<PAGE> 1
SCHEDULE 13E-3
(Rule l3e-1)
Transaction Statement Pursuant to Section 13(e) of the Securities
Exchange Act of 1934 and Rule 13e-3 Thereunder
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e)
of the Securities Exchange Act of 1934)
Amendment No. 1
EQUITRAC CORPORATION
(Name of Issuer)
EQUITRAC CORPORATION
CHARGEBACK ACQUISITION CORP.
CORNERSTONE EQUITY INVESTORS IV, L.P.
JOHN T. KANE
GEORGE P. WILSON
STEVE SMITH
CHRISTOPHER RICKBORN
PATRICK RAFTERY
CID YOUSEFI
JOHN P. JONES
(Name of Persons Filing statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
---------
294599105
(CUSIP Number of Class of Securities)
-----------
George P. Wilson
Equitrac Corporation
836 Ponce de Leon Boulevard
Coral Gables, Florida 3314
Tel: (305) 442-2060
(Name, Address and Telephone Number of Persons Authorized to Receive
Notices and Communications on Behalf of Persons Filing Statement)
Copies to:
Mark Rossi Frederick Tanne
Cornerstone Equity Investors IV, L.P. Kirkland & Ellis
717 Fifth Avenue, Suite 1100 153 East 53rd Street
New York, NY 10022 New York, NY 10022
(212) 753-0901 (212) 446-4800
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This statement is filed in connection with (check the appropriate box):
a. [x] The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C or Rule
13e-3(c) under the Securities Exchange Act of 1934.
b. [ ] The filing of registration statement under the Securities
Act of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF FILING FEE
- ---------------------------------- --------------------------------------------
Transaction Valuation* Amount of Filing Fee
- ---------------------------------- --------------------------------------------
$89,077,045 $17,815.40
- ---------------------------------- --------------------------------------------
*$25.25 per share in cash-out merger plus the difference between $25.25 and the
exercise price of each share subject to an option. This transaction valuation
was based on the terms of the original merger agreement.
[x] Check box if any part of the fee is offset as provided by Rule
0-ll(a)(2) and identify the filing with which the offsetting fee-was
previously paid. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
- ---------------------------------- --------------------------------------------
Amount Previously Paid: $17,815.40
Form or Registration No.: Schedule 14A
Filing Party: Equitrac Corporation
Date Filed: March 17, 1999
- ---------------------------------- --------------------------------------------
INTRODUCTION
This Rule 13E-3 Transaction Statement (this "Statement") relates to
the solicitation of proxies by the Equitrac Corporation, a Florida corporation
("Equitrac"), in connection with a Special Meeting of its shareholders at which
Equitrac's shareholders will be asked to consider and vote upon a proposal to
approve the Amended and Restated Recapitalization Agreement and Plan of Merger
(the "Merger Agreement"), dated June 4, among Equitrac, Chargeback Acquisition
Corp. ("Merger
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Sub"), a Florida corporation formed by Cornerstone Equity Investors IV, L.P.
("Cornerstone"), and John T. Kane and George P. Wilson.
The cross reference sheet on the following pages, which is being
supplied pursuant to General Instruction F to Schedule 13E-3, shows the location
in the Preliminary Proxy Statement, as amended (the "Proxy Statement"), filed by
the Issuer with the Securities and Exchange Commission on the date hereof of the
information required to be included in response to the items of this Statement.
The information set forth in the Proxy Statement which is attached hereto as
Exhibit (d), including all exhibits thereto, is hereby incorporated herein by
reference, and the responses to each Item herein are qualified in their entirety
by the provisions of the Proxy Statement. Scott Modist, a filing person of the
original Schedule 13E-3, is no longer a filing person hereof because he will not
be part of the Management Group (as defined in the Proxy Statement).
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CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
All references are to portions of the Proxy Statement which are
incorporated herein and made a part hereof by reference.
- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
1. Issuer and Class of
Security Subject to the
Transaction.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- The Companies"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- Record Date; Voting Power;
Quorum"; "SUMMARY -- Market Prices for
Common Stock and Dividends"; and "THE
SPECIAL MEETING --Record Date; Voting Power;
Quorum"
- ---------------------------------- --------------------------------------------
(c) "SUMMARY -- Market Prices for Common Stock
and Dividends"
- ---------------------------------- --------------------------------------------
(d) "SUMMARY -- Market Prices for Common Stock
and Dividends"
- ---------------------------------- --------------------------------------------
(e) *
- ---------------------------------- --------------------------------------------
(f) "SUMMARY -- Market Prices for Common Stock
and Dividends" and "APPENDIX D -
Transactions Involving Equitrac's Common
Stock effected by members of the Management
Group since March 1, 1997"
- ---------------------------------- --------------------------------------------
2. Identity and Background.
- ---------------------------------- --------------------------------------------
(a)-(g) "SUMMARY -- The Companies" and "CERTAIN
INFORMATION CONCERNING MERGER SUB AND THE
EQUITY INVESTORS"
- ---------------------------------- --------------------------------------------
- -------------------------
* Not applicable or answer is negative.
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
3. Past Contacts,
Transactions or
Negotiations.
- ---------------------------------- --------------------------------------------
(a) (1) "SUMMARY -- Market Prices for Common Stock
and Dividends" and "APPENDIX D --
Transactions Involving Equitrac's common
stock effected by members of the Management
Group since March 1, 1997"
- ---------------------------------- --------------------------------------------
(2) "SUMMARY -- Conflicts of Interest";
"SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"; "SUMMARY -- Voting Agreement;
Irrevocable Proxy"; and "THE SPECIAL MEETING
-- Voting Agreement; Irrevocable Proxy"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY --Conflicts of Interest"; "SPECIAL
FACTORS - Background of the Merger ";
"SPECIAL FACTORS -- Conflicts of Interest";
"SUMMARY -- Voting Agreement; Irrevocable
Proxy"; and "THE SPECIAL MEETING -- Voting
Agreement; Irrevocable Proxy"
- ---------------------------------- --------------------------------------------
4. Terms of the
Transaction.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- The Recapitalization and
Merger"; "SUMMARY -- Conflicts of Interest";
"SPECIAL FACTORS"; and "THE RECAPITALIZATION
AND MERGER"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- The Recapitalization and
Merger"; "SUMMARY --Conflicts of Interest";
"SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"; and "THE RECAPITALIZATION AND
MERGER"
- ---------------------------------- --------------------------------------------
5. Plans or Proposals of the Issuer or Affiliate.
- ---------------------------------- --------------------------------------------
(a) *
- ---------------------------------- --------------------------------------------
(b) *
- ---------------------------------- --------------------------------------------
- -------------------------
* Not applicable or answer is negative.
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
(c) "SUMMARY -- The Recapitalization and
Merger"; "THE RECAPITALIZATION AND MERGER --
Consequences of the Recapitalization and
Merger" and "CERTAIN INFORMATION CONCERNING
MERGER SUB AND THE EQUITY INVESTORS"
- ---------------------------------- --------------------------------------------
(d) "SUMMARY -- Financing of the Merger"; "THE
RECAPITALIZATION AND MERGER -- Consequences
of the Recapitalization and Merger"; and
"THE RECAPITALIZATION AND MERGER --
Financing"
- ---------------------------------- --------------------------------------------
(e) "SUMMARY -- The Recapitalization and
Merger"; and "THE RECAPITALIZATION AND
MERGER -- Consequences of the
Recapitalization and Merger"
- ---------------------------------- --------------------------------------------
(f) "SUMMARY -- The Recapitalization and
Merger"; "THE RECAPITALIZATION AND MERGER --
Consequences of the Recapitalization and
Merger"; and "THE RECAPITALIZATION AND
MERGER -- Delisting and
Deregistration of Common Stock"
- ---------------------------------- --------------------------------------------
(g) "SUMMARY -- The Recapitalization and
Merger"; "THE RECAPITALIZATION AND MERGER --
Consequences of the Recapitalization and
Merger"; and "THE RECAPITALIZATION AND
MERGER -- Delisting and
Preregistration of Common Stock"
- ---------------------------------- --------------------------------------------
6. Source and Amount of Funds or Other Consideration.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Financing of the Merger" and
"THE RECAPITALIZATION AND MERGER --
Financing"
- ---------------------------------- --------------------------------------------
(b) "THE MERGER AGREEMENT -- Fees and Expenses"
and "THE MERGER AGREEMENT -- Estimated Fees
and Expenses of the Merger"
- ---------------------------------- --------------------------------------------
(c) (1) "SUMMARY--Financing of the Merger" and "THE
RECAPITALIZATION AND MERGER -- Financing"
- ---------------------------------- --------------------------------------------
(2) "SUMMARY -- Financing of the Merger" and
"THE RECAPITALIZATION AND MERGER --
Financing"
- ---------------------------------- --------------------------------------------
- -------------------------
* Not applicable or answer is negative.
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
(d) *
- ---------------------------------- --------------------------------------------
7. Purpose(s), Alternatives, Reasons and Effects.
- ---------------------------------- --------------------------------------------
(a) "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Recommendations
of the Special Committee and Board of
Directors"; and "SPECIAL FACTORS - Equity
Investors' Purpose and Reasons for the
Recapitalization and Merger"
- ---------------------------------- --------------------------------------------
(b) "SPECIAL FACTORS -- Background of the
Merger" and "SPECIAL FACTORS -- Equity
Investors' Purpose and Reasons for the
Recapitalization and Merger"
- ---------------------------------- --------------------------------------------
(c) "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Recommendations
of the Special Committee and Board of
Directors"; and "SPECIAL FACTORS -- Equity
Investors' Purpose and Reasons for the
Recapitalization and Merger"
- ---------------------------------- --------------------------------------------
(d) "SUMMARY"; "SPECIAL FACTORS -- Conflicts of
Interest"; "THE RECAPITALIZATION AND MERGER
-- Consequences of the Recapitalization and
Merger"; "THE RECAPITALIZATION AND MERGER
--Federal Income Tax Consequences"; "THE
RECAPITALIZATION AND MERGER -- Accounting
Treatment"; "SPECIAL FACTORS --
Recommendations of the Special Committee and
Board of Directors"; and "SPECIAL FACTORS -
Equity Investors' Purpose and Reasons for
the Recapitalization Merger"
- ---------------------------------- --------------------------------------------
8. Fairness of the Transaction.
- ---------------------------------- --------------------------------------------
(a) "SPECIAL FACTORS -- Recommendations of the
Special Committee and Board of Directors";
and "SPECIAL FACTORS -- Equity Investors'
Purpose and Reasons for the Recapitalization
and Merger"
- ---------------------------------- --------------------------------------------
- -------------------------
* Not applicable or answer is negative.
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
(b) "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS - Recommendations
of the Special Committee and Board of
Directors"; "SPECIAL FACTORS -- Equity
Investors' Purpose and Reasons for the
Recapitalization and Merger"; and "SPECIAL
FACTORS -- Opinion of Financial Advisor"
- ---------------------------------- --------------------------------------------
(c) "SUMMARY -- Vote Required; Security
Ownership of Management" and "THE SPECIAL
MEETING -- Vote Required; Security Ownership
of Management"
- ---------------------------------- --------------------------------------------
(d) "SUMMARY - Recommendations of the Board of
Directors and Special Committee" and
"SPECIAL FACTORS - Recommendations of the
Special Committee and Board of Directors"
- ---------------------------------- --------------------------------------------
(e) "SUMMARY - Recommendations of the Board of
Directors and Special Committee" and
"SPECIAL FACTORS -Recommendations of the
Special Committee and Board of Directors"
- ---------------------------------- --------------------------------------------
(f) *
- ---------------------------------- --------------------------------------------
9. Reports, Opinions, Appraisals and Certain Negotiations.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Opinion of Financial Advisor"
and "SPECIAL FACTORS -- Opinion of Financial
Advisor"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- Opinion of Financial Advisor"
and "SPECIAL FACTORS -- Opinion of Financial
Advisor"
- ---------------------------------- --------------------------------------------
(c) "SUMMARY -- Opinion of Financial Advisor"
and "SPECIAL FACTORS -- Opinion of Financial
Advisor"
- ---------------------------------- --------------------------------------------
10. Interest in Securities of the Issuer.
- ---------------------------------- --------------------------------------------
- -------------------------
* Not applicable or answer is negative.
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Vote Required; Security
Ownership of Management"; "SUMMARY --
Conflicts of Interest"; "SPECIAL FACTORS
-"Conflicts of Interest"; "THE SPECIAL
MEETING -- Vote Required; Security Ownership
of Management"; and "BENEFICIAL OWNERSHIP OF
COMMON STOCK"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- Market Prices for Common Stock
and Dividends" and "APPENDIX D -
Transactions Involving Equitrac's Common
Stock effected by members of the Management
Group since March 1, 1997"
- ---------------------------------- --------------------------------------------
11. Contracts, Arrangements or "SUMMARY -- Vote Required; Security
Understandings with Ownership of Management"; "SUMMARY
Respect to the Issuer's Voting Agreement; Irrevocable Proxy";
Securities. -- THE SPECIAL MEETING -- Vote
Required; Security Ownership of Management";
and "THE SPECIAL MEETING -- Voting Agreement;
Irrevocable Proxy"
- ---------------------------------- --------------------------------------------
12. Present Intention and Recommendation of Certain Persons with Regard to
the Transaction.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Vote Required; Security
Ownership of Management"; "SUMMARY -- Voting
Agreement; Irrevocable Proxy"; "THE SPECIAL
MEETING -- Vote Required; Security Ownership
of Management"; and "THE SPECIAL MEETING --
Voting Agreement; Irrevocable Proxy"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- Recommendations of the Board of
Directors and Special Committee" and
"SPECIAL FACTORS -- Recommendations of the
Special Committee and Board of Directors"
- ---------------------------------- --------------------------------------------
13. Other Provisions of the Transaction.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Dissenters' Appraisal Rights and
"THE RECAPITALIZATION AND MERGER --
Dissenters' Appraisal Rights"
- ---------------------------------- --------------------------------------------
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- ---------------------------------- --------------------------------------------
SCHEDULE 13E-3 ITEM
NUMBER AND CAPTION RESPONSE/CAPTION IN PROXY STATEMENT
- ---------------------------------- --------------------------------------------
(b) *
- ---------------------------------- --------------------------------------------
(c) *
- ---------------------------------- --------------------------------------------
14. Financial Information.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- FINANCIAL INFORMATION" and
"DOCUMENTS INCORPORATED BY REFERENCE"
- ---------------------------------- --------------------------------------------
(b) *
- ---------------------------------- --------------------------------------------
15. Persons and Assets Employed, Retained or Utilized.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Conflicts of Interest"; "THE
SPECIAL MEETING -- Solicitation of Proxies";
and "SPECIAL FACTORS - Conflicts of
Interest"
- ---------------------------------- --------------------------------------------
(b) *
- ---------------------------------- --------------------------------------------
16. Additional Information. *
- ---------------------------------- --------------------------------------------
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The information set forth in "SUMMARY -- The Companies" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Record Date; Voting Power;
Quorum"; "SUMMARY -- Market Prices for Common Stock and Dividends"; and "THE
SPECIAL MEETING --Record Date; Voting Power; Quorum" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" of the Proxy Statement is incorporated herein by
reference.
(e) Not applicable.
- -------------------------
* Not applicable or answer is negative.
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(f) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" and "APPENDIX D -- Transactions Involving Equitrac's
common stock effected by members of the Management Group since March 1, 1997"
of the Proxy Statement is incorporated herein by reference.
Item 2. Identity and Background.
(a)-(g) The information set forth in "SUMMARY -- The Companies" and
"CERTAIN INFORMATION CONCERNING MERGER SUB AND THE EQUITY INVESTORS" of the
Proxy Statement is incorporated herein by reference.
Item 3. Past Contacts, Transactions or Negotiations.
(a)(1) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" and "APPENDIX D -- Transactions Involving Equitrac's common
stock effected by members of the Management Group since March 1, 1997" of the
Proxy Statement is incorporated herein by reference.
(a)(2) The information set forth in "SUMMARY -- Conflicts of Interest";
"SPECIAL FACTORS -- Background of the Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"; "SUMMARY -- Voting Agreement; Irrevocable Proxy"; and "THE SPECIAL
MEETING -- Voting Agreement; Irrevocable Proxy" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth in "SUMMARY --Conflicts of Interest";
"SPECIAL FACTORS - Background of the Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"; "SUMMARY -- Voting Agreement; Irrevocable Proxy"; and "THE SPECIAL
MEETING -- Voting Agreement; Irrevocable Proxy" of the Proxy Statement is
incorporated herein by reference.
Item 4. Terms of the Transaction.
(a) The information set forth in "SUMMARY -- The Recapitalization and
Merger"; "SUMMARY -- Conflicts of Interest"; "SPECIAL FACTORS"; and "THE
RECAPITALIZATION AND MERGER" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in "SUMMARY -- The Recapitalization and
Merger"; "SUMMARY --Conflicts of Interest"; "SPECIAL FACTORS -- Background of
the Merger"; "SPECIAL FACTORS -- Conflicts of Interest"; and "THE
RECAPITALIZATION AND MERGER" of the Proxy Statement is incorporated herein
by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a) Not applicable.
(b) Not applicable.
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(c) The information set forth in "SUMMARY -- The Recapitalization and
Merger"; "THE RECAPITALIZATION AND MERGER -- Consequences of the
Recapitalization and Merger"; and "CERTAIN INFORMATION CONCERNING MERGER SUB
AND THE EQUITY INVESTORS" of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "SUMMARY -- Financing of the Merger";
"THE RECAPITALIZATION AND MERGER -- Consequences of the Recapitalization and
Merger"; and "THE RECAPITALIZATION AND MERGER -- Financing" of the Proxy
Statement is incorporated herein by reference.
(e) The information set forth in "SUMMARY -- The Recapitalization and
Merger"; and "THE RECAPITALIZATION AND MERGER -- Consequences of the
Recapitalization and Merger" of the Proxy Statement is incorporated herein by
reference.
(f) The information set forth in "SUMMARY -- The Recapitalization and
Merger";"THE RECAPITALIZATION AND MERGER -- Consequences of the
Recapitalization and Merger"; and "THE RECAPITALIZATION AND MERGER -- Delisting
and Deregistration of the Stock" of the Proxy Statement is incorporated herein
by reference.
(g) "SUMMARY -- The Recapitalization and Merger"; "THE RECAPITALIZATION
AND MERGER -- Consequences of the Recapitalization and Merger; and "THE
RECAPITALIZATION AND MERGER -- Delisting and Deregistration of Common Stock"
Item 6. Source and Amount of Funds or Other Consideration.
(a) The information set forth in "SUMMARY -- Financing of the Merger";
and "THE RECAPITALIZATION AND MERGER -- Financing" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth in "THE MERGER AGREEMENT -- Fees and
Expenses" and "THE MERGER AGREEMENT -- Estimated Fees and Expenses of the
Merger" of the Proxy Statement is incorporated herein by reference.
(c)(1) The information set forth in "SUMMARY -- Financing of the Merger"
and "THE RECAPITALIZATION AND MERGER -- Financing" of the Proxy Statement is
incorporated herein by reference.
(2) The information set forth in "SUMMARY -- Financing of the Merger"
and "THE RECAPITALIZATION AND MERGER -- Financing" of the Proxy Statement is
incorporated herein by reference.
(d) Not applicable.
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Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Recommendations of the Special Committee and Board
of Directors"; and "SPECIAL FACTORS - Equity Investors' Purpose and Reasons for
the Recapitalization and Merger" of the Proxy Statement is incorporated herein
by reference.
(b) The information set forth in "SPECIAL FACTORS -- Background of the
Merger and "SPECIAL FACTORS -- Equity Investors' Purpose and Reasons for the
Recapitalization and Merger" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth in "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Recommendations of the Special Committee and Board
of Directors"; and "SPECIAL FACTORS -- Equity Investors' Purpose and Reasons
for the Recapitalization and Merger" of the Proxy Statement is incorporated
herein by reference.
(d) The information set forth in "SUMMARY"; "SPECIAL FACTORS --
Conflicts of Interest"; "THE RECAPITALIZATION AND MERGER -- Consequences of the
Recapitalization and Merger"; "THE RECAPITALIZATION AND MERGER --Federal Income
Tax Consequences"; "THE RECAPITALIZATION AND MERGER -- Accounting Treatment";
"SPECIAL FACTORS -- Recommendations of the Special Committee and Board of
Directors; and "SPECIAL FACTORS - Equity Investors' Purpose and Reasons for the
Recapitalization Merger" of the Proxy Statement is incorporated herein by
reference.
Item 8. Fairness of the Transaction.
(a) The information set forth in "SPECIAL FACTORS -- Recommendations of
the Special Committee and Board of Directors"; and "SPECIAL FACTORS -- Equity
Investors' Purpose and Reasons for the Recapitalization and Merger" of the
Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS Recommendations of the Special Committee and Board of
Directors"; and "SPECIAL FACTORS -- Equity Investors' Purpose and Reasons for
the Recapitalization and Merger"; and "SPECIAL FACTORS -- Opinion of Financial
Advisor" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "SUMMARY -- Vote Required; Security
Ownership of Management" and "THE SPECIAL MEETING -- Vote Required; Security
Ownership of Management" of the Proxy Statement is incorporated herein by
reference.
