action.
3.17 Taxes.
(a) All Federal, foreign, state, county and local income, gross
receipts, excise, property, franchise, license, sales, use,
withholding, and other Taxes and all Tax Returns which are required to
be filed by the Company on or before the date hereof have been filed
within the time and in the manner provided by law, and all such Tax
Returns are true and correct and accurately reflect the Tax
liabilities of the Company. No Tax Returns of the Company or the
Stockholders are presently subject to an extension of the time to
file. Other than as described in the proviso which follows, all Taxes,
assessments, penalties, and interest of the Company which have become
due pursuant to such Tax Returns or any assessments received have been
paid or adequately accrued on the Company's Financial Statements;
provided, however, in respect
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of the gross receipts tax in Fairfax County, Virginia disclosed
by the Company in Schedules 3.4(b) and 3.27, the Company will satisfy
and discharge any such taxes prior to Closing. The provisions for
Taxes reflected on the balance sheets contained in the Financial
Statements are adequate to cover all of the Company's Tax liabilities
for the respective periods then ended and all prior periods. The
Company has not executed any presently effective waiver or extension
of any statute of limitations against assessments and collection of
Taxes, and there are no pending or threatened claims, assessments,
notices, proposals to assess, deficiencies, or audits with respect to
any such Taxes. For Governmental Bodies with respect to which the
Company does not file Tax Returns, no such government body has claimed
that any of the Company is or may be subject to taxation by that
government body. The Company has withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or
owing to any employee, stockholder, creditor, independent contractor
or other party. There are no tax liens on any of the property or
assets of the Company.
(b) Neither the Company nor any other corporation has filed an
election under section 341(f) of the Code that is applicable to the
Company or any assets held by the Company. The Company has not made
any payments, is not obligated to make any payments, and is not a
party to any agreement that under certain circumstances could obligate
it to make any payments that will not be deductible under Code Sec.
280G. The Company has not been a United States real property holding
corporation within the meaning of Code Sec. 897(c)(2) during the
applicable period specified in Code Sec. 897(c)(1)(A)(ii). The Company
is not a party to any Tax allocation or sharing agreement. Since
September 1992, the Company has not been (nor does the Company have
any liability for unpaid Taxes because it once was) a member of an
affiliated group during any part of which return year any corporation
other than the Company also was a member of the affiliated group. The
Company has never made an election to be taxed under subchapter S of
the Code.
(c) No transaction contemplated by this Agreement is subject to
withholding under Section 1445 of the Code and no stock transfer
taxes, real estate transfer taxes or similar taxes will be imposed
upon the issuance and sale of the Shares pursuant to this Agreement.
3.18 Personnel. Attached hereto as Schedule 3.18 is a list of the names and
annual rates of compensation of the directors and executive officers
of the Company, and of the employees of the Company whose annual rates
of compensation during the fiscal year ended June 30, 1996 (including
base salary, bonus and incentive pay) exceed (or by December 31, 1996
are expected to exceed) $75,000. Schedule 3.18 also summarizes the
bonus, profit sharing, percentage compensation, company automobile,
club membership, and other like benefits, if any, paid or payable to
such directors, officers, and employees during the Company's fiscal
year ended June 30, 1996 and to the date hereof. Schedule 3.18 also
contains a brief description of all material terms of employment
agreements to which the Company is a party and all severance benefits
which any director, officer or employee of the Company is or may be
entitled to receive. The employee relations of the Company are good
and there is no pending or threatened labor dispute or union
organization campaign. None of the employees of the Company are
represented by any labor union or organization. The Company is in
compliance in all material respects with all Requirements of Laws
respecting employment and employment practices, terms and conditions
of employment, and wages and hours, and are not engaged in any unfair
labor practices. Neither the Company nor the Stockholders has been
advised, or has any reason to believe, that any of the persons whose
names are set forth on Schedule 3.18 or any other employee will not
agree to remain employed by the Company after the consummation of the
transactions contemplated hereby. There is no unfair labor practice
claim against the Company before the National Labor Relations Board,
or any strike, dispute, slowdown, or stoppage pending or, to the
knowledge of the Company and the Stockholders, threatened against or
involving the Company, and none has occurred.
3.19 Business Relations. Neither the Company nor the Stockholders know or
have any reason to believe that any supplier of the Company or
customer comprising more than 5% of the Company's sales or service
revenues will cease to do business with the Company after the
consummation of the
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Transactions in the same manner and at the same levels as
previously conducted with the Company, except for any reductions which
do not result in a Material Adverse Change. Neither the Company nor
the Stockholders have received any notice of any material disruption
(including delayed deliveries or allocations by suppliers) in the
availability of any material portion of the materials used by the
Company nor are the Company or the Stockholders aware of any facts
which could lead it reasonably to believe that the Business will be
subject to any such material disruption.
3.20 Accounts Receivable; Inventory.
(a) Accounts Receivable. All of the accounts, notes, and loans
receivable that have been recorded on the books of the Company are
bona fide and represent amounts validly due for goods sold or services
rendered and all such amounts (net of normal reserves for doubtful
accounts and valuation allowances recorded in accordance with GAAP)
will be collected in full within 180 days following the Closing Date.
Except as disclosed on Schedule 3.20 hereto, (i) all of such accounts,
notes, and loans receivable are free and clear of any Encumbrances;
(ii) none of such accounts, notes, or loans receivable is subject to
any offsets or claims of offset; and (iii) none of the obligors of
such accounts, notes, or loans receivable has given notice that it
will or may refuse to pay the full amount or any portion thereof.
(b) Inventory. Except as disclosed on Schedule 3.20, all of the
Company's Inventory (as defined below) are free and clear of any
Encumbrances. For purposes of this Agreement, "Inventory" means all of
the Company's photocopiers, facsimile equipment, automated office
equipment, office furniture and related parts and supplies held for
resale or lease or to be furnished under contracts for service.
3.21 Bank Accounts. Attached hereto as Schedule 3.21 is a list of all
banks or other financial institutions with which the Company has
an account or maintains a safe deposit box, showing the type and
account number of each such account and safe deposit box and the
names of the persons authorized as signatories thereon or to act
or deal in connection therewith.
3.22 Agents. Except as set forth on Schedule 3.22 hereto, the Company
has not designated or appointed any Person to act for it or on
its behalf pursuant to any power of attorney or agency which is
presently in effect.
3.23 Warranties. Except as set forth on Schedule 3.23 and except for
warranty claims that are typical and in the ordinary course of
the Business, (i) no claim for breach of product or service
warranty to any customer has been made against the Company since
June 30, 1996; and (ii) to the Company's knowledge, no state of
facts exists, and no event has occurred, which may form the basis
of any present claim against the Company for liability on account
of any express or implied warranty to any third party in
connection with products sold or services rendered by the
Company.
3.24 Brokers. Neither the Company nor either Stockholder has engaged,
or caused to be incurred any liability to any finder, broker, or
sales agent in connection with the origin, negotiation,
execution, delivery, or performance of this Agreement or the
transactions contemplated hereby.
3.25 Interest in Competitors, Suppliers, Customers, Etc. Except as
disclosed in Schedule 3.25 hereto, no officer, director, or
Stockholder or any affiliate of any such officer, director, or
Stockholder, has any ownership interest in any competitor,
supplier, or customer of the Company (other than ownership of
securities of a publicly-held corporation of which such Person
owns, or has real or contingent rights to own, less than one
percent of any class of outstanding securities) or any property
used in the operation of the Business.
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3.26 Indebtedness To and From Officers, Directors, Stockholders, and
Employees. Attached hereto as Schedule 3.26 is a list and brief
description of the payment terms of all indebtedness of the
Company to officers, directors, Stockholders and employees of the
Company and all indebtedness of officers, directors, Stockholders
and employees of the Company to the Company, excluding
indebtedness for travel advances or similar advances for expenses
incurred on behalf of and in the ordinary course of the Business,
consistent with past practices.
3.27 Undisclosed Liabilities. Except as indicated in Schedule 3.27 and
the other Schedules hereto, the Company does not have any
material liabilities (whether absolute, accrued, contingent or
otherwise), of a nature required by GAAP to be reflected on a
corporate balance sheet or disclosed in the notes thereto, except
such liabilities which are accrued or reserved against in the
Financial Statements or disclosed in the notes thereto.
3.28 Information Furnished. The Company has made (or, prior to the
Closing, will make) available to the Investors true and correct
copies of all corporate records of the Company and all
agreements, documents, and other items listed on the Schedules to
this Agreement or referred to herein and except as disclosed in
Schedule 3.28 hereto, neither this Agreement, the Schedules
hereto, nor any information, instrument, or document delivered to
the Investors pursuant to this Agreement contains any untrue
statement of a material fact or omits any material fact necessary
to make the statements herein or therein, as the case may be, not
misleading.
3.29 No Liens on Shares. In respect of the sale of the Cerberonics
Shares being redeemed pursuant to the Redemption and the
Manoogian Shares being purchased pursuant to the Stock Purchase,
respectively, each Stockholder represents and warrants
individually in respect of their own Shares, and not jointly and
severally, to the Company that the Cerberonics Parties own the
Cerberonics Shares and Manoogian owns the Manoogian Shares, free
and clear of any Encumbrances other than the rights and
obligations arising under this Agreement, and none of such shares
is subject to any outstanding option, warrant, call, or similar
right of any other Person to acquire the same, and none of such
shares is subject to any restriction on transfer thereof except
for restrictions imposed by applicable federal and state
securities laws. The Cerberonics Parties and Manoogian have full
power and authority to convey good and marketable title to the
Cerberonics Shares and the Manoogian Shares, respectively, free
and clear of any Encumbrances.
3.30 Due Organization. In respect of the sale of the Cerberonics
Shares pursuant to the Redemption, the Cerberonics Parties (but
not Manoogian) represent and warrant to the Company that each of
the Cerberonics Parties is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Delaware and has full corporate power and authority to carry on
its business as now conducted and as proposed to be conducted
through Closing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Each of the Investors represents and warrants jointly and severally to the
Company and the Stockholders as follows:
4.1 Due Organization of GTCR IV. GTCR IV represents and warrants that
it is a Delaware limited partnership duly organized, validly
existing, and in good standing under the laws of the State of
Delaware and has full power and authority to enter into and
perform this Agreement.
4.2 Due Authorization. The execution, delivery and performance of
this Agreement has been duly authorized by all necessary
individual, partnership or corporate action on the part of each
Person
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comprising the Investors, as appropriate, and the Agreement has
been duly and validly executed and delivered by each of the Investors
and constitutes the valid and binding obligation of each of the
Investors, enforceable in accordance with its terms. The execution,
delivery, and performance of this Agreement and the Escrow Agreement
(as well as all other instruments, agreements, certificates or other
documents contemplated hereby) by the Investors shall not (a) violate
any Requirements of Laws or Court Order of any Governmental Body
applicable to any Investor or its or his respective property, (b)
violate or conflict with, or permit the cancellation of, or constitute
a default under any agreement to which any Investor is a party or by
which any Investor or its or his respective property is bound, (c)
permit the acceleration of the maturity of any indebtedness of, or any
indebtedness secured by the property of, any Investor, or (d) violate
or conflict with any provision of the Certificate of Limited
Partnership of GTCR IV or the charter or bylaws of any other Investor
which is a corporation or a partnership (as applicable).
4.3 No Brokers. None of the Investors has engaged, or caused to be
incurred any liability to any finder, broker or sales agent in
connection with the origin, negotiation, execution, delivery, or
performance of this Agreement or the transactions contemplated
hereby.
4.4 Investment. Each Investor hereby represents that they are
acquiring the Shares purchased hereunder or acquired pursuant
hereto for their own account with the present intention of
holding such securities for purposes of investment, that each of
them is an Accredited Investors as that term is defined in Rule
501 under the Securities Act and that each of them has no
intention of selling such securities in a public distribution in
violation of the federal securities laws or any applicable state
securities laws; provided that nothing contained herein will
prevent the Investors and subsequent holders of Restricted
Securities from transferring such securities in compliance with
the provisions of Section 6.2 hereof.
4.5 No Undisclosed Agreement. Other than as described in the Exhibits
hereto, there are no undisclosed agreements between the
Investors, or any one of them, or any Affiliate of any of them
(including, without limitation, Global Imaging Systems, Inc.), on
the one hand, and the Company and/or either of the Stockholders
or the Eriksons, on the other hand.
ARTICLE V
COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
5.1 Conduct of Business Pending Closing. From the date of this
Agreement to the Closing Date:
(a) Negative Covenants. Except as otherwise contemplated by this
Agreement, or as the Investors may otherwise consent to orally or in
writing, the Company will not and the Stockholders shall cause the
Company not to engage in any material activity or enter into any
material transaction outside of the ordinary and usual course of the
Business. Without limiting the generality of the foregoing, except as
contemplated by this Agreement, the Company will not and the
Stockholders shall cause the Company not to: (i) declare, set aside,
or pay any dividend or other distribution in respect of its capital
stock, or make any redemption, purchase or other acquisition of any
shares of its capital stock; provided, however, that dividends or
distributions of cash may be made subject to the closing condition
contained in Section 7.1(d); (ii) issue or sell any shares of its
capital stock or any options, warrants or other rights to purchase any
such shares or any securities convertible into or exchangeable for
such shares or any other securities of the Company or take any action
to reclassify or recapitalize or split up its capital stock; (iii)
merge with any other company, consolidate or sell or consent to the
sale of any of the material assets of the Company; (iv) outside of the
ordinary course of the Business (A) change or increase compensation
payable, or to become payable by the Company to its officers or
employees, (B) increase benefits or benefit plan costs, or (C) except
for the acceleration of the payment of the Company's "return on
equity" bonus arrangement with Manoogian and the Eriksons in respect
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of the Company's fiscal year ended June 30, 1997 (which will be
paid (on a pro-rated basis for the partial year in the event the
Closing Date is before June 30, 1997) prior to the Closing Date as
opposed to October 1997 as would have been the case under normal
circumstances), change any bonus, insurance, pension, compensation or
other benefit plan or arrangement made for or with or covering any
officers or employees of the Company; (v) waive any rights of
substantial value which, singly or in the aggregate, are material to
the Business; (vi) change the Certificate of Incorporation or Bylaws
of the Company; (vii) borrow or agree to borrow any funds other than
through existing credit relationships; (viii) pledge or mortgage or
agree to pledge or mortgage any of the properties or assets of the
Company; (ix) guarantee or agree to guarantee the obligations of any
Person; (x) make or commit to make any capital expenditures in excess
of $25,000 individually, and $100,000 in the aggregate; (xi) make any
loans to any of the Company's officers, directors and stockholders
(except for ordinary course of business advances for out-of-pocket
expenses incurred in the performance of the Business); or (xii)
dispose of or acquire any material assets outside of the ordinary
course of the Business, or agree to do any of the foregoing.
(b) Conduct of Business. The Company will and the Stockholders
shall cause the Company to continue to record its transactions and to
prepare its financial statements consistently and in accordance with
GAAP, consistent with past practice. The Company will and the
Stockholders shall cause the Company to preserve substantially intact
its business organization and present relationships with its
customers, suppliers and employees and to maintain all of its
insurance currently in effect.
(c) Nature of Breach. The Company shall give prompt notice to the
Investors of any notice of material default received by the Company
subsequent to the date of this Agreement under any material instrument
or agreement, or any Material Adverse Change occurring prior to the
Closing Date.
(d) No Solicitation.
(i) Immediately following the execution of
this Agreement, the Company and the Stockholders will and will
use their best efforts to cause each of their representatives
(including such parties' employees, counsel, investment bank,
accountants, and similar consultants and representatives)
("Representatives") to terminate any and all existing
activities, discussions and negotiations with third parties
(other than Investors) with respect to any possible
transaction involving the acquisition of the Company's capital
stock or assets or the merger or other business combination of
the Company with or into any such third party.
(ii) The Company and the Stockholders will
not (and will use their best efforts to cause their
Representatives not to) solicit, initiate or knowingly
encourage the submission of, any offer or proposal to acquire
all or any part of the capital stock of the Company or all or
any material portion of the assets or business of the Company
(other than the transactions contemplated by this Agreement),
whether by merger, purchase of stock or assets, tender offer,
exchange offer or otherwise (an "Alternative Proposal"),
provided, however, that, if the Company, the Stockholders or
any of their Representatives shall receive an Alternative
Proposal, then such Representatives may discuss such
Alternative Proposal with the Person presenting such
Alternative Proposal and provide information to such Person if
the board of directors of Cerbco determines in good faith,
after considering the advice of its legal counsel, that it is
required to do so in order to discharge properly its fiduciary
duty to Cerbco's stockholders.
