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:
[ ] Preliminary Proxy Statement
[ X ] 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). [ ] 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 computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
Cash Consideration to be received
4) Proposed maximum aggregate value of transaction: $22,000,000.00
5) Total fee paid: $ 4,400.00
[X] 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 27, 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
27, 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 May 2, 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
March 31, 1997 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.
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, ROBERT W. ERIKSON AND GEORGE WM.
ERIKSON.
By Order of the Board of Directors,
/s/ Robert F. Hartman
Robert F. Hartman
Secretary
Landover, Maryland
May 27, 1997
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CERBCO, Inc.
3421 Pennsy Drive
Landover, Maryland 20785
Special Meeting of Stockholders
Friday, June 27, 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 27, 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
May 2, 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 May 27, 1997.
OUTSTANDING SHARES AND VOTING RIGHTS
Each share of Common Stock is entitled to one vote. 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 1,177,601 shares of
Common Stock, $.10 par value (the "Common Stock") and 296,355 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 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 (the "Eriksons"). As of the Record Date, the
Non-Erikson Stockholders held 1,060,299 shares of outstanding Common Stock,
entitling them to cast 1,060,299 votes, and 48,791 shares of outstanding Class B
Common Stock, entitling them to cast 487,910 votes, for a total of 1,548,209
votes eligible to be cast by the Non-Erikson Stockholders.
Approval of the Transaction for purposes of Section 271 of the Delaware
Corporation Law ("Section 271") 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 4,141,151 the total number of votes entitled to be cast
by all stockholders with respect to the Transaction. Therefore, at least
2,070,576 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 ............................................ 12
Recommendation of the Board of Directors..................... 14
Principal Terms of the Transaction........................... 14
Recapitalization. .................................. 14
Financing. ......................................... 14
Redemption. ........................................ 15
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.................................. 19
Erikson Consulting and Non-Competition Agreement 19
Erikson Voting Agreement................... 19
Manoogian Executive Agreement.............. 20
Other Related Agreements................... 20
Special Factor............................................... 20
Interests of Certain Persons in the Transaction.............. 20
Federal Income Tax Consequences.............................. 21
Regulatory Requirements...................................... 21
Accounting Treatment......................................... 21
USE OF PROCEEDS....................................................... 21
SELECTED FINANCIAL DATA............................................... 22
PRO FORMA FINANCIAL INFORMATION....................................... 23
SECURITY OWNERSHIP.................................................... 28
INDEPENDENT PUBLIC ACCOUNTANTS........................................ 29
STOCK PRICE........................................................... 29
Common Stock................................................. 29
Class B Common Stock......................................... 30
Holders...................................................... 30
Dividends.................................................... 30
OTHER MATTERS......................................................... 30
INCORPORATION BY REFERENCE............................................ 31
STOCKHOLDER PROPOSALS................................................. 31
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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 June 30, 1997 or as soon thereafter as possible.
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
("Insituform East"), 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 the 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 $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.
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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 1,060,299
shares of outstanding Common Stock, entitling them to cast 1,060,299 votes, and
48,791 shares of outstanding Class B Common Stock, entitling them to cast
487,910 votes, for a total of 1,548,209 votes eligible to be cast by the
Non-Erikson Stockholders. As of the date of this Proxy Statement, the Company
has made no determination regarding resolicitation of proxies if the Transaction
is not approved by a majority of the votes 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 annual 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 has 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. If it
did, GTCR informed the Board, given the length of time that the parties had been
negotiating, GTCR would withdraw its proposal . 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 of the Company 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 (the "Redemption Agreement"), 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 after which he
owned 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 calendar 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 a risk of 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 Global's 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, without formally tendering an offer, 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 offer
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 a total of $1.75 million to
the Eriksons for income continuation/consulting paid out evenly 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 for continued services while Global was negotiating the sales price with
the Company.
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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 the allocation of $19
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's
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. The Board recognized, however, that Mr. Manoogian is neither an
expert nor a professional appraiser and that any opinion he gave would be based
on his knowledge of and experience in the industry.