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(d) The information set forth in "SUMMARY -- Recommendations of the
Board of Directors and Special Committee" and "SPECIAL FACTORS --
Recommendations of the Special Committee and Board of Directors" of the Proxy
Statement is incorporated herein by reference.
(e) The information set forth in "SUMMARY -- Recommendations of the
Board of Directors and Special Committee" and "SPECIAL FACTORS --
Recommendations of the Special Committee and Board of Directors" of the Proxy
Statement is incorporated herein by reference.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a) The information set forth in "SUMMARY -- Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Opinion of Financial Advisor" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Opinion of Financial Advisor" of the Proxy
Statement is incorporated herein by reference.
(c) The information set forth in "SUMMARY -- Opinion of Financial
Advisor" and "SPECIAL FACTORS -- Opinion of Financial Advisor" of the Proxy
Statement is incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in "SUMMARY -- Vote Required; Security
Ownership of Management"; "SUMMARY -- Conflicts of Interest"; "SPECIAL FACTORS
- -- Conflicts of Interest"; "THE SPECIAL MEETING -- Vote Required; Security
Ownership of Management"; and BENEFICIAL OWNERSHIP OF COMMON STOCK" of the
Proxy Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Market Prices for Common
Stock and Dividends" and "APPENDIX D -- Transactions Involving Equitrac's
Common Stock effected by members of the Management Group since March 1, 1997"
of the Proxy Statement is incorporated herein by reference.
Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities.
The information set forth in "SUMMARY -- Vote Required; Security Ownership
of Management"; "SUMMARY -- Voting Agreement; Irrevocable Proxy"; THE SPECIAL
MEETING
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- -- Vote Required; Security Ownership of Management"; and "THE SPECIAL
MEETING -- Voting Agreement; Irrevocable Proxy" of the Proxy Statement is
incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard
to the Transaction.
(a) The information set forth in "SUMMARY -- Vote Required; Security
Ownership of Management"; "SUMMARY -- Voting Agreement; Irrevocable Proxy";
"THE SPECIAL MEETING -- Vote Required; Security Ownership of Management"; and
"THE SPECIAL MEETING -- Voting Agreement; Irrevocable Proxy" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "SUMMARY -- Recommendations of the
Board of Directors and Special Committee" and "SPECIAL FACTORS --
Recommendations of the Special Committee and Board of Directors" of the Proxy
Statement is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in "SUMMARY -- Dissenters' Appraisal
Rights" and "THE RECAPITALIZATION AND MERGER -- Dissenters' Appraisal Rights"
of the Proxy Statement is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
Item 14. Financial Information.
(a) The information set forth in "SUMMARY -- FINANCIAL INFORMATION" and
"DOCUMENTS INCORPORATED BY REFERENCE" of the Proxy Statement is incorporated
herein by reference. The Issuer's fixed charge coverage ratio for fiscal 1998
and fiscal 1999 was 2.78 to 1 and 3.67 to 1, respectively.
(b) Not applicable.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in "THE SPECIAL MEETING -- Solicitation
of Proxies" and "SPECIAL FACTORS Conflicts of Interest" of the Proxy Statement
is incorporated herein by reference.
(b) Negative.
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Item 16. Additional Information.
Not applicable.
16
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After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
June 15, 1999 CORNERSTONE EQUITY INVESTORS IV, L.P.
By: /s/ Mark Rossi
--------------------------------
Name: Mark Rossi
Title: Senior Managing Director
EQUITRAC CORPORATION
By: /s/ George P. Wilson
--------------------------------
Name: George P. Wilson
Title: President and Chief Executive
Officer
CHARGEBACK ACQUISITION CORP.
By: /s/ Mark Rossi
--------------------------------
Name: Mark Rossi
Title: President
/s/ John T. Kane
------------------------------------
John T. Kane
/s/ George P. Wilson
------------------------------------
George P. Wilson
17
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/s/ Steve Smith
------------------------------------
Steve Smith
/s/ Christopher Rickborn
------------------------------------
Christopher Rickborn
/s/ Patrick Raftery
------------------------------------
Patrick Raftery
/s/ Cid Yousefi
------------------------------------
Cid Yousefi
/s/ John P. Jones
------------------------------------
John P. Jones
18
<PAGE> 19
INDEX TO EXHIBITS
- ----------------------- -------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- ----------------------- -------------------------------------------------------
(a) Commitment letters for Senior Secured Credit Facility
and Senior Subordinated Notes.*
- ----------------------- -------------------------------------------------------
(b)(1) Opinion of Prudential Securities Incorporated.
Included as Appendix B to Exhibit (d) hereto.*
- ----------------------- -------------------------------------------------------
(b)(2) Presentation of Prudential Securities
Incorporated.*
- ----------------------- -------------------------------------------------------
(c) Amended and Restated Recapitalization Agreement and Plan
of Merger, dated February 17, 1999, among Equitrac
Corporation, Chargeback Acquisition Corp., John T. Kane
and George P. Wilson included as Appendix A to Exhibit
(d) hereto.*
- ----------------------- -------------------------------------------------------
(d) Preliminary Proxy Statement of Equitrac Corporation.*
- ----------------------- -------------------------------------------------------
(e) Not applicable
- ----------------------- -------------------------------------------------------
(f) Not applicable.
- ----------------------- -------------------------------------------------------
*Supersedes previously filed exhibit
19
<PAGE> 1
[LOGO]
FLEET CORPORATE FINANCE
1185 AVENUE OF THE AMERICAS-16TH FLOOR
NEW YORK, NY 10036
212-819-6024
Fax 212-819-6201
April 23, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue
Suite 1100
New York, New York 10022
Attn.: Mr. Stephen L. Larson
Ladies and Gentlemen:
This letter sets forth certain fees payable by you in
connection with the debt financing contemplated to be provided pursuant to a
commitment letter dated the date hereof (the "COMMITMENT LETTER") between you
and Fleet National Bank ("FLEET"). Capitalized terms not otherwise defined
herein have the same meanings as set forth in the Commitment Letter.
By accepting the Commitment Letter, you hereby agree to cause
the Company to pay to Fleet, (subject to the advancement, if any, of any funds
under the Credit Facilities), the nonrefundable fees set forth below in
accordance with the terms hereof:
(a) An underwriting and arranging fee of 2% of the aggregate
principal amount of the Credit Facilities payable at the time any funds are
first advanced pursuant to the Credit Facilities.
(b) An annual administrative agency fee of $40,000 on the date
any funds are first advanced under the Credit Facility and on each anniversary
of such date.
From the fee referred to in section (a) above, Fleet will pay
to the Lenders such syndication and facility fees as may be determined by it in
its sole discretion. You shall not be responsible for the payment of any other
fees to, or any expense of, any Lender (other than as set forth in section (b)
of this Fee Letter, the Commitment Letter and the Term Sheet).
Payment of the foregoing fees will not be subject to
counterclaim or set off for, or be otherwise affected by, any claim or dispute
relating to any other matter.
By accepting delivery of the Commitment Letter, you agree that
this Fee Letter is for your confidential use only and neither its existence nor
the terms hereof will be disclosed by you to any person or entity other than
your officers, directors, accountants, attorneys and other advisors, and then
only on a "need to know" basis in connection with the transactions contemplated
by the Commitment Letter and on a confidential basis (except that,
<PAGE> 2
notwithstanding the foregoing, you may make such public disclosures as you are
required by law, in the opinion of your counsel, to make).
Your obligations under this Fee Letter with respect to
confidentiality shall survive the expiration or termination of the Commitment
Letter and this Fee Letter.
This Fee Letter shall be governed by, and construed in
accordance with, the laws of the State of New York.
This Fee Letter may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original and all of
which, taken together, shall constitute one and the same Fee Letter. Delivery of
an executed counterpart of this Fee Letter by telecopier shall be effective as
delivery of a manually executed counterpart of this Fee Letter.
Please evidence your acceptance of the provisions of this Fee
Letter by signing the enclosed copy of this Fee Letter and returning it to the
undersigned, together with the Commitment Letter, at or before 5:00 P.M. (New
York City time) on April 30, 1999 the time at which the Commitment Letter (if
not so accepted prior thereof) will expire.
Very truly yours,
FLEET NATIONAL BANK
By: /s/ Robert H. Dial
-------------------------------
Name: Robert H. Dial
Title: Director
Accepted and agreed to as of
the date first above written:
CORNERSTONE EQUITY INVESTORS, LLC
By
-----------------------------------
Name:
Title:
-2-
<PAGE> 3
TERM SHEET
SUMMARY OF TERMS AND CONDITIONS
Transaction:
The Buyer will effect the transactions referenced in the first paragraph of the
Commitment Letter of which these Terms and Conditions are a part.
Borrower:
The Company and its subsidiaries shall be the Borrower.
Guarantors:
All present and future subsidiaries of the Company and if the Company is owned
by a holding company or companies, such holding company or companies. Each of
the Guarantors will unconditionally and irrevocably guarantee all of the
obligations of the Borrower and the other Guarantors under the loan
documentation, and will secure such guaranties with the collateral and to the
extent set forth under "Security".
Administrative Agent:
Fleet National Bank ("FLEET").
Lenders:
Fleet and other banks, financial institutions and institutional lenders
acceptable to it and the Company. Each Lender may assign all or any part of its
share thereof to one or more other banks, financial institutions and
institutional lenders that are Eligible Assignees (to be defined in the loan
documentation) and, upon such assignment, such banks, financial institutions or
institutional lenders, as the case may be, shall become Lenders for all purposes
under the loan documentation.
Credit Facilities
Up to $46,000,000 at any time outstanding, apportioned as follows:
(a) $18,000,000 as a Senior Term A Loan with a final maturity on May 31, 2005
(the "TERM A FACILITY").
(b) $12,000,000 as a Senior Term B Loan with a final maturity on May 31, 2006
("TERM B FACILITY").
(c) Up to $16,000,000 as a six-year Senior Revolving Loan with a final
maturity on May 31, 2005 (the "REVOLVING FACILITY"), with a sublimit for
standby and trade letters of credit (a "LETTER OF CREDIT") in an amount to
be determined. The Revolving Facility will have a sub-facility (the "SWING
LINE FACILITY") in an amount to be agreed upon between Fleet and Borrower.
It is anticipated that approximately $6,000,000 of availability under
Revolving Facility will be drawn at Closing Date.
-3-
<PAGE> 4
The Term A Facility and the Term B Facility are collectively the "Term
Facilities" and the Term Facilities and the Revolving Facility are the "Credit
Facilities".
Letters of Credit:
The expiration date of any trade Letter of Credit shall be not more than 180
days after the date of issuance thereof, the expiration date of any standby
Letter of Credit shall be not more than 365 days after the date of issuance
thereof (although any such Letter of Credit shall be renewable for an additional
365 day period on terms to be set forth in the loan documentation) and the
expiration date of any Letter of Credit shall not occur within 60 days prior to
the maturity date of the Revolving Facility.
Purpose:
To finance in part the Recapitalization, to pay fees and expenses incurred in
connection with the Recapitalization, to finance working capital and general
corporate purposes. Closing Date: On or before June 30, 1999.
Interest Rates and Interest Periods:
At the Borrower's option, any advance made to it will be available at the rates
and for the Interest Periods stated below:
(a) PRIME RATE - a fluctuating rate equal to (i) Fleet's "Prime Rate" (360 day
basis) PLUS (ii) the Applicable Margin (as hereinafter defined). Fleet's
"Prime Rate" is a fluctuating interest rate equal to the higher from time
to time of (A) the rate of interest announced publicly by Fleet in Boston,
Massachusetts, as its prime rate and (B) a rate equal to 1/2 of 1% per
annum above the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by
federal funds brokers, as determined for any day by Fleet.
Interest based on the Prime Rate shall be payable monthly in arrears.
(b) EURODOLLAR RATE - a periodic fixed rate equal to (i) LIBOR (360 day basis)
PLUS, (ii) the Applicable Margin. "LIBOR" means, for any Interest Period
for all Eurodollar Rate borrowings, the interest rate per annum (rounded
upward, if necessary, to the nearest 1/32 of one percent) as determined on
the basis of the offered rates for deposits in U.S. dollars, for a period
of time comparable to such Interest Period which appears on the Telerate
Page 3750 as of 11:00 a.m. (New York time) two Business Days before the
first day of such Interest Period; PROVIDED, HOWEVER, that if the rate
described above does not appear on the Telerate
-4-
<PAGE> 5
System on any applicable interest determination date, LIBOR shall be the
rate (rounded upward as described above, if necessary) for deposits in
U.S. dollars for a period substantially equal to the interest period on
the Reuters Page "LIBO" (or such other page as may replace the LIBO page
on that service for the purpose of displaying such rates), as of 11:00
a.m. (London time) two Business Days before the first day of such Interest
Period, in each case, adjusted for reserve requirements.
Interest Periods for Eurodollar Rate borrowings shall be one, two, three
or six months, as selected by the Borrower. Interest will be payable in
arrears on the earlier of (A) the last day of the applicable Interest
Period and (B) quarterly.
Until the earlier of 120 days after the Closing Date or the date on which
Fleet notifies the Borrower that the syndication of the facilities has
been completed, the only Interest Period available to Borrower for a
Eurodollar Rate borrowing will be not greater than thirty (30) days.
(c) The "APPLICABLE MARGIN" with respect to Eurodollar Rate advances means at
any time from time to time the rate per annum above LIBOR applicable to
the Credit Facilities, based upon a leverage test of Total Debt to EBITDA,
as follows:
With respect to the Term A Facility and the Revolving Facility:
Applicable Margin for Eurodollar Advances
LEVEL TOTAL DEBT/EBITDA APPLICABLE MARGIN
- ----- ----------------- -----------------
I > or =___x 3.00%
II > or =___x, <___x 2.75%
III > or =___x, <___x 2.50%
IV <___x 2.25%
With respect to the Term B Facility:
Applicable Margin for Eurodollar Advances
LEVEL TOTAL DEBT/EBITDA APPLICABLE MARGIN
- ----- ----------------- -----------------
I > or =___x 3.50%
II > or =___x, <___x 3.25%
III > or =___x, <___x 3.00%
IV <___x 2.75%
Level I shall be the initial pricing level for the period of six months
following the Closing Date. Other levels will be set forth in the definitive
loan documentation.
-5-
<PAGE> 6
(d) The "APPLICABLE MARGIN" with respect to Prime Rate advances means at any
time from time to time the rate per annum above Prime Rate applicable to
the Credit Facilities, based upon a leverage test of Total Debt to EBITDA,
as follows:
With respect to the Term A Facility and the Revolving Facility:
Applicable Margin for Prime Rate Advances
LEVEL TOTAL DEBT/EBITDA APPLICABLE MARGIN
- ----- ----------------- -----------------
I > or =___x 1.75%
II > or =___x, <___x 1.50%
III > or =___x, <___x 1.25%
IV <___x 1.00%
With respect to the Term B Facility:
Applicable Margin for Prime Rate Advances
LEVEL TOTAL DEBT/EBITDA APPLICABLE MARGIN
- ----- ----------------- -----------------
I > or =___x 2.25%
II > or =___x, <___x 2.00%
III > or =___x, <___x 1.75%
IV <___x 1.50%
Level I shall be the initial pricing level for the period of six months
following the Closing Date. Other levels will be set forth in the definitive
loan documentation.
During the continuance of any payment default under the loan documentation, the
Applicable Margin on all obligations owing under the loan documentation shall
increase by 2% per annum.
Unused 0.50% Commitment Fee:
An Unused Commitment fee equal to 0.50% per annum of the unused portion of the
Revolving Facility:
Letter of Credit Fees:
Fees for Letters of Credit shall be equal to the Applicable Margin for
Eurodollar Rate borrowings under the Revolving Facility and shall be payable on
the average daily outstanding undrawn amount of all Letters of Credit. A
separate fee of one quarter of one percent (1/4%) per annum shall be payable to
the fronting bank for the Letters of Credit, payable quarterly in arrears and on
the date of terminations thereof and, in addition, Borrower shall pay other
customary letter of credit fees.
-6-
<PAGE> 7
Security:
The Borrower and each of the Guarantors shall grant the Administrative Agent and
the Lenders a valid and perfected first priority (subject to certain exceptions
to be set forth in the loan documentation) lien and security interest in all of
the following:
(a) All present and future personal and real property and assets of the
Borrower or Guarantors, including, but not limited to, machinery and
equipment, inventory and other goods, accounts receivable, leaseholds,
fixtures, bank accounts, general intangibles, customer lists, license
rights, patents, trademarks, tradenames, copyrights, chattel paper,
insurance proceeds, contract rights, hedge agreements, documents,
instruments, indemnification rights, tax refunds, cash, and all real
property and all improvements and structures thereon which are owned or
used by the Borrower or a Guarantor.
(b) All shares of capital stock issued by the Company (if owned by a holding
company or companies) and all shares of capital stock of each present and
future domestic subsidiary of the Company and 65% of the shares of capital
stock of each present and future foreign subsidiary of the Company.
(c) All proceeds and products of the property and assets described in clauses
(a) and (b) above.
The priority of the lien and security interest of the Administrative Agent and
the Lenders shall be supported by such landlord and mortgagee waivers,
warehousemen and bailee letters, bank consent agreements, third party consents,
intercreditor agreements and other agreements as shall be requested by the
Lenders, in each case in form and substance satisfactory to the Lenders.
Availability:
In one drawing, in the case of the Term Facilities and in multiple drawings from
time to time, in the case of the Revolving Facility. Each borrowing under the
Revolving Facility shall be in an amount to be agreed upon by Fleet and Borrower
and, in the case of Eurodollar Rate advances, each will be made on not less than
three business days' notice and, in the case of Prime Rate advances, each will
be made on not less than one business day's notice. All advances will be made by
the Lenders ratably in proportion to their respective commitments under the
Credit Facility under which such borrowing is being made.
Amortization/Repayment of the Credit Facilities
(a) TERM A FACILITY - Amortization of the Term A Facility will be in equal
quarterly installments in annual aggregate amounts as listed below:
Year Ending May 31, 2000 $250,000
Year Ending May 31, 2001 $1,250,000
Year Ending May 31, 2002 $2,500,000
Year Ending May 31, 2003 $3,500,000
-7-
<PAGE> 8
Year Ending May 31, 2004 $4,500,000
Year Ending May 31, 2005 $6,000,000
The first such installment will be due on February 28, 2000, with the
final installment due on May 31, 2005.
(b) TERM B FACILITY - Amortization of the Term B Facility will be in equal
quarterly installments in annual aggregate amounts as listed below:
Year Ending May 31, 2000 $50,000
Year Ending May 31, 2001 $100,000
Year Ending May 31, 2002 $100,000
Year Ending May 31, 2003 $100,000
Year Ending May 31, 2004 $100,000
Year Ending May 31, 2005 $100,000
Year Ending May 31, 2006 $11,450,000
The first such installment will be due on February 28, 2000, with the
final installment due on May 31, 2006.
(c) REVOLVING FACILITY - The Revolving Facility will be payable in full on May
31, 2005.
Optional Commitment Reduction:
The Borrower may, upon at least three business days' notice, terminate in whole
or reduce ratably in part, the unused portion of the Revolving Facility;
PROVIDED, HOWEVER, that each partial reduction shall be in amounts and integral
multiples to be determined.
Optional Prepayment:
The Borrower may, upon at least three business days' notice, prepay, in full or
in part, the Credit Facility without premium or penalty; PROVIDED, HOWEVER, that
each partial prepayment shall be in amounts and integral multiples to be
determined, and PROVIDED FURTHER that no prepayment shall be made other than on
the last day of the applicable Interest Period therefor. Except for optional
prepayments of the Revolving Facility, each such prepayment shall be applied to
the Credit Facilities in the same manner as mandatory prepayments provided for
below.
Mandatory Prepayment and Commitment Reduction:
(a) 100% of the net cash proceeds (i) from sales of property and assets of the
Company and its subsidiaries (excluding sales of inventory in the ordinary
course of business and other customary exceptions), subject to a mutually
agreed upon amount to be retained to acquire replacement properly or other
assets; (ii) from the issuance of additional debt of Company and its
subsidiaries; and (iii) from extraordinary receipts by or paid to or for
the
-8-
<PAGE> 9
account of Borrower not in the ordinary course of business, including
without limitation, tax refunds, pension plan reversions, proceeds of
insurance and condemnation awards;
(b) In addition to the scheduled principal amortization, 75% (subject to
reductions which will be set forth in the definitive loan documentation)
of Excess Cash Flow (to be defined in the loan documentation) of the
Company and its subsidiaries, such prepayment will be subject to reduction
based upon performance criteria set forth in the loan documentation;
(c) 50% of the net cash proceeds of the issuance of any equity securities of
the Company or its subsidiaries subject to certain agreed exceptions.
In each case to be applied, first, ratably to the Term A Facility and the Term B
Facility to reduce the then remaining installments thereunder; second, to prepay
advances made to pay drafts under Letters of Credit; third, to prepay advances
made under the Swing Line Facility; fourth, to prepay Revolving Credit advances
and to permanently reduce the Revolving Facility; and fifth, deposited in an L/C
Cash Collateral Account to cash collateralize 100% of available Letters of
Credit.