(iii) The Company and the Stockholders will
promptly communicate to the Investors the terms and conditions
of any Alternative Proposal that they may receive and will
keep the Investors informed as to the status of any actions
(including any discussions with
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any potential third party acquiror in the form of proposals or
counter-proposals) taken pursuant to such Alternative
Proposal.
(iv) If the Company or the Stockholders or
any of their Representatives receive an Alternative Proposal
and the board of directors of Cerbco determines in good faith,
after considering the advice of its legal counsel, that it is
required to do so in order to discharge properly its fiduciary
duty to Cerbco's stockholders, then such Representatives may
negotiate the terms of such Alternative Proposal and a binding
definitive agreement with such Person with respect thereto (an
"Alternative Transaction").
(v) Nothing in this Section 5.1(d) shall
permit the Company or the Stockholders to terminate this
Agreement except as specifically provided in Section 9.1 or
9.3.
(e) Access to Information. The Stockholders shall cause the
Company to afford the Investors access, during normal business hours
and upon reasonable notice, to all of the assets, properties, books,
records, and agreements of the Company, and shall furnish to the
Investors and their representatives such information regarding the
Company as the Investors may reasonably request; provided, however,
that any such investigation shall be conducted in such a manner as not
to interfere unreasonably with the operation of the Business.
(f) Transfers or Restrictions. The Stockholders shall not sell,
transfer, pledge or grant a security interest in, or otherwise dispose
of or encumber, any of the outstanding shares of the capital stock of
the Company without the consent of the Investors.
5.2 Cerbco Stockholders Meeting. Cerbco shall take all action
necessary in accordance with applicable law and its certificate
of incorporation and by-laws to convene a meeting of its
stockholders as promptly as practicable after the date hereof for
the purpose of voting on the proposed Redemption (the "Redemption
Proposal"). The board of directors of Cerbco shall recommend
approval of the Redemption Proposal and shall take all lawful
action to solicit such approval, including the timely mailing of
a Proxy Statement to the stockholders of Cerbco, which shall have
been reviewed by the Investors. It is acknowledged and agreed by
the Investors that the Cerbco board of directors intends to seek,
and condition the consummation of the Redemption on, the separate
approval of the Redemption Proposal by a majority of the votes
cast by the non-Erikson stockholders of Cerbco, and that any such
majority vote of the votes cast by the non-Erikson stockholders,
coupled with the votes of the Eriksons as provided in the Erikson
Voting Agreement, shall be sufficient to approve the Redemption
in accordance with Delaware law and Cerbco's corporate charter
documents. Notwithstanding the above, however, it shall be a
condition to the mailing of such Proxy Statement that Cerbco
shall have received an opinion from a qualified, independent firm
of investment bankers or financial advisors selected by Cerbco
(which opinion shall be acceptable in form and substance to
Cerbco) to the effect that the consideration to be received in
the Redemption by Cerberonics is fair to Cerbco from a financial
point of view, and such opinion shall not have been withdrawn,
revoked or modified; provided, however, that the compensation
arrangements with such investment bank shall (i) not be
contingent on the successful consummation of the Redemption, and
(ii) provide that such bank shall be ineligible to receive
compensation in connection with the consummation of any
Alternative Transaction consummated prior to the expiration of 18
months following the termination of this Agreement under Article
IX.
5.3 Consents of Others. Prior to the Closing, the Stockholders shall
use their commercially reasonable best efforts to obtain and to
cause the Company to obtain all authorizations, consents and
permits required of the Company or the Stockholders to permit
them to consummate the Transactions, including without limitation
any consents required under the Canon License Agreement described
on Schedule 3.11 or under any of the Company's leases.
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5.4 Stockholders' Efforts. The Company and the Stockholders shall use
all reasonable efforts to cause all conditions for the Closing to
be met.
5.5 Powers of Attorney. The Stockholders shall cause the Company to
terminate at or prior to Closing all powers of attorney granted
by the Company, other than those relating to service of process,
qualification or pursuant to governmental regulatory or licensing
agreements, or representation before the IRS or other government
agencies.
5.6 Transfer Taxes. The Stockholders shall be responsible for and
shall pay all stock transfer or gains taxes (if any) incurred in
connection with the Redemption (in the case of the Cerberonics
Parties) or the Stock Purchase (in the case of Manoogian).
5.7 Notice of Developments; Update of Disclosure Schedules. The
Company and the Stockholders will give prompt written notice to
the Investors of any material development affecting the assets,
liabilities, Business, financial condition, operations or results
of operations of the Company and each party hereto will give
prompt written notice to the others of any material development
affecting the ability of any of such parties to consummate the
Transactions. The Company and the Stockholders shall have the
right, for a period from the date of this Agreement to that date
which is not later than fifteen (15) business days prior to the
Closing Date, to update any of the disclosure schedules provided
under Article III; provided, however, that if such updated
schedules reveal a change that is material (defined as in the
preamble to Article III), the Investors shall notify the Company
and the Stockholders within three (3) business days of receipt of
such updated schedule that the same contains such a material
change. If after a period of ten (10) business days from the
receipt of the Investors' notice, the parties are unable to reach
an agreement regarding an appropriate adjustment to the Purchase
Price or other amendment to this Agreement that adequately
compensates the Investors for the adverse impact of such material
change, then the Investors may, at their option, either (i)
terminate this Agreement without liability for the break-up fee
set forth in the first sentence of Section 9.3, or (ii) waive the
right to claim that such matter constitutes a breach of the
representations and warranties of this Agreement under Section
7.1(b) or Article VIII.
ARTICLE VI
POST-CLOSING COVENANTS
6.1 General. In case at any time after the Closing any further action
is legally necessary or reasonably desirable to carry out the
purposes of this Agreement, each of the parties will take such
further action (including the execution and delivery of such
further instruments and documents) as any other party reasonably
may request, all at the sole cost and expense of the requesting
party (unless the requesting party is entitled to indemnification
therefor under Article VIII below). Each Stockholder acknowledges
and agrees that from and after the Closing the Company will be
entitled to possession of all documents, books, records,
agreements, and financial data of any sort relating to the
Company, which shall be maintained at the chief executive office
of the Company; provided, however, that the Stockholders shall be
entitled to reasonable access to and to make copies of such books
and records at its sole cost and expense and the Company will
maintain the books, records and material financial data relating
to the Company for a period of at least three (3) years.
6.2 Litigation Support. In the event and for so long as any party
actively is contesting or defending against any charge,
complaint, action, suit, proceeding, hearing, investigation,
claim, or demand in connection with (i) any transaction
contemplated under this Agreement or (ii) any fact, situation,
circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or
transaction on or prior to the Closing Date involving the
Company, each of the other parties will cooperate with it and its
counsel in the contest or defense, make available their
personnel, and provide such testimony and
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access to their books and records as shall be reasonably
necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending party (unless the
contesting or defending party is entitled to indemnification therefor
under Article VIII below).
6.3 Transition. For a period of three (3) years following Closing,
the Stockholders will not take any action that primarily is
designed or intended to have the effect of discouraging any
lessor, licensor, customer, supplier, or other business associate
of the Company from maintaining the same business relations with
the Company after the Closing as it maintained with the Company
prior to the Closing. For a period of three (3) years following
Closing, the Stockholders will refer all customer inquiries
relating to the Business to the Company. In respect of
Manoogian's commitment pursuant to the foregoing, it is
acknowledged that his agreement thereto is in consideration of
his receipt of the Stock Purchase Price and is independent of any
similar agreement pursuant to the terms of the Manoogian
Executive Agreement.
6.4 Confidentiality. The Stockholders will treat and hold as such all
Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement
for a period of three (3) years from the Closing, and deliver
promptly to the Company or destroy, at the request and option of
the Company, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession except as
otherwise permitted herein. In the event that any of the
Stockholders is requested or required (by oral question or
request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar
process) to disclose any Confidential Information, such
Stockholder will notify the Company promptly of the request or
requirement.
ARTICLE VII
CONDITIONS TO OBLIGATION OF PARTIES TO CONSUMMATE CLOSING
7.1 Conditions to the Investors' Obligations. The obligation of the
Investors under this Agreement to consummate the Closing is
subject to the conditions that:
(a) Satisfaction with Due Diligence. The Investors shall have the
right to conduct their due diligence on the Company and the Business,
and it is a condition precedent to the consummation of the
Transactions that the Investors shall be satisfied in all material
respects with their due diligence investigation of the Company;
provided, however, that although the Investors may continue their due
diligence investigation up through the Closing Date, in order for the
Investors to terminate this Agreement due to the results of such
investigation without liability for the $1,000,000 break-up fee set
forth in the first sentence of Section 9.3, the Investors must notify
the Company and the Stockholders on or before the 60th day from the
date of this Agreement that it has found a material adverse matter or
problem in the course of such investigation such that the reasonably
demonstrable impact on the Purchase Price (whether as a result of an
individual adverse matter or problem or in the aggregate for all such
adverse matters or problems) (the "Impact") is in excess of $100,000.
Failure by the Investors to provide such notice within such 60-day
period shall constitute a waiver by the Investors of this condition
precedent. Any such notice shall contain a reasonably detailed
description of such matter or problem and the Company and the
Stockholders shall have 15 days to either (i) resolve the matter or
cure the problem to the Investors' reasonable satisfaction, or (ii)
after good faith negotiations by all parties, reach an agreement with
the Investors regarding an appropriate adjustment to the Purchase
Price or other amendment to this Agreement that adequately compensates
the Investors for the adverse impact of such matter or problem. For
the purposes of the previous sentence, reducing the Purchase Price by
an amount equal to the Impact shall be deemed reasonable. Failure of
either (i) or (ii) to occur within such 15-day period may, at the
option of the Investors, result in a termination of this Agreement by
the Investors (again, without liability for any break-up fee under
Section 9.3). If no such notice is delivered by the Investors on or
before the 60th day from the date of this Agreement, and the Investors
terminate this Agreement as a result of their due diligence
investigation, then provided that neither Section 9.1(c) or any of the
other
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termination triggers under Section 9.1 are applicable, the
Investors shall owe the break-up fee required by the first sentence of
Section 9.3.
(b) Covenants, Representations and Warranties. The Company and
the Stockholders shall have performed in all material respects all
obligations and agreements and complied in all material respects with
all covenants contained in this Agreement to be performed and complied
with by any of them prior to or at the Closing Date. The
representations and warranties of the Company and the Stockholders set
forth in this Agreement shall be accurate in all material respects at
and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date except for any changes resulting
from activities or transactions which may have taken place after the
date hereof and which are permitted or contemplated by this Agreement
or which have been entered into in the ordinary course of business and
except to the extent that such representations and warranties are
expressly made as of another specified date and, as to such
representation, the same shall be true as of such specified date.
(c) Hart-Scott-Rodino; Other Consents. All statutory requirements
for the valid consummation by the Company and the Stockholders of the
transactions contemplated by this Agreement, including without
limitation the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (if applicable), shall have been fulfilled and all
authorizations, consents and approvals, including without limitation
those of all federal, state, local and foreign governmental agencies
and regulatory authorities required to be obtained in order to permit
the consummation of the transactions contemplated hereby shall have
been obtained in form and substance reasonably satisfactory to the
Investors unless such failure shall not have a Material Adverse
Effect. In addition, the Company shall have obtained a consent from
Canon under the License Agreement described on Schedule 3.11, if same
is required under the terms thereof as a result of the Transactions.
Finally, the Boards of Directors, Cerbco, Cerberonics and the Company
shall have approved the consummation of this Agreement and the
transactions contemplated hereby.
(d) Cash on Balance Sheet. The Company's cash and cash
equivalents immediately prior to Closing shall on a consolidated basis
be not less than $800,000, if the Closing Date occurs prior to the
Transaction Date. If the Closing Date is subsequent to the Transaction
Date, then in accordance with Section 2.14, the Company's cash and
cash equivalents shall be not less than $800,000 as of the Transaction
Date plus the cash component of the Company's net income on the
Closing Date.
(e) Discharge of Indebtedness and Encumbrances. The Stockholders
and the Company shall have provided for the payment in full of all
Funded Indebtedness of the Company and all extended credit from
vendors at the Closing. Such Funded Indebtedness as of December 31,
1996 is listed on Schedule 7.1(e) hereto. The Stockholders shall have
also caused the Company to have terminated or provided for the
termination of all Encumbrances of record on the properties of the
Company.
(f) Material Adverse Change. There has been no Material Adverse
Change.
(g) Recapitalization Documents. The Company shall have amended
its Certificate of Incorporation to authorize the issuance of three
classes of common stock in accordance with Exhibit F attached hereto,
and the Stockholders shall have received their proportionate shares of
Class A Common, Class B Common and Class C Common in exchange for
their old shares of the Company's common stock, all as set forth in
Section 2.1 and Part 2 of Schedule 2.
(h) Erikson Voting Agreement. The Eriksons shall have complied in
all material respects with all covenants contained in the Erikson
Voting Agreement to be complied with by them prior to or at the
Closing Date.
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(i) Cerbco and Cerberonics Stockholder Approval. Pursuant to
applicable law and subject to the provisions of Section 5.2, a
majority vote approving the sale of the Cerberonics Shares pursuant to
the Redemption shall have been obtained from (i) the non-Erikson
stockholders voting as a group and (ii) the Eriksons. In addition,
Cerbco, as the sole stockholder of Cerberonics, shall have approved
the sale of the Cerberonics Shares pursuant to the Redemption.
(j) Deliveries by the Stockholders and the Company. The following
shall be delivered at the Closing by the Stockholders and the Company:
(i) Opinion of Stockholders' Counsel. The
Investors shall have received favorable opinions of McGuire,
Woods, Battle & Boothe, Arent Fox Kintner Plotkin & Kahn, and
Reichelt, Nussbaum, LaPlaca & Miller, counsel to Cerbco,
Manoogian and the Company, respectively, dated the Closing
Date, in form and substance mutually satisfactory to the
parties, such terms of opinions in substantially the forms to
be attached hereto prior to the Closing Date as Exhibits C-1,
C-2 and C-3.
(ii) Certificates. The Investors shall have
received an officer's certificate and a secretary's
certificate of each of the Company, Cerbco and Cerberonics
executed by officers of each, dated the Closing Date, in form
and substance mutually satisfactory to the parties, such forms
of certificates to be in substantially the forms attached
hereto as Exhibits D-1, D-2 and D-3.
(iii) Escrow Agreement. The Stockholders
and the Company shall have delivered to the Investors at the
Closing the duly executed Escrow Agreement in the form of
Exhibit A hereto required pursuant to Section 2.7 hereof.
(iv) Resignation of Directors. The Company
shall have received the properly documented resignations of
incumbent directors of the Company other than Manoogian.
(v) Release. The Stockholders shall have
delivered to the Company a general release of liabilities in
the form of Exhibit H-1 attached hereto. In addition, the
Stockholders shall have delivered general releases of
liabilities to each other substantially in the form of
Exhibits H-2 and H-3 attached hereto.
(vi) Stock Certificates. The Company shall
have issued and delivered the Investment Shares to the
Investors (allocated as per Schedule 1, as updated prior to
the Closing), Manoogian shall have delivered the Manoogian
Shares to the Investors accompanied by duly executed stock
powers, together with any stock transfer stamps or receipts
for any transfer taxes required to be paid thereon as a result
of the Stock Purchase, and Cerberonics shall have delivered
the Cerberonics Shares to the Company accompanied by duly
executed stock powers, together with any stock transfer stamps
or receipts for any transfer taxes required to be paid thereon
as a result of the Redemption.
(k) Ancillary Documents. The Ancillary Documents shall have been
executed and delivered by the respective parties thereto.
7.2 Conditions to the Company's and the Stockholders' Obligations.
The obligations of the Company and the Stockholders under this
Agreement to consummate the Closing is subject to the conditions
that:
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(a) Covenants, Representations and Warranties. The Investors
shall have performed in all material respects all obligations and
agreements and complied in all material respects with all covenants
contained in this Agreement to be performed and complied with by the
Investors prior to or at the Closing and the representations and
warranties of the Investors set forth in Article IV hereof shall be
accurate in all material respects, at and as of the Closing Date, with
the same force and effect as though made on and as of the Closing Date
except for any changes resulting from activities or transactions which
may have taken place after the date hereof and which are permitted or
contemplated by the Agreement or which have been entered into in the
ordinary course of the Business and except to the extent that such
representations and warranties are expressly made as of another
specified date and, as to such representations, the same shall be true
as of such specified date.