Mr. Manoogian reported orally and in followup memoranda that, based on
general discussions with certain of his counterparts in the industry without
reference to specific transactions, 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
fair, although such report should be viewed in conjunction with the statement
within MLBAS' opinion that it did not undertake any analysis comparing the
financial terms of the Transaction with other acquisitions as it did not
identify a sufficient number of relevant acquisitions.
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
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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 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 Eriksons' 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 with respect to the transaction.
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
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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 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 for COS
by $400,000. While meeting separately, Messrs. Kincheloe and Hayes contacted Mr.
Manoogian and advised him that 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 agreements. 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 for which 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.
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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
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; and (v) reviewed
such other financial studies and analyses and performed such other
investigations and taken 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.
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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 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 that 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 4, 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
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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.
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 was selected as the provider of the fairness
opinion because it, among other things, regularly engages in the valuation of
businesses 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.
Recommendation of the Board of Directors
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.
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.
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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.
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 to 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
15
<PAGE>
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 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, the 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 the 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 receivable and lack of
encumbrances on inventory and accounts receivable, except as set forth on
schedule(s) to the
16
<PAGE>
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 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 of GTCR 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 1,060,299 shares of outstanding Common Stock,
entitling them to cast 1,060,299 votes, and 48,791 shares of outstanding Class B
Common Stock, entitling them to cast 487,910 votes, for a total of 1,548,209
votes eligible to be cast by the Non-Erikson Stockholders. As of the date of
this Proxy Statement, the Company has made no determination regarding
resolicitation of proxies if the Transaction is not approved by a majority of
the votes cast by the Non-Erikson Stockholders.
17
<PAGE>
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 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 indemnity 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.
18
<PAGE>
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
performance as directors and officers of the Company. The Board currently
monitors the performance by the Company's directors and officers, including the
Eriksons, of their respective duties and will continue to do so after Closing,
including whether services rendered by the Eriksons pursuant to the Consulting
Agreement are scheduled and performed in a manner that will not detract from
their performance as directors and officers of the Company. The directors and
officers of the Company remain subject to fiduciary duties owed to the Company's
holders of Common Stock and Class B Common Stock.
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
19
<PAGE>
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 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 the COS Board, 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.
Special Factor
Pending the Company's application of the proceeds from the Transaction
as described under "Use of Proceeds" below, the Company's performance after
Closing will substantially follow that of the Company's other current principal
operating subsidiary, Insituform East, which, as the unaudited pro forma
financial information below indicates, would have resulted in the Company
incurring an $860,000 loss for the nine months ended March 31, 1997.
Historically, a principal factor affecting Insituform East's performance has
been the volatility of its earnings as a function of its sales volumes at normal
margins. Accordingly, because a substantial portion of Insituform East's costs
are semi-fixed in nature, the Company's earnings after Closing may, at times, be
severely reduced or eliminated during periods of depressed Insituform East sales
at normal margins or material increases in Insituform discounted sales, even if
total Insituform East revenues experience apparent buoyancy or growth from
increased Insituform East discounted sales resulting from strategic decisions by
Insituform East. Conversely, increases after Closing in Insituform East normal
margin sales may significantly leverage positive earnings for the Company.
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
20
<PAGE>
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 net income or loss 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 taxes and
transaction expenses. Promptly 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 approximately $2,211,000. The balance of the proceeds, net of
tax, 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.