Any holder of the Term B Facility may (with the Borrower's consent) waive any
mandatory prepayment to which it would be otherwise entitled. Upon such waiver,
such amounts shall be applied first to reduce the amounts outstanding under the
Term A Facility and then as provided for in clauses "second" through "fifth" in
the preceding paragraph.
Conditions Precedent to Initial Extension of Credit:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of Fleet, including, without limitation, the
following:
(a) The final terms, conditions and resulting corporate structure of the
Recapitalization shall be satisfactory in all respects to the Lenders, and
all documentation relating to the Credit Facilities shall be in form and
substance satisfactory to the Lenders. The Recapitalization shall have
been consummated in accordance with definitive agreements, and management
or employment agreements will have been entered into. The capital
structure of the Company (including the terms of any subordinated
indebtedness) shall be acceptable to the Lenders. All such agreements
shall be satisfactory to the Lenders, shall be in compliance with all
applicable laws and all necessary approvals will have been obtained.
-9-
<PAGE> 10
(b) The Lenders shall have valid and perfected first priority (subject to
certain exceptions to be set forth in the loan documentation) liens and
security interests in the collateral referred to under the section
"Security" above; all filings, recordations and searches necessary or
desirable in connection with such liens and security interests shall have
been duly made; and all filing and recording fees and taxes shall have
been duly paid.
(c) There shall have occurred no material adverse change in the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and its Subsidiaries since February 28, 1998.
(d) There shall exist no action, suit, investigation, litigation or proceeding
pending or threatened in any court or before any arbitrator or
governmental or regulatory agency or authority that (i) could reasonably
be expected to (A) have a material adverse effect on the business,
condition (financial or otherwise), operations, performance, properties or
prospects of the Company and its subsidiaries; (B) adversely affect the
ability of the Borrower or any Guarantor to perform its obligations under
the loan documentation or (C) adversely affect the rights and remedies of
the Administrative Agent and the Lenders under the loan documentation or
(ii) purports to adversely affect any aspect of the Recapitalization or
the Credit Facilities (collectively, a "MATERIAL ADVERSE EFFECT").
(e) All governmental and third party consents and approvals necessary in
connection with each aspect of the Recapitalization and the Credit
Facilities shall have been obtained (without the imposition of any
conditions that are not acceptable to the Lenders) and shall remain in
effect; all applicable waiting periods shall have expired without any
adverse action being taken by any competent authority; and no law or
regulation shall be applicable in the judgment of the Lenders that
restrains, prevents or imposes material adverse conditions upon any aspect
of the Recapitalization or the Credit Facilities.
(f) All of the information provided by or on behalf of the Borrower or any of
its subsidiaries to the Administrative Agent and the Lenders prior to
their commitment (the "PRE-COMMITMENT INFORMATION") shall be true and
correct in all material aspects; and no development or change shall have
occurred, and no additional information shall have come to the attention
of the Administrative Agent or the Lenders, that (i) has resulted in or
could reasonably
-10-
<PAGE> 11
be expected to result in a material change in, or material deviation from,
the Pre-Commitment Information or (ii) has had or could reasonably be
expected to have a Material Adverse Effect.
(g) All loans made by the Lenders to the Borrower or any of its affiliates
shall be in full compliance with the Federal Reserve's Margin Regulations.
(h) The Borrower and each of the Guarantors shall have delivered certificates,
in form and substance satisfactory to the Lenders, attesting to the
Solvency (as hereinafter defined) of the Borrower or such Guarantor, as
the case may be, in each case individually and together with its
subsidiaries, taken as a whole, immediately before and immediately after
giving effect to the Recapitalization, from their respective chief
financial officers. As used herein, the term "SOLVENCY" of any person
means (i) the fair value of the property of such person exceeds its total
liabilities (including, without limitation, contingent liabilities), (ii)
the present fair saleable value of the assets of such person is not less
than the amount that will be required to pay its probable liability on its
debts as they become absolute and matured, (iii) such person does not
intend to, and does not believe that it will, incur debts or liabilities
beyond its ability to pay as such debts and liabilities mature and (iv)
such person is not engaged, and is not about to engage, in business or a
transaction for which its property would constitute an unreasonably small
capital.
(i) The Lenders shall have received (i) satisfactory opinions of counsel for
the Borrower and the Guarantors, of counsel for the Administrative Agent
and of local and special counsel for the Lenders as to the transactions
contemplated hereby and (ii) such corporate resolutions, certificates and
other documents as the Lenders shall reasonably request.
(j) There shall exist no default under any of the loan documentation, and the
representations and warranties of the Borrower, each of the Guarantors and
each of their respective subsidiaries therein shall be true and correct
immediately prior to, and after giving effect to, the initial extension of
credit under the loan documentation.
(k) All accrued reasonable fees and expenses of the Administrative Agent
(including the reasonable fees and expenses of counsel for the
Administrative Agent and local counsel for the Administrative Agent) shall
have been paid.
-11-
<PAGE> 12
Conditions Precedent to Subsequent Extensions of Credit:
There shall exist no default under any of the loan documentation, and the
representations and warranties of the Borrower, each of the Guarantors and each
of their respective subsidiaries therein shall be true and correct immediately
prior to, and after giving effect to such extension of credit.
Representation and Warranties:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of Fleet.
Covenants:
Those affirmative, negative and financial covenants customarily found in credit
agreements for similar secured financings (applicable to the Borrower and each
of its subsidiaries) and others appropriate in the judgment of Fleet, including,
without limitation, the following:
(a) AFFIRMATIVE COVENANTS - (i) Compliance with laws and regulations
(including, without limitation, ERISA and environmental laws); (ii)
payment of taxes and other obligations; (iii) maintenance of appropriate
and adequate insurance; (iv) preservation of corporate existence, rights
(charter and statutory), franchises, permits, licenses and approvals; (v)
preparation of environmental reports; (vi) visitation and inspection
rights; (vii) keeping of proper books in accordance with generally
accepted accounting principles; (viii) maintenance of properties; (ix)
performance of leases, related documents and other material agreements;
(x) conducting transactions with affiliates on terms equivalent to those
obtainable on an arm's- length basis; (xi) further assurances as to
perfection and priority of security interests; and (xii) customary
financial and other reporting requirements (including without limitation,
audited annual financial statements and monthly and quarterly unaudited
financial statements, in each case prepared on a consolidated and a
consolidating basis, notices of defaults, compliance certificates, annual
business plans and forecasts, reports to stockholders and other creditors
and other business and financial information).
(b) NEGATIVE COVENANTS - Restrictions on (i) liens (other than liens securing
the Credit Facilities); (ii) debt, guaranties or other contingent
obligations; (iii) lease obligations in excess of an amount to be agreed
between the Borrower and the Lenders; (iv) mergers, acquisitions or other
consolidations; (v) sales, transfers and other dispositions of assets
(other than sales of inventory in the ordinary course of business); (vi)
loans, acquisitions, joint ventures and other investments; (vii) dividends
and other distributions to stockholders; (viii) issuing or repurchasing
shares of capital stock, (ix) prepaying, redeeming or repurchasing debt;
(x) capital expenditures; (xi) granting negative
-12-
<PAGE> 13
pledges other than to the Administrative Agent and the Lenders; (xii)
changing the nature of its business; (xiii) amending organizational
documents, or amending or otherwise modifying any debt, any related
document or any other material agreement; (xiv) changing accounting
policies or reporting practices and (xv) change of control (to be defined
in the loan documentation) of the Company; in each of the foregoing cases,
with such exceptions as may be agreed upon in the loan documentation.
(c) FINANCIAL COVENANTS. The loan documentation will contain financial
covenants, including without limitation required ratios of debt to EBITDA
and EBITDA to interest expense, required fixed charge coverage and
required minimum EBITDA, each of which will be tested on a quarterly basis
for the preceding four fiscal quarters.
Events of Default:
Those customarily found in credit agreements for similar secured financings and
others appropriate in the judgment of Fleet, including, without limitation, (a)
failure to pay principal when due, or to pay interest, fees and other amounts
within two business days after any such amount becomes due; (b) any
representation or warranty proving to have been materially incorrect when made
or confirmed; (c) failure to perform or observe covenants set forth in the loan
documentation within a specified period of time, where customary and
appropriate, after notice or knowledge of such failure; (d) cross-defaults to
other indebtedness in an amount to be agreed in the loan documentation; (e)
bankruptcy and insolvency defaults (with grace period for involuntary
proceedings); (f) monetary judgment defaults in an amount to be agreed in the
loan documentation and nonmonetary judgment defaults that could reasonably be
expected to have a Material Adverse Effect; (g) impairment of loan documentation
or security; (h) change of ownership or operating control; and (i) standard
ERISA defaults.
Interest Rate Protection:
The Borrower shall obtain interest rate protection in form and with parties
acceptable to the Administrative Agent for a notional amount to be agreed in the
final loan documentation.
Expenses:
The Borrower shall pay all of the Administrative Agent's due diligence,
syndication (including printing, distribution and bank meetings),
transportation, computer, duplication, search, filing and recording fees and all
other out-of-pocket expenses incurred by the Administrative Agent (including the
fees and expenses of counsel for the Administrative Agent), whether or not any
of the transactions contemplated hereby are consummated, as well as all expenses
of the Administrative Agent in
-13-
<PAGE> 14
connection with the administration of the loan documentation. The Borrower shall
also pay the expenses of the Administrative Agent and the Lenders in connection
with the enforcement of any of the loan documentation.
Indemnity:
The Borrower will indemnify and hold harmless the Administrative Agent, each
Lender and each of their affiliates and their officers, directors, employees,
agents and advisors (each an "INDEMNIFIED PARTY") from and against any and all
claims, damages, losses, liabilities and expenses (including, without
limitation, reasonable fees and expenses of counsel) that may be incurred by or
asserted or awarded against any Indemnified Party, in each case arising out of
or in connection with or by reason of, or in connection with the preparation for
a defense of, any investigation, litigation or proceeding arising out of,
related to or in connection with (a) the Recapitalization or any related
transaction of the Borrower or any of its subsidiaries or its other affiliates
and any of the other transactions contemplated in the loan documentation, (b)
any acquisition or proposed acquisition or similar business combination or
proposed business combination by the Borrower or any of its subsidiaries or
affiliates of all or any portion of the shares of capital stock or substantially
all of the property and assets of any other person, (c) the Credit Facilities
and any use made or proposed to be made with the proceeds thereof or (d) the
actual or alleged presence of hazardous materials on any property of the
Borrower or any of its subsidiaries or any environmental action or proceeding
relating in any way to the Borrower or any of its subsidiaries or any of their
respective properties, in each case, whether or not such investigation,
litigation or proceeding is brought by the Borrower, its shareholders or
creditors or an Indemnified Party or an Indemnified Party is otherwise a party
thereto and whether or not the Recapitalization is consummated, except to the
extent such claim, damage, loss, liability or expense resulted from such
Indemnified Party's gross negligence or willful misconduct. The Borrower will
further agree that no Indemnified Party shall have any liability (whether direct
or indirect, in contract or tort or otherwise) to the Borrower or any of its
subsidiaries or to their respective security holders or creditors arising out
of, related to or in connection with the Recapitalization or any of the
transactions contemplated in the Credit Facilities, except for direct, as
opposed to consequential, damages resulting from such Indemnified Party's gross
negligence or willful misconduct.
Required Lenders:
Greater than 50%; provided that unanimous consent shall be required for matters
customarily requiring such consent.
-14-
<PAGE> 15
Assignments and Participations:
Assignments may be non-pro rata and must be to Eligible Assignees and, in each
case other than an assignment to a Lender or an assignment of the entirety of a
Lender's interest in the Credit Facility, in a minimum amount of $5,000,000.
Each Lender will also have the right, without consent of the Borrower or the
Administrative Agent, to assign (i) as security all or part of its rights under
the loan documentation to any Federal Reserve Bank and (ii) all or part of its
rights or obligations under the loan documentation to any of its affiliates. No
participation shall include voting rights, other than for reductions or
postponements of amounts payable or releases of all or substantially all of the
collateral. A processing and recordation fee of $3,500 shall be payable to the
Administrative Agent for each assignment.
Taxes:
All payments to be free and clear of any present or future taxes, withholdings
or other deductions whatsoever (other than income taxes in the jurisdiction of
the Lenders' applicable lending office). The Lenders will use reasonable efforts
(consistent with their respective internal policies and legal and regulatory
restrictions and so long as such efforts would not otherwise be disadvantageous
to such Lenders) to minimize to the extent possible any applicable taxes, and
the Borrower will indemnify the Lenders and the Administrative Agent for such
taxes paid by the Lenders or the Administrative Agent.
Miscellaneous:
Standard yield protection (including compliance with risk-based capital
guidelines, increased costs, payments free and clear of withholding taxes and
interest period breakage indemnities), Eurodollar illegality and similar
provisions, defaulting lender provisions, waiver of jury trial and submission to
jurisdiction.
Governing Law:
New York.
Counsel for the Administrative Agent:
Winston & Strawn.
-15-
<PAGE> 16
FLEET CORPORATE FINANCE, INC.
One Federal Street
Boston, Massachusetts 02110
April 23, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue, Suite 1100
New York, NY 10022
Attn: Steve Larson
RE: COMMITMENT LETTER - SENIOR SUBORDINATED NOTES
---------------------------------------------
Gentlemen:
You have advised Mainsail Capital ("Mainsail"), a division of Fleet
Corporation Finance, Inc. ("Fleet"), that Cornerstone Equity Investors
("Cornerstone" or the "Sponsor") intends to sponsor a recapitalization of
substantially all of the outstanding shares of Equitrac Corporation ("Equitrac"
or the "Issuer") to complete a going private transaction (the "Transaction").
The Transaction will be financed through an equity investment and/or rollover by
investors including, without limitation, Cornerstone and certain existing
members of management, $46,000,000 of senior secured credit facilities (the
"Senior Facilities") of which $36,000,000 will be funded at close and from funds
borrowed pursuant to the Senior Subordinated Notes (as defined below). We
understand that the Transaction is expected to close in June 1999.
Mainsail is pleased to advise you of its commitment to purchase
$9,000,000 of Senior Subordinated Notes (the "Senior Subordinated Notes") from
the Issuer on the terms and conditions set forth in this letter and in the
Summary of Terms and Conditions attached to this letter (the "Term Sheet", this
letter, together with the Term Sheet, the "Commitment Letter"). Proceeds from
the sale of the Senior Subordinated Notes will be used to finance, in part, the
Transaction. This Commitment Letter also constitutes a termination of Mainsail's
commitment in its February 8, 1999 letter to provide financing; although your
obligations under that letter with respect to fees, indemnification, costs and
expenses, and confidentiality remain in full force and effect.
Mainsail will be responsible for preparing and negotiating definitive
documentation for the purchase and sale of the Senior Subordinated Notes.
Although Mainsail is committing to purchase the Senior Subordinated Notes on a
fully underwritten basis, Mainsail expects that a portion of the Senior
Subordinated Notes may be resold to other financial institutions, reasonably
acceptable to the Issuer.
<PAGE> 17
Cornerstone Equity Investors
April 23, 1999
Page 2
If requested by Mainsail, you agree to assist Mainsail in connection
with the resale of the Senior Subordinated Notes and to provide Mainsail and any
other investors, promptly upon request, with all information reasonably deemed
necessary by them to complete successfully such purchase and/or resale,
including, but not limited to, (i) an information package for delivery to
potential investors in connection with any resale of the Senior Subordinated
Notes, and (ii) information and projections prepared by you or your advisors
relating to the transaction described herein. You further agree to make
appropriate offers and representatives of the Issuer and its subsidiaries
available to participate in information meetings for potential investors in
connection with any such resale at such times and place as Mainsail may
reasonably request.
You represent and warrant and covenant that to your knowledge (i) all
information which has been or is hereafter made available to Mainsail by you or
any of your representatives in connection with the transactions contemplated
hereby is and will be complete and correct in all material respects (other than
the financial projections referenced below) with respect to the matters such
information purports to cover and does not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not materially misleading in light of
the circumstances under which such statements have been or will be made, and
(ii) all financial projections that have been or are hereafter prepared by you
and made available to Mainsail or any other potential investors in the Senior
Subordinated Notes have been or will be prepared in good faith based upon
reasonable assumptions. In purchasing the Senior Subordinated Notes and in
connection with any resale thereof, Mainsail may use and rely on such
information and projections without independent verification thereof.
Please note that the terms and conditions of this commitment and
undertaking are not limited to those set forth in this letter. Those matters
that are not covered or made clear herein or in the attached Term Sheet are
subject to mutual agreement of the parties. The terms and conditions of this
commitment and undertaking may be modified by only in writing. In addition, this
commitment and undertaking is subject to: (i) the preparation, execution and
delivery of mutually acceptable note purchase documentation in a form customary
for a transaction such as the purchase of the Senior Subordinated Notes,
including a note purchase agreement incorporating substantially the terms and
conditions outlined herein and in the Term Sheet, (ii) the absence of (a) a
material adverse change in the business, conditions (financial or otherwise),
operations, performance, properties or prospects of the Issuer and its
subsidiaries, taken as a whole, and (b) any material adverse change in financial
or capital market conditions generally from those currently in effect, (iii) the
accuracy and completeness of all representations that you make to us and all
information that you furnish to us in connection with this commitment and
undertaking and your compliance with the terms of this letter, (iv) no
development or change occurring after the date hereof, and no information
becoming known after the date hereof, that (a) results in or could reasonably be
expected to result in a material adverse change in the legal, tax, accounting or
financial aspects of the Transaction, or (b) in good faith as inconsistent in a
material and adverse manner with any information provided to Mainsail prior to
the date of this Commitment Letter, (v) Mainsail being satisfied with all
agreements and documents,
-2-
<PAGE> 18
Cornerstone Equity Investors
April 23, 1999
Page 3
including the terms of all equity and debt securities, entered into in
connection with the Transaction, and (vi) Mainsail shall have participated in a
meeting to be held by April 30, 1999 with the management of the Company at which
the management shall update Mainsail on the business, condition (financial or
otherwise), operations, performance, and prospects of the Company and the
results of such meeting shall be satisfactory to Mainsail in its sole
discretion.
The Cost and expenses of Mainsail (including, without limitation, the
reasonable fees and expenses of its counsel and its other out-of-pocket
expenses) in connection with the preparation, execution and delivery of this
letter and the definitive financing agreements shall be for your account whether
or not the purchase of the Senior Subordinated Notes or any portion thereof
closes or is consummated. You further agree to indemnify and hold harmless Fleet
and each director, officer, employee and affiliate or control person thereof and
of Mainsail (each an "indemnified person") from and against any and all actions,
suits, proceedings (including any investigations or inquiries), claims, losses,
damages, liabilities or expenses of any kind or nature whatsoever which may be
incurred by or asserted against or involve Fleet or any such indemnified person
as a result of or arising out of or in any way related to or resulting form the
Transaction, or this letter or any eventual extension of credit, and, upon
demand, to pay and reimburse Fleet and each indemnified person for any legal or
other out-of-pocket expenses incurred in connection with investigating,
defending or preparing to defend any such action, suit, proceeding (including
any inquiry or investigation) or claim (whether or not Fleet or any such person
is a party to any action or preceding out of which any such expenses arise):
provided, however, that you shall not have to indemnify any indemnified person
to the extent that any loss, claim, damage, expense or liability resulted from
the gross negligence or willful misconduct or such indemnified person. This
letter is issued for your benefit only and no other person or entity may rely
hereon. Neither Fleet nor any of its affiliates shall be responsible or liable
to you or any other person for any compensatory damages which may be alleged as
a result of this letter or any of the transactions contemplated herein.
You agree that this letter is for your confidential use only and
neither its existence nor the terms hereof will be disclosed by you to any
person or entity other than your officers, directors, accountants, attorneys and
other advisors, and then only on a "need to know" basis in connection with the
transaction referenced herein and on a confidential basis, except that,
following your return of an executed counterpart hereof to Mainsail, you may (a)
make public disclosure of the existence and amount of Mainsail's commitment
hereunder, (b) file a copy of this Commitment Letter in any public record in
which it is required by law to be filed, (c) provide a copy of this Commitment
Letter on a confidential basis to the seller(s) of the interest being acquired
by you in the Transaction and its or their accountants, attorneys and other
advisors and (d) make such other public disclosures of the terms and conditions
hereof as you are required by law, in the opinion of our counsel, to make. You
agree that you will permit Mainsail to review and approve any reference to
Mainsail ro to any of its affiliates or any other agent or arranger under the
Facilities contained in any press release or similar public disclosure prior to
public release.
-3-
<PAGE> 19
Cornerstone Equity Investors
April 23, 1999
Page 4
By executing this letter, you acknowledge that this letter is the only
agreement between you and Mainsail with respect to the Senior Subordinated Notes
and sets forth the entire understanding of the parties with respect thereto.
This letter may not be changed except pursuant to a written agreement signed by
each of the parties hereto.
Your obligations under this letter with respect to fees,
indemnification, costs and expenses, and confidentiality shall survive the
expiration or termination of this letter.