(b) Consents. All statutory requirements for the valid
consummation by the Investors of the transactions contemplated by this
Agreement including without limitation the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (if applicable), shall have been
fulfilled and all authorizations, consents and approvals, including
those of all federal, state, local and foreign governmental agencies
and regulatory authorities required to be obtained in order to permit
the consummation by the Investors of the transactions contemplated
hereby shall have been obtained unless such failure shall not have a
Material Adverse Effect. The Investors shall have used their
reasonable best efforts to have obtained the release of the
Stockholders from all personal guarantees with respect to the Company,
if any.
(c) Deliveries by the Investors. The following shall be delivered
at the Closing by the Investors:
(i) Opinion of the Investors' Counsel. The
Stockholders shall have received from Davis, Graham & Stubbs
LLP, counsel to the Investors, a favorable opinion, dated the
Closing Date, in form and substance mutually satisfactory to
the parties, such form of opinion to be attached hereto prior
to the Closing Date as Exhibit E.
(ii) Escrow Agreement. The Investors shall
have delivered to the Stockholders and the Company at the
Closing the duly executed Escrow Agreement in the form of
Exhibit A hereto required pursuant to Section 2.7 hereof.
(iii) Purchase Price for GTCR Shares. The
Company shall have received from GTCR IV the Investment
Proceeds.
(iv) Ancillary Documents. The Investors
shall have executed and delivered the Ancillary Documents.
(d) Deliveries in Connection With the Redemption. All conditions
precedent to the Redemption shall have been met and the Redemption by
the Company of the Cerberonics Shares shall have been consummated and
Cerbco shall have received the Net Redemption Price.
(e) Deliveries in Connection With the Stock Purchase. All
conditions precedent to the Stock Purchase shall have been met and the
purchase of Investor Shares by the Investors shall have been
consummated and Manoogian shall have received the Net Stock Purchase
Price.
ARTICLE VIII
INDEMNIFICATION
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Notwithstanding anything to the contrary in this Agreement,
the Investors, the Company and the Stockholders shall have no claim of
entitlement for reimbursement of losses or damages in any way related to the
Transactions under this Agreement except as provided in this Article VIII.
8.1 Indemnification by the Stockholders. The Stockholders agree to,
individually and not jointly and severally, indemnify and hold
harmless the Investors or the Company (post-Closing) and each
officer, director, and affiliate of any Investor or the Company
(post-Closing) (collectively, the "Indemnified Parties") from and
against any and all damages, losses, claims, liabilities,
demands, charges, suits, penalties, costs and expenses (including
court costs and reasonable attorneys' fees and expenses incurred
in investigating and preparing for any litigation or proceeding)
(collectively, the "Indemnifiable Costs"), which any of the
Indemnified Parties may sustain, or to which any of the
Indemnified Parties may be subjected, arising out of (A) any
misrepresentation, breach or default by the Stockholders or the
Company (pre-Closing) of or under any of the covenants,
agreements or other provisions of this Agreement or any agreement
or document executed in connection herewith; (B) the assertion
and final determination of any claim or liability against any of
the Indemnified Parties by any Person based upon the facts which
form the alleged basis for any litigation to the extent it should
have been, but was not, reserved for in the Financial Statements
in accordance with GAAP; and (C) the Company's (pre-Closing) or a
Stockholder's tortious acts or omissions to act prior to Closing
for which the Company did not carry liability insurance, whether
or not such acts or omissions to act result in a breach or
violation of any representation or warranty. Determination of
whether the Company, on the one hand, or the Investors, on the
other hand, is entitled to indemnification hereunder shall be
made by such parties in light of the economic impact or loss
caused by the matter which is the subject of the claim of
indemnification. By way of example, a claim of indemnification
for breaches of the representation made in Section 3.17 (Taxes)
would impact the Company so that the Company would be entitled to
indemnification. A claim of indemnification based on a breach of
Section 3.29 (No Liens on Shares) would affect the Investors'
investment in the Company directly (as opposed to derivatively),
so that the Investors would be entitled to indemnification.
8.2 Defense of Claims. If any legal proceeding shall be instituted,
or any claim or demand made, against any Indemnified Party in
respect of which the Stockholders may be liable hereunder, such
Indemnified Party shall give prompt written notice thereof to the
Stockholders and, except as otherwise provided in Section 8.4
below, the Stockholders shall have the right to defend, or cause
the Company or its successors to defend, any litigation, action,
suit, demand, or claim for which they may seek indemnification
unless, in the reasonable judgment of the Investors, such
litigation, action, suit, demand, or claim, or the resolution
thereof, would have an ongoing effect on the Investors, the
Company or its successors, and such Indemnified Party shall
extend reasonable cooperation in connection with such defense,
which shall be at the Stockholders' expense. In the event the
Stockholders fail to defend the same within a reasonable length
of time, the Indemnified Parties and/or the Company (as
appropriate) shall be entitled to assume the defense thereof, and
the Stockholders shall be liable to repay the Indemnified Parties
and/or the Company (as appropriate) for all expenses reasonably
incurred in connection with said defense (including reasonable
attorneys' fees and settlement payments) if it is determined that
such request for indemnification was proper. If the Stockholders
shall not have the right to assume the defense of any litigation,
action, suit, demand, or claim in accordance with either of the
two preceding sentences, the Indemnified Parties shall have the
right to control the defense of and to settle, with the consent
of the Stockholders, which consent shall not be unreasonably
withheld, such litigation, action, suit, demand, or claim, but
the Stockholders shall be entitled, at their own expense, to
participate in such litigation, action, suit, demand, or claim.
8.3 Escrow Claim. If any claim for indemnification is made by an
Indemnified Party pursuant to this Article VIII prior to the
expiration of the Escrow Period, such Indemnified Party may apply
to the Escrow Agent provided in Section 2.7 of this Agreement for
reimbursement of such claim in accordance with the provisions of
the Escrow Agreement.
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8.4 Tax Audits, Etc. In the event of an audit of a Tax Return of the
Company with respect to which an Indemnified Party might be
entitled to indemnification pursuant to this Article VIII, the
Stockholders shall have the right in proportion to their
respective interest in the Company prior to the consummation
hereof, to control any and all such audits which may result in
the assessment of additional Taxes against the Company and any
and all subsequent proceedings in connection therewith, including
appeals (subject to the prior written consent of the Investors,
which shall not unreasonably be withheld). The Company and the
Stockholders shall each cooperate fully with the other in all
matters relating to any such audit or other Tax proceeding
(including according access to all records pertaining thereto),
and will execute and file any and all consents, powers of
attorney, and other documents as shall be reasonably necessary in
connection therewith. If additional Taxes are payable by the
Company as a result of any such audit or other proceeding, the
Stockholders shall be responsible for and shall promptly pay
their proportionate share of all Taxes, interest, and penalties
to which any of the Indemnified Parties shall be entitled to
indemnification.
8.5 Indemnification of the Stockholders and the Company. The
Investors agree, on a joint and several basis, to indemnify and
hold harmless the Stockholders and the Company and each officer,
director, stockholder or affiliate of the Company, from and
against any Indemnifiable Costs arising out of (A) any
misrepresentation, breach or default by the Investors of or under
any of the covenants, agreements or other provisions of this
Agreement or any agreement or document executed in connection
herewith and (B) any tortious acts or omissions by the Investors
or the Company after the Closing. In addition, the Company and
the Investors shall indemnify the Stockholders for any payment by
the Stockholders of the Company's obligations occurring after the
Closing Date.
8.6 Limits on Indemnification. Except for any claims for breach of
the representations and warranties of the Stockholders under
Sections 3.1, 3.2, 3.3, 3.17 or 3.29 hereof (the indemnification
for which shall expire on the expiration of the applicable
statute of limitations), the indemnification provided under this
Article VIII shall expire twelve (12) months from the Closing
Date. The Stockholders shall not be obligated to pay any amounts
for indemnification under this Article VIII until the aggregate
indemnification obligation hereunder exceeds $50,000, whereupon
the Stockholders shall only be liable for all amounts in excess
of such $50,000 for which indemnification may be sought.
Notwithstanding the foregoing, in no event shall any Stockholder
have any liability to the Investors in excess of their allocable
portion of ten percent (10%) (i.e., allocated 7.0379% to the
Cerberonics Parties and 2.963% to Manoogian) of the sum of (i)
the Redemption Price, as adjusted by Sections 2.8 and 2.11, and
(ii) the Stock Purchase Price, as adjusted by Sections 2.8 and
2.11 (except for claims made for any breach of the
representations and warranties of the Stockholders under Sections
3.1, 3.2, 3.3, 3.17 or 3.29 hereof, for which no such limitation
on the Stockholders' indemnification obligations shall apply). In
addition, (i) the Cerberonics Parties shall only be liable for
breaches of the representations and warranties contained in
Sections 3.8 through 3.20, 3.23, 3.24, 3.25, 3.27 and 3.28 to the
extent it or the Eriksons had actual knowledge of such breach,
(ii) the Cerberonics Parties shall only be liable for breaches of
the representations and warranties contained in Section 3.29 to
the extent such breach relates to the Cerberonics Shares, and
(iii) Manoogian shall only be liable for breaches of the
representations and warranties contained in Section 3.29 to the
extent such breach relates to the Manoogian Shares and shall have
no liability for breaches of the representations and warranties
made by the Cerberonics Parties under Section 3.30. However,
nothing in this Article VIII shall limit the Investors in any way
in exercising or securing any remedies provided by applicable
common law with respect to the conduct of the Stockholders in
connection with this Agreement or in the amount of damages that
it can recover from the Stockholders in the event that the
Investors successfully prove intentional fraud or intentional
fraudulent conduct in connection with this Agreement.
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ARTICLE IX
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) Mutual Consent. Upon the mutual written consent of all
parties hereto;
(b) Litigation. By either Stockholder or the Company or the
Investors if an injunction or other order shall have been issued by a
court or administrative body of competent jurisdiction, or litigation
or a governmental proceeding shall be pending or threatened, which
restrains or seeks to restrain or otherwise would make unlawful the
consummation of the transactions contemplated by this Agreement;
(c) Conditions to the Investors' Obligations. By the Investors if
any of the conditions provided in Section 7.1 hereof shall not have
been satisfied, complied with or performed in any material respect on
or before the Closing Date and the Investors shall not have waived in
writing such failure of satisfaction, non-compliance or
non-performance;
(d) Conditions to the Stockholders' and the Company's
Obligations. By the Stockholders and the Company if any of the
conditions provided in Section 7.2 hereof shall not have been
satisfied, complied with or performed in any material respect on or
before the Closing Date, and the Stockholders have not waived in
writing such failure of satisfaction, non-compliance or
non-performance;
(e) Alternative Transaction. By Cerbco if (i) Cerbco, the
Stockholders and/or the Company is (or are) prepared to enter into a
binding definitive agreement to effect an Alternative Transaction; and
(ii) the Company, the Stockholders and/or Cerbco has (or have) given
the Investors at least five (5) business days' notice of their
intention to terminate this Agreement pursuant to this Section 9.1(e)
(which notice shall include a description of all relevant terms and
conditions of such Alternative Transaction), during which period
Investors shall have the opportunity to propose amendments or
modifications to the terms of the Redemption and the Stock Purchase;
(f) Withdrawal of Cerbco Board Approval. By the Investors if the
Cerbco board of directors shall have amended or withdrawn any such
recommendation and such recommendation is not reinstated in its prior
form within five (5) business days after such amendment or withdrawal
other than as a result of the events described in paragraphs (g) or
(h) below;
(g) Lack of Favorable Fairness Opinion. By the Investors or
Cerbco if the Cerbco board of directors shall have failed to recommend
adoption of the Redemption Proposal at the time the Proxy Statement is
first mailed to Cerbco's stockholders and such failure is due to
Cerbco having obtained, pursuant to Section 5.2, a fairness opinion
that is not favorable; or
(h) Rejection by Cerbco Stockholders. By the Investors or Cerbco
if the stockholders of Cerbco shall have failed to approve the
Transaction at meetings duly convened therefore in accordance with the
terms of Sections 5.2 and 7.1(i).
9.2 Effect of Termination. Termination of this Agreement by a party
pursuant to this Article IX shall not of itself result in any
liability on such party or his or its respective representatives,
directors, officers, stockholders or agents. In the event of
termination of this Agreement, nothing contained in this Section
9.2 shall relieve any party from liability for any breach of this
Agreement.
9.3 Fees and Expenses. If (i) the Investors terminate this Agreement
at any time under circumstances where the provisions of and
events described by Section 9.1(a), (b), (c), (f), (g) or (h) are
not
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applicable, or (ii) the Investors fail to consummate the
Transactions through no fault of the Stockholders or the Company, and
the Company and the Stockholders have otherwise satisfied all
conditions precedent applicable to such parties under Section 7.1,
then the Investors shall, jointly and severally, promptly pay the
Stockholders (19/27ths to Cerberonics and 8/27ths to Manoogian) a fee
equal to $1,000,000 (subject, however, to the operation of Section
7.1(a)). If this Agreement is terminated pursuant to Section 9.1(e) or
(f), Cerbco shall promptly pay Investors a fee equal to $1,000,000. If
this Agreement is terminated pursuant to Section 9.1(g) or (h), Cerbco
shall promptly pay Investors a fee equal to (i) $250,000 in same day
funds (such amount being a reasonable estimate of the Investors costs
and expenses) and (ii) if an Alternative Transaction is consummated
within one (1) year following such termination, an additional $750,000
shall be payable by Cerbco to the Investors upon such consummation of
the Alternative Transaction. Any such fees shall be paid in same day
funds and in no event later than one business day after termination of
this Agreement and shall bear interest on such amount from the date
payable until paid at a rate of eight percent (8%) per annum.
Notwithstanding anything to the contrary in this Article IX, any
termination by either party under Sections 9.1(e), (f), (g) or (h)
shall not be effective until Investors have received payment of the
$1,000,000 fee payable pursuant to the second sentence of this Section
9.3 in the case of a termination under Sections 9.1(e) or (f), or the
$250,000 fee payable pursuant to clause (i) of the third sentence of
this Section 9.3 in the case of a termination under Section 9.1(g) or
(h).
ARTICLE X
MISCELLANEOUS
10.1 Modifications. Any amendment, change or modification of this
Agreement shall be void unless in writing and signed by all
parties hereto. No failure or delay by any party hereto in
exercising any right, power or privilege hereunder (and no course
of dealing between or among any of the parties) shall operate as
a waiver of any such right, power or privilege. No waiver of any
default on any one occasion shall constitute a waiver of any
subsequent or other default. No single or partial exercise of any
such right, power or privilege shall preclude the further or full
exercise thereof.
10.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given when
personally delivered, or 48 hours after deposited in the United
States mail, first-class, postage prepaid, or by facsimile
addressed to the respective parties hereto as follows:
The Investors:
c/o Golder, Thoma, Cressey, Rauner, Inc.
233 S. Wacker Drive, 61st Floor
6100 Sears Tower
Chicago, IL 60606-6402
Attention: Will Kessinger
Tel No.: (312) 382-2219
Fax No.: (312) 382-2201
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With a copy to:
Davis, Graham & Stubbs LLP
1314 Nineteenth Street, N.W.
Washington, D.C. 20036
Attention: J. Hovey Kemp or
Karen Renfree Clark
Tel No.: (202) 822-1029 or 1055
Fax No.: (202) 293-4794
The Company:
Capitol Office Solutions, Inc.
f/k/a Capitol Copy Products, Inc.
12000 Old Baltimore Pike
Beltsville, Maryland 20705
Attention: Mr. Armen Manoogian, President
Tel No.: (301) 937-5030
Fax No.: (301) 937-6031
With a copy to:
Reichelt, Nussbaum, LaPlaca & Miller
7500 Century Center Drive
Suite 1000
Greenbelt, Maryland 20770
Attention: Raymond G. LaPlaca
Tel No.: (301) 474-9000
Fax No.: (301) 345-0565
Stockholders:
Cerberonics
Cerberonics, Inc.
300 Delaware Avenue
Suite 1704
Wilmington, Delaware 19801
Attention: President
Tel No.: (302) 427-7876
Fax No.: (302) 427-9560
With a copy to:
McGuire, Woods, Battle & Boothe, L.L.P.