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<PAGE>
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 March 31, 1997 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
Nine Nine
Months Year Months
Ended Ended Ended
Years Ended June 30, Mar .31, June30, Mar.31,
1996(1) 1995 1994 1993 1992 1996(1) 1996(1) 1997(1)
------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales...................... $ 50,680 $ 39,143 $ 29,846 $ 24,774 $ 28,984 $ 35,671 $ 30,471 $ 18,230
Operating profit (loss).... $ 7,013 $ 5,583 $ 2,234 $ (657) $ 2,120 $ 1,952 $ 2,551 $ (1,869)
Earnings (loss) before
income taxes and non-
owned interests......... $ 7,614 $ 6,602 $ 2,526 $ (308) $ 1,962 $ 2,330 $ 3,121 $ (1,610)
Earnings (loss) before
non-owned interests... $ 4,760 $ 3,637 $ 1,246 $ (237) $ 1,220 $ 1,413 $ 2,047 $ (1,142)
Earnings from continuing
operations............ $ 2,055 $ 1,391 $ 588 $ 19 $ 430 $ 843 $ 247 $ (860)
Net earnings (loss)........ $ 2,055 $ 1,542 $ 1,319 $ (290) $ 340 $ 843 $ 247 $ (860)
Net earnings (loss) per
share:
Continuing operations.. $ 1.40 $ 0.96 $ 0.40 $ 0.01 $ 0.29 $ 0.57 $ 0.17 $ (0.59)
Net earnings (loss).... $ 1.40 $ 1.06 $ 0.90 $ (0.20) $ 0.23 $ 0.57 $ 0.17 $ (0.59)
Weighted average number
of shares.............. 1,465 1,460 1,457 1,457 1,457 1,470 1,465 1,470
Dividends declared per
share.................. $ 0.05 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1.55 $ 0
- ------------------------------------
(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>
22
<PAGE>
<TABLE>
Balance Sheet Information
<CAPTION>
June 30, March 31,
1996(1) 1995 1994 1993 1992 1997(1) 1997(1)
---- ---- ---- ---- ---- ---- ----
Historical Pro Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Accounts receivable.......... $ 8,497 $ 6,386 $ 6,675 $ 3,641 $ 5,423 $ 8,694 $ 6,459
Working capital.............. $ 17,886 $ 12,152 $ 9,480 $ 7,313 $ 8,044 $ 18,665 $ 24,633
Total assets................. $ 39,451 $ 32,980 $ 29,507 $ 27,559 $ 29,452 $ 41,884 $ 51,478
Short-term debt.............. $ 55 $ 53 $ 611 $ 962 $ 816 $ 41 $ 27
Long-term debt............... $ 136 $ 42 $ 96 $ 458 $ 813 $ 160 $ 147
Non-owned interests.......... $ 16,509 $ 12,367 $ 10,318 $ 9,809 $ 10,749 $ 16,816 $ 13,106
Stockholders' equity......... $ 17,002 $ 15,000 $ 13,445 $ 12,127 $ 12,492 $ 17,892 $ 25,141
Average stockholders' equity
(Weighted average equity
during year exclusive of
current earnings)........... $ 15,010 $ 13,452 $ 12,127 $ 12,454 $ 12,152 $ 17,025 $ 25,601
Return on equity
(Current earnings divided by
average stockholders'
equity as defined above). 13.7% 11.5% 10.9% (2.3%) 2.7% 6.6% (4.5%)
Book value per share......... $ 11.58 $ 10.26 $ 9.23 $ 8.32 $ 8.57 $ 12.14 $ 17.06
- -----------------------------------
(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 March 31, 1997 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 nine months ended March 31,
1997 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.
23
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<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 $10,322 (a) ($5,550) (c) $22,000 $26,772
Accounts receivable 8,695 (a) (2,236) 0 6,459
Inventories 3,692 (a) (1,852) 0 1,840
Deferred income taxes 133 (a) (133) 0 0
Prepaid expenses and other 1,393 (a) (192) 0 1,201
----- ---- - -----
TOTAL CURRENT ASSETS 24,235 (9,963) 22,000 36,272
Property, Plant and Equipment -
net of accumulated depreciation 12,137 (a) (196) 0 11,941
Other Assets:
Investment in COS 0 (b) 7,440 (c) (7,440) 0
Excess of acquisition cost over
value of net assets acquired - net 4,609 (a) (2,179) 0 2,430
Deferred income taxes 41 (a) (41) 0 0
Deposits and other 861 (a) (26) 0 835
--- --- - ---
TOTAL ASSETS $41,883 ($4,965) $14,560 $51,478
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $4,868 (a) ($ 582) $0 $4,286
Income taxes payable 135 (a) (120) (c) 5,100 5,115
Dividend payable 0 0 (d) 2,211 $2,211
Deferred revenue 526 (a) (526) 0 0
Current portion of capital lease obligations 41 (a) (14) 0 27
-- --- - --
TOTAL CURRENT LIABILITIES 5,570 (1,242) 7,311 11,639
Long-Term Liabilities:
Capital lease obligations 160 (a) (13) 0 147
Deferred income taxes 1,043 0 0 1,043
Other 402 0 0 402
--- - - ---
TOTAL LIABILITIES 7,382 (1,255) 7,311 13,231
----- ------ ----- ------
Non-Owned Interests 16,816 (a) (3,710) 0 13,106
------ ------ - ------
Stockholders' Equity:
Common stock 118 0 0 118
Class B common stock 30 0 0 30
Additional paid-in capital 7,478 0 0 7,478
Retained earnings 10,266 0 (c) 9,460 17,515
(d) (2,211)
TOTAL STOCKHOLDERS' EQUITY 17,892 0 7,249 25,141
------ - ------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $41,883 ($4,965) $14,560 $51,478
======= ======= ======= =======
See notes to unaudited pro forma condensed consolidated financial information.