This letter is intended to be solely for the benefit of the parties and
is not intended to confer any benefits upon, or create any rights in favor of,
any person other than the parties hereto and shall not be assignable by you
without the prior written consent of Mainsail. This letter may be executed by
any number of counterparts, each of which shall be an original and all of which,
when taken together, shall constitute one agreement. Upon the closing of the
Transaction, all of the obligations of the Sponsor shall be assumed by and be
the sole obligation of the Issuer.
This Commitment Letter shall be governed by and construed in accordance
with the laws of the State of Massachusetts without giving effect to the
conflicts of laws of principles thereof. EACH OF THE PARTIES HERETO IRREVOCABLY
AGREES TO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM
BROUGHT BY OR ON BEHALF OF ANY PARTY RELATED TO OR ARISING OUT OF THIS
COMMITMENT LETTER OR THE PERFORMANCE OF SERVICES THEREUNDER. Cornerstone
irrevocably and unconditionally submits to the exclusive jurisdiction of any
state or federal court sitting in the City of Boston over any suit, action or
proceeding arising out of or relating to this Commitment Letter. Service of any
process, summons, notice or document by registered mail addressed to Cornerstone
at its respective address set forth above shall be effective service of process
against Cornerstone, as the case may be, of any such suit, action or proceeding
brought in any such court. Cornerstone irrevocably and unconditionally waives
any objection to the laying of venue of any such suit, action or proceeding
brought in any such court and any claim that any such suit, action or proceeding
brought in any such court may be enforced in any other courts to whose
jurisdiction Cornerstone are or may be subject, by suit upon judgment.
In the event the Transaction is consummated, Fleet may, at their
expense, publicly announce as Fleet may choose the capacities in which Fleet or
its affiliates have acted hereunder.
Any notice given pursuant hereto shall be mailed or hand delivered in
writing, if to (i) Cornerstone at the address set forth on page one hereof; and
(ii) Mainsail Capital, Attention: Robert J. Ziemer, One Federal Street, 3rd
Floor, Boston, MA 02110.
If you are in agreement with the foregoing, please sign and return to
Mainsail the enclosed copies of this letter and the Fee Letter no later than
5:00 PM, New York time, on April 30, 1999.
-4-
<PAGE> 20
Cornerstone Equity Investors
April 23, 1999
Page 5
This offer shall terminate at such time unless prior thereto we shall have
received duly signed and completed copies of such letter.
We look forward to working with you on this transaction.
Very truly yours,
FLEET CORPORATE FINANCE, INC.
By: /s/ Robert J. Ziemer
-----------------------------------
Name: Robert J. Ziemer
Title: Director, Mainsail Capital
Accepted and agreed to
as of _____________
CORNERSTONE EQUITY INVESTORS
By:
-----------------------------------
Name:
Title:
-5-
<PAGE> 21
SUMMARY OF TERMS AND CONDITIONS
SENIOR SUBORDINATED NOTES
ISSUER:
Equitrac Corporation ("Equitrac", "Issuer", or the "Company")
ISSUE:
Senior Subordinated Notes (the "Notes").
PRINCIPAL AMOUNT:
$9,000,000.
MATURITY:
Eight years.
RANKING PRIORITY:
The Notes will constitute senior subordinated debt of the Company and be
unsecured.
PRICE:
100% of Principal Amount
PLACEMENT FEE:
None
USE OF PROCEEDS:
To finance a portion of the purchase of the stock of Equitrac Corporation by
Cornerstone Equity Investors.
RATE OF INTEREST:
11.75% fixed rate per annum, comprised of cash coupon payable quarterly in
arrears.
INTEREST PAYMENTS:
Interest will be compounded quarterly, calculated on twelve 30-day months,
360-day year, basis.
MANDATORY REDEMPTION:
No scheduled amortization.
OPTIONAL PAYMENTS:
The Notes are prepayable at any time at par plus accrued interest and a
prepayment premium as described below:
Year 1: 4% of the principal amount outstanding
Year 2: 3% of the principal amount outstanding
Year 3: 2% of the principal amount outstanding
Year 4: 1% of the principal amount outstanding
After the fourth anniversary, the Notes are prepayable at par.
<PAGE> 22
SUBORDINATION PROVISIONS:
The Notes shall be subordinated in right of payment to the Senior Bank Debt on
terms that are customary for "high yield" issues. The Notes will be senior to
all future and other existing indebtedness, excluding Senior Bank indebtedness.
CHANGE OF CONTROL:
Upon the occurrence of a Change of Control, the Noteholder(s) will have the
right to require prepayment of the Notes at par together with accrued interest.
REPRESENTATIONS AND WARRANTIES:
The Issuer will representations and warranties as are standard and customary for
transactions of this type.
AFFIRMATIVE COVENANTS:
The Notes will incorporate affirmative covenants typical for debt financings of
this type, including but not limited to covenants regarding corporate existence,
compliance with laws and regulations, maintenance of properties, insurance and
lines of business and payment of taxes.
NEGATIVE COVENANTS:
The Notes will incorporate the following negative covenants which are
contemplated to be the same as in the Senior Bank agreement:
1) Limitation on debt and the incurrence of debt;
2) Maintenance of minium interest coverage and fixed charge coverage ratios;
3) Limitations on the payment dividends, stock repurchases and investments and
other restricted payments;
4) Limitations on capital expenditures, consolidations and mergers, asset sales,
management fees and compensation and transactions with affiliates; and
5) Limitation on the issuance of certain types of preferred stock.
TRANSFERABILITY:
Three will be no restrictions on the transferability of the Notes, subject to
securities law compliance.
OBSERVATION RIGHTS:
While the Notes are outstanding, Board Observation Rights are required.
-2-
<PAGE> 23
FINANCIAL STATEMENTS:
The Company will provide to the Noteholders:
1) Quarterly (unaudited) consolidated financial statements within 45 days after
the end of each quarterly period (except the last quarter of each fiscal year),
certified by an authorized officer;
2) Annual (audited) consolidated financial statements within 90 days after the
end of each fiscal year; and
3) Quarterly compliance certificates, certified by an authorized officer and
annual compliance certificates, certified by the Company's independent auditors.
EVENTS OF DEFAULT:
Events of Default will include:
1) The Company defaults in the payment of any principal or premium, if any on
the Notes when due;
2) The Company defaults in the payment of interest on the Notes when due within
applicable grace periods;
3) Any representations or warranties proving untrue when made or deemed to have
been made by the Company;
4) Bankruptcy or insolvency of the Company;
5) Defaults of the Company in observance of any material covenants which
continue unremedied within applicable grace periods;
6) Payment defaults on other Debt of the Issuer in excess of $1,000,000; and
7) Final judgment(s) or final order of a court of competent jurisdiction in
excess of $1,000,000 which remains uncontested, unappealed, unpaid or uninsured
for a period of 45 days.
DETACHABLE WARRANTS:
ISSUER:
Equitrac Corporation ("Equitrac", "Issuer" or the "Company"),
NUMBER OF SHARES:
The warrants may be exercised into shares of the Company's common stock (the
"Common Stock") representing 7.5% ownership on a fully diluted basis (before
management promote) at the Close.
-3-
<PAGE> 24
WARRANT EXERCISE:
The Warrants are exercisable upon the earlier of the third anniversary of
closing, or
1) The date the Company files a registration statement with the SEC for public
securities offering;
2) The Company sells a major portion of its assets; or
3) The Company has a material default under any of its debt.
The Warrants will expire automatically ten years after Close if not yet
exercised.
EXERCISE PRICE:
Nominal.
REGISTRATION RIGHTS:
The Investor shall have unlimited "piggyback" registration rights, subject to
underwriter discretion, in the event of an initial public offering or any
subsequent public offering. All expenses of a piggyback registration shall be
borne by the Company.
TAG ALONG RIGHTS:
If the Majority shareholder sells, transfers or disposes of any Common Stock,
the majority shareholder will require the buyer to offer to acquire from the
Investor, upon exercising their Warrants, a proportionate number of their shares
for the same consideration as given to the majority shareholder.
DRAG ALONG RIGHTS:
If the majority shareholder sells, transfers or disposes all of its Common
Stock, the majority shareholder will have the right to require the Investor to
sell its Warrants or Warrant Common Stock to the buyer for the same
consideration as given to the majority shareholder.
-4-
<PAGE> 25
PUT RIGHTS:
The Investor shall have the right to require the issuer to purchase the Warrants
or Warrant Common Stock at a price equal to the Fair Market Value, at any time
after the sixth anniversary of the Close. In the event that such purchase would
result in a default of the issuers outstanding debt, the issuer shall be able to
defer the repurchase for up to one year. Appropriate remedies for the failure to
honor the put shall be agreed upon. Fair Market Value shall mean the value of
the Issuer determined by an independent valuation expert mutually satisfactory
to the Issuer and the Investor.
CALL RIGHTS:
The Issuer shall have the right to purchase the Warrants or Warrant Common Stock
at a price equal to the Fair Market Value, at any time after the sixth
anniversary of the Close. Fair Market Value shall mean the value of the Issuer
determined by an independent valuation expert mutually satisfactory to the
Issuer and the Investor.
ANTIDILUTION RIGHTS:
The Warrants will be subject to adjustment for:
1) The payment of dividends (or other distribution) in Common Stock on any class
of the Company;
2) Subdivisions, combinations and re-classifications of Common Stock;
3) Merger, consolidation, recapitalization and other similar events; and
4) The issuance of sale of warrants, convertible securities or Common Stock at
an effective price per share less than fair market value.
No adjustments need to be made until cumulative adjustments amount to 1%.
-5-
<PAGE> 26
[LOGO]
Fleet Corporate Finance
1185 Avenue of the Americas
16th Floor
New York, NY 10036
212-819-6024
Fax 212-819-6201
April 23, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue
Suite 1100
New York, New York 10022
Attn.: Mr. Stephen L. Larson
Ladies and Gentlemen:
You have advised Fleet National Bank ("FLEET") that
Cornerstone Equity Investors, LLC ("CEI") or a new corporation formed by CEI or
one of its affiliates ("Buyer") will enter into a transaction (the
"RECAPITALIZATION") pursuant to which Buyer will acquire substantially all of
the equity of a company ("Company") previously identified to us by you. The
Recapitalization will be financed through an equity investment and/or rollover
by investors including, without limitation, CEI and certain existing members of
management, from not less than $9,000,000 in subordinated indebtedness incurred
by the Company, and from funds borrowed pursuant to the Credit Facilities (as
defined below). The precise form of the transaction through which the
Recapitalization will be accomplished has not yet been determined.
Fleet is pleased to advise you of its commitment to provide up
to the fall amount of $46,000,000 senior secured credit facilities (the "CREDIT
FACILITIES") on the terms and conditions summarized in this letter and in the
Summary of Terms and Conditions attached to this letter (the "TERM SHEET"). The
Credit Facilities will be used (i) to finance a portion of the purchase price
for the Recapitalization and to pay fees and expenses of the Recapitalization,
(ii) to finance working capital and capital expenditures and (iii) general
corporate purposes. This letter also constitutes a termination of Fleet's
commitment in its February 4, 1999 letter to provide financing; although your
obligations under that letter with respect to fees, indemnification, costs and
expenses, and confidentiality remain in full force and effect.
<PAGE> 27
[LOGO]
Cornerstone Equity Investors, LLC
April 23, 1999
Page 2
Although Fleet is committing to provide all of the Credit
Facilities on a fully underwritten basis, Fleet expects that a portion of the
Credit Facilities will be made available to other financial institutions (such
lenders including Fleet the "LENDERS") in consultation with you. It is agreed
that Fleet will act as the sole arranger (in such capacity, the "Arranger") and
administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the
Credit Facilities. Fleet will be responsible for preparing and negotiating
definitive documentation for the Credit Facilities, and Fleet will manage the
syndication effort of forming the syndicate of lenders that will make the Credit
Facilities available. Additional agents, co-agents or arrangers may be appointed
at the discretion of Fleet.
You agree to assist Fleet in forming any such syndicate and to
provide Fleet and the other Lenders, promptly upon request, with all information
reasonably deemed necessary by them (consistent with industry practice) to
complete successfully the syndication, including, but not limited to, (i) an
information package for delivery to potential syndicate members and participants
and (ii) all information and projections prepared by you or your advisers
relating to the transactions described herein. Prior to the closing of the
Credit Facilities you agree to refrain from any other financings during such
syndication process unless (i) consisting of the Subordinated Indebtedness
referenced in the first paragraph of this letter, or (ii) otherwise agreed to by
Fleet. You further agree to make appropriate officers and representatives of the
Company and its subsidiaries available to participate in informational meetings
for potential syndicate members and participants at such times and places as
Fleet may reasonably request.
You represent and warrant and covenant that to your knowledge
(i) all information which has been or is hereafter made available to Fleet by
you or any of your representatives in connection with the transactions
contemplated hereby is and will be complete and correct in all material respects
with respect to the matters such information purports to cover and does not and
will no contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
materially misleading in light of the circumstances under which such statements
have been or will be made and (ii) all financial projections that have been or
are hereafter prepared by you and made available to Fleet or any other
participants in the Credit Facilities have been or will be prepared in good
faith based upon reasonable assumptions. You agree to supplement the information
and projections referred to in clauses (i) and (ii) above from time to time
until completion of the syndication so that the representations and warranties
in the preceding sentence remain correct. In arranging and syndicating the
Credit Facilities, Fleet may use and rely on such information and projections
without independent verification thereof.
In connection with the syndication of the Credit Facilities,
Fleet may, in its discretion, allocate to other Lenders portions of any fees
payable to Fleet in connection with the Credit Facilities. You agree that no
Lender will receive any compensation of any kind for its
-2-
<PAGE> 28
[LOGO]
Cornerstone Equity Investors, LLC
April 23, 1999
Page 3
participation in the Credit Facilities, except as expressly provided for in this
letter, the Term Sheet or in the Fee Letter referred to below.
Please note, however, that the terms and conditions of this
commitment and undertaking are not limited to those set forth in this letter.
Those matters that are not covered or made clear herein or in the attached Term
Sheet are subject to mutual agreement of the parties. The terms and conditions
of this commitment and undertaking may be modified only in writing. In addition,
this commitment and undertaking is subject to: (i) the preparation, execution
and delivery of mutually acceptable loan documentation, including a credit
agreement incorporating substantially the terms and conditions outlined herein
and in the Term Sheet, (ii) the absence of (a) a material adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company and its subsidiaries since February 28,
1998 and (b) any material adverse change in loan syndication or financial or
capital market conditions generally from those currently in effect, (iii) the
accuracy and completeness of all representations that you make to us and all
information that you furnish to us in connection with this commitment and
undertaking and your compliance with the terms of this letter, (iv) no
development or change occurring after the date hereof, and no information
becoming known after the date hereof, that (a) results in or could reasonably be
expected to result in a material change in, or material deviation from, the
information previously delivered by you or could reasonably be expected to be
materially adverse to the Company or any of its subsidiaries or to the
Administrative Agent or the Lenders, or to the legal, tax, accounting or
financial aspects of the Recapitalization, or (b) has had or could reasonably be
expected to have a Material Adverse Effect (as defined under the section
"Conditions Precedent to Initial Extension of Credit" in the Term Sheet), (v)
the negotiation and delivery of definitive documentation on or before June 30,
1999, and (vi) Fleet shall have participated in a meeting to be held by April
30, 1999 with the management of the Company at which the management shall update
Fleet on the business, condition (financial or otherwise), operations,
performance, and prospects of the Company and the results of such meeting shall
be satisfactory to Fleet in its sole discretion.
The costs and expenses of Fleet (including, without
limitation, the reasonable fees and expenses of its counsel and its syndication
and other out-of-pocket expenses) in connection with the preparation, execution
and delivery of this letter and the definitive financing agreements shall be for
your account. You further agree to indemnify and hold harmless Fleet and each
director, officer, employee and affiliate or control person thereof (each an
"indemnified person") from and against any and all actions, suits, proceedings
(including any investigations or inquiries), claims, losses, damages,
liabilities or expenses of any kind or nature whatsoever which may be incurred
by or asserted against or involve Fleet or any such indemnified person as a
result of or arising out of or in any way related to or resulting from the
Recapitalization, or this letter or any eventual extension of credit, and, upon
demand, to pay and reimburse Fleet and each indemnified person for any legal or
other out-of-pocket expenses incurred in connection with investigating,
defending or preparing to defend any such action, suit, proceeding (including
any
-3-
<PAGE> 29
[LOGO]
Cornerstone Equity Investors, LLC
April 23, 1999
Page 4
inquiry or investigation) or claim (whether or not Fleet or any such person is a
party to any action or proceeding out of which any such expenses arise);
PROVIDED, HOWEVER, that you shall not have to indemnify any indemnified person
against any loss, claim, damage, expense or liability which resulted solely from
the gross negligence or willful misconduct of such indemnified person. This
letter is issued for your benefit only and no other person or entity may rely
hereon. Neither Fleet nor any of its affiliates shall be responsible or liable
to you or any other person for any damages which may be alleged as a result of
this letter.
This letter is for your confidential use only, and neither the
terms nor the existence of this letter, the Fee Letter or the Term Sheet may be
disclosed to any other person except your senior management, the senior
management of the Company and your respective advisers, and then only in
connection with your bid to acquire the Company.
The provisions of this letter are supplemented as set forth in
a separate fee letter dated the date hereof from us to you (the "FEE LETTER")
and are subject to the terms of such Fee Letter. By executing this letter, you
acknowledge that this letter and the Fee Letter are the only agreements between
you and Fleet with respect to the Credit Facilities and set forth the entire
understanding of the parties with respect thereto. Neither this letter nor the
Fee Letter may be changed except pursuant to a writing signed by each of the
parties hereto.
Your obligations under this letter and the Fee Letter with
respect to fees, indemnification, costs and expenses, and confidentiality shall
survive the expiration or termination of this letter.
This letter is intended to be solely for the benefit of the
parties and is not intended to confer any benefits upon, or create any rights in
favor of, any person other than the parties hereto and shall not be assignable
by you without the prior written consent of Fleet; provided, however, that your
obligations under this paragraph and the first full paragraph and fourth full
paragraph on page 3 hereof may be assigned to the Company upon the consummation
of the transactions referenced in the first paragraph of this letter. This
letter may be executed in any number of counterparts, each of which shall be an
original and all of which, when taken together, shall constitute one agreement.
This letter shall be governed by, and construed in accordance with, the laws of
the State of New York.
If you are in agreement with the foregoing, please sign and
return to Fleet the enclosed copies of this letter and the Fee Letter no later
than 5:00 P.M., New York time, on April 30, 1999. This offer shall terminate at
such time unless prior thereto we shall have received duly signed and completed
copies of such letters.
-4-
<PAGE> 30
[LOGO]
Cornerstone Equity Investors, LLC
April 23, 1999
Page 5
We look forward to working with you on this transaction.
Very truly yours,
FLEET NATIONAL BANK
By: /s/ Robert H. Dial
--------------------------------
Name: Robert H. Dial
Title: Director
Accepted and agreed to as of the date first above written:
CORNERSTONE EQUITY INVESTORS, LLC
By
--------------------------------
Name:
Title:
-5-
<PAGE> 31
[LOGO]
Fleet Corporate Finance
1185 Avenue of the Americas
16th Floor
New York, NY 10036
212-819-6024
Fax 212-819-6201
June 3, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue
Suite 1100
New York, New York 10022
Attn.: Mr. Stephen L. Larson
Mr. Michael B. Nejjar
Ladies and Gentlemen:
Reference is made to our Commitment Letter dated April 23, 1999, and the
related Fee Letter and Term Sheet delivered to you in connection therewith.
Capitalized terms defined in the Commitment Letter are used herein as defined
therein.
Please be advised that the Commitment Letter is amended as follows:
1. The expiration date of the Commitment Letter will be August 31,
1999.
2. The conditions of the continuing effectiveness of our Commitment
Letter remain in full force and effect, including, not by way of limitation, the
absence of any material adverse change in the business and affairs of the
Company between the date of the Commitment Letter and the execution of
definitive loan materials.
Please also be advised that our Commitment Letter (as amended hereby) is
based upon the financial projections of the Company previously delivered to us
by you. Insofar as the actual operating results of the Company are not
consistent with such projections, we may either exercise our right to terminate
our commitment or, in the alternative, restructure the Credit Facilities,
modifying their terms and conditions to reflect the actual financial
performance of the Company.
All of the other terms of the Commitment Letter shall remain in full
force and effect.
<PAGE> 32
[LOGO]
Cornerstone Equity Investors, LLC
June 3, 1999
Page 2
Please indicate your agreement with this Amendment of the Commitment Letter by
signing where indicated below.
Very truly yours,
FLEET NATIONAL BANK
By: /s/ R.H. Dial
-------------------------------------
Name: R.H. Dial
Title: Director
Accepted and agreed to as of
the date first above written:
CORNERSTONE EQUITY INVESTORS, LLC
By /s/ Michael E. Najjar
---------------------------------------
Name: Michael E. Najjar
Title: Managing Director
-2-
<PAGE> 33
FLEET CORPORATE FINANCE, INC.