8280 Greensboro Drive, Suite 900
Tysons Corner, Virginia 22102
Attention: Christopher L. Keefer
Tel No.: (703) 712-5000
Fax No.: (703) 712-5050
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Manoogian:
Armen Manoogian
c/o Capitol Office Solutions, Inc.
12000 Old Baltimore Pike
Beltsville, Maryland 20705
Tel No.: (301) 937-5030
Fax No.: (301) 937-6031
With a copy to:
Arent Fox Kintner Plotkin & Kahn
Washington Square
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5339
Attention: Arnold R. Westerman
Tel No.: (202) 857-6243
Fax No.: (202) 857-6395
Cerbco:
CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
Attention: George Wm. Erikson
Robert W. Erikson
Tel No.: (301) 386-7400
Fax No.: (301) 322-3041
or to such other address as to any party hereto as such party shall designate by
like notice to the other parties hereto.
10.3 Counterparts; Facsimile Transmission. This Agreement may be
executed in several counterparts, each of which shall be deemed
an original but all of which counterparts collectively shall
constitute one instrument, and in making proof of this Agreement,
it shall never be necessary to produce or account for more than
one such counterpart. Signatures sent to the other parties by
facsimile transmission shall be binding as evidence of acceptance
of the terms hereof by such signatory party.
10.4 Expenses. Each of the parties hereto will bear all costs, charges
and expenses incurred by such party in connection with this
Agreement and the consummation of the transactions contemplated
herein, provided, however, that (i) the Stockholders shall bear
all costs and expenses of (A) any broker involved in this
transaction and (B) all legal expenses of the Stockholders with
respect to this Agreement and the transactions contemplated
hereby; and (ii) the Company (post-Closing) shall reimburse
Manoogian for his reasonable legal costs and expenses in
connection with the negotiation of any Ancillary Agreement to
which he is a party.
10.5 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Investors, the Company and the
Stockholders, their heirs, representatives, successors, and
permitted assigns, in accordance with the terms hereof. This
Agreement shall not be assignable by the
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Stockholders without the prior written consent of the Investors.
This Agreement shall be assignable by the Investors to a wholly-owned
subsidiary of the Investors without the prior written consent of the
Stockholders.
10.6 Entire and Sole Agreement. This Agreement and the other schedules
and agreements referred to herein, constitute the entire
agreement between the parties hereto and supersede all prior
agreements, representations, warranties, statements, promises,
information, arrangements and understandings, whether oral or
written, express or implied, with respect to the subject matter
hereof.
10.7 Governing Law. This Agreement and its validity, construction,
enforcement, and interpretation shall be governed by the
substantive laws of the State of Delaware.
10.8 Survival of Representations, Warranties and Covenants. Regardless
of any investigation at any time made by or on behalf of any
party hereto or of any information any party may have in respect
thereof, all covenants, agreements, representations, and
warranties and the related indemnities made hereunder or pursuant
hereto or in connection with the transactions contemplated hereby
shall survive the Closing for a period of one (1) year, provided
(a) the representations and warranties contained in Section 3.17
of this Agreement, and the related indemnities, shall survive the
Closing until the expiration of the applicable statutes of
limitations for determining or contesting Tax liabilities and (b)
the representations and warranties contained in Sections 3.1,
3.2, 3.3 and 3.29 of this Agreement, and the related indemnities,
shall survive the Closing indefinitely.
10.9 Invalid Provisions. If any provision of this Agreement is deemed
or held to be illegal, invalid or unenforceable, this Agreement
shall be considered divisible and inoperative as to such
provision to the extent it is deemed to be illegal, invalid or
unenforceable, and in all other respects this Agreement shall
remain in full force and effect; provided, however, that if any
provision of this Agreement is deemed or held to be illegal,
invalid or unenforceable there shall be added hereto
automatically a provision as similar as possible to such illegal,
invalid or unenforceable provision and be legal, valid and
enforceable. Further, should any provision contained in this
Agreement ever be reformed or rewritten by any judicial body of
competent jurisdiction, such provision as so reformed or
rewritten shall be binding upon all parties hereto.
10.10 Public Announcements. Neither party shall make any public
announcement of the transactions contemplated hereby without the
prior written consent of the other party, which consent shall not
be unreasonably withheld, unless such disclosure is required, on
advice of counsel, in order to comply with federal securities
laws or the listing requirements of NASDAQ or another national
stock exchange.
10.11 Remedies Cumulative. The remedies of the parties under this
Agreement are cumulative and shall not exclude any other remedies
to which any party may be lawfully entitled.
10.1 Waiver. No failure or delay on the part of any party in
exercising any right, power, or privilege hereunder or under any
of the documents delivered in connection with this Agreement
shall operate as a waiver of such right, power, or privilege; nor
shall any single or partial exercise of any such right, power, or
privilege preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege.
10.13 Further Assurances. From time to time after the Closing, at the
request of the Investors but without further consideration, the
Company and the Stockholders will execute and deliver such other
instruments of conveyance, assignment, transfer, and delivery and
take such other action as the Investors reasonably may request in
order to consummate the transactions contemplated hereby.
10.14 Headings. The descriptive section headings are for convenience
of reference only and shall not control or affect the meaning or
construction of any provision of this Agreement.
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10.15 Joinder by Additional Investors. During the term of this
Agreement, to the extent Schedule 1 is updated to the effect that
additional Investors will join GTCR IV as Investors hereunder,
GTCR IV shall cause all such Persons to become parties hereto,
without the consent of the Company or the Stockholders, by
execution and delivery of a counterpart of this Agreement
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed as of the date and year first above written.
THE COMPANY:
CAPITOL OFFICE SOLUTIONS, INC.
(f/k/a Capitol Copy Products, Inc.)
By: /s/ Armen A. Manoogian
Armen A. Manoogian
President
STOCKHOLDERS:
CERBERONICS:
CERBERONICS, INC.
By: /s/ Robert W. Erikson
Name: Robert W. Erikson
Title: Chairman
MANOOGIAN:
/s/ Armen A. Manoogian
Armen A. Manoogian
CERBCO:
CERBCO, INC.
By: /s/ George Wm. Erikson
Name: George Wm. Erikson
Title: Chairman
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INVESTORS:
GOLDER, THOMA, CRESSEY, RAUNER
FUND IV, L.P.
By: GTCR IV, L.P.,
General Partner
By: Golder, Thoma, Cressey,
Rauner, Inc.,
General Partner
By: /s/ Carl D. Thoma
Carl D. Thoma
Principal
Name:
Title:
Name:
Title:
Name:
Title:
Name:
Title:
Name:
Title:
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EXHIBIT B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") dated this ----- day
of --------------, 1997, is entered into by and among GOLDER, THOMA, CRESSEY,
RAUNER FUND IV, L.P., a Delaware limited partnership ("GTCR"), and certain other
investors as are signatory hereto (collectively, GTCR and the other investors
are referred to herein as the "Investors"), -----------------------------------
(the "Escrow Agent"), CAPITOL OFFICE SOLUTIONS, INC. (f/k/a Capitol Copy
Products, Inc.), a Delaware corporation (the "Company"), CERBCO, INC., a
Delaware corporation ("Cerbco"), and CERBERONICS, INC., a Delaware corporation
("Cerberonics;" collectively, Cerberonics and Cerbco are referred to herein as
the "Cerberonics Parties"), and ARMEN A. MANOOGIAN ("Manoogian") (collectively,
the Cerberonics Parties and Manoogian are referred to herein as the
"Stockholders").
Recitals
A. The Company, the Investors and the Stockholders have entered into an
Investment, Redemption and Stock Purchase Agreement dated as of February ---,
1997 (the "Investment and Redemption Agreement").
B. Pursuant to the Investment and Redemption Agreement, (i) the Cerberonics
Parties have agreed to sell to the Company and the Company has agreed to
purchase from the Cerberonics Parties all the shares of the Company's capital
stock held by Cerberonics (the "Redemption") in exchange for the price set forth
in Section 2.3 of the Investment and Redemption Agreement (the "Redemption
Price"); (ii) GTCR has agreed to purchase from the Company and the Company has
agreed to sell to GTCR 49.5 shares of the Company's Class A Common Stock and .5
shares of the Company's Class C Common Stock (the "Investment"); and (iii)
Manoogian has agreed to sell to the Investors and the Investors have agreed to
purchase from Manoogian all of the shares of the Company's Class A Common Stock
held by him and 62.5% of the Company's Class C Common Stock held by him (the
"Stock Purchase") in exchange for the price set forth in Section 2.5 of the
Investment and Redemption Agreement (the "Stock Purchase Price").
C. This Escrow Agreement is entered into for the purpose of securing and
providing a first, but non-exclusive source for satisfying any amount that is
required to be paid by the Stockholders jointly or separately to the Investors,
the Company and/or any of the Indemnified Parties for the purposes and in the
manner described in Section 2.7 and Article VIII of the Investment and
Redemption Agreement.
D. Obligations for amounts due to the Investors, the Company and/or any
Indemnified Parties under the Investment and Redemption Agreement are in most
instances mutual to both the Cerberonics Parties and Manoogian, however, there
are certain limitations on the Stockholders' indemnification obligations
provided for in Section 8.6 of the Investment and Redemption Agreement, and this
Agreement allocates certain responsibilities among the Cerberonics Parties and
Manoogian according to such limitations.
Agreement
NOW, THEREFORE, in consideration of the premises, the parties
do hereby agree as follows:
a. Deposit of Cash and Securities.
(a) Concurrent with the closing contemplated by Section 2.13 of
the Investment and Redemption Agreement, the Company and the Investors
shall cause to be deposited with the Escrow Agent, in accordance with
the following sentence, the sum of $1,500,000 (the "Escrow Sum") for
the purposes intended in Section 2.7 and Article VIII thereof.
Pursuant to Section 2.7 of the Investment and Redemption Agreement,
(i) an amount equal to 19/27ths of the Escrow Sum shall be deducted
from the Redemption Price and deposited with the Escrow Agent as the
Cerberonics Parties' share of the Escrow Sum (i.e., $1,055,556)
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(the "Cerbco Escrow Account"), and (ii) the following shall be
deposited with the Escrow Agent as Manoogian's share of the Escrow Sum
(i.e., $444,444), (A) an amount of cash equal to 5/27ths of the Escrow
Sum (i.e., $277,778), which shall be deducted from the Stock Purchase
Price (the "Cash Component") and (B) 8.33 shares of the Company's
Class B Common Stock (which have a liquidation value equal to 3/27ths
of the Escrow Sum or $166,667) (the "Securities Component;"
collectively, the amounts set forth in clauses (A) and (B) above shall
be referred to herein as the "Manoogian Escrow Account"). The Escrow
Agent will keep accounting records which segregate the Escrow Sum into
two separate accounts, the Cerbco Escrow Account and the Manoogian
Escrow Account.
(b) The Escrow Sum is to be retained by the Escrow Agent pursuant
to this Agreement, and the Escrow Sum and income thereon may be
disbursed by the Escrow Agent only in accordance with this Agreement.
(c) Manoogian will retain the right to vote the shares of Class B
Common Stock deposited in the Securities Component.
b. Investment of the Escrow Sum.
(1) The portion of the Escrow Sum which is comprised of cash
shall be invested by the Escrow Agent at the direction of all the
Stockholders in:
(i) U.S. Treasury bills having maturities of 90 days or less
or
(ii) U.S. Government Securities having maturities of one yea
or less; or
(iii) Certificates of Deposit issued by a national or state
bank that is a member of the FDIC and has over $100
million of capital and surplus, or commercial paper
having a maturity of 120 days or less and an
A-1/P-1 or comparable rating; or
(iv) Other marketable debt securities at the joint written
direction of the Investors and the Stockholders; or
(v) A money market fund backed by the full
faith and credit of the U.S. Government
consisting of securities with a maturity of 90 days
or less, and providing for funds available on 24 hours
advance notice except in the event the Federal Reserve
Bank is closed.
(2) Portions of the Escrow Sum not so invested may be kept in
cash pending such investment. The portions of the Escrow Sum invested
under (i), (ii) and (iii) above or held as cash shall be valued for
all purposes under this Agreement at "face value." All other portions
of the Escrow Sum shall be valued as mutually agreed upon by the
Stockholders and the Investors in writing at the time such parties
give their consent to the investment. All assets held under this
Agreement shall be registered in the names of any nominees selected by
the Escrow Agent.
c. Duties of the Escrow Agent
(1) The Escrow Agent shall receive, hold and invest the Escrow
Sum pursuant to the terms of this Agreement. Except as hereinafter
provided, on -----------, 1998 (the first anniversary of the Closing
Date), or as soon thereafter as possible, the Escrow Agent shall
deliver to the Stockholders, or to their order, all remaining portions
of their respective escrow accounts then held by the Escrow Agent in
excess of the amounts (if any) reserved against Claims (as such term
is defined pursuant to Section 3(b) hereof). Pursuant to Section 8.6
of the Investment and Redemption Agreement, not all indemnification
obligations of the Stockholders under the Investment and Redemption
Agreement are mutual. Where the indemnification obligations of the
Cerberonics Parties and Manoogian are mutual (e.g., where both parties
are required to indemnify the Company or the Investors, as the case
may be, as a result of a breach of a covenant or a representation and
warranty that the Stockholders collectively made), the payment of such
Claims shall be allocated among the Stockholders as follows: (i) the
Cerberonics Parties shall be responsible for 19/27ths (70.37037%) of
such Claim and the Cerbco Escrow Account shall be adjusted accordingly
and (ii) Manoogian
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shall be responsible for 8/27ths (29.62963%) of such Claim and,
subject to Section 3(c) below, the Manoogian Escrow Account shall be
adjusted accordingly. Where Manoogian has sole indemnification
responsibility for such Claim (e.g., where there was a breach of a
given representation and warranty but the Cerberonics Parties are
found to be excused from their indemnification obligation in
connection therewith because they had no actual knowledge of the
matter in question, as per Section 8.6 of the Investment and
Redemption Agreement), then Manoogian shall be solely (100%)
responsible therefor, and where the Cerberonics Parties have sole
indemnification responsibility for such Claim (e.g., where there was a
breach of a given representation and warranty but Manoogian is found
to be excused from his indemnification obligation in connection
therewith, as per Section 8.6 of the Investment and Redemption
Agreement), then the Cerberonics Parties shall be solely (100%)
responsible therefor. (The relevant percentage allocation of
responsibility for a Claim (either 100%, 70.37037% or 0% for the
Cerberonics Parties and either 100%, 29.62963% or 0% for Manoogian)
shall be referred to herein as the parties' respective "Percentage
Interests.")
(2) Upon written notice from the Investors to the Escrow Agent
and the Stockholders jointly or individually (in the event the claim
is the sole responsibility of one Stockholder) of any claim against
the Escrow Sum under Section 2.11 of the Investment and Redemption
Agreement or under Article VIII of the Investment and Redemption
Agreement against the Stockholders, which notice sets forth a
description of the facts upon which the claim is based and the amount
of the claim (a "Claim", with the notice thereof referred to herein as
the "Claim Notice"), the Escrow Agent immediately shall reserve an
amount in the Escrow Sum equal to the Claim specified in the Claim
Notice (the "Reserved Amount") and shall make the appropriate
allocations to the Cerbco Escrow Account or, subject to Section 3(c)
below, the Manoogian Escrow Account; provided, however, that if the
Claim is based on an indemnification obligation which is solely the
responsibility of one Stockholder, the Escrow Agent shall not reserve
an amount against the Escrow Sum in excess of the current unclaimed
Escrow Sum allocable to such Stockholder's escrow account.
(3) Any amounts required to be deducted from the Manoogian Escrow
Account in order to satisfy a Claim under the Investment and
Redemption Agreement shall be deducted first from the Cash Component
until the Cash Component shall be reduced to zero, and then from the
Securities Component.
(4) The Investors shall notify the Escrow Agent and the
Stockholders jointly or individually (in the event the Claim is the
sole responsibility of one Stockholder) of a Claim by delivering a
copy of the Claim Notice to the Escrow Agent and both or one of the
Stockholders, as appropriate, as provided in Section 6(f) hereof. In
the event the Stockholders who are potentially responsible for the
Claim do not notify the Escrow Agent and the Investors in writing of
an objection to the Claim within fifteen (15) days of the mailing by
the Investors of the Claim Notice, the Escrow Agent shall deliver to
the Investors from the Escrow Sum the Reserved Amount and shall make
all necessary adjustments to the Cerbco Escrow Account and the
Manoogian Escrow Account.