</TABLE>
24
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997
<CAPTION>
Pro Forma
Entries Pro Forma Pro Forma
to Reverse Entries As Adjusted
($ in thousands) CERBCO, Inc. Consolidation to Dispose for COS
Consolidated of COS of COS Disposition
<S> <C> <C> <C> <C> <C>
SALES $35,671 (e) ($17,441) $0 $18,230
------- -------- -- -------
COSTS AND EXPENSES:
Cost of sales 26,026 (e) (10,579) 0 15,447
Selling, general and administrative
expenses 7,693 (e) (3,041) 0 4,652
----- ------- - -----
Total Costs and Expenses 33,719 (13,620) 0 20,099
------ ------- - ------
Operating Profit (Loss) 1,952 (3,821) 0 (1,869)
Investment Income 394 (e) (177) 0 217
Interest Expense (28) (e) 4 0 (24)
Other Income (Expense) - net 12 (e) 54 0 66
-- -- - --
Earnings (Loss) Before Income Taxes and
Non-Owned Interests 2,330 (3,940) 0 (1,610)
Provision (Credit) for Income Taxes 917 (e) (1,385) 0 (468)
--- ------- - ----
Earnings (Loss) Before Non-Owned Interests 1,413 (2,555) 0 (1,142)
Non-Owned Interests in Earnings of
Consolidated Subs 570 (e) (852) 0 282
--- ---- - ---
NET EARNINGS (LOSS) $843 ($1,703) $0 ($860)
==== ======= == =====
NET EARNINGS (LOSS)
PER SHARE $0.57 ($1.16) $0.00 ($0.59)
===== ====== ===== ======
See notes to unaudited pro forma condensed consolidated financial information.
</TABLE>
25
<PAGE>
<TABLE>
CERBCO, Inc.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<CAPTION>
Pro Forma
Entries Pro Forma Pro Forma
to Reverse Entries As Adjusted
($ in thousands) CERBCO, Inc. Consolidation to Dispose for COS
Consolidated of COS of COS Disposition
<S> <C> <C> <C> <C> <C>
SALES $50,680 (f) ($20,209) $0 $30,471
------- -------- -- -------
COSTS AND EXPENSES:
Cost of sales 34,325 (f) (12,037) 0 22,288
Selling, general and administrative
expenses 9,342 (f) (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 (f) (89) 0 291
Interest Expense (28) (f) 11 0 (17)
Other Income - net 248 (f) 48 0 296
--- -- - ---
Earnings Before Income Taxes and
Non-Owned Interests 7,613 (4,492) 0 3,121
Provision for Income Taxes 2,854 (f) (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 (f) (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 March 31, 1997.
(b) represents the Company's investment in COS at March 31, 1997 using the
equity method.
(c) represents the disposition transaction.
(d) represents post-closing dividend of $1.50 per share.
(e) represents COS' historical amounts for the nine months ended March 31, 1997.
(f) represents COS' historical amounts for the year ended June 30, 1996.