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
June 3, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue, Suite 1100
New York, New York 10022
Attn: Steve Larson
Gentlemen:
Reference is made to Mainsail Capital's ("Mainsail") Commitment Letter of
April 23, 1999 (together with the Summary of Terms and Conditions, the
"Commitment Letter") whereby Mainsail has committed to provide debt financing in
connection with Cornerstone Equity Investors, LLC's ("Cornerstone") acquisition
of substantially all of the outstanding equity of Equitrac Corporation
("Equitrac" or the "Company").
Please be advised that the Commitment Letter is amended as follows:
1. The expiration date of the Commitment Letter will be August 31,
1999.
2. The conditions of the continuing effectiveness of our Commitment
Letter remain in full force and effect, including, not by way of limitation, the
absence of any material adverse change in the business and affairs of the
Company between April 23, 1999 and the execution of definitive loan materials.
3. The number of shares in detachable warrants that may be exercised
into shares of the Company's common stock will represent 8.0% ownership on a
fully diluted basis (before management promote) at the close.
Please also be advised that our Commitment Letter (as amended hereby) is
based on the financial projections of the Company previously delivered to
Mainsail by you. Insofar as the actual operating results of the Company are not
consistent with such projections, Mainsail may either exercise our right to
terminate our commitment or, in the alternative, restructure the Senior
Subordinated Notes modifying their terms to reflect the actual financial
performance of the Company.
<PAGE> 34
Cornerstone Equity Investors
June 3, 1999
Page 2
All of the terms of the Commitment Letter shall remain in full force and
effect.
Please indicate your agreement with this amendment of the Commitment
Letter by signing where indicated below.
FLEET CORPORATE FINANCE, INC.
By: /s/ Robert J. Ziemer
-------------------------------------
Name: Robert J. Ziemer
Title: Director Mainsail Capital
Accepted and agreed to as of
the date first above written:
CORNERSTONE EQUITY INVESTORS, LLC
By /s/ Michael E. Najjar
---------------------------------------
Name: Michael E. Najjar
Title: Managing Director
-2-
<PAGE> 1
Project chargeback
Highly Confidential
Presentation to the Special
Committee of the Board of
Directors
June 2, 1999
<PAGE> 2
Project Chargeback
TABLE OF CONTENTS
I. Transaction Overview
II. Marketing Process Summary
III. Company Overview
IV. Valuation Summary
Appendices
A. Comparable Companies Descriptions
B. Weighted Average Cost of Capital
2
<PAGE> 3
Project chargeback
I. Transaction Overview
<PAGE> 4
Project Chargeback
Transaction Overview
The Recapitalization: Pursuant to the Amended and Restated Recapitalization
Agreement and Plan of Merger, MergerCo, a
newly-formed, acquisition company wholly-owned by
Bedrock (the "Investor"), will merge with and into
Chargeback, and each Chargeback share of common
stock, $0.01 par value (the "Common Stock"), will be
converted into the right to receive $21.00 per share
in cash.
Management Investors: John Kane, Chairman of the Board of Directors, George
Wilson, President and Chief Executive Officer and
certain other senior executives of the Company will
exchange a portion of their Common Stock and options
to acquire Common Stock for an equity interest in the
surviving company.
Financing: Bedrock has received commitment letters from Fleet
National Bank ("Fleet") and Mainsail Capital, an
affiliate of Fleet, to provide the debt financing
necessary to consummate the transaction.
Accounting Treatment: Recapitalization accounting. The historical basis of
the Company's assets and liabilities will not be
affected.
4
<PAGE> 5
Project Chargeback
Transaction Overview
Tax Treatment: Fully taxable transaction to selling
shareholders.
Options: All existing Company stock options will vest
upon the consummation of the transaction. A
portion of the options held by the
Management Investors will be converted into
equity interests in the surviving company.
All other options will be cashed out by the
Company at the closing of the transaction at
their "in-the-money" value.
New Management Options: It is expected that the management of the
surviving company will receive new
performance-based stock options.
Timing: Consummation of the transaction will require
the preparation of a merger proxy followed
by shareholder approval. Closing of the
transaction is expected by mid to late
August (the "Effective Time").
5
<PAGE> 6
Project Chargeback
THE RECAPITALIZATION
Step 1: Prior to the Effective Time
[FLOW CHART GRAPHIC]
- - Bedrock contributes
cash in exchange for
Preference Stock
- - Management
Investors convert
some of their
Common Stock to
Preference Stock
6
<PAGE> 7
Project Chargeback
THE RECAPITALIZATION
Step 2: At the Effective Time
MergerCo Merges With and Into the Company:
- - All Preference Stock converted into "new" common and preferred stock
- - The Company consummates debt financing
- - All existing Common Stock canceled in exchange for $21.00 per share in cash
[FLOW CHART GRAPHIC]
7
<PAGE> 8
Project Chargeback
Significant Contract Terms
Voting Agreement: To be delivered at the signing by John Kane and
George Wilson, representing approximately 33 percent
of the outstanding Common Stock.
"No Shop"
Provision: The Company may not, directly or indirectly, solicit,
initiate, or encourage a Competing Transaction.
Fiduciary Out: The Company's board of directors may terminate the
merger agreement to accept an unsolicited, superior
third party offer.
Breakup Fee: $2.3 million plus expenses, payable in the event the
Company terminates the merger agreement in connection
with a third party offer.
Significant Closing Funding obtained as contemplated by the commitment
Conditions: letters, approval by a majority of the Company's
shareholders, no Company Material Adverse Effect, and
the Company shall have entered into a satisfactory
employment agreement with George Wilson and
terminated the existing employment agreement with
John Kane.
Ongoing
Management: The Company's existing management is expected to
remain in place, with the exception of John Kane, who
will resign as Chairman upon the closing of the
transaction.
Ongoing Board
Composition: Seven member board. Members will include John Kane,
George Wilson, Mark Rossi, Stephen L. Larson, Michael
Najjar, and two 8 additional members to be mutually
decided upon.
8
<PAGE> 9
Project Chargeback
Sources and Uses of Funds
(000's, except per share data)
Sources
-------
<TABLE>
<S> <C>
Excess Cash(1) $ 9,500
Revolver 6,000
Term Debt 30,000
Subordinated Debt 9,000
Sponsor Group Equity
Preferred Stock $18,621
Common Stock 6,207
$24,828
-------
Management Investors Rollover Equity
Preferred Stock $ 4,307
Common Stock 1,436
-------
$ 5,743
TOTAL SOURCES OF FUNDS $85,071
</TABLE>
Uses
----
<TABLE>
<S> <C>
Diluted Common Shares Outstanding 3,837
Offer Price Per Share $ 21.00
Purchase Price of Equity $80,571
Plus: Outstanding Debt --
Transaction Costs 4,500
-------
TOTAL USES OF FUNDS $85,071
</TABLE>
- ----------
(1) Estimated 7/31/99 cash balance, per management's projection.
9
<PAGE> 10
Project Chargeback
Initial Capitalization
(000's)
<TABLE>
<CAPTION>
% of Total
Initial Capitalization Amount Sources
- ---------------------- ------ -------
<S> <C> <C>
Revolver $ 6,000 7.9%
Term Debt 30,000 39.7%
Subordinated Debt 9,000 11.9%
------- -----
TOTAL DEBT $45,000 59.5%
Equity Contribution 30,571 40.5%
------- -----
Total Sources of Funds $75,571 100.0%
</TABLE>
10
<PAGE> 11
Project Chargeback
Valuation Multiples at Offer Price
(000's, except offer price)
<TABLE>
<CAPTION>
Price Premium
----- -------
<S> <C> <C>
Offer Price $21.00
Pre-Announcement Closing Prices
2/12/1999 (One Day prior) $20.25 3.7%
2/8/99 (Five Days prior) $19.50 7.7%
1/19/99 (Four Weeks prior) $18.63 12.8%
52 Week High (4/23/98) $22.00
52 Week Low (12/8/98) $16.75
</TABLE>
<TABLE>
<S> <C>
Diluted Shares Outstanding 3,837
Enterprise Value Calculation
Equity Market Value $80,571
Net Debt ($9,000) (1)
-------
Enterprise Value: $71,571
</TABLE>
<TABLE>
<CAPTION>
Actual Pro Forma (2) Projected
FYE 2/28/99 FYE 2/28/99 FYE 2/29/00
----------- ----------- -----------
Chargeback Amount(3) Multiple Amount(3) Multiple Amount(3)(4) Multiple
- ---------- --------- -------- --------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues (5) $55,690 1.3x $51,634 1.4x $59,540 1.2x
EBITDA (5) $10,102 7.1x $10,301 6.9x $10,193 7.0x
EBIT (5) $ 6,284 11.4x $ 6,499 11.0x $ 5,860 12.2x
EBITDA - Capex (5) $ 3,988 17.9x $ 5,701 12.6x $ 5,493 13.0x
Net Income (6) $ 4,913 16.4x $ 4,500 17.9x $ 4,055 19.9x
</TABLE>
- ----------
(1) Estimated cash balance as of May 31, 1999. Source: Company Management.
(2) Pro Forma figures exclude ECS operations and gain on sale of ECS
division. Pro forma capital expenditures reduced to $4.6 million from
actual $6.1 million to remove effect of non-recurring items.
(3) Source: Form 10-K.
(4) Includes $900,000 of personnel-related and public company costs (the
"Cost Savings") which were previously eliminated in the
post-transaction budget prepared by management in connection with the
transaction announced in February.
(5) Enterprise value multiples.
(6) Equity value multiple.
11
<PAGE> 12
Project Chargeback
II. Marketing Process
<PAGE> 13
Project Chargeback
Chronology of Events (1)
<TABLE>
<CAPTION>
Marketing Activity Time Period
------------------ -----------
<S> <C>
Preparation of Marketing Materials July - September 1998
Discussions with Strategic and Financial Buyers September - November
Preliminary Indications of Interest Due (9 received) November 12
Detailed Management Presentations to Six Bidders December 9 - 11
Second Round Indications of Interest Due (3 received) December 22
Finalist Due Diligence January 11 - February 8, 1999
Final Bids Due (3 received) February 8
Negotiations with Bedrock February 9 - 16
Recapitalization Agreement Signed February 17
</TABLE>
(1) Reflects events leading up to February 17(th) Recapitalization
Agreement and Plan of Merger (the "February 17(th) Agreement").
13
<PAGE> 14
Project Chargeback
Review of the Marketing Process
<TABLE>
<CAPTION>
Received Submitted Initial Submitted Revised
Number Selling Indication of Indication of Submitted
Contacted Memo Interest Interest Final Bid
--------- ---- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Strategic Buyers 13 3 0 0 0
Financial Buyers 29 24 9 3 3
</TABLE>
14
<PAGE> 15
Project Chargeback
Summary of Indications Received (1)
<TABLE>
<CAPTION>
Preliminary Value Revised Value Final Value
Bidder Indication Indication Indication
------ ---------- ---------- ----------
<S> <C> <C> <C>
Bedrock $22.00 - $24.00 $23.50 - $24.50 $24.75(2)
Bidder #2 $22.00 - $25.00 $25.00 - $26.00 $24.00
Bidder #3 $21.50 - $24.40 $23.00 - $24.00 $23.50
Bidder #4 $21.00 - $23.50
Bidder #5 $21.00 - $23.00
Bidder #6 $20.00 - $23.00
Bidder #7 $20.00 - $21.00
Bidder #8 $20.00
Bidder #9 $20.00
</TABLE>
(1) Reflects indications of value received in auction process which
culminated in the February 17(th) Agreement. Such indications were
based upon financial projections which have since been revised.
(2) Subsequently raised to $25.25.
15
<PAGE> 16
Project chargeback
III. Company Overview
<PAGE> 17
Project Chargeback
Chargeback Price Volume Chart
[Chargeback Price Volume Chart Graphic]
Daily Prices: June 2, 1998 to June 1, 1999
Source: IDD Information Services/Tradeline
17
<PAGE> 18
Project Chargeback
Chargeback Trading Volume
Percent of Total Volume Traded at Specified Prices
February 16, 1998 to February 16, 1999
[Bar Chart]
DAILY CLOSING PRICE
Graph shows aggregate trading volume of 1,324,600 cumulative shares, which
represents 37% of the 3,539,600 shares outstanding as reported on 4/23/99.
Source: IDD Information Services/Tradeline
18
<PAGE> 19
Project Chargeback
Chargeback Trading Volume
Percent of Total Volume Traded at Specified Prices
February 17, 1999 to June 1, 1999
[Bar Chart]
DAILY CLOSING PRICE
Graph shows 788,800 cumulative shares, 22% of the 3,539,600 shares outstanding
as reported on 6/01/99.
Source: IDD Information Services/Tradeline
19
<PAGE> 20
Project Chargeback
Chargeback vs. Nasdaq Composite Index
(Based on Closing Prices for last 5 years)
[Chargeback Chart]
Daily: February 16, 1994 to February 16, 1999
Source: IDD Information Services/Tradeline
20
<PAGE> 21
Project Chargeback
Chargeback vs. Various Indices
[Chargeback Chart]
Source: IDD Information Services/Tradeline
21
<PAGE> 22
Project Chargeback
Ownership Summary
Chargeback Affiliates
---------------------
<TABLE>
<CAPTION>
Common % of
Beneficial Owner Stock Owned (1) Outstanding
- ---------------- --------------- -----------
<S> <C> <C>
John T. Kane 652,750 18.4%
George P. Wilson
Wilson Family Partnership 116,414 3.3%
Kane Family Trust 35,200 *
Owned Outright 372,500 10.5%
--------- ----
Total 1,176,864 33.2%
Cid Yousefi 9,400 *
John P. Jones 5,400 *
Chris Rickborn 1,500 *
Steve Smith 2,500 *
Patrick J. Raftery 1,800 *
Scott Modist 200 *
--------- ----
Senior Management 1,197,664 33.8%
--------- ----
James F. Courbier 8,000 0.2%
Marc M. Watson 3,000 0.1%
Peter Marx 1,000 0.0%
--------- ----
Outside Board Members 12,000 0.3%
--------- ----
Total Employees and Board Members 1,209,664 34.2%
========= ====
</TABLE>
Chargeback Institutional Investors
----------------------------------
<TABLE>
<CAPTION>
Common % of
Beneficial Owner Stock Owned (2) Outstanding
- ---------------- --------------- -----------
<S> <C> <C>
SafeCo Asset Management Company(3) 383,000 10.8%
FMR Corporation 353,000 10.0%
Laifer Capital Management, Inc. 152,000 4.3%
Dimensional Fund Advisors Inc 113,000 3.2%
Barclays Bank PLC 73,000 2.1%
Scudder Kemper Investments, Inc. 26,000 *
Mellon Bank Corporation 14,000 *
Rosenberg Institutional Equity Management 12,000 *
Donaldson, Lufkin & Jenrette, Inc 1,000 *
Bankers Trust Company 1,000 *
--------- ----
Total Institutional Holdings 1,128,000 31.9%
========= ====
Ownership Summary
- -----------------
Total Employees and Board Members 1,209,664 34.2%
Total Institutional Holdings 1,128,000 31.9%
Retail Float 1,201,936 34.0%
--------- ----
Total Shares Outstanding (4) 3,539,600 100.0%
========= ====
</TABLE>
- ----------
* Less than 0.1%.
(1) Source: Ownership numbers provided by the Company. Excludes outstanding
options.
(2) Source: Vickers database as of June 2, 1999
(3) Source: Schedule 13G filed March 31, 1999.
(4) Source: Company management.
22
<PAGE> 23
Project Chargeback
Historical and Projected Consolidated Income Statements
(000's, except per share data)
<TABLE>
<CAPTION>
1999 Quarterly Summary
-----------------------------------------------------------
1998 Q1A Q2A Q3A Q4A
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Sales $ 22,528 $ 5,988 $ 7,552 $ 6,913 $ 6,265
Total Service, Support & Rental 27,256 7,270 7,472 7,517 6,712
-------- -------- -------- -------- --------
Total Revenues $ 49,784 $ 13,258 $ 15,025 $ 14,430 $ 12,977
Expenses
Cost of Revenues $ 20,553 $ 5,287 $ 6,796 $ 5,955 $ 5,516
Product Development 2,982 762 711 731 841
Selling Expenses 7,153 1,907 2,003 1,870 1,740
General & Administrative 14,609 3,929 3,894 4,195 3,270
-------- -------- -------- -------- --------
Total Expenses $ 45,297 $ 11,885 $ 13,404 $ 12,750 $ 11,367
Operating Income $ 4,487 $ 1,373 $ 1,621 $ 1,680 $ 1,610
======== ======== ======== ======== ========
Growth Rate 20.3%
Margin 9.0% 10.4% 10.8% 11.6% 12.4%
Depreciation $ 2,688 $ 688 $ 645 $ 761 $ 969
Amortization 1,160 249 171 177 158
-------- -------- -------- -------- --------
EBITDA $ 8,335 $ 2,310 $ 2,437 $ 2,618 $ 2,737
======== ======== ======== ======== ========
Depreciation $ 2,688 $ 688 $ 645 $ 761 $ 969
Amortization 1,160 249 171 177 158
-------- -------- -------- -------- --------
EBIT $ 4,487 $ 1,373 $ 1,621 $ 1,680 $ 1,610
======== ======== ======== ======== ========
Interest Income/(Expense) 616 188 190 185 197
Gain on Asset Disposition 830
Income before Income Taxes 5,102 1,561 1,811 2,695 1,807
Income Taxes (1,944) (593) (688) (1,011) (669)
-------- -------- -------- -------- --------
Net Income $ 3,158 $ 968 $ 1,123 $ 1,684 $ 1,137
======== ======== ======== ======== ========
Growth Rate 21%
Earnings per Share:
Basic $ 0.91 $ 0.28 $ 0.32 $ 0.48 $ 0.32
Diluted $ 0.85 $ 0.25 $ 0.29 $ 0.45 $ 0.30
<CAPTION>
For The Year Ended February 28,
----------------------------------------------------------------------------
Forecasted
-----------------------------------------------------------
1999A 2000(1) 2001 2002 2003
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Sales $ 26,718 $ 31,349 $ 38,841 $ 44,356 $ 49,019
Total Service, Support & Rental 28,972 28,192 30,090 32,111 34,182
-------- -------- -------- -------- --------
Total Revenues $ 55,690 $ 59,540 $ 68,931 $ 76,467 $ 83,202
Expenses
Cost of Revenues $ 23,554 $ 24,009 $ 26,597 $ 28,861 $ 30,318
Product Development 3,044 3,377 3,675 3,975 4,275
Selling Expenses 7,520 8,745 9,416 9,981 10,619
General & Administrative 15,288 17,549 18,531 19,419 20,244
-------- -------- -------- -------- --------
Total Expenses $ 49,406 $ 53,680 $ 58,218 $ 62,237 $ 65,456
Operating Income $ 6,284 $ 5,860 $ 10,713 $ 14,230 $ 17,746
======== ======== ======== ======== ========
Growth Rate 40.1% -6.7% 82.8% 32.8% 24.7%
Margin 11.3% 9.8% 15.5% 18.6% 21.3%
Depreciation $ 3,063 $ 3,679 $ 4,066 $ 4,316 $ 4,416
Amortization 755 654 593 551 339
-------- -------- -------- -------- --------
EBITDA $ 10,102 $ 10,193 $ 15,372 $ 19,097 $ 22,501
======== ======== ======== ======== ========
Depreciation $ 3,063 $ 3,679 $ 4,066 $ 4,316 $ 4,416
Amortization 755 654 593 551 339
-------- -------- -------- -------- --------
EBIT $ 6,284 $ 5,860 $ 10,713 $ 14,230 $ 17,746
======== ======== ======== ======== ========
Interest Income/(Expense) 760 680 856 1,195 1,706
Gain on Asset Disposition 830
Income before Income Taxes 7,874 6,541 11,569 15,425 19,452
Income Taxes (2,961) (2,486) (4,396) (5,861) (7,392)
-------- -------- -------- -------- --------
Net Income $ 4,913 $ 4,055 $ 7,173 $ 9,563 $ 12,060
======== ======== ======== ======== ========
Growth Rate 56% -17% 77% 33% 26%
Earnings per Share:
Basic $ 1.39 $ 1.15 $ 2.03 $ 2.70 $ 3.41
Diluted $ 1.29 $ 1.06 $ 1.87 $ 2.49 $ 3.14
</TABLE>
Source: Historical data from SEC filings. Forecasted data from management
estimates, after reversing effect of the Cost Savings.
(1) Fiscal Year 2000 ends on February 29.