(5) In the event a Claim Notice is received by the Escrow Agent
and the Escrow Agent receives a written objection to the Claim from
the Stockholders who are potentially responsible therefor within
fifteen (15) days of the mailing by the Investors of the Claim Notice,
the Escrow Agent shall continue to hold the Reserved Amount relating
to that Claim Notice until it either (i) receives a joint written
direction from the Investors and the responsible Stockholders with
respect to the disposition of such Reserved Amount of the Escrow Sum
or (ii) until the Investors and the responsible Stockholders have
resolved the Claim.
(6) Any interest or other income earned by the Cerbco Escrow
Account and the Manoogian Escrow Account, net of any transaction costs
associated with investment thereof, shall be paid to the Cerberonics
Parties and Manoogian, respectively, at the termination of this
Agreement to the extent not paid to the Company or the Investors, as
the case may be, pursuant to a Claim Notice.
(7) The Escrow Agent shall provide the Investors and the
Stockholders with quarterly reports of assets held and income earned
by the Escrow Sum including an accounting of amounts of the total
Escrow Sum allocated to the Cerbco Escrow Account and to the Manoogian
Escrow Account.
Notwithstanding anything to the contrary above, it is the intent of the parties
that (i) with respect to payments of the Escrow Sum in satisfaction of the
Stockholders obligations under Section 2.11(a) of the Investment and
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Redemption Agreement, such payments will be allocated 19/27ths to the
Cerberonics Parties and 8/27ths to Manoogian; and (ii) with respect to Claims
that relate to the Stockholders' indemnification obligations under Article VIII
of the Investment and Redemption Agreement, $444,444 (comprised of the Cash
Component and the Securities Component) of the original Escrow Sum shall be used
to fund Claims made by the Company or the Investors, as the case may be, for
which Manoogian is responsible and $1,055,556 of the original Escrow Sum shall
be used to fund Claims made by the Investors or the Company for which the
Cerberonics Parties are responsible, such that the Cerbco Escrow Account cannot
be used to fund Claims for which Manoogian is solely responsible, and the
Manoogian Escrow Account cannot be used to fund Claims for which the Cerberonics
Parties is solely responsible.
d. Resolution of Disputes. All disputes between the Stockholders (or either
of them) and the Investors with respect to (a) the Escrow Sum, (b) the payment
of Escrow Sum amounts pursuant to Section 3 hereof, (c) the allowance or
disallowance of a Claim, or (d) the terms of this Agreement or the rights and
obligations of the Stockholders and the Investors hereunder, which cannot be
resolved promptly by mutual agreement, will be resolved by binding arbitration
in accordance with the rules of the American Arbitration Association and in
accordance with the Arbitration Procedures attached hereto as Exhibit A.
e. Operations.
The Stockholders, the Company and the Investors hereby agree
with the Escrow Agent that:
(1) The Escrow Agent shall have no duties or
responsibilities except as expressly provided for in this
Agreement.
(2) The Escrow Agent shall not be responsible for the
identity, authority or rights of any person, firm or corporation
executing or delivering or purporting to execute or deliver this
Agreement or any document or security deposited hereunder or any
endorsement thereon or assignment thereof.
(3) The Escrow Agent shall not be responsible for the
sufficiency, genuineness or validity of or title to any document
or security deposited or to be deposited with it pursuant to this
Agreement or of any endorsement thereon or assignment thereof.
(4) The Escrow Agent may rely upon any instrument or writing
believed by it to be genuine and sufficient and properly
presented, and shall not be liable or responsible for any action
taken or omitted in accordance with the provisions thereof.
(5) The Escrow Agent shall not be liable or responsible for
any act it may do or omit to do in the exercise of reasonable
care.
(6) In case any property held by the Escrow Agent hereunder
shall be attached, garnished or levied upon under any order of
any court or the delivery thereof shall be stayed or enjoined by
any order of any court, or any other order, judgment or decree
shall be made or entered by any court affecting such property or
any part thereof or any acts of the Escrow Agent, the Escrow
Agent is hereby authorized, in its exclusive discretion, to obey
and comply with all writs, orders, judgments, or decrees so
entered or issued, whether with or without jurisdiction, and, if
the Escrow Agent obeys and complies with any such writ, order,
judgment or decree, it shall not be liable to any of the parties
hereto, their successors, heirs or personal representatives or to
any other person, firm or corporation, by reason of such
compliance, notwithstanding such writ, order, judgment or decree
being subsequently reversed, modified, annulled, set aside or
vacated.
(7) The Escrow Agent shall be entitled to reasonable
compensation for its services and may employ agents and attorneys
for the reasonable protection of the property held hereunder.
(8) The Investors, the Company and the Stockholders jointly
and severally agree to indemnify and hold the Escrow Agent
harmless from any and all costs, expenses, claims, losses,
liabilities and damages (including reasonable attorneys' fees)
that may arise out of or in connection with the Escrow Agent's
acting as Escrow Agent under the terms of this Escrow Agreement,
except in those instances where the Escrow Agent has been guilty
of gross negligence or willful misconduct.
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f. Miscellaneous.
(1) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns, and no other persons shall have any rights
herein. No transferee, successor or assign of the Stockholders or
the Investors shall have any rights hereunder until each notice
thereof has been given and evidence of each transfer, assignment
or succession is provided to Escrow Agent.
(2) This Agreement may be executed and endorsed in one or
more counterparts and each of such counterparts shall, for all
purposes, be deemed to be an original, but all such counterparts
shall together constitute one and the same instrument.
(3) All fees and expenses of the Escrow Agent shall be
shared equally by the Stockholders, on the one hand, and the
Investors on the other hand, except that any expenses of the
Escrow Agent in connection with any litigation hereunder shall be
paid by the party obligated for the cost of such litigation.
(4) A successor Escrow Agent may be appointed at any time by
mutual agreement of the Stockholders and the Investors.
(5) The Escrow Agent agrees to hold the assets of the Escrow
Sum in two segregated and separate accounts, the Cerbco Escrow
Account and the Manoogian Escrow Account, outside the reach of
its general creditors.
(6) Any notice, statement or other communication which is
required to be given, including Claim Notices, hereunder shall be
in writing and shall be sufficient in all respects if delivered
personally, or 48 hours after deposit in the United States mail,
first-class, postage prepaid, or by facsimile addressed to the
respective parties hereto as follows:
To the Investors:
GTCR IV cc: Davis, Graham & Stubbs LLP
c/o Golder, Thoma, Cressey, 1314 Nineteenth Street, N.W.
Rauner, Inc. Washington, DC 20036
233 S. Wacker Drive, 61st Floor Attn: J. Hovey Kemp
6100 Sears Tower Tel No.: (202) 822-1029
Chicago, IL 60606-6402 Fax No.: (202) 293-2794
Attn: Will Kessinger
Tel No.: (312) 382-2219
Fax No.: (312) 382-2201
To the Company:
Capitol Office Solutions, Inc. cc: Reichelt, Nussbaum, LaPlaca &
f/k/a Capitol Copy Products, Inc. Miller
12000 Old Baltimore Pike 7500 Century Center Drive
Beltsville, Maryland 20705 Suite 1000
Attention: Mr. Armen Manoogian Greenbelt, MD 20770
President Attention: Raymond G. LaPlaca
Tel No.: (301) 937-5030 Tel No.: (301) 474-9000
Fax No.: (301) 937-6031 Fax No.: (301) 345-0565
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To the Stockholders:
CERBERONICS, Inc. cc: McGuire, Woods, Battle &
- --------------------------------------- Boothe, L.L.P.
- --------------------------------------- 8280 Greensboro Drive
- -----------------------------, Delaware Suite 900
Attn: --------------------------------- Tysons Corner, VA 22102
Tel No.: ----------------------------- Attn: Chris Keefer
Fax No.: ----------------------------- Tel No.: (703) 712-5339
Fax No.: (703) 712-5050
Armen Manoogian cc: Arent Fox Kintner Plotkin &
c/o Capital Office Solutions, Inc. Kahn
12000 Old Baltimore Pike Washington Square
Beltsville, MD 20705 1050 Connecticut Avenue, NW
Tel No.: (301) 937-5030 Washington, DC 20036-5339
Fax No.: (301) 937-6031 Attn: Arnold R. Westerman
Tel No.: (202) 857-6243
Fax No.: (202) 857-6395
To Cerbco:
CERBCO, Inc. or
3421 Pennsy Drive
Landover, MD 20785
Attn: George Wm. Erikson
Robert W. Erikson
Tel No.: (301) 386-7400
Fax No.: (301) 322-3401
To Escrow Agent:
- -----------------------------
- -----------------------------
- -----------------------------
- -----------------------------
The address of a party may be changed from time to time by giving notice in the
manner prescribed in this paragraph. All such notices or communications will be
effective upon mailing, if mailed, and upon receipt, if personally delivered.
(7) The validity, enforcement and construction of this
Agreement shall be governed by the laws of the State of Delaware.
(8) Each of the parties hereto agrees to cooperate with the
other parties hereto in effectuating this Agreement and to
execute and deliver such further documents or instruments and to
take such further actions as shall be reasonably requested in
connection therewith.
(9) If any one or more provisions in this Agreement, for any
reason, shall be determined to be invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of any such provision in any other respect and the
remaining provisions of this Agreement shall not be in anyway
impaired.
(10) The Escrow Agent may resign as such by delivering
written notice to that effect, at least 30 days prior to the
effective date of such resignation, to the Investors and the
Stockholders. The Investors and the Stockholders, acting jointly,
may terminate the Escrow Agent from its position as such
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by delivering to the Escrow Agent written notice to that
effect executed by the Investors and the Stockholders at least 30
days prior to the effective date of such termination. In the
event of such resignation or termination of the Escrow Agent, a
successor Escrow Agent shall be appointed by mutual agreement
between the Investors and the Stockholders. From and after the
appointment of a successor Escrow Agent pursuant to this Section
6(j), all references herein to the Escrow Agent shall be deemed
to be to such successor Escrow Agent.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this
Escrow Agreement as of the day and year first above written.
ESCROW AGENT: INVESTOR:
- ------------------------------ GOLDER, THOMA, CRESSEY, RAUNER
FUND IV, L.P.
By: GTCR IV, L.P.,
By: -------------------------- General Partner
Name:----------------
Title:--------------- By: Golder, Thoma, Cressey, Rauner, Inc.,
General Partner
By: ------------------------------------
Name: ------------------------------------
Title: ------------------------------------
COMPANY:
CAPITOL OFFICE SOLUTIONS, INC.
By:------------------------------------
Armen A. Manoogian
President and Chief Executive Officer
STOCKHOLDERS:
CERBERONICS:
CERBERONICS, INC.
By: ------------------------------------
Name: ------------------------------------
Title: ------------------------------------
MANOOGIAN:
-------------------------------------------
Armen A. Manoogian
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CERBCO:
CERBCO, INC.
By: -------------------------------------
Name: -------------------------------------
Title: -------------------------------------
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EXHIBIT C
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") dated as of March 7, 1997 is
by and among Robert W. Erikson and George Wm. Erikson (collectively, the
"Eriksons" or the "Stockholders"), CERBCO, Inc., a Delaware corporation (the
"Company"), CERBERONICS, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Cerberonics"), Capitol Office Solutions, Inc., a
Delaware corporation ("Capitol"), and Golder, Thoma, Cressey, Rauner Fund IV,
L.P., a Delaware limited partnership ("GTCR IV"), on behalf of itself and as
agent for the other investors (collectively, with GTCR IV, the "Investors") who
are listed in Schedule 1 to and are signatory to the Redemption Agreement
referenced in Recital B below.
Recitals
P. The Company, through Cerberonics, owns two-thirds of the total
outstanding common stock of Capitol. Armen A. Manoogian ("Manoogian") owns the
remaining one-third of the outstanding common stock of Capitol.
Q. Concurrently herewith, the Company, Cerberonics and Manoogian are
entering into an Investment, Redemption and Stock Purchase Agreement (the
"Redemption Agreement") with Capitol, GTCR IV and the other Investors, and
pursuant to which (i) the Investors are purchasing certain new shares of Capitol
common stock from Capitol, (ii) the Investors are purchasing certain of
Manoogian's shares of common stock in Capitol, and (iii) with the proceeds of
the purchase referenced in clause (i) of this Recital B and certain borrowings
to be made by Capitol, Capitol is redeeming all of the shares of Capitol common
stock owned by Cerberonics (the "Redemption"). (The Redemption and the
transactions described in clauses (i) and (ii) of this Recital B are sometimes
collectively referred to herein as the "Transactions").
R. Because the shareholdings in Capitol constitute a substantial asset of
the Company, the Company, Cerberonics, Capitol, Manoogian and the Investors deem
it advisable in order to effect the Transactions that the Eriksons, on the one
hand, and the Non-Erikson stockholders of the Company, on the other hand, each
be provided the opportunity to vote on the sale of the Company's stake in
Capitol pursuant to the Redemption. Accordingly, the Company's obligation under
the Redemption Agreement is effectively contingent upon, among other conditions,
the affirmative votes of (i) a majority of the votes cast by the stockholders of
the Company other than the Eriksons, and (ii) a majority of the votes cast by
the Eriksons. In lieu of voting at a meeting of the stockholders of the Company,
approval of the stockholders of the Company may be obtained by their written
consents, equivalent in number to the required affirmative votes.
S. As of the date hereof, the Stockholders own (a) 115,056 shares, or
approximately 9.9% of the total outstanding Common Stock of the Company (the
"Common Stock") and (b) 245,318 shares, or approximately 78.9% of the total
outstanding Class B Common Stock of the Company (the "Class B Stock"), exclusive
of 2,246 shares of Common Stock and 2,246 shares of Class B Stock owned by
George Wm. Erikson jointly with his spouse (the "GWE Joint Shares") (such shares
(again, exclusive of the GWE Joint Shares) and any other shares of the Company's
capital stock acquired by the Stockholders subsequent to the date hereof being
herein referred to collectively as the "Shares") and desire to (i) agree to vote
any and all Shares in favor of the Redemption (subject to the proxy described in
clause (i) of Section 2 and the conditions set forth in Section 3) and (ii)
grant to GTCR IV an irrevocable proxy covering the Shares.
T. The Investors have required as a condition to entering into the
Redemption Agreement that the Stockholders enter into this Agreement, and the
Company, Cerberonics, and Capitol desire that the Stockholders enter into this
Agreement. The Company, Cerberonics, Capitol and the Investors will enter into
the Redemption Agreement in part in reliance on the Stockholders'
representations, warranties and agreements under this Agreement.
Agreement
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In consideration of the mutual covenants and agreements contained in
this Agreement and other good and valuable consideration, and intending to be
legally bound hereby, it is agreed as follows:
1. Agreement to Support Redemption. The Stockholders agree, subject to
the terms and conditions of Section 3, to vote any Shares held by them in favor
of the Redemption pursuant to the terms of Redemption Agreement. In addition, if
subsequent to the date hereof the Stockholders are entitled to vote the Shares
on any Designated Matters (as defined in Section 2 below), they shall take all
actions necessary to vote the Shares pursuant to instructions received from GTCR
IV.
2. Limited Proxy With Respect to the Shares. The Stockholders hereby
irrevocably appoint GTCR IV as their attorney and proxy, with full power of
substitution, to vote or to express written consent or dissent in such manner as
such attorney and proxy or its substitute shall, in its sole discretion, deem
proper, and otherwise act (including pursuant to any corporate action in writing
without a meeting) with respect to all of the Shares which they are entitled to
vote at any meeting of stockholders (whether annual or special and whether or
not an adjourned meeting) of the Company, or pursuant to a written consent taken
in lieu of any such meeting or otherwise; provided, however, that the
Stockholders grant a proxy hereunder limited to and only with respect to the
following matters (the "Designated Matters"): (i) votes or consents with respect
to the Redemption; (ii) votes or consents with respect to any action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of the Company under the
Redemption Agreement; (iii) votes or consents with respect to any action or
agreement involving Capitol that would impede, interfere with, delay, postpone
or attempt to discourage the Redemption, including, but not limited to, any
extraordinary corporate transaction (other than as contemplated by the
Redemption Agreement), such as a merger, other business combination, the sale of
material assets, reorganization or liquidation involving Capitol. This limited
proxy is irrevocable, is coupled with an interest sufficient in law to support
an irrevocable proxy and is granted in consideration of and as an inducement to
cause Capitol and Investors to enter into the transactions contemplated by this
Agreement and the Redemption Agreement. With respect to the Designated Matters,
this limited proxy shall revoke any other proxy granted by Stockholders at any
time with respect to the Shares and no subsequent proxies will be given with
respect thereto by Stockholders.