26
<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 March 31, 1997 and
for the periods ended June 30, 1996 and March 31, 1997, 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.
Nine Months Ended Year Ended
March 31, 1997 June 30, 1996
-------------- -------------
1,470,255 1,465,169
========= =========
3. Tax Effects of Pro Forma Adjustments
The tax effects of the Transaction are calculated at the statutory rates
in effect at March 31, 1997.
27
<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 Percent
Beneficial Owner Title of Class Beneficial Ownership of Class
<S> <C> <C> <C> <C>
Robert W. Erikson Common Stock 59,200 1/ 5.0%
3421 Pennsy Drive Class B Common Stock 131,750 1/ 44.4%
Landover, MD
George Wm. Erikson Common Stock 58,102 2/ 4.9%
3421 Pennsy Drive Class B Common Stock 115,814 2/ 39.1%
Landover, MD
Koonce Securities, Inc. Common Stock 230,588 3/ 19.6%
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> <C>
Robert W. Erikson Common Stock 59,200 1/ 1,500 5.1%
Class B Common 131,750 1/ 0 44.4%
Stock
George Wm. Erikson Common Stock 58,102 2/ 1,500 5.0%
Class B Common 115,814 2/ 0 39.1%
Stock
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 11.4%
as a Group (6 persons Class B Common 247,564 0 83.5%
including those named Stock
above) 3/ 4/
- ------------------------------------
1/ Record and beneficial ownership, sole voting and sole investment power.
28
<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>
<CAPTION>
Common Stock
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
29
<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 May 2, 1997, the approximate number of record holders of each
class of common equity of the Company was as follows:
Common Stock 320
Class B Common Stock 133
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.
30
<PAGE>
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 (File No. 000-16749);
(b) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (File No. 000-16749);
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996 (File No. 000-16749);
(d) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 (File No. 000-16749);
(e) the Company's Current Report on Form 8-K filed March 12, 1997
(File No. 000-16749);
(f) the Company's Current Report on Form 8-K filed March 24, 1997
(File No. 000-16749); and
(g) 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
Robert F. Hartman
Secretary
Landover, Maryland
May 27, 1997
31
<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 27, 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 May 2, 1997, at the Special Meeting of Stockholders to be held on
June 27, 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>
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 27, 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 May 2, 1997, at the Special Meeting of Stockholders
to be held on June 27, 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.
33
<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
34
<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
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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.
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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
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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. ss.ss. 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
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the 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
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reasonably 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
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record 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
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constitute 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
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which 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
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Property 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.
10.12 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]
35
<PAGE>
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:
Armen A. Manoogian
President
STOCKHOLDERS:
CERBERONICS:
CERBERONICS, INC.
By:
Name:
Title:
MANOOGIAN:
Armen A. Manoogian
CERBCO:
CERBCO, INC.
By:
Name:
Title:
36
<PAGE>
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:
Carl D. Thoma
Principal
Name:
Title:
Name:
Title:
Name:
Title:
Name:
Title:
Name:
Title:
37
<PAGE>
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)
1
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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 year 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
2
<PAGE>
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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<PAGE>
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.
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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]
7
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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
8
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CERBCO:
CERBCO, INC.
By:-------------------------------------
Name:------------------------------------
Title:------------------------------------
9
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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.
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Agreement
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:-----------------------------
Robert W. Erikson
By:-----------------------------
George Wm. Erikson
The Company:
CERBCO, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
Cerberonics:
CERBERONICS, INC.
By:----------------------------
Name:--------------------------
Title:-------------------------
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Capitol:
CAPITOL OFFICE SOLUTIONS, INC.
By:---------------------------
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:----------------------------
Carl D. Thoma
Principal
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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, "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
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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.
(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
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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.
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.
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(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 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
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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.
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;
(C) Gross misconduct in the performance of his
duties hereunder, materially injurious to the reputation, business or
operation of the Company; or
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(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 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.
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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.
(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
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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.
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
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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.
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.
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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
MERRILL LYNCH
Business Advisory Services
Private Client Group
854 East Algonquin Road
Suite 100
Schaumburg, Illinois 60173-3808
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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