23
<PAGE> 24
Project Chargeback
Historical and Projected Consolidated Balance Sheets
(000's, except per share data)
<TABLE>
<CAPTION>
1999 Quarterly Summary
--------------------------------------------------------
1998 Q1A Q2A Q3A Q4A
---- --- --- --- ---
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 5,819 $ 4,993 $ 2,473 $ 2,701 $ 964
Short Term Investment Securities 5,208 6,770 6,121 6,600 7,383
Accounts Receivable 8,178 8,243 9,454 10,864 10,600
Inventories 2,465 3,694 3,940 3,530 3,946
Deferred Income Taxes 234 832 1,014 1,130 1,166
Other Current Assets 444 379 409 388 415
-------- -------- -------- -------- --------
Total Current Assets 22,348 24,911 23,411 25,213 24,474
NON-CURRENT ASSETS
Investment Securities 2,497 2,490 3,905 3,687 2,772
Property Plant & Equipment 6,418 6,647 7,306 8,009 9,302
Intangible Assets, Net 3,111 2,862 2,654 2,468 2,312
Deferred Income Taxes 556 648 623 637 562
Other Assets 184 187 203 238 321
-------- -------- -------- -------- --------
Total Non-Current Assets 12,766 12,834 14,691 15,039 15,269
TOTAL ASSETS: 35,114 37,745 38,102 40,252 39,743
======== ======== ======== ======== ========
LIABILITIES
Accounts Payable 1,720 1,999 2,255 1,426 2,084
Accrued Expenses 3,878 4,880 4,714 6,179 3,673
Unearned Income 1,337 1,213 979 781 925
Deferred Income Taxes -- -- -- -- --
-------- -------- -------- -------- --------
Total Liabilities 6,935 8,092 7,948 8,386 6,682
OWNERS' EQUITY
Common Stock and Addt'l Paid in Capital 11,529 12,090 12,559 12,730 12,786
Retained Earnings 18,830 19,798 20,921 22,605 23,743
Cumulative Translation Adjustment (45) (48) (153) (92) (91)
Unrealized Gain on Investment Securities, Net 52 -- -- -- --
Treasury Stock (2,187) (2,187) (3,173) (3,377) (3,377)
-------- -------- -------- -------- --------
Total Owners' Equity 28,179 29,653 30,154 31,866 33,061
TOTAL LIABILITIES & EQUITY: 35,114 37,745 38,102 40,252 39,743
======== ======== ======== ======== ========
<CAPTION>
For The Year Ended February 28,
----------------------------------------------------------------------------
Forecasted
----------------------------------------------------
1999A 2000(1) 2001 2002 2003
----- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 11,119 $ 12,966 $ 17,333 $ 24,961 $ 35,420
Short Term Investment Securities -- -- -- -- --
Accounts Receivable 10,600 12,316 14,258 15,817 17,210
Inventories 3,946 4,601 5,502 6,187 6,501
Deferred Income Taxes 1,166 1,202 2,126 2,835 3,575
Other Current Assets 415 1,054 1,220 1,353 1,473
-------- -------- -------- -------- --------
Total Current Assets 27,246 32,138 40,440 51,154 64,179
NON-CURRENT ASSETS
Investment Securities -- -- -- -- --
Property Plant & Equipment 9,302 10,323 10,856 11,140 11,324
Intangible Assets, Net 2,312 1,658 1,066 515 176
Deferred Income Taxes 562 588 1,040 1,387 1,749
Other Assets 321 369 427 474 516
-------- -------- -------- -------- --------
Total Non-Current Assets 12,497 12,938 13,389 13,516 13,765
TOTAL ASSETS: 39,743 45,076 53,829 64,670 77,943
======== ======== ======== ======== ========
LIABILITIES
Accounts Payable 2,084 1,267 1,374 1,469 1,545
Accrued Expenses 3,673 5,368 5,822 6,224 6,546
Unearned Income 925 981 1,735 2,314 2,918
Deferred Income Taxes -- 344 609 811 1,023
-------- -------- -------- -------- --------
Total Liabilities 6,682 7,960 9,540 10,818 12,031
OWNERS' EQUITY
Common Stock and Addt'l Paid in Capital 12,786 12,786 12,786 12,786 12,786
Retained Earnings 23,743 27,798 34,971 44,534 56,594
Cumulative Translation Adjustment (91) (91) (91) (91) (91)
Unrealized Gain on Investment Securities, Net -- -- -- -- --
Treasury Stock (3,377) (3,377) (3,377) (3,377) (3,377)
-------- -------- -------- -------- --------
Total Owners' Equity 33,061 37,117 44,289 53,853 65,913
TOTAL LIABILITIES & EQUITY: 39,743 45,076 53,829 64,670 77,943
======== ======== ======== ======== ========
</TABLE>
Source: Historical data from SEC filings. Forecasted data from management
estimates.
(1) Fiscal Year 2000 ends on February 29.
24
<PAGE> 25
Project Chargeback
Financial Update
Quarter Ended February 28, 1999
(000's, except per share data)
<TABLE>
<CAPTION>
Previous
Projection(1) Actual Difference
------------- ------ ----------
<S> <C> <C> <C> <C>
Revenue $13,278 $12,977 $ (301) (2.3%)
EBITDA 2,943 2,737 (206) (7.0%)
EBIT 1,998 1,610 (388) (19.4%)
Net Income 1,359 1,137 (222) (16.3%)
Diluted EPS 0.36 0.30 (0.06) (17.4%)
Capex 1,515 2,262 747 49.3%
EBITDA - Capex 1,428 475 (953) (66.7%)
D&A 945 1,127 182 19.3%
</TABLE>
Source: Financial information from management.
(1) Management projections provided to Bedrock prior to signing the
February 17th Agreement.
25
<PAGE> 26
Project Chargeback
Financial Update
Fiscal Year 1999 Pro Forma (1)
(000's, except per share data)
<TABLE>
<CAPTION>
Previous
Projection(2) Actual Difference
------------- ------ ----------
<S> <C> <C> <C> <C>
Revenue $51,935 $51,634 $ (301) (0.6%)
EBITDA 10,507 10,301 (206) (2.0%)
EBIT 6,887 6,499 (388) (5.6%)
Net Income 4,739 4,500 (239) (5.0%)
Diluted EPS 1.24 1.17 (0.07) (5.3%)
Capex 5,250 6,114 864 16.5%
EBITDA - Capex 5,257 4,187 (1,070) (20.3%)
D&A 3,620 3,803 183 5.0%
</TABLE>
Source: Financial information from management estimates.
(1) Pro Forma figures exclude ECS operations and gain on sale of ECS
division.
(2) Management projections provided to Bedrock prior to signing the
February 17th Agreement.
26
<PAGE> 27
Project Chargeback
Financial Update
Fiscal Year 2000
(000's, except per share data)
<TABLE>
<CAPTION>
Previous Current
Projection(1) Projection Difference
------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $64,054 $59,540 (4,514) (7.0%)
EBITDA 15,511 10,193 (5,318) (34.3%)
EBIT 11,246 5,860 (5,386) (47.9%)
Net Income 7,606 4,055 (3,551) (46.7%)
Diluted EPS 1.99 1.06 (0.93) (46.8%)
Capex 4,000 4,700 700 17.5%
EBITDA - Capex 11,511 5,493 (6,018) (52.3%)
D&A 4,265 4,333 68 1.6%
</TABLE>
(1) Management projections provided to Bedrock prior to signing the
February 17th Agreement, revised to add back the Cost Savings which
had been anticipated in management's post-transaction budget.
27
<PAGE> 28
Project Chargeback
FINANCIAL
UPDATE
COMPARISON OF PROPOSED TRANSACTION TO FEBRUARY 17TH TRANSACTION
(000's, except per share data)
<TABLE>
<CAPTION>
February 17th Proposed
Transaction Transaction Difference
----------- ----------- ----------
<S> <C> <C> <C>
Purchase Price $ 25.25 $ 21.00 -16.8%
Shares Outstanding 3,899 3,837
Equity Value 98,449 80,571 -18.2%
Expected Cash at Closing (14,000) (9,500) -32.1%
Enterprise Value 84,449 71,071 -15.8%
February 17th Proposed
Valuation Multiples Transaction(1) Transaction(2)
-------------- --------------
Enterprise Value to:
Fiscal 1999 EBITDA 8.0x 6.9x
Fiscal 2000 EBITDA 5.4x 7.0x
Fiscal 1999 EBIT 12.3x 10.9x
Fiscal 2000 EBIT 7.5x 12.1x
Fiscal 1999 EBITDA - Cap Ex 19.2x 17.0x
Fiscal 2000 EBITDA - Cap Ex 7.3x 12.9x
Equity Value to:
Fiscal 1999 Net Income 20.8x 17.9x
Fiscal 2000 Net Income 12.9x 19.9x
</TABLE>
(1) Valuation multiples relate to financial results and projections
provided to Bedrock prior to the February 17th Agreement.
(2) Valuation multiples relate to revised financial results and
projections provided to Bedrock subsequent to the February 17th
Agreement.
28
<PAGE> 29
Project Chargeback
FINANCIAL
UPDATE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 28,
ACTUAL FORECASTED
1999 (1) 2000 2001 2002 2003
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue
Previous Projection $ 51,935 $ 64,054 $ 77,036 $ 86,684 $ 96,668
Current Estimate 51,634 59,540 68,931 76,467 83,202
-------- -------- -------- -------- --------
Difference $ 301 $ 4,514 $ 8,105 $ 10,217 $ 13,466
% Revision (0.6%) (7.0%) (10.5%) (11.8%) (13.9%)
EBITDA
Previous Projection(2) $ 10,507 $ 15,511 $ 22,119 $ 27,341 $ 32,721
Current Estimate 10,301 10,193 15,372 19,097 22,502
-------- -------- -------- -------- --------
Difference $ 206 $ 5,318 $ 6,747 $ 8,244 $ 10,219
% Revision (2.0%) (34.3%) (30.5%) (30.2%) (31.2%)
EBIT
Previous Projection(2) $ 6,887 $ 11,246 $ 17,944 $ 23,243 $ 28,740
Current Estimate 6,499 5,860 10,713 14,230 17,746
-------- -------- -------- -------- --------
Difference $ 388 $ 5,386 $ 7,231 $ 9,013 $ 10,994
% Revision (5.6%) (47.9%) (40.3%) (38.8%) (38.3%)
Net Income
Previous Projection(2) $ 4,739 $ 7,606 $ 12,040 $ 15,762 $ 19,746
Current Estimate 4,500 4,055 7,173 9,563 12,060
-------- -------- -------- -------- --------
Difference $ 239 $ 3,551 $ 4,867 $ 6,199 $ 7,686
% Revision (5.0%) (46.7%) (40.4%) (39.3%) (38.9%)
EBITDA - CAPEX
Previous Projection(2) $ 5,257 $ 11,511 $ 18,369 $ 23,591 $ 28,971
Current Estimate 4,187 5,493 10,772 14,497 17,902
-------- -------- -------- -------- --------
Difference $ 1,070 $ 6,018 $ 7,597 $ 9,094 $ 11,069
% Revision (20.3%) (52.3%) (41.4%) (38.6%) (38.2%)
</TABLE>
(1) Fiscal year 1999 figures exclude ECS operations and gain on sale
of ECS division.
(2) Management projections provided to Bedrock prior to signing the
February 17th Agreement, revised to add back the Cost Savings
which had been anticipated in management's post-transaction
budget.
29
<PAGE> 30
Project chargeback
IV. VALUATION SUMMARY
<PAGE> 31
Project Chargeback
COMPOSITE VALUATION SUMMARY
[GRAPHIC]
Data represents the mean of the low, median and high values derived
from each valuation methodology.
31
<PAGE> 32
Project Chargeback
SUMMARY OF IMPLIED PRICES OF ALL VALUATION METHODOLOGIES
OFFER PRICE $ 21.00
<TABLE>
<CAPTION>
HIGH MEDIAN MEAN LOW
<S> <C> <C> <C> <C>
DISCOUNTED CASH FLOWS $ 27.15 $ 21.87 $ 21.99 $ 17.57
COMPARABLE COMPANY MULTIPLES
LTM Revenue $ 38.46 $ 19.60 $ 21.40 $ 10.54
LTM EBITDA 49.61 20.38 24.09 11.12
LTM EBIT 45.54 22.94 24.97 9.26
LTM EBITDA - Capex (1) 39.77 18.72 20.77 7.93
LTM Net Income 28.41 17.91 18.55 11.13
1999 EPS 34.05 16.31 18.44 9.96
2000 EPS 33.49 23.53 24.53 16.40
--------- --------- --------- ---------
Mean $ 38.48 $ 19.91 $ 21.82 $ 10.91
COMPARABLE TRANSACTION MULTIPLES
LTM Revenue $ 49.29 $ 24.80 $ 27.86 $ 14.54
LTM EBITDA 34.31 27.44 27.84 18.82
LTM EBIT 35.86 23.73 24.68 15.76
LTM EBITDA - Capex (1) 33.53 22.41 23.68 12.84
LTM Net Income 34.94 19.99 21.65 14.29
--------- --------- --------- ---------
Mean $ 37.59 $ 23.67 $ 25.14 $ 15.25
</TABLE>
(1) For purposes of this analysis, the Company's LTM capital
expenditures have been reduced from $6.1 million (actual) to $4.6
million to remove the impact of non-recurring items.
32
<PAGE> 33
Project chargeback
A. DISCOUNTED CASH FLOW ANALYSIS
<PAGE> 34
Project Chargeback
EXISTING VS. NEW PRODUCT CONTRIBUTION ANALYSIS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FEBRUARY 28,
FORECASTED
------------------------------------------------------------------------ 1999-2003
1999 2000 2001 2002 2003 CAGR
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $51,634 $59,540 $68,931 $76,467 $83,202 12.7%
======= ======= ======= ======= =======
Existing Products 50,214 55,146 58,634 61,625 64,565 6.5%
% change 9.8% 6.3% 5.1% 4.8%
New Products (1) 1,419 4,395 10,297 14,842 18,637 90.4%
% change 209.6% 134.3% 44.1% 25.6%
Gross Profit $31,224 $35,531 $42,334 $47,605 $52,884 14.1%
======= ======= ======= ======= =======
Existing Products 30,564 32,325 34,780 36,703 38,659 6.1%
% change 5.8% 7.6% 5.5% 5.3%
New Products (1) 659 3,206 7,555 10,902 14,224 115.5%
% change 386.2% 135.7% 44.3% 30.5%
Corporate G&A and Product
Development Expenses (2) $17,669 $20,926 $22,206 $23,394 $24,519 8.5%
======= ======= ======= ======= =======
Existing Products 17,669 19,237 20,328 21,233 22,112 5.8%
% change 8.9% 5.7% 4.5% 4.1%
New Products (1) -- 1,689 1,878 2,162 2,407 N/A
% change 11.2% 15.1% 11.3%
EBITDA $10,301 $10,193 $15,372 $19,097 $22,502 21.6%
======= ======= ======= ======= =======
Existing Products 10,253 9,899 11,491 12,814 13,567 7.3%
% change -3.5% 16.1% 11.5% 5.9%
New Products (1) 48 294 3,882 6,282 8,935 269.4%
% change N/M N/M 61.8% 42.2%
</TABLE>
Source: Management projections.
(1) New products consist of Telemetrac, Expense Management, and
Printlog.
(2) 50% of corporate-wide product development allocated to new
products. G&A expense allocated such that G&A growth in excess of
3% annually (from FY2000 base) is allocated to new products.
34
<PAGE> 35
Project Chargeback
EXISTING PRODUCTS
PROJECTED UNLEVERED FREE CASH FLOWS
<TABLE>
<CAPTION>
(000'S) FISCAL YEARS ENDED FEBRUARY 28,
2000 (1) 2001 2002 2003
-------- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA 9,899 11,491 12,814 13,567
Less: Depreciation & Amortization (4,333) (4,659) (4,867) (4,755)
------ ------ ------ ------
OPERATING INCOME (EBIT) 5,566 6,831 7,948 8,812
Less: Income Taxes @ 38.0% (2,115) (2,596) (3,020) (3,348)
------ ------ ------ ------
Tax-Adjusted Operating Income 3,451 4,236 4,928 5,463
Plus: Depreciation & Amortization 4,333 4,659 4,867 4,755
Less: Capital Expenditures (4,700) (4,600) (4,600) (4,600)
------ ------ ------ ------
Cash Flow before Changes to Working Capital 3,084 4,295 5,194 5,619
(Increase)/Decrease in Working Capital(2) (1,124) (2,170) (1,882) (1,561)
FREE CASH FLOW $ 1,960 $ 2,125 $ 3,313 $ 4,058
</TABLE>
Source: Management projections.
(1) Fiscal Year 2000 ends February 29.
(2) Allocated between new and existing products based on respective revenue
contribution.
35
<PAGE> 36
Project Chargeback
EXISTING PRODUCTS
DISCOUNTED CASH FLOW IMPLIED VALUATION
<TABLE>
<CAPTION>
(000's, except per share data) FISCAL YEARS ENDED FEBRUARY 28,
2000(1) 2001 2002 2003
------- ---- ---- ----
<S> <C> <C> <C> <C>
FREE CASH FLOW $ 1,960 $ 2,125 $3,313 $4,058
Present Value of Free Cash Flow Discounted at 12.4% (2) $ 8,801
Projected 2003 EBITDA $13,567
Terminal Value at EBITDA Exit Multiple of 5.7x 77,332
Present Value of Terminal Value Discounted at 12.4% (2) 48,450
plus: Cash (3) 9,000
-------
AGGREGATE PRESENT VALUE OF EQUITY $66,251
Diluted Shares Outstanding 3,837
AGGREGATE PRESENT VALUE OF EQUITY PER SHARE $ 17.27
</TABLE>
AGGREGATE PRESENT VALUE OF EQUITY
<TABLE>
<CAPTION>
Discount Rate
13.9% 12.4% 10.9%
<S> <C> <C> <C> <C>
EBITDA 4.7x $55,437 $57,751 $60,219
Exit 5.7x $63,498 $66,251 $69,189
Multiple 6.7x $71,559 $74,751 $78,158
</TABLE>
AGGREGATE PRESENT VALUE OF EQUITY PER SHARE
<TABLE>
<CAPTION>
Discount Rate
13.9% 12.4% 10.9%
<S> <C> <C> <C> <C>
EBITDA 4.7x $14.45 $15.05 $15.70
Exit 5.7x $16.55 $17.27 $18.03
Multiple 6.7x $18.65 $19.48 $20.37
</TABLE>
(1) Fiscal Year 2000 ends February 29.
(2) Free cash flow discounted using the half year convention.
(3) Based on the year ended 2/28/99.
36
<PAGE> 37
Project Chargeback
NEW PRODUCTS
PROJECTED UNLEVERED FREE CASH FLOWS
<TABLE>
<CAPTION>
(000'S) FISCAL YEARS ENDED FEBRUARY 28,
2000 (1) 2001 2002 2003
-------- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA 294 3,882 6,282 8,935
Less: Depreciation & Amortization - - - -
---- ------ ------ ------
OPERATING INCOME (EBIT) 294 3,882 6,282 8,935
Less: Income Taxes @ 38.0% (112) (1,475) (2,387) (3,395)
---- ------ ------ ------
Tax-Adjusted Operating Income 182 2,407 3,895 5,539
Plus: Depreciation & Amortization - - - -
Less: Capital Expenditures - - - -
---- ------ ------ ------
Cash Flow before Changes to Working Capital 182 2,407 3,895 5,539
(Increase)/Decrease in Working Capital(2) (90) (381) (453) (450)
FREE CASH FLOW $ 93 $ 2,026 $ 3,442 $ 5,089
</TABLE>
Source: Management projections.
(1) Fiscal Year 2000 ends February 29.
(2) Allocated between new and existing products based on respective
revenue contribution.
37
<PAGE> 38
Project Chargeback
NEW PRODUCTS
DISCOUNTED CASH FLOW IMPLIED VALUATION
<TABLE>
<CAPTION>
(000's, except per share data) FISCAL YEARS ENDED FEBRUARY 28,
2000 (1) 2001 2002 2003
-------- ---- ---- ----
<S> <C> <C> <C> <C>
FREE CASH FLOW $ 93 $ 2,026 $3,442 $5,089
Present Value of Free Cash Flow Discounted at 60.0%(2) $ 3,119
Projected 2003 EBITDA $ 8,935
Terminal Value at EBITDA Exit Multiple of 10.7x 95,243
Present Value of Terminal Value Discounted at 60.0%(2) 14,533
plus: Cash (3) -
-------
Aggregate Present Value of Equity $17,652
Diluted Shares Outstanding 3,837
Aggregate Present Value of Equity Per Share $ 4.60
</TABLE>
AGGREGATE PRESENT VALUE OF EQUITY
<TABLE>
<CAPTION>
Discount Rate
70.0% 60.0% 50.0%
<S> <C> <C> <C> <C>
EBITDA 8.7x $11,957 $14,926 $18,942
Exit 10.7x $14,096 $17,652 $22,472
Multiple 12.7x $16,236 $20,379 $26,002
</TABLE>
AGGREGATE PRESENT VALUE OF EQUITY PER SHARE
<TABLE>
<CAPTION>
Discount Rate
70.0% 60.0% 50.0%
<S> <C> <C> <C> <C>
EBITDA 8.7x $3.12 $3.89 $4.94
Exit 10.7x $3.67 $4.60 $5.86
Multiple 12.7x $4.23 $5.31 $6.78
</TABLE>
Source: Management projections..
(1) Fiscal Year 2000 ends February 29.
(2) Free cash flow discounted using the half year convention.
(3) Based on the year ended 2/28/99.