3. Condition to the Stockholders' Obligations.
(a) The Stockholders' obligations under this Agreement,
including without limitation Section 1 (with respect to their voting the Shares
in favor of the Redemption pursuant to the Redemption Agreement) and Section 2
(with respect to their granting a proxy to GTCR IV) are conditioned upon (i) the
Company's Board of Directors, prior to the closing of the Redemption Agreement
not having either (x) exercised its fiduciary duties and withdrawn, modified or
amended in a manner adverse to Capitol or Investors, its approval and
recommendation of the Redemption and the Redemption Agreement, or (y) approved
or recommended any transaction relating to the acquisition of Capitol or a
substantial portion of its assets other than pursuant to the Redemption and the
Redemption Agreement, and (ii) the Redemption and the Redemption Agreement
having been approved by the affirmative vote of a majority of the votes of the
other holders of the Company's capital stock (i.e., votes other than the votes
of the Stockholders), that vote thereon at a meeting of the Company's
stockholders.
(b) The obligations of the parties to perform under this
Agreement upon its execution and thereafter shall be subject to the additional
condition that there shall be no preliminary or permanent injunction or other
order issued by any court of competent jurisdiction in effect which prohibits
(i) this Agreement or (ii) the Redemption. The Stockholders, Capitol and
Investors agree not to seek any such injunction or order and agree that they
will oppose and will seek the immediate lifting of any such injunction or order.
(c) The representations, warranties and agreements of Robert
W. Eriksons under this Agreement are qualified and conditioned upon the terms of
the brokerage margin agreements relating to certain of his shares of Common
Stock identified in Schedule 3(c) attached hereto.
4. Representations and Warranties of the Stockholders. The
Stockholders represent and warrant to the Company, Cerberonics, Capitol and the
Investors as follows:
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(a) Ownership of Shares. On the date hereof, other than the
GWE Joint Shares, the Shares are all of the shares of Common Stock and Class B
Stock currently owned by the Stockholders beneficially and of record. Other than
pursuant to outstanding options described in the Company's most recent proxy
statement, the Stockholders do not have any rights to acquire any additional
shares of Common Stock or Class B Stock. The Stockholders currently have, and at
the closing of the Redemption will have, good, valid and marketable title to the
Shares, free and clear of all liens, encumbrances, restrictions, options,
warrants, rights to purchase and claims of every kind (other than the
encumbrances created by this Agreement and the margin agreements identified on
Schedule 3(c) hereto and other than restrictions on transfer under applicable
Federal and State securities laws).
(b) Power; Binding Agreement. The Stockholders have the full
legal right, power and authority to enter into and perform all of the
Stockholders' obligations under this Agreement. The execution and delivery of
this Agreement by the Stockholders will not violate any other agreement to which
the Stockholders are a party including, without limitation, any voting
agreement, stockholders agreement, voting trust or proxy. This Agreement has
been duly executed and delivered by the Stockholders and constitutes a legal,
valid and binding agreement of the Stockholders, enforceable in accordance with
its terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws, now or hereafter in
effect affecting creditors' rights and remedies generally or general principles
of equity. Neither the execution or delivery of this Agreement nor the
consummation by the Stockholders of the transactions contemplated hereby will
(i) except as disclosed on Schedule 4(b) require any consent or approval of or
filing with any governmental or other regulatory body except for filings under
the Securities Exchange Act of 1934, as amended, or (ii) constitute a violation
of, conflict with or constitute a default under, any contract, commitment,
agreement, understanding, arrangement or other restriction of any kind to which
the Stockholders are a party or by which either Stockholder is bound.
5. Termination. This Agreement (other than the provisions relating to
expenses and indemnification (Section 6) and confidentiality (Section 7)) shall
terminate on the earliest of the following to occur:
(a) the date on which the Company, Capitol, the Investors and the
Stockholders mutually consent to terminate this Agreement in writing;
(b) the date of consummation of the Redemption pursuant to the Redemption
Agreement;
(c) prior to the successful consummation of the Redemption, the termination
of the Redemption Agreement pursuant to its terms;
(d) prior to the successful consummation of the Redemption, the withdrawal,
modification or amendment by the Company's Board of Directors, in a manner
adverse to Capitol and the Investors, of its approval and recommendation of
the Redemption and the Redemption Agreement;
(e) prior to the successful consummation of the Redemption, the approval or
recommendation by the Company's Board of Directors of any transaction
relating to the acquisition of Capitol or its assets other than in
connection with the Redemption Agreement;
(f) the Redemption and the Redemption Agreement shall not have been
approved by the affirmative vote of a majority of the votes cast by the
holders of the Company's capital stock other than the Stockholders; or
(g) September 30, 1997.
6. Expenses; Indemnification.
(a) Expenses. Subject to paragraph (b) below, each party hereto will pay
all of its expenses in connection with the transactions contemplated by
this Agreement, including, without limitation, the fees and expenses of its
counsel and other advisers.
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(b) Indemnification. To the extent the Company's directors (other than the
Stockholders) in the proper exercise of their fiduciary obligations to the
Company were permitted by law to have the Company indemnify the
Stockholders in their capacity as stockholders, the Company agrees to pay
promptly and to indemnify the Stockholders and hold them harmless from, all
reasonable expenses (including attorneys fees and other professional fees)
and loss reasonably incurred by the Stockholders in whole or in part in
their capacity as stockholders in connection with the following:
(i) The review and negotiation of this Agreement
and research on related issues.
(ii) Any actual or threatened litigation,
investigation or proceeding initiated by another stockholder of the
Company relating to this Agreement, the redemption, the Redemption
Agreement, or the Erikson Consulting and Non-Competition Agreement
(collectively, the "Agreements"). In no event, however, shall such
expenses or losses include any expense or loss arising out of the
failure by the Stockholders to perform their obligations under any of
the Agreements.
(iii) Any actual or threatened litigation,
investigation or proceeding initiated by one or more of the parties to
this Agreement involving a dispute as to the interpretation of the
language of this Agreement, or as to the existence, non-existence,
occurrence or non-occurrence of any of the conditions to the
Stockholders' obligations under this Agreement set forth in Section 3
hereof and any dispute as to whether this Agreement has terminated
under Section 5 hereof. In no event, however, shall such expenses or
losses include any expense or loss arising from an intentional
violation of any of the covenants of the Stockholders set forth in
Section 8.1 hereof.
(iv) Any actual or threatened litigation,
investigation or proceeding initiated by any other person or entity
(including any government agency) other than another stockholder of the
Company or one or more of the parties to this Agreement relating to any
of the Agreements, provided that the Stockholders are successful on the
merits or to the extent they otherwise prevail. In no event, however,
shall such expenses or losses include any expense or loss arising out
of the failure by the Stockholders to perform their obligations under
any of the Agreements.
The rights granted to the Stockholders under this Section 6(b) shall be
in addition to and not in lieu of any other rights.
The Stockholders agree, jointly and severally, that they will pay
promptly and indemnify the Company's other directors, but only to the extent
they are not otherwise indemnified by the Company or from insurance, from all
reasonable expenses (including attorneys fees and other professional fees) and
loss reasonably incurred by either of those directors arising from the Company
entering into this Agreement to indemnify the Stockholders.
In the event of a dispute under this Section 6(b) either the Company or
one or both of the Stockholders may initiate Alternative Dispute Resolution
("ADR"). ADR shall be pursuant to the provisions of 6. Del. C. ss.ss. 7701-7721
(the "Delaware ADR Act") expect that, as permitted by 6 Del. C. ss. 7702(a), the
parties adopt by written agreement a method of ADR that modifies the procedure
in the Delaware ADR Act as follows:
(i) ADR shall apply to all disputes, including
disputes involving $1,000 or more in contention and disputes over the
interpretation of this paragraph 6(b).
(ii) Once the Company or one or both of the
Stockholders elects ADR, the ADR proceedings may not be revoked.
(iii) If at the regular close of business on the day
the mediation hearing commenced, the parties have not resolved the
dispute, the ADR Specialist at that time or within two (2) business
days thereof shall make a binding non-appealable determination of the
dispute.
(iv) Each party involved in the dispute shall pay
their own attorneys' fees and an equal share of the fee of the ADR
Specialist, provided, however, if the ADR Specialist makes a binding
non-appealable determination of the dispute, the ADR Specialist shall
include in the determination the
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allocation of payment among the parties of all fees and expenses
involved in the ADR proceedings, including the fees and expenses of
both the ADR Specialist and the parties' attorneys. Unless the ADR
Specialist deems circumstances mandate a different allocation, the
losing party shall pay to the wining party the amount of the winning
party's attorneys' fees and expenses that do not exceed the amount of
the losing party's fees and expenses, as well as the fees and expenses
of the ADR Specialist.
7. Confidentiality. The Stockholders recognize that successful
consummation of the transactions contemplated by this Agreement and the
Redemption Agreement may be dependent upon confidentiality with respect to these
matters. Although the Company has not executed a Confidentiality Agreement with
respect to the transactions contemplated by the Redemption Agreement, the
Stockholders agree that, pending public disclosure by the Company, the
Stockholders will not disclose or discuss these matters with anyone (other than
their legal counsel and advisors or the Company's legal counsel and advisors, if
any) not a party to this Agreement or the Redemption Agreement, without the
prior written consent of Capitol and the Investors, except for filings required
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder or disclosures the Company's or the Stockholders' legal
counsel advises in writing are necessary in order to fulfill the Company's or
the Stockholder's obligations imposed by law, in which events the Stockholders
shall give prompt prior notice of such disclosure to Capitol and Investors.
8. Certain Covenants of the Stockholders.
8.1 No Shop. Except (i) for brokerage margin requirements
identified in Schedule A and (ii) in accordance with the provisions of this
Agreement, the Stockholders agree, while this Agreement is in effect, not to,
directly or indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, encumbrance,
assignment or other disposition of, any of the Shares;
(b) grant any proxies, deposit any Shares into a voting trust
or enter into a voting agreement with respect to any Shares; or
(c) take any action as the Stockholders to encourage, solicit,
initiate, or participate in any way in discussions or negotiations
(except for participation in discussions or negotiations in which the
Company is permitted to participate under the Redemption Agreement)
with, or furnish any information to, or afford any access to the
properties, books or records of the Company or Capitol, or otherwise
assist, facilitate or encourage, any person or entity (other than
Capitol and Investors, or their officers, directors, representatives,
agents, affiliates or associates) in connection with any possible or
proposed merger, consolidation, business combination, liquidation,
reorganization, sale or other disposition of assets, sale of shares of
capital stock or similar transactions involving Capitol.
8.2 Notice re Additional Shares. The Stockholders agree, while
this Agreement is in effect, to notify Capitol and the Investors promptly of the
number of any shares of the Common Stock and Class B Stock acquired by the
Stockholders after the date hereof.
9. Certain Covenants of Capitol and Investors. Capitol and Investors
agree to use their reasonable best efforts to make and consummate the Redemption
pursuant to the terms, and subject to the conditions, contained in the
Redemption Agreement.
10. Notices. All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided here) and shall be
deemed duly given when received by delivery in person, by telecopy, telex or
telegram or by certified mail, postage prepaid, or by an overnight courier
service, addressed as follows:
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To the Company
Paul C. Kincheloe, Jr. cc: Bayard, Handelman & Murdoch
Webb C. Hays, IV 902 Market Street, Suite 1300
c/o CERBCO, Inc. P.O. Box 25130
3421 Pennsy Drive Wilmington, DE 19899
Landover, MD 20785 Attn: Howard Handelman
Tel: (301) 386-7400 Tel: (302) 429-4231
Fax: (301) 322-3041 Fax: (302) 658-6395
McGuire, Woods, Battle &
Boothe, L.L.P.
8280 Greensboro Drive
Suite 900
Tysons Corner, VA 22102
Attn: John Stump
Tel: (703) 712-5000
Fax: (703) 712-5050
To the Stockholders
Robert W. Erikson cc: Prickett, Jones, Elliott,
George Wm. Erikson Kristol & Schnee
c/o CERBCO, Inc. 1310 King Street
3421 Pennsy Drive Wilmington, DE 19801
Landover, MD 20785 Attn: Michael Hanrahan
Tel: (301) 386-7400 Tel: (302) 888-6513
Fax: (301) 322-3041 Fax: (302) 658-8111
To Capitol
Capitol Office Solutions, Inc. cc: Reichelt, Nussbaum, LaPlaca
12000 Old Baltimore Pike & Miller
Beltsville, MD 20750 7500 Greenway Center Drive
Attn: Armen Manoogian Greenbelt, MD 20770
Tel: (301) 937-5030 Attn: Raymond G. LaPlaca
Fax: (301) 937-6031 Tel: (301) 474-9009
Fax: (301) 345-0565
To Investors
Golder, Thoma, Cressey, Rauner, Inc. cc: Davis, Graham & Stubbs LLP
233 S. Wacker Drive, 61st Floor 1314 Nineteenth Street, N.W.
6100 Sears Tower Washington, D.C. 20036
Chicago, IL 60606-6402 Attn: J. Hovey Kemp
Attn: Will Kessinger Tel: (202) 822-1029
Tel: (312) 382-2219 Fax: (202) 293-4794
Fax: (312) 382-2201
11. Entire Agreement; Amendment. This Agreement, together with the
documents expressly referred to herein, constitute the entire agreement among
the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings among the parties with respect
to such subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by the party against
whom such modification, amendment, alteration or supplement is sought to be
enforced.
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12. Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the parties hereto without the prior written consent
of the other parties.
13. Governing Law. This Agreement, and all matters relating hereto,
shall be governed by, and construed in accordance with the laws of the State of
Delaware without giving effect to the principles of conflicts of laws thereof.
14. Injunctive Relief. The parties agree that in the event of a breach
of any provision of this Agreement, the aggrieved party may be without an
adequate remedy at law. The parties therefore agree that in the event of a
breach of any provision of this Agreement, the aggrieved party may elect to
institute and prosecute proceedings in any court of competent jurisdiction to
enforce specific performance or to enjoin the continuing breach of such
provision, as well as to obtain damages for breach of this Agreement and such
aggrieved party may take any such actions without the necessity of posting a
bond. By seeking or obtaining such relief, the aggrieved party will not be
precluded from seeking or obtaining any other relief to which it may be
entitled.
15. Counterparts; Facsimile Transmission. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original and all of which together shall constitute one and the same document.
The signature of a party that is sent to the other parties by facsimile
transmission shall be binding as evidence of such signatory's agreement to be
bound by the terms of this Agreement.
16. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable such provision shall be interpreted
to be only so broad as is enforceable.
17. Further Assurances. Each party hereto shall execute and deliver
such additional documents as may be reasonably necessary to consummate the
transactions contemplated by this Agreement.
18. Third Party Beneficiaries. Nothing in this Agreement, expressed
or implied, shall be construed to give any person other than the parties hereto
any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Company, Cerberonics, Capitol, the Investors
and the Stockholders have each caused this Agreement to be executed by their
duly authorized officers as of the date and year first above written.
Stockholders:
By: /s/ Robert W. Erikson
Robert W. Erikson
By: /s/ George Wm. Erikson
George Wm. Erikson
The Company:
CERBCO, INC.
By: /s/ George Wm. Erikson
Name: George Wm. Erikson
Title: Chairman
Cerberonics:
CERBERONICS, INC.
By: /s/ Robert W. Erikson
Name: Robert W. Erikson
Title: Chairman
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<PAGE>
Capitol:
CAPITOL OFFICE SOLUTIONS, INC.
By: /s/ Armen A. Manoogian
Armen A. Manoogian
President
Investors (By GTCR IV, as Agent):
GOLDER, THOMA, CRESSEY, RAUNER
FUND IV, L.P.
By: GTCR IV, LP
General Partner
By: Golder Thoma Cressey Rauner, Inc.
General Partner
By: /s/ Carl D. Thoma
Carl D. Thoma
Principal
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<PAGE>
EXHIBIT D
ERIKSON CONSULTING
AND NON-COMPETITION AGREEMENT
THIS AGREEMENT, dated as of -----------, 1997, is between Capitol Office
Solutions, Inc., a Delaware corporation (the "Company"), and --------
Erikson (the "Consultant").
Recitals
1. Pursuant to that certain Investment, Redemption and Stock Purchase
Agreement dated February ---, 1997 between the Company, the Company's prior
stockholders and certain investors (the "Redemption Agreement"), a change of
control of the Company occurred in connection with the consummation of the
transactions contemplated by the Redemption Agreement (defined therein and
herein as the "Transactions"), effective as of the Closing Date (as defined
thereunder).
2. Prior to the Closing Date, the Consultant was a major stockholder of the
Company's ultimate parent and a long-standing member of the board of directors
of the Company, and in such capacity gained valuable insight into the operation
of the Company's business and the copier supply and service industry generally,
which insight and expertise would be useful and valuable to the Company's
competitors.
3. Immediately following the closing of the Transactions and the change of
control effected by the Transactions, the Company, with the approval of its
newly reconstituted board of directors, now desires to engage the Consultant as
a consultant with respect to the Company and, in addition, to secure a
non-competition agreement from the Consultant, and the Consultant is willing to
enter into such arrangements, all pursuant to the terms of this Agreement.
4. The terms of the Redemption Agreement and all of the Transactions and
this Agreement and all other related agreements between the parties thereto
and/or their affiliates have been disclosed to the stockholders of CERBCO, Inc.
("Cerbco") in a proxy statement relating thereto, and the Redemption Agreement
has been approved by Cerbco's stockholders.
Agreement
In consideration of the mutual agreements and premises herein contain, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Consultant agree as follows:
1. Consulting. The Company hereby engages the Consultant to serve as an
advisor and consultant with respect to the Company, and the Consultant hereby
accepts such engagement, on the terms and conditions of this Agreement.
2. Term of Engagement. The term of the Consultant's engagement hereunder
shall commence as of the date first written above, which shall be the Closing
Date under the Redemption Agreement, and shall continue thereafter for a term of
three (3) years until ----------------, 2000. In addition to any other remedies
the Company may have, the Company may terminate this Agreement immediately in
the event of any material breach of the provisions of this Agreement by the
Consultant that is not cured within 30 days.
3. Duties. In consideration for the Consulting Fee (defined below in
Section 8) to be paid to the Consultant as compensation hereunder, during the
term of this Agreement, the Consultant shall at all reasonable times be
available to the Company on a mutually agreeable,
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"as needed" basis to serve as an advisor and consultant to the Company's
management and/or board of directors in connection with the operation of the
Company's business (the "Consulting Services"). The Consultant shall be
available at least one (1) and up to a maximum of three (3) days per month for
Consulting Services, upon request of the Company. The Consulting Services shall
be scheduled and performed in a manner that will not detract from Consultant's
performance of his duties as a director and officer of Cerbco and its
subsidiaries.
4. Expenses. The Company will reimburse the Consultant for all reasonable
business expenses incurred by the Consultant in rendering services hereunder
upon submission to the Company of an accounting and substantiation for such
expenses and related receipts.
5. Trade Secret Information. The Consultant acknowledges that the
information, observations and data obtained by him while engaged by the
Company's parent and/or while a member of the Company's board of directors,
concerning the business or affairs of the Company or any of its Subsidiaries (or
any of their predecessors) and the copier supply and service industry, which the
Company or any such Subsidiary considers to be confidential and which is
proprietary to the Company or any such Subsidiary ("Trade Secret Information")
are the property of the Company or any such Subsidiary. Therefore, the
Consultant agrees that he shall not disclose to any unauthorized Person (except
(i) to the Company or, at the request of the Company, its Affiliates (as defined
in the Redemption Agreement), (ii) to any entity which shall succeed to the
business of the Company or any such Subsidiary, (iii) as may be required in the
regular course of business of the Company or any such Subsidiary or (iv) as
required by law) or use for his own purposes any Trade Secret Information
without the prior written consent of the Company, unless and to the extent that
the aforementioned matters become generally known to and available for use by
the public or Persons knowledgeable in the Company's industry other than as a
result of the Consultant's acts or omissions which constitute a breach hereof.
The Consultant shall deliver to the Company at the termination of the Agreement,
or at any other time the Company may request, all memoranda, notes, plans,
records, reports, computer tapes, printouts and software and other documents and
data (and copies thereof) relating to the Trade Secret Information, Work Product
(as defined below in Section 7) or the business of the Company or any such
Subsidiary which he may then possess or have under his control.
6. Intellectual Property. The Consultant acknowledges that any and all
intellectual property other than the Trade Secret Information (including, if
any, all inventions, innovations, improvements, developments, methods, designs,
analyses, drawings, reports and all similar or related information (whether or
not patentable)) which (i) relate to the Company's or any of its Subsidiaries'
(or any of their predecessors) actual or anticipated business, research and
development or existing or future products or services or (ii) result from any
work performed by the Consultant for the Company and its Subsidiaries (or any of
their predecessors) and which are conceived, developed or made by the Consultant
while engaged by the Company ("Work Product") belong to the Company or such
Subsidiaries.
7. Non-Compete, Non-Solicitation.
(a) As further consideration for the Non- Compete Fee (defined below in
Section 8) to be paid to the Consultant hereunder and his exposure to or
involvement in the Trade Secret Information, the Consultant acknowledges that in
the course of his engagement by the Company, he shall become familiar with
business data, trade secrets and other Trade Secret Information concerning the
Company and its Subsidiaries and that his services have been and shall be of
special, unique and extraordinary value to the Company and its Subsidiaries.
Therefore, the Consultant agrees that, during the Non-compete Period (as defined
in Section 10 hereof), he shall not directly or indirectly own any interest in,
manage, control, participate in, consult with, render services for, or in any
manner engage in any business competing with the business the Company and its
Subsidiaries, or their successors and assigns, were engaged in at the time this
Agreement was entered into within any countries or geographical regions in which
the Company and its Subsidiaries, or their successors and assigns, engage or
plan to engage in such business on the date of the termination of the
Consultant's engagement; provided, however, nothing herein shall prohibit the
Consultant from being a passive owner of not more than 5% of the outstanding
stock of any class of a corporation which is publicly traded, so long as the
Consultant has no active participation in the business of such corporation.
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(b) During the Noncompete Period, the Consultant shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any of its Subsidiaries to leave the employ of the Company or
such Subsidiaries, or in any way interfere with the relationship between the
Company or any of its Subsidiaries and any employee thereof, (ii) hire any
person who was a management employee of the Company or any of its Subsidiaries
at any time during the one-year period prior to the termination of the Agreement
or (iii) induce or attempt to induce any customer, supplier, licensee, licensor,
franchisee or other business relation of the Company or any of its Subsidiaries
to cease doing business with the Company or such Subsidiaries, or in any way
materially interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any of its Subsidiaries
(including, without limitation, making any negative statements or communications
about the Company or its Subsidiaries).
(c) If, at the time of enforcement of this Section 8, a court shall hold
that the duration, scope or area restrictions stated herein are unreasonable
under circumstances then existing, the parties agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted for the
stated duration, scope or area and that the court shall be allowed to revise the
restrictions contained herein to cover the maximum period, scope and area
permitted by law. The Consultant agrees that the restrictions contained in this
Section 8 are reasonable.
(d) In the event of any breach or threatened breach by the Consultant of
any of the provisions of this Section 8, the Company and its Subsidiaries, in
addition and supplementary to other rights and remedies existing in its favor,
may apply to any court of competent jurisdiction for specific performance and/or
injunctive or other relief in order to enforce or prevent any violations of the
provisions hereof (without posting a bond or other security). In addition, in
the event of an alleged breach or violation by the Consultant of this Section 8,
the Noncompete Period shall be tolled until such breach or violation has been
duly cured.
(e) Subject to the foregoing, nothing in this Agreement shall prevent
Consultant from accepting any employment or consulting engagements of any kind
or from otherwise accepting any business opportunity.
8. Compensation. For the Consultant's agreements contained in Sections 5, 6
and 7 hereof, the Company shall pay the Consultant a fee of $150,000 (the
"Noncompete Fee") which shall be due and payable promptly after the date hereof.
For providing the Consulting Services during the term hereof, the Company shall
pay Consultant a total fee of $150,0000 (the "Consulting Fee"). Unless the
Company and the Consultant mutually agree to a different installment schedule
(e.g., monthly or quarterly), the Fee shall be paid in three annual installments
of $50,000 each. The first payment shall be due and payable promptly after the
date hereof, with respect to the Consultant's first year of Consulting Services.
The second payment shall be due and payable on the first anniversary of such
date, with respect to the Consultant's second year of Consulting Services. The
third payment shall be due and payable on the second anniversary of such date
with respect to the third year of such Consulting Services. Any payment due on a
day which is not a business day shall be paid on the next business day. Accrued
but unpaid Fees shall bear interest at the rate of [eight percent (8%)] per
annum until paid. If at the time payment of the second or third installment is
due, the Consultant is unavailable or unable to perform Consulting Services in
that year, the Company shall not be required to make the applicable payments.
9. Consultant's Representations. The Consultant hereby represents and
warrants to the Company that (i) the execution, delivery and performance by the
Consultant of this Agreement and all other agreements contemplated hereby to
which the Consultant is a party do not and shall not conflict with, breach,
violate or cause a default under any contract, agreement, instrument, order,
judgment or decree to which the Consultant is a party or by which he is bound,
(ii) with respect to the business in which the Company is engaged on the date of
this Agreement, the Consultant is not a party to or bound by any employment
agreement, noncompete agreement or confidentiality agreement with any other
person or entity that remains in full force and effect, and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of the Consultant, enforceable in accordance
with its terms.
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10. Representations and Warranties of the Company. The Company represents
and warrants that:
(a) The Company has all necessary power and authority to execute and
deliver, and to perform all of its obligations under, this Agreement. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms.
(b) The entering into by the Company of this Agreement and the performance
by the Company hereunder will not conflict with, violate or constitute a breach
of, or require any consent or approval under the terms of its certificate of
incorporation or by-laws, or any agreement, license, arrangement or
understanding, whether written or oral, or any law, judgment, decree, order,
rule or regulation to which the Company is a party or by which it is bound.
11. Alternative Dispute Resolution. In the event of a dispute between the
parties under this Section 11, either the Company or the Consultant may initiate
Alternative Dispute Resolution ("ADR"). ADR shall be pursuant to the provisions
of 6 Del.C. ss.ss.7701-7721 (the "Delaware ADR Act") except that, as permitted
by 6 Del.C. ss.7702(a), the parties adopt by written agreement a method of ADR
that modifies the procedure in the Delaware ADR Act as follows:
(i) ADR shall apply to all disputes, including disputes
involving $1,000 or more in contention and disputes
over the interpretation of this Agreement.
(ii) Once the Company or the Consultant elects ADR, the
election may not be revoked.
(iii)If the dispute is resolved by the agreement of the
parties, the reasonable expenses and fees of the ADR
Specialist shall be as agreed upon by the parties or,
absent such agreement, split equally between the
parties.
(iv) If at the regular close of business on the day ADR
commenced, the parties have not resolved the dispute,
the ADR Specialist at that time or within two (2)
business days thereof shall make a binding
non-appealable determination of the dispute.
(v) If the dispute is determined by the ADR Specialist
pursuant to subparagraph (iv) above, the reasonable
expenses and fees of the ADR Specialist and of the
prevailing party shall be paid by the losing party, as
determined by the ADR Specialist.
12. Definitions.
"Noncompete Period" means during the term of this Agreement and upon
termination of this Agreement prior to its expiration by the Consultant or
the Company for any reason, a period of time, to be determined by the
Company in its sole discretion within 30 days after such termination, of no
more than two additional years thereafter.
"Subsidiaries" means, with respect to any person, any corporation, limited
liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares
of stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by such person or entity
or one or more of the other Subsidiaries of such person
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or entity or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any person or entity or one
or more Subsidiaries of such person or entity or a combination thereof.
13. Non-Assignability. The Consultant shall have no right to assign or
transfer any rights hereunder. The Company may assign its rights and obligations
to third parties or Affiliates with the prior written consent of the Consultant,
which consent shall not be unreasonably withheld.
14. Binding Nature, Governing Law, Amendment and Waiver, Entire Agreement.
This Agreement shall be binding upon the Company, its successors and assigns,
and upon the Consultant and his respective heirs, legatees, executors and
administrators. This Agreement shall be construed and enforced in accordance
with the laws of the state of Delaware. This Agreement may not be modified or
amended except by an instrument in writing signed by both the parties. Any
inconsistency or conflict between the terms of this Agreement and any purchase
order, invoice or other communication shall be solely governed by the terms of
this Agreement. This Agreement is the entire agreement between the parties
hereto with regard to the subject matter hereof and supersedes all prior
discussions, arrangements or agreements between the parties relating thereto.
15. Independent Contractor. The relationship of the Consultant to the
Company is that of an independent contractor. The Consultant shall not be
considered an employee or agent of the Company, and except as specified
elsewhere in this Agreement, shall have absolutely no authority to bind, commit
or otherwise obligate the Company in any way whatsoever. The Consultant is not
eligible to participate in any employee benefit or other plan of the Company.
16. Counterparts; Facsimile Transmission. This Agreement may be executed in
several counterparts, each of which shall be deemed an original but all of which
counterparts collectively shall constitute one instrument. The signature of a
party sent by facsimile transmission to the other party shall be binding as
evidence of such signatory's agreement to be bound by the terms of this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
THE COMPANY:
CAPITOL OFFICE SOLUTIONS, INC.
By: ---------------------------
Name: Armen A. Manoogian
Title: President
CONSULTANT:
-------------------------------
------------------------Erikson
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EXHIBIT E
EXECUTIVE AGREEMENT
This Executive Agreement (this "Agreement") is entered into as of
- ------------, 1997, by and between Armen A. Manoogian ("Executive") and Capitol
Office Solutions, Inc., a Delaware corporation (the "Company").
Recitals
A. The Company and Executive desire to enter into an agreement to provide
for the terms and conditions of Executive's employment with the Company.
Agreement
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto agree as follows:
ARTICLE I. TERMS AND CONDITIONS OF SERVICES
1.1 Engagement. The Company hereby engages Executive to serve as President
of the Company, and Executive agrees to serve the Company, during the Service
Term (as defined in Section 1.6 hereof) in the capacities, and subject to the
terms and conditions, set forth in this Agreement.
1.2 Services.
(a) During the Service Term, Executive, as President and Chief Executive
Officer of the Company, shall have all the duties and responsibilities
customarily rendered by presidents and chief executive officers of
companies of similar size and nature and which are consistent with the
services rendered by Executive to the Company immediately prior to the date
hereof and as may be delegated from time to time by the Company's Board of
Directors (the "Board"); provided, however, the following actions of the
Company must be approved in advance by the Board:
(i) Acquisitions or dispositions of the assets or stock of
a business with a value in excess of $10,000;
(ii) Employment agreements (other than standard
confidentiality and noncompetition agreements with
employees) and stock or option issuances;
(iii) Annual corporate objectives;
(iv) Annual operating budgets (including capital
expenditures budgets);
(v) Contracts with an operating cost to the Company in
excess of $10,000 (not including expenses required as a
consequence of a customer contract);
(vi) Dividends, distributions or redemptions of the
Company's capital stock; and
(vii)Statutory corporate matters, including sales of stock,
amendments to the Company's charter or bylaws and
qualifying to do business in other jurisdictions.
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Executive will devote his best efforts and substantially all of his business
time and attention (except for vacation periods and periods of illness or other
incapacity) to the business of the Company and its subsidiaries. Notwithstanding
the foregoing, and provided that such activities do not interfere with the
fulfillment of Executive's obligations hereunder, Executive may (i) serve as a
director or trustee of any charitable or non-profit entity; (ii) acquire
investment interests in one or more entities which are not, directly or
indirectly, in competition with the Company or its subsidiaries and which do not
provide supplies to the Company; or (iii) own up to 5% of the outstanding voting
securities of any publicly-held company.
(b) Unless the Company and Executive agree to the contrary, Executive's
place of employment shall be at the Company's principal executive offices
in Beltsville, Maryland; provided, however, that Executive will travel to
such other locations of the Company and its affiliates as may be reasonably
necessary in order to discharge his duties hereunder.