38
<PAGE> 39
Project Chargeback
================================================================================
EXISTING AND NEW PRODUCTS
COMPOSITE DISCOUNTED CASH FLOW IMPLIED VALUATION
AGGREGATE PRESENT VALUE OF EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Existing Products Discount Rate 13.9% 12.4% 10.9%
New Products Discount Rate 70.0% 60.0% 50.0%
- --------------------------------------------------------------------------------------------------------------------
New 8.7x $ 67,394 $ 72,676 $ 79,162 4.7x Existing
Products 10.7x $ 77,595 $ 83,903 $ 91,661 5.7x Products
Multiple 12.7x $ 87,795 $ 95,130 $ 104,160 6.7x Multiple
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE PRESENT VALUE OF EQUITY PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Existing Products Discount Rate 13.9% 12.4% 10.9%
New Products Discount Rate 70.0% 60.0% 50.0%
- --------------------------------------------------------------------------------------------------------------------
New 8.7x $ 17.57 $ 18.94 $ 20.63 4.7x Existing
Products 10.7x $ 20.22 $ 21.87 $ 23.89 5.7x Products
Multiple 12.7x $ 22.88 $ 24.79 $ 27.15 6.7x Multiple
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRESENT VALUE PRESENT VALUE OF
OF EQUITY EQUITY PER SHARE
- --------------------------------------------------------
<S> <C> <C>
High $ 104,160 $ 27.15
Median $ 83,903 $ 21.87
Mean $ 84,386 $ 21.99
Low $ 67,394 $ 17.57
- --------------------------------------------------------
</TABLE>
39
<PAGE> 40
Project chargeback
================================================================================
----------------------------------------
D.COMPARABLE COMPANY
ANALYSIS
----------------------------------------
<PAGE> 41
Project Chargeback
================================================================================
COMPARABLE COMPANY SUMMARY VALUATION
[GRAPHIC]
41
<PAGE> 42
Project Chargeback
================================================================================
COMPARABLE COMPANY SUMMARY VALUATION MATRIX
(000's, except per share data)
OFFER PRICE $21.00
<TABLE>
<CAPTION>
ENTERPRISE VALUE / EQUITY VALUE /
----------------------------------------------- ---------------------------------
LTM LTM
LTM LTM LTM EBITDA - Net CY1999E CY2000E
Revenue EBITDA EBIT Capex Income EPS EPS
------- ------ ---- ----- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHARGEBACK OPERATING PARAMETERS(1) $51,634(2) $10,301(2) $6,499(2) $5,701(2)(3) $4,500(2) $ 1.06(4) $ 1.87(4)
- -----------------------------------------------------------------------------------------------------------------------------------
COMPARABLE COMPANIES VALUATION
MULTIPLES
High 2.7x 17.6x 25.5x 25.2x 24.2x 32.2x 17.9x
Median 1.3x 6.7x 12.2x 11.0x 15.3x 15.4x 12.6x
Mean 1.4x 8.1x 13.4x 12.4x 15.8x 17.4x 13.1x
Low 0.6x 3.3x 4.1x 3.8x 9.5x 9.4x 8.8x
- -----------------------------------------------------------------------------------------------------------------------------------
PLUS: CASH (5) $ 9,000 $ 9,000 $ 9,000 $9,000
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED SHARES OUTSTANDING(6) 3,837 3,837 3,837 3,837 3,837
- -----------------------------------------------------------------------------------------------------------------------------------
IMPLIED EQUITY VALUE PER SHARE MEAN
High $ 38.46 $ 49.61 $ 45.54 $ 39.77 $ 28.41 $34.05 $33.49 $38.48
Median 19.60 20.38 22.94 18.72 17.91 16.31 23.53 19.91
Mean 21.40 24.09 24.97 20.77 18.55 18.44 24.53 21.82
Low 10.54 11.12 9.26 7.93 11.13 9.96 16.40 10.91
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Parameters exclude ECS figures.
(2) Chargeback financial information for the latest twelve months is for the
year ended 2/28/99.
(3) Chargeback LTM capital expenditures reduced from $6.1 million (actual) to
$4.6 million to remove impact of non-recurring items.
(4) Chargeback financial projections for CY1999 and CY2000 are for the fiscal
years ended 2/29/00 and 2/28/01, respectively.
(5) Estimated cash balance as of May 31, 1999. Source: Company Management.
(6) Calculated using the treasury stock method and an offer price of $21.00.
42
<PAGE> 43
Project Chargeback
- --------------------------------------------------------------------------------
COMPARABLE COMPANY SUMMARY VALUATION MATRIX
<TABLE>
<CAPTION>
Market Values (1) Three-Year Growth
----------------------------------- EBITDA -----------------
(000's, except per share data) Ticker Per Share Equity Enterprise Margin Revenue EBITDA
GROUP A (EXISTING BUSINESS LINES)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. BILL $12.50 $ 472,253 $ 454,462 26.6% 25.7% 26.5%
Checkpoint Systems, Inc. CKP $ 9.13 $ 277,620 $ 403,853 15.2% 21.0% 19.5%
Coinmach Laundry Corp. WDRY $12.25 $ 155,417 $ 816,393 32.5% 41.4% 47.6%
GTECH Holdings Corp. GTK $24.69 $ 929,355 $1,242,660 36.6% 9.3% 9.2%
Kofax Image Products, Inc. KOFX $ 8.88 $ 47,877 $ 22,559 18.6% 16.5% 18.9%
Mac-Gray Corp. TUC $ 8.94 $ 112,857 $ 188,567 21.0% 27.4% 34.0%
PSC Inc. PSCX $10.00 $ 133,996 $ 218,520 18.4% 35.4% 54.3%
Sensormatic Electronics Corp. SRM $13.38 $1,183,798 $1,554,798 13.0% 3.5% (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
HIGH 36.6% 41.4% 54.3%
MEDIAN 19.8% 23.4% 23.0%
MEAN 22.7% 22.5% 25.7%
LOW 13.0% 3.5% (4.7%)
-----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Based on
Based on Latest Twelve Months Results Forward Results
------------------------------------------------ -------------------
Equity
Enterprise Value Multiples Value Equity Value
----------------------------------- Multiples Multiples
------- -------------------
EBITDA - Net CY1999E CY2000E
(000's, except per share data) Revenue EBITDA EBIT CAPEX Income EPS EPS
GROUP A (EXISTING BUSINESS LINES)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. BILL 2.7x 10.1x 12.2x 13.5x 17.9x 15.4x N/A
Checkpoint Systems, Inc. CKP 1.1x 7.3x 13.4x 8.6x 15.9x 13.8x 11.4x
Coinmach Laundry Corp. WDRY 1.6x 5.0x 16.0x 7.7x NM NM N/A
GTECH Holdings Corp. GTK 1.3x 3.5x 7.9x 5.3x 9.5x 9.4x N/A
Kofax Image Products, Inc. KOFX 0.6x 3.3x 4.1x 3.8x 11.3x 9.6x N/A
Mac-Gray Corp. TUC 1.3x 6.1x 10.5x 21.2x 15.1x 14.9x 11.2x
PSC Inc. PSCX 1.0x 5.3x 8.0x 6.2x 11.4x 10.5x 8.8x
Sensormatic Electronics Corp. SRM 1.6x 12.1x 24.3x 20.3x NM 22.3x 16.1x
- -------------------------------------------------------------------------------------------------------------------------------
HIGH 2.7x 12.1x 24.3x 21.2x 17.9x 22.3x 16.1x
MEDIAN 1.3x 5.7x 11.3x 8.1x 13.2x 13.8x 11.3x
MEAN 1.4x 6.6x 12.1x 10.8x 13.5x 13.7x 11.9x
LOW 0.6x 3.3x 4.1x 3.8x 9.5x 9.4x 8.8x
--------------------------------------------------------------------------------
</TABLE>
Notes:
(1) As of May 28, 1999.
See footnotes in Appendix A.
43
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================================================================================
COMPARABLE COMPANY SUMMARY VALUATION MATRIX
<TABLE>
<CAPTION>
Market Values (1) Three-Year Growth
----------------------------------- EBITDA -----------------
(000's, except per share data) Ticker Per Share Equity Enterprise Margin Revenue EBITDA
GROUP B (NEW BUSINESS LINES)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Brooktrout Technology, Inc. BRKT $18.81 $217,374 $204,278 10.7% 37.6% 12.5%
Digi International Inc. DGII $ 8.38 $123,516 $126,801 12.1% 3.5% 1.1%
Omtool, Ltd. OMTL $ 3.75 $ 48,472 $ 27,554 9.3% 99.3% 88.9%
Peerless Systems Corp. PRLS $ 9.19 $103,753 $ 77,741 20.8% 44.8% NM
HIGH 20.8% 99.3% 88.9%
MEDIAN 11.4% 41.2% 12.5%
MEAN 13.2% 46.3% 34.2%
LOW 9.3% 3.5% 1.1%
GROUPS A AND B COMBINED
(CHARGEBACK AS A WHOLE)
HIGH 36.6% 99.3% 88.9%
MEDIAN 18.5% 26.6% 19.5%
MEAN 19.6% 30.5% 28.0%
LOW 9.3% 3.5% (4.7%)
Chargeback (at Offer Price) $21.00 $ 80,571 $ 71,571 18.1% 18.2% 19.0%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Based on
Based on Latest Twelve Months Results Forward Results
------------------------------------------------ -------------------
Equity
Enterprise Value Multiples Value Equity Value
----------------------------------- Multiples Multiples
------- --------------------
EBITDA - Net CY1999E CY2000E
(000's, except per share data) Ticker Revenue EBITDA EBIT CAPEX Income EPS EPS
GROUP B (NEW BUSINESS LINES)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Brooktrout Technology, Inc. BRKT 1.9x 17.6x 25.5x 25.2x 21.8x 23.2x 17.9x
Digi International Inc. DGII 0.7x 5.5x 10.4x 7.2x 15.3x 32.2x N/A
Omtool, Ltd. OMTL 0.9x 9.8x NM 16.4x NM 23.4x 13.9x
Peerless Systems Corp. PRLS 2.4x 11.6x 14.6x 13.5x 24.2x 17.0x 12.6x
HIGH 2.4X 17.6x 25.5x 25.2x 24.2x 32.2x 17.9x
MEDIAN 1.4X 10.7x 14.6x 14.9x 21.8x 23.3x 13.9x
MEAN 1.5X 11.1x 16.8x 15.6x 20.4x 24.0x 14.8x
LOW 0.7X 5.5x 10.4x 7.2x 15.3x 17.0x 12.6x
GROUPS A AND B COMBINED
(CHARGEBACK AS A WHOLE)
HIGH 2.7X 17.6x 25.5x 25.2x 24.2x 32.2x 17.9x
MEDIAN 1.3X 6.7x 12.2x 11.0x 15.3x 15.4x 12.6x
MEAN 1.4X 8.1x 13.4x 12.4x 15.8x 17.4x 13.1x
LOW 0.6X 3.3x 4.1x 3.8x 9.5x 9.4x 8.8x
Chargeback (at Offer Price) $21.00 1.4x 6.9x 11.0x 12.6x (2) 17.9x 19.9x (3) 11.2x (3)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
Summary Statistics Exclude Chargeback.
(1) As of May 28, 1999, except Chargeback, which is the offer price.
(2) Chargeback LTM capital expenditures reduced from $6.1 million (actual) to
$4.6 million to remove impact of non-recurring items.
(3) Chargeback financial projections for CY1999 and CY2000 are for the fiscal
years ended 2/29/00 and 2/28/01, respectively.
See footnotes in Appendix A.
44
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- --------------------------------------------------------------------------------
----------------------------------------
E. COMPARABLE TRANSACTIONS
ANALYSIS
----------------------------------------
<PAGE> 46
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- --------------------------------------------------------------------------------
COMPARABLE TRANSACTIONS SUMMARY VALUATION
[GRAPHIC]
CHARGEBACK OPERATING PARAMETERS
46
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- --------------------------------------------------------------------------------
COMPARABLE TRANSACTIONS SUMMARY VALUATION MATRIX
(000's, except per share data)
OFFER PRICE $ 21.00
<TABLE>
<CAPTION>
ENTERPRISE VALUE / EQUITY VALUE /
------------------------------------------------------ -------------
1999FY 1999FY
1999FY 1999FY 1999FY EBITDA - NET
REVENUE EBITDA EBIT CAPEX INCOME
------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
CHARGEBACK OPERATING PARAMETERS(1)(2) $ 51,634 $ 10,301 $ 6,499 $ 5,701(3) $ 4,500
COMPARABLE TRANSACTION VALUATION MULTIPLES
High 3.5x 11.9x 19.8x 21.0x 29.8x
Median 1.7x 9.3x 12.6x 13.5x 17.0x
Mean 1.9x 9.5x 13.2x 14.4x 18.5x
Low 0.9x 6.1x 7.9x 7.1x 12.2x
PLUS: CASH(4) $ 9,000 $ 9,000 $ 9,000 $ 9,000
DILUTED SHARES OUTSTANDING(5) 3,837 3,837 3,837 3,837 3,837
IMPLIED EQUITY VALUE PER SHARE MEAN
High $ 49.29 $ 34.31 $ 35.86 $ 33.53 $ 34.94 $ 37.59
Median 24.80 27.44 23.73 22.41 19.99 23.67
Mean 27.86 27.84 24.68 23.68 21.65 25.14
Low 14.54 18.82 15.76 12.84 14.29 15.25
</TABLE>
(1) Chargeback financial information for the latest twelve months ended
2/28/99.
(2) Parameters exclude ECS results.
(3) Chargeback LTM capital expenditures reduced from $6.1 million (actual) to
$4.6 million to remove impact of non-recurring items.
(4) Estimated cash balance as of May 31, 1999. Source: Company Management.
(5) Calculated using the treasury stock method and an offer price of $21.00.
47
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- --------------------------------------------------------------------------------
COMPARABLE TRANSACTIONS VALUATION SUMMARY (1)
<TABLE>
<CAPTION>
SHARES OUT.
(000's, except per share data) ANNOUNCED EV
TARGET TARGET EFFECTIVE PP
ACQUIROR DESCRIPTION ATTITUDE PRICE/SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trident International Inc(3) Designs, manufactures and markets piezoelectric 1/6/99 7.3
impulse ink jet subsystems including printheads, Pending $114,534
Illinois Toolworks Inc inks and other related components. Friendly $120,421
$ 16.500
- --------------------------------------------------------------------------------------------------------------------------------
Microdyne Corp Designs products for use in data gathering and 12/3/98 13.1
analysis, and provides outsourced technical 1/8/99 $ 86,982
L-3 Communications Holdings services for electronic products companies. Friendly $ 65,519
$ 5.000
- --------------------------------------------------------------------------------------------------------------------------------
Donnelley Enterprise Solutions Single-source provider of integrated information 5/27/98 5.1
management services to professional service 7/7/98 $105,915
Bowne & Company, Inc organizations, primarily large law firms, investment Friendly $106,126
banks and accounting firms. $ 21.000
- --------------------------------------------------------------------------------------------------------------------------------
IPC Information Systems Inc Leader in providing integrated telecommunications 12/19/97 11.0
equipment and services that facilitate the execution 4/30/98 $247,298
Cable Systems International of transactions by the financial trading community Friendly $231,634
$ 21.000
- --------------------------------------------------------------------------------------------------------------------------------
Holmes Protection Group Inc Provider of security alarm monitoring services 12/28/97 6.9
and designs, sells, installs and services 2/19/98 $142,486
Tyco International Ltd electronic security systems. Friendly $117,141
$ 17.000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TM VALUATION MULTIPLES
---------------------------------------------------------------------------------------
(000's, except per share data) REVENUE EBITDA EBIT EBITDA-CAPEX NET INCOME
TARGET EV/REV. EV/EBITDA EV/EBIT EV/EBITDA-CAPEX PP/NET INC.
ACQUIROR HIST GROWTH(2) HIST GROWTH(2) HIST GROWTH(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trident International Inc(3) $ 32,832 $11,422 $10,187 $10,325 $7,066
3.5 x 10.0 x 11.2 x 11.1 x 17.0 x
Illinois Toolworks Inc 12.5% 24.2% 29.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Microdyne Corp $ 58,310 $ 7,307 $ 5,673 $4,305 $4,688
1.5 x 11.9 x 15.3 x 20.2 x 14.0 x
L-3 Communications Holdings 36.1% 13.7% 5.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Donnelley Enterprise Solutions $113,543 $ 2,558 ($3,964) ($3,520) ($3,282)
0.9 x 41.4 x * NM NA NM
Bowne & Company, Inc 29.6% NM NM
- ----------------------------------------------------------------------------------------------------------------------------------
IPC Information Systems Inc $272,927 $28,550 $17,649 $11,785 $7,775
0.9 x 8.7 x 14.0 x 21.0 x 29.8 x
Cable Systems International 14.5% NM NM
- ----------------------------------------------------------------------------------------------------------------------------------
Holmes Protection Group Inc $ 62,354 $ 4,440 ($6,420) ($5,862) ($4,070)
2.3 x 32.1 x * NM NM NM
Tyco International Ltd NM NM NM
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Outliers excluded from summary statistics.
(1) Financial data excludes the results of discontinued operations,
extraordinary gains and one-time charges. Diluted shares outstanding
calculated using the treasury stock method.
(2) Historical growth rate is based on the three fiscal years preceeding the
transaction.
(3) Pending transaction multiples are not included in summary statistics.
48
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- --------------------------------------------------------------------------------
COMPARABLE TRANSACTIONS VALUATION SUMMARY (1)
<TABLE>
<CAPTION>
SHARES OUT.
(000's, except per share data) ANNOUNCED EV
TARGET TARGET EFFECTIVE PP
ACQUIROR DESCRIPTION ATTITUDE PRICE/SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shared Technologies Fairchild Inc Provider of shared telecommunications services 11/20/97 17.2
and telecommunication systems to tenants of 12/29/97 $513,180
Intermedia Communications Inc modern, multi-tenant office buildings. Friendly $257,642
$ 15.000
- --------------------------------------------------------------------------------------------------------------------------------
DH Technology Inc Leading designer, manufacturer and marketer of 7/15/97 8.5
impact transaction printing mechanisms, impact 8/21/97 $172,089
Axiohm S.A. and thermal transaction printers. Friendly $213,114
$ 25.000
- --------------------------------------------------------------------------------------------------------------------------------
Colonial Data Technologies Designs, develops and markets telecommunications 8/7/96 15.5
products that support network services being 11/8/96 $135,059
US Order inc developed and implemented by telephone Friendly $146,055
operating companies. $ 9.437
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LTM VALUATION MULTIPLES
---------------------------------------------------------------------------------------
(000's, except per share data) REVENUE EBITDA EBIT EBITDA-CAPEX NET INCOME
TARGET EV/REV. EV/EBITDA EV/EBIT EV/EBITDA-CAPEX PP/NET INC.
ACQUIROR HIST GROWTH(2) HIST GROWTH(2) HIST GROWTH(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shared Technologies Fairchild Inc $188,125 $44,232 $25,933 $32,254 ($6,765)
2.7 x 11.6 x 19.8 x 15.9 x NM
Intermedia Communications Inc 86.2% 141.3% 190.9%
- ----------------------------------------------------------------------------------------------------------------------------------
DH Technology Inc $106,773 $19,935 $15,901 $15,804 $11,048
1.6 x 8.6 x 10.8 x 10.9 x 19.3 x
Axiohm S.A. 21.9% 28.6% 29.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Colonial Data Technologies $ 78,288 $22,014 $17,053 $19,125 $11,990
1.7 x 6.1 x 7.9 x 7.1 x 12.2 x
US Order inc 106.3% 148.7% 203.4%
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY STATISTICS
High 3.5 x 11.9 x 19.8 x 21.0 x 29.8 x
Median 1.7 x 9.3 x 12.6 x 13.5 x 17.0 x
Mean 1.9 x 9.5 x 13.2 x 14.4 x 18.5 x
Low 0.9 x 6.1 x 7.9 x 7.1 x 12.2 x
=======================================================================================
CHARGEBACK'S IMPLIED MULTIPLE AT
OFFER PRICE 1.4x 6.9x 11.0x 12.6x (4) 17.9x
=======================================================================================
</TABLE>
Legend
LTM = Latest Twelve Months
PP = Purchase Price
EV = Enterprise Value
* Outliers excluded from summary statistics.
(1) Financial data excludes the results of discontinued operations,
extraordinary gains and one-time charges. Diluted shares outstanding
calculated using the treasury stock method.
(2) Historical growth rate is based on the three fiscal years preceeding the
transaction.
(3) Pending transaction multiples are not included in summary statistics.
(4) Chargeback LTM capital expenditures reduced from $6.1 million (actual) to
$4.6 million to remove impact of non-recurring items.
49
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APPENDICES
50
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A. COMPARABLE COMPANY
DESCRIPTIONS
51
<PAGE> 52
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COMPARABLE COMPANY DESCRIPTIONS
GROUP A - EXISTING BUSINESS LINES
- ---------------------------------
BILLING CONCEPTS CORP. Billing Concepts Corp. ("BCC") is a third-party
billing clearinghouse and information management
services provider to the telecommunications
industry. BCC also develops, sells and supports
sophisticated billing systems for
telecommunications service providers, and provides
direct billing services through an in-house
service bureau. BCC's customers include direct
dial long distance telephone companies, operator
services providers, information providers,
telecommunications equipment suppliers and other
telecommunication services providers.
CHECKPOINT SYSTEMS, INC. Checkpoint is a designer, manufacturer and
distributor of integrated electronic security
systems - utilizing proprietary radio frequency
technologies - designed primarily to help
retailers prevent losses caused by theft of
merchandise. The Company markets a wide range of
these systems, including electronic article
surveillance (EAS) systems, closed circuit
television systems, point-of-sale monitoring
systems and electronic access control systems.
52
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COMPARABLE COMPANY DESCRIPTIONS
COINMACH LAUNDRY CORP. Coinmach Laundry Corporation is a leading supplier
of outsourced laundry equipment services for
multi-family housing properties in the United
States. The outsourced laundry equipment services
industry provides washer and dryer services to
individuals living in multi-family housing
properties. The Company's core business involves
leasing laundry rooms from building owners and
property management companies, installing and
servicing the laundry equipment and collecting
revenues generated from laundry machines. The
Company typically sets pricing for the use of
laundry machines on location, and the owner or
property manager maintains the premises and
provides utilities such as gas, electricity and
water.
GTECH HOLDINGS CORP. GTECH is the world's leading operator of
computerized on-line lottery systems. The
Company's core business consists of providing
on-line lottery services and products to
governmental lottery authorities worldwide. The
Company offers its customers a full range of
lottery services, including the design, assembly,
installation, operation, maintenance and marketing
of on-line lottery systems and instant ticket
support systems and services. The Company's
lottery systems consist of numerous lottery
terminals located in retail outlets, central
computer systems, systems software and game
software, and communications equipment which
connects the terminals and the central computer
systems. The Company currently operates, or
supplies equipment to, on-line lottery systems for
29 of the 38 on-line lottery authorities in the
United States and has supplied, currently operates
or has entered into contracts to operate in the
future on-line lottery systems for 50 of the 77
international on-line lottery authorities.
53
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COMPARABLE COMPANY DESCRIPTIONS
KOFAX IMAGE Kofax Image Products, Inc. is a leading supplier
PRODUCTS, INC. of both application software and scanner
enhancement products for the imaging, workflow and
document management market. The Company
specializes in the document capture segment of the
market, which involves converting paper documents
to digital electronic images, enhancing and
indexing the images, and then compressing them for
routing and storage. The Company's products are
used in conjunction with industry standard
personal computers and personal computer operating
systems. The Company sells its products to a wide
variety of document imaging, workflow and document
management solution providers including
value-added resellers, system integrators,
independent software vendors and computer
companies.
MAC-GRAY CORP. Mac-Gray is among North America's largest
suppliers of card and coin-operated laundry
services in multiple housing facilities such as
apartment buildings, colleges and universities and
public housing complexes. The Company believes it
is North America's largest supplier of such
services to the college and university market. A
substantial portion of Mac-Gray's revenue is
derived from the operation of washers and dryers
in laundry rooms under long-term leases with
property owners. Under Mac-Gray's long-term
leases the Company typically receives the
exclusive right to operate laundry rooms within a
multiple housing property in exchange for a
percentage of the revenue collected.
54
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COMPARABLE COMPANY DESCRIPTIONS
PSC INC. PSC Inc. manufactures the world's broadest line of
laser based handheld and fixed position bar code
readers, verifiers, integrated sortation and
point-of-sale ("POS") scanning systems for the
worldwide Automatic Identification and Data
Capture ("AIDC") market. The Company's products
serve as the "front end" of terminals or host
computers and are used to identify, capture,
process and transmit data. The Company has
developed products for AIDC at every stage of the
product supply chain from raw material,
manufacturing and warehousing, to logistics,
transportation, inventory management and POS. The
Company's products are used throughout the world
in food, general retail, health care and other
industries, and in government.
SENSORMATIC ELECTRONICS Sensormatic Electronics Corporation is a fully
CORPORATION integrated supplier of electronic security systems
to retailers and commercial, industrial and
governmental users worldwide. The Company designs,
manufactures, markets and services Electronic
Article Surveillance ("EAS") systems (including
the reusable hard tags and disposable labels used
with such systems), and Integrated Security
Systems which include Closed Circuit Television
("CCTV") systems (including microprocessor-
controlled CCTV systems and exception monitoring
systems), Access Control systems and Intelligent
Tagging and Tracking ("ITT") systems utilizing
radio frequency identification. The Company's EAS
and CCTV systems and products are used by
retailers to deter shoplifting and internal theft.
Sensormatic's CCTV, Access Control and ITT systems
are used by retail and commercial/industrial
customers to protect assets, information and
people. The Company's products are marketed by an
extensive worldwide sales and service organization
complemented by a broad network of independent
distributors and dealers.
55
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Project Chargeback
COMPARABLE COMPANY DESCRIPTIONS
GROUP B - NEW BUSINESS LINES
BROOKTROUT TECHNOLOGY INC. Brooktrout Technology, Inc. is a Massachusetts
corporation founded in 1984 to design, manufacture
and market computer hardware and software for use
in electronic messaging applications in
telecommunications and networking environments.
Brooktrout is a supplier of advanced software and
hardware products for system vendors and service
providers in the electronic messaging market. The
Company's products enable its customers to deliver
a wide range of solutions for the integration and
management of image (fax), voice and data
communications in telecommunications and
networking environments. The Company sells its
products primarily to service providers, original
equipment manufacturers and value added resellers
both domestically and internationally through a
direct sales force.
DIGI INTERNATIONAL INC. Digi International Inc. is a leading ISO
9001-compliant provider of data communications
hardware and software that delivers seamless
connectivity solutions for multiuser environments,
open systems, server-based remote access and local
area network markets. The two major product areas
include: 1) communications interface cards for
multiuser and remote access environments, and 2)
"physical layer" capabilities of a local area
network.
56
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Project Chargeback
COMPARABLE COMPANY DESCRIPTIONS
OMTOOL, LTD. Omtool, Ltd. designs, develops, markets and
supports open, client/server facsimile software,
delivering solutions which automate and integrate
fax communication throughout the enterprise.
Omtool's Fax Sr. product family, licensed
typically on a shrink-wrap basis, provides users
with an extensive, flexible feature set for
transmitting and receiving faxes and improves an
organization's management of its fax
communications processes by providing a suite of
utility and control functions. Fax Sr. is
available on the Windows NT, Sun Solaris, HP UNIX
and DEC UNIX and VMS server operating systems, and
Windows 95, Windows NT, Windows 3.1.x, Macintosh,
Java, Activex and MS-DOS clients.
PEERLESS SYSTEMS Peerless Systems Corporation is a leading provider
CORPORATION of software-based embedded imaging systems to
original equipment manufacturers ("OEM"s) of
digital document products. Digital document
products include printers, copiers, fax machines,
scanners and emerging color products, as well as
multifunction products that perform a combination
of these imaging functions. In order to process
digital text and graphics, digital document
products rely on a core set of imaging software
and supporting electronics, collectively known as
an embedded imaging system. The Company markets
its solutions directly to OEM customers such as
Adobe, Canon, IBM and Xerox.
57
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COMPARABLE COMPANY STATISTICS
<TABLE>
<CAPTION>
Latest Twelve Month Results
-----------------------------------------------------
Results
-----------------------------------------------------
LTM FYE Shares EBITDA- Net Tangible
(millions, except per share data) Notes Date Date Out. Revenue EBITDA EBIT CAPEX Income Book Value
----- ---- ---- ---- ------- ------ ---- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP A (EXISTING BUSINESS LINES)
- ---------------------------------
Billing Concepts Corp. (a)(b) 3/31/99 9/30/98 37.2 $169.4 $45.0 $37.4 $33.6 $26.4 $96.3
Checkpoint Systems, Inc. (c) 3/28/99 12/31/98 30.1 $364.3 $55.4 $30.1 $47.2 $17.4 $169.4
Coinmach Laundry Corp. 3/31/99 3/31/99 12.7 $505.3 $164.4 $50.9 $105.8 $(12.0) ($62.3)
GTECH Holdings Corp. (d) 2/27/99 2/27/99 37.6 $972.9 $356.0 $156.7 $234.8 $97.9 $148.2
Kofax Image Products, Inc. 3/31/99 6/30/98 5.3 $37.0 $6.9 $5.5 $6.0 $4.2 $30.6
Mac-Gray Corp. (e) 3/31/99 12/31/98 12.6 $146.6 $30.7 $18.0 $8.9 $7.5 ($0.9)
PSC Inc. (f)(g) 4/2/99 12/31/98 12.0 $222.7 $41.0 $27.4 $35.4 $11.8 ($5.3)
Sensormatic Electronics Corp. (g)(h) 3/31/99 6/30/98 75.6 $983.9 $128.1 $63.9 $76.6 $21.3 $312.2
GROUP B (NEW BUSINESS LINES)
- ----------------------------
Brooktrout Technology, Inc. 3/31/99 12/31/98 10.9 $108.9 $11.6 $8.0 $8.1 $10.0 $36.9
Digi International Inc. (i) 3/31/99 9/30/98 14.6 $189.3 $22.9 $12.2 $17.5 $8.1 $67.2
Omtool, Ltd. (j) 3/31/99 12/31/98 12.7 $30.5 $2.8 $0.2 $1.7 $0.8 $25.1
Peerless Systems Corp. (k)(l) 4/30/99 1/31/99 11.2 $32.3 $6.7 $5.3 $5.8 $4.3 $41.5
Chargeback (at Offer Price) (m)(n)(o) 2/28/99 2/28/99 3.8 $51.6 $10.3 $6.5 $5.7 $4.5 $30.7
</TABLE>
<TABLE>
<CAPTION>
Latest Fiscal Year Results
------- --------------------------
Results Per Share Results
------- ------------------------ ------------------
Net
(millions, except per share data) Debt Revenue EBITDA EBIT CY1999 CY2000
---- ------- ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
GROUP A (EXISTING BUSINESS LINES)
- ---------------------------------
Billing Concepts Corp. ($17.8) $160.8 $47.5 $41.0 0.81 N/A
Checkpoint Systems, Inc. $126.2 $362.4 $55.7 $30.1 $0.66 $0.80
Coinmach Laundry Corp. $661.0 $505.3 $164.4 $50.9 (0.77) N/A
GTECH Holdings Corp. $313.3 $972.9 $356.0 $156.7 2.62 N/A
Kofax Image Products, Inc. ($25.3) $ 33.4 $5.9 $4.4 $0.92 N/A
Mac-Gray Corp. $75.7 $137.2 $31.8 $17.5 0.60 0.80
PSC Inc. $84.5 $217.2 $39.7 $26.3 $0.95 $1.14
Sensormatic Electronics Corp. $371.0 $986.9 $126.3 $62.0 $0.60 $0.83
GROUP B (NEW BUSINESS LINES)
- ----------------------------
Brooktrout Technology, Inc. ($13.1) $100.9 $10.8 $8.0 $0.81 $1.05
Digi International Inc. $3.3 $182.9 $31.9 $24.1 $0.26 N/A
Omtool, Ltd. ($20.9) $31.1 $3.2 $0.8 $0.16 $0.27
Peerless Systems Corp. ($26.0) $32.6 $6.9 $5.7 0.54 $0.73
Chargeback (at Offer Price) ($9.0) $51.6 $10.3 $6.5 $1.06 $1.87
</TABLE>
See explanation of footnotes on the following page.
58
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Project Chargeback
COMPARABLE COMPANY FOOTNOTES
ABBREVIATIONS:
LTM Latest twelve months.
EBIT Earnings before interest and taxes (operating income).
EBITDA Earnings before interest, taxes, depreciation and amortization.
CAGR Compound annual growth rate.
EPS Earnings per share. Assumes fully diluted shares.
CY Calendar year.
NM Not meaningful.
N/A Not available.
NOTES:
EPS estimates for CY1999 and CY2000 are from First Call, unless noted otherwise.
LTM results are from reports on Forms 10-K and 10-Q and company press releases,
unless noted otherwise.
(a) Balance sheet is for the previous quarter. Capital expenditures for the
most recent quarter are estimated to be the same as the preceding quarter.
(b) LTM results exclude nonrecurring charges of $2.0 million for write-off of
acquired in-process R&D, in connection with the acquisition of 22% of PTC
in 9/98.
(c) LTM results exclude nonrecurring income of $0.6 million for reversal of
previously recorded restructuring charges. Total debt is from previous
quarter.
(d) LTM results exclude nonrecurring charges of $15.0 million for unconsummated
merger costs.
(e) LTM results exclude nonrecurring charges of $1.1 million for merger costs.
(f) LTM results exclude nonrecurring charges of $2.1 million for severance
costs.
(g) Market value of preferred stock is estimated to be its liquidation value.
(h) LTM exclude $6.2 gain from litigation recovery.
(i) Digi acquired two private companies in July 1998. LTM results include the
operating results of those companies from the acquisition dates through
9/30/98 but exclude nonrecurring charges of $40.2 million for write-off of
acquired in-process research & development and restructuring. LTM results
also exclude nonrecurring gains of $1.4 million from the reversal of a
previously written off investment in subsidiary and nonrecurring charges of
$1.5 million for reorganization and $1.4 million for inventory write-down
in connection with a discontinued product line.
(j) LTM results exclude nonrecurring charges of $1.1 million for restructuring.
(k) Depreciation, amortization and capital expenditures for the most recent
quarter are estimated to be the same as the preceding quarter.
(l) The three-year CAGR is for the 3.08-year period from the year ended
12/31/95 to the year ended 1/31/99.
(m) LTM results exclude the operating results from, and gain on sale of, a
division sold on 11/30/98.
(n) LTM capital expenditures reduced from $6.1 million (actual) to $4.6 million
to remove impact of non-recurring items.
(o) CY1999 and CY2000 EPS projections are prepared by management and represent
the fiscal years ending 2/29/00 and 2/28/01, respectively.
59
<PAGE> 60
Project chargeback
B. WEIGHTED AVERAGE COST
OF CAPITAL
<PAGE> 61
Project Chargeback
CAPITAL STRUCTURE ANALYSIS
(millions)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Market Value Market Value Enterprise Debt/ Equity/ Debt/ Historic Unlevered
of Total Debt of Equity (1) Value(2) Ent. Value Ent. Value Equity Beta (3) Beta (4)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. 0.0 472.3 472.3 0.0% 100.0% 0.0% 0.39 0.39
Checkpoint Systems, Inc. 171.5 277.6 449.1 38.2% 61.8% 61.8% 0.77 0.67
Coinmach Laundry Corp. 687.5 155.4 842.9 81.6% 18.4% 442.4% 1.23 0.94
GTECH Holdings Corp 321.0 929.4 1,250.4 25.7% 74.3% 34.5% 0.92 0.84
Kofax Image Products, Inc. -- 47.9 47.9 0.0% 100.0% 0.0% 0.48 0.48
Mac-Gray Corp. 83.8 112.9 196.7 42.6% 57.4% 74.3% 0.65 0.56
PSC Inc. 89.6 134.0 223.6 40.1% 59.9% 66.9% 0.70 0.61
Sensormatic Electronics Corp. 514.7 1,178.0 1,692.7 30.4% 69.6% 43.7% 1.20 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
Mean $ 128.5 $ 267.9 $ 475.8 32.3% 67.7% 90.4% 0.79 0.70
Median $ 130.6 $ 216.5 $ 460.7 34.3% 65.7% 52.7% 0.74 0.64
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Market value of equity as of 05/28/99.
(2) Market value of equity plus market value of total debt.
(3) Based on Bloomberg adjusted beta calculation from two years of historical
(weekly) price information compared to the S&P 500.
(4) Unlevered Beta=Beta/[1+((total debt)(*)(1-tax rate))/total equity value)]
61
<PAGE> 62
Project Chargeback
WACC CALCULATION
<TABLE>
<S> <C>
WACC CALCULATION INPUTS:
% Equity (%E) 67.68%
% Debt (%D) 32.32%
Debt/Equity 47.75%
BETA (LEVERED) ------
BL=Bu(*)[1+((1-t)(*)D/E)] 0.90
------
COST OF EQUITY ------
Ke=Rf+BL(*)(Rm-Rf)+SSR 15.97%
------
SELECTED UNLEVERED BETA (MEAN VALUE) 0.70
Risk-Free Rate (Rf) (1) 6.16%
Risk Premium (Rm-Rf)(2) 8.00%
Tax Rate 38.00%
Small Stock Risk Premium (SSR) (3) 2.60%
COST OF DEBT
Pre-Tax Cost of Debt (Kd)(4) 8.05%
- ---------------------------------------------------
WACC=[((Kd)(*)(%D))(*)(1-t)]+((Ke(*)(%E)) 12.42%
- ---------------------------------------------------
</TABLE>
(1) 20-year Treasury as of 5/28/99.
(2) Ibbotson Associates. Stock Bonds and Inflation, 1999 Yearbook. Large
company common stocks total returns minus long term government bond total
returns.
(3) Ibbotson Associates. Stock Bonds and Inflation, 1999 Yearbook. Expected
small capitalization equity size premium (capitalization under $261
million).
(4) Based on 300 basis points over the 3-month LIBOR Rate as of 5/28/99.
62
<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
<TABLE>
<CAPTION>
Check the appropriate box:
<S> <C>
/X/ Preliminary proxy statement / / Confidential, For Use of the Commission
/ / Definitive proxy statement only (as permitted by Rule 14a-6(e)(2))
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
EQUITRAC CORPORATION
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
EQUITRAC CORPORATION
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on the table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share ("Common Stock"), of Equitrac
Corporation.
(2) Aggregate number of securities to which transaction applies:
3,375,338 shares of Common Stock and 297,982 options to purchase
shares of Common Stock (based on the terms of the original
recapitalization agreement and plan of merger)
(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):
$25.25 per share in cash-out merger plus the difference between
$25.25 and the exercise price of each share subject to an option
(based on the terms of the original recapitalization agreement and
plan of merger)
(4) Proposed maximum aggregate value of transaction:
$89,077,045. (based on the terms of the original recapitalization
agreement and plan of merger)
(5) Total fee paid:
$17,815.40 (previously paid on March 17, 1999).
/ / Fee paid previously with preliminary materials:
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a) (2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date Filed:
<PAGE> 2
EQUITRAC CORPORATION
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
June , 1999
Dear Shareholders:
You are cordially invited to attend a special meeting of shareholders of
Equitrac Corporation to be held on July 27, 1999 at local time at
.
At this special meeting, you will be asked to consider and vote to approve
the Amended and Restated Recapitalization Agreement and Plan of Merger among
Equitrac, Chargeback Acquisition Corp., a corporation newly formed by
Cornerstone Equity Investors IV, L.P., John T. Kane and George P. Wilson.
Pursuant to the recapitalization agreement and plan of merger, Equitrac will be
recapitalized and an investor group led by Cornerstone, together with members of
Equitrac's senior management, will acquire all of the capital stock of Equitrac
in a merger. As a result of the merger, Equitrac's shareholders will be entitled
to receive $21.00 in cash for each of their shares of common stock. Members of
Equitrac's senior management who will be part of the investor group acquiring
Equitrac will be entitled to receive an equity interest in Equitrac following
the merger in exchange for a portion of their shares of Equitrac common stock
and stock options. These members of Equitrac's senior management will also be
entitled to receive cash merger consideration based on a value of $21.00 per
share for the remaining portion of their shares and stock options.
The recapitalization and merger cannot be completed unless the
recapitalization agreement and plan of merger is approved by shareholders
holding a majority of the outstanding shares of Equitrac common stock. Some of
the executive officers of Equitrac, who beneficially own approximately 33% of
the outstanding shares of Equitrac common stock entitled to vote at the special
meeting, have agreed to vote their shares of Equitrac common stock in favor of
the recapitalization agreement and plan of merger. Therefore, holders of only an
additional 17% of the outstanding shares of Equitrac common stock need to vote
in favor of the recapitalization and the merger for these transactions to be
approved. Equitrac's shareholders are not entitled under Florida law or
Equitrac's articles of incorporation to exercise dissenters' appraisal rights in
connection with the recapitalization or the merger.
Completion of the transactions is also subject to the satisfaction of
several other conditions, including the surviving corporation obtaining the
necessary financing under existing commitments that have been obtained on its
behalf. Accordingly, if shareholders approve the recapitalization and merger,
there can be no assurance these transactions will be completed. If the merger is
completed, the receipt of the cash merger consideration by you for your Equitrac
common stock will be a taxable transaction for federal income tax purposes.
The recapitalization agreement and plan of merger has been unanimously
approved by Equitrac's Board of Directors, acting on the unanimous
recommendation of an independent special committee of the Board of Directors. In
connection with their evaluation of this agreement, the Board of Directors on
behalf of the special committee engaged Prudential Securities Incorporated to
act as financial advisor to the special committee. Prudential Securities has
rendered a fairness opinion dated June 3, 1999 to the special committee to the
effect that, as of such date and based upon and subject to the assumptions,
limitations and qualifications set forth in such opinion, the cash consideration
of $21.00 per share to
<PAGE> 3
be received by Equitrac's shareholders (other than members of Equitrac's senior
management who will be part of the investor group