1.3 Salary and Bonus. During the Service Term, the Company shall pay
Executive an annual base salary of $200,000, subject to periodic increases at
the discretion of the Board (the "Base Salary"). Commencing with the Company's
fiscal year ending June 30, 1998, Executive shall be entitled to an annual bonus
of up to one-half of Executive's Base Salary based upon the Company's attainment
of its yearly business plan as determined in good faith by the Board (the
"Annual Plan").
1.4 Other Benefits. Executive shall be entitled to continue to receive the
fringe benefits, including, without limitation, medical, dental, disability, and
life insurance benefits and participation in the Company's 401(k) plan, plus any
other benefits approved by the Board and made available to other senior
executives of the Company.
1.5 Termination.
(a) Events of Termination. Executive's employment with the Company shall
cease upon:
(i) Executive's death.
(ii) Executive's voluntary retirement.
(iii)the sale of the Company as contemplated by Section
6(b) of the Stockholders Agreement of even date
herewith between the Company, Executive and the other
stockholders of the Company (the "Stockholders
Agreement").
(iv) Executive's disability, which means his incapacity due
to physical or mental illness such that he is unable to
perform his previously assigned duties where (A) such
incapacity has been determined to exist by either (i)
the Company's disability insurance carrier or (ii) by
the concurring opinions of two licensed physicians (one
selected by the Company and one by Executive), and (B)
the Board has determined, based on competent medical
advice, that such incapacity will continue for such
period of time of at least six continuous months and
that it would have a material adverse effect on the
Company. Any such termination for disability shall be
only as expressly permitted by the Americans with
Disabilities Act.
(v) Termination by the Company by the delivery to Executive
of a written notice from the Board that Executive has
been terminated ("Notice of Termination") with or
without Cause. "Cause" shall mean:
(A) Executive's conviction for, or
plea of nolo contendere to, (1) a felony, (2) a
misdemeanor materially injurious to the Company, or
(3) Executive's misappropriation of any funds or
assets of the Company for personal use;
(B) Executive's continued substantial neglect of
his duties, after written notice from the Board and
an opportunity to correct;
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(C) Gross misconduct in the performance of his
duties hereunder, materially injurious to the
reputation, business or operation of the Company; or
(D) Executive's engaging in conduct
constituting a breach of Section 1.7 hereof.
Executive must be notified in writing (which writing shall specify the
cause in reasonable detail) of any termination of his employment for Cause.
Executive will then have the right, within ten days of receipt of such
notice, to file a written request for review by the Company. In such case,
Executive will be given the opportunity to be heard, personally or by
counsel, by the Board and a majority of the Directors must thereafter
confirm that such termination is for Cause. If the Directors do not provide
such confirmation, the termination shall be treated as other than for
Cause.
The delivery by the Company of notice to Executive that it does not intend
to renew this Agreement as provided in Section 1.6 shall constitute a
termination by the Company without Cause unless such notice fulfills the
requirements of Section 1.5(a)(v)(A), (B), (C) or (D) above.
(vi) Executive's voluntary resignation by the delivery to
the Board of a written notice from Executive that
Executive has resigned with or without Good Reason.
"Good Reason" shall mean Executive's resignation from
employment with the Company within 30 days after the
occurrence of any one of the following:
(A) the failure of the Company to
pay an amount owing to Executive hereunder after
Executive has provided the Company with written
notice of such failure and such payment has not
thereafter been made within 15 days of the delivery
of such written notice;
(B) the forced relocation of
Executive from the Washington, D.C.
metropolitan area without his consent; or
(C) a material reduction in
Executive's title or duties from those set forth in
this Agreement without Executive's prior written
consent.
(b) Rights on Termination.
(i) In the event that termination is by Executive with Good
Reason or by the Company without Cause, the Company
will pay Executive the Base Salary for a period equal
to one year.
(ii) In the event termination is by the Company without
Cause and the Company is meeting 100% of its operating
income (EBIT) budget (as such budget shall be mutually
agreed upon by Executive and Golder, Thoma, Cressey,
Rauner Fund IV, L.P., and as set forth in the
then-current Annual Plan approved by the Board),
Executive shall have the right to proceed under the
provisions relating to the sale of the Company as
contemplated by Section 6(b) of the Stockholders
Agreement and the Company shall continue to employ the
Executive, and the Executive agrees that he will
continue to serve, as the Company's President and Chief
Executive Officer until, and the effective date of his
termination shall be, the date on which any sale
pursuant to such Section 6(b) is consummated.
(iii)If the Company terminates Executive's employment for
Cause, if Executive dies or is disabled, if Executive
resigns without Good Reason or in the event of a sale
of the Company as contemplated by Section 6(b) of the
Stockholders Agreement, the Company's obligations to
pay any compensation or benefits under this Agreement
will cease effective
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the date of termination. Executive's right to
receive any other benefits will be determined under the
provisions applicable plans, programs or other
coverages.
Notwithstanding the foregoing, the Company's obligation to Executive for
severance pay or other rights under either subparagraphs (i) or (ii) above (the
"Severance Pay") shall cease if Executive is in violation of the provisions of
Section 1.7(a) hereof. The Severance Pay, if any, shall be paid by the Company
to Executive in equal monthly consecutive installments payable commencing on the
Company's regularly scheduled payroll date next following the date of
Executive's termination. Until such time as Executive has received all of his
Severance Pay, he will be entitled to continue to receive any health, life,
accident and disability insurance benefits provided by the Company to Executive
under this Agreement. If Executive dies or is permanently disabled, then
Executive or his estate shall be entitled to any disability income or life
insurance payments from any insurance policies paid for by the Company.
1.6 Term of Employment. Unless Executive's employment under this Agreement
is sooner terminated as a result of Executive's resignation or termination in
accordance with the provisions of Section 1.5(a) above or a sale of the Company
as contemplated by Section 6(b) of the Stockholders Agreement, Executive's
employment under this Agreement shall commence on the date hereof and shall
terminate on the third anniversary of the date hereof (the "Service Term");
provided, however, that Executive's employment under this Agreement, and the
Service Term, shall be automatically renewed for one-year periods commencing on
the third anniversary of the date hereof and, thereafter, on each successive
anniversary of such date unless either the Company or Executive notifies the
other party in writing within thirty days prior to any such anniversary that it
or he desires to terminate Executive's employment under this Agreement.
1.7 Covenant Not to Compete.
(a) Executive agrees that, during the Service Term and for a period (the
"Noncompete Period") ending two years after Executive ceases to be employed
by the Company, he will not, except with the express written consent of the
Board, either directly or indirectly, for himself or on behalf or in
conjunction with any other person, partnership, corporation or other
entity, own, maintain, engage in, render any services for, manage, have any
financial interest in, or permit his name to be used in connection with any
office equipment/copier service or dealer business in any market in the
United States in which the Company or its subsidiaries are engaged or have
firm plans to enter within six months after the date that Executive's
employment hereunder is terminated; provided, however, that notwithstanding
the foregoing such covenant shall not apply to Executive's ownership of up
to 5% of the outstanding voting securities of any publicly-held company
which may be engaged in the office equipment/copier service or dealer
business.
(b) If, at the time of enforcement of any provision of Section 1.7(a)
above, a court holds that the restrictions stated therein are unreasonable
under circumstances then existing, the parties hereto agree that the
maximum period, scope or geographical area reasonable under such
circumstances will be substituted for the stated period, scope or area.
(c) In the event of a breach by Executive of the provisions of Section
1.7(a) above, the Company or its successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violations of the provisions
thereof.
(d) After the later of (i) the date Executive's employment hereunder is
terminated (whether due to his termination or resignation) or (ii) the date
that Executive has received all of his Severance Pay (such date being
referred to as the "Effective Date"), the Company shall advise Executive of
its election to continue to enforce the provisions of Section 1.7(a) above
for the period of time desired, in incremental periods of one month, in
writing within 15 business days after the Effective Date. If the Company
elects to continue to enforce the provisions of Section 1.7(a) after the
Effective Date, the Company shall pay Executive, as additional
consideration for Executive's agreement not to compete, an amount equal to
15% of Executive's then monthly Base Salary during each month of the
non-compete commencing with the first calendar month after the month of the
Effective Date, such amount to be paid to Executive in accordance with the
Company's normal payroll schedule. In no event shall such time period
exceed the Noncompete Period set forth in Section 1.7(a) above.
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(f) The provisions of this Section 1.7 are independent of any other
noncompete agreement between the Company and Executive and shall be
cumulative with any such noncompete provisions set forth in such agreement.
1.8 Confidential Information. Executive acknowledges that the information
and data obtained by him during the course of his employment with the Company
concerning the business or affairs of the Company and its affiliates are the
property of the Company. Therefore, Executive agrees that he will not disclose
to any unauthorized person or use for his own benefit any of such information or
data without the Board's prior written consent, unless and to the extent that
the aforementioned matters become generally known to and available for use by
the public otherwise than as a result of Executive's acts or omissions.
Executive agrees to deliver to the Company at the termination of his employment,
or at any other time the Company may request, all memoranda, notes, plans,
records, reports and other documents (and copies thereof) relating to the
business of the Company and its Affiliates which he may then possess or have
under his control.
1.9 Executive's Representations and Warranty. Executive represents and
warrants that he has full right and authority to enter into this Agreement and
fully to perform his obligations hereunder, that he is not subject to any
non-competition agreement, and that his past, present and anticipated future
activities have not and will not infringe on the proprietary rights of others.
Executive further represents and warrants that he is not obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency which would conflict with his obligation to use his best
efforts to promote the interests of the Company or which would conflict with the
Company's business as conducted or proposed to be conducted. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
business as an officer, director or employee by Executive, will conflict with or
result in a breach of the terms, conditions or provisions of or constitute a
default under any contract, covenant or instrument under which Executive is now
obligated.
ARTICLE II. GENERAL PROVISIONS
2.1 Notices. Any notice provided for in this Agreement must be in writing
and must be delivered to the recipient at the address indicated below:
To the Company:
Capitol Office Solutions, Inc.
c/o Golder, Thoma, Cressey, Rauner Inc.
233 S. Wacker Drive, 61st Floor
6100 Sears Tower
Chicago, IL 60606-6402
Attn: Will Kessinger
Tel No.: (312) 382-2219
Fax No.: (312) 382-2201
with a copy to:
Davis, Graham & Stubbs LLP
1314 Nineteenth Street, N.W.
Washington, DC 20036
Attn: J. Hovey Kemp
Tel No.: (202) 822-1029
Fax No.: (202) 293-4794
To Executive:
Armen A. Manoogian
c/o Capitol Office Solutions, Inc.
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12000 Old Baltimore Pike
Beltsville, MD 20704
Tel No.: (301) 937-5030
Fax No.: (301) 937-6031
with a copy to:
Arent Fox Kintner Plotkin & Kahn
Washington Square
1050 Connecticut Avenue, N.W.
Washington, DC 20036-5339
Attn: Arnold R. Westerman
Tel No.: (202) 857-6243
Fax No.: (202) 857-6395
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given five business days
after mailing by first class mail, certified return receipt requested, one
business day after delivery to a receipted courier for next business day
delivery, or upon transmission by telex or facsimile.
2.2 Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
2.3 Complete Agreement. This Agreement, those documents expressly referred
to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
2.4 Counterparts; Facsimile Transmission. This Agreement may be executed on
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement. This Agreement may
be executed and delivered by facsimile transmission.
2.5 Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of and be enforceable by Executive and the Company and their
respective successors and assigns, except that Executive may not assign any of
his rights or obligations under Article I.
2.6 Choice of Law. This Agreement shall be governed by the internal law,
and not the law of conflicts, of the State of Maryland.
2.7 Remedies. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages by
reason of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
2.8 Amendments and Waivers. Any provision of this Agreement may be amended
or waived only with the prior written consent of the Company and Executive.
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2.9 Resolutions of Disputes. All disputes between the Company and Executive
arising under this Agreement which cannot be resolved promptly by mutual
agreement, will be resolved by binding arbitration in accordance with the rules
of the American Arbitration Association and in accordance with the Arbitration
Procedures attached hereto as Exhibit A.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first above written above.
EXECUTIVE:
By: --------------------------
Armen A. Manoogian
CAPITOL OFFICE SOLUTIONS, INC.
By: --------------------------
Carl D. Thoma
Chairman
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EXHIBIT F
Business Advisory Services
Private Client Group
854 East Algonquin Road
Suite 100
Schaumburg, Illinois 60173-3808
MERRILL LYNCH
847 981 9800
FAX 847 397 0946
April 4, 1997 PERSONAL AND CONFIDENTIAL
Board of Directors
CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
Gentlemen:
Capitol Office Solutions, Inc., a Delaware Corporation ("Capitol"), Cerberonics,
Inc., a Delaware Corporation ("Cerberonics"), and a wholly-owned subsidiary of
CERBCO, Inc., a Delaware Corporation ("CERBCO"), CERBCO and Armen Manoogian,
President and minority shareholder of Capitol, have entered into an Investment,
Redemption and Stock Purchase Agreement (the "Agreement") with Golder, Thoma,
Cressey, Rauner Fund IV dated as of March 7, 1997. Pursuant to the Agreement,
the parties thereto will enter into several contemporaneous transactions as a
result of which, among other things, Capitol will redeem all shares of Class A
common stock, Class B common stock and Class C common stock of Capitol held by
Cerberonics immediately prior to the closing of the transactions contemplated by
the Agreement (the "Transaction") for $19 million in cash (the "Consideration").
The Transaction is more fully described in the Agreement.
You have asked us whether, in our opinion, the Consideration to be received by
Cerberonics pursuant to the Agreement is fair from a financial point of view to
CERBCO. In conducting our investigation and analysis and in arriving at our
opinion set forth below, we have, among other things:
(i) reviewed the Agreement and the proposed financial terms
of the Transaction;
(ii) reviewed audited financial information for the five
fiscal years ended June 30, 1992 through 1996 for
CERBCO and Capitol, as well as various other unaudited
financial information for CERBCO and Capitol;
(iii)compared Capitol's historical results of operations
with that of certain public companies which we
considered relevant for our analysis;
(iv) visited Capitol's headquarters and conducted
discussions with Capitol's senior management concerning
the history and past performance of Capitol's current
business operations, and reviewed certain forecasts
provided to us in the course of such discussions
relating to the business, earnings, cash flow, assets
and prospects of Capitol;
(v) reviewed such other financial studies and analyses and
performed such other investigations and took into
account such accepted financial and valuation
procedures and considerations and such other matters as
we deemed relevant, including our
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Board of Trustees
CERBCO, Inc.
April 4, 1997
Page 2
assessment of general and local economic, market and
financial conditions which have an impact on the
industry in which Capitol operates.
While we reviewed the financial terms of certain transactions involving the
acquisition of companies in industries comparable to Capitol's operations, we
did not identify a sufficient number of acquisitions that we deemed to be
relevant for the purpose of our analysis and, accordingly, did not undertake any
analysis comparing the financial terms of the Transaction with other
acquisitions.
In preparing our opinion, we have relied on the accuracy and completeness of all
financial and other information supplied or otherwise made available to us by
CERBCO and Capitol, or which are publicly available, and we have not
independently verified such information or undertaken an independent appraisal
or valuation of the assets or liabilities of Capitol. With respect to any
financial forecasts and projected expense reductions provided by and discussed
with Capitol's management, we have assumed that such financial forecasts and
projected expense reductions (together with the assumptions and bases therefor)
have been reasonably prepared and reflect the best currently available estimates
and judgment of Capitol's management as to the expected future financial
performance of Capitol.
This opinion is also given on the assumption that there are no undisclosed or
unexpected conditions which would affect the value of Capitol's assets or the
financial condition or operations of Capitol or the expected future financial
performance of Capitol.
Our opinion is necessarily based upon market and general economic conditions
existing as of the date hereof.
The terms of our engagement are limited to expressing an opinion as to whether
the Consideration to be received by Cerberonics pursuant to the Agreement is
fair to CERBCO from a financial point of view and we were not requested to
assist and have not participated in structuring or negotiating the terms of the
Transaction. In addition, our opinion does not address the relative merits of
the Transaction and alternative business strategies involving Capitol, including
the sale of Capitol to third parties.
On the basis of, and subject to the foregoing, were are of the opinion that the
proposed Consideration to be received by Cerberonics pursuant to the Agreement
is fair to CERBCO from a financial point of view.
Sincerely,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
by its division Merrill Lynch Business Advisory Services
("MLBAS")
By: \s\ Nathaniel E. Sher
Nathaniel E. Sher
Senior Vice President (MLBAS)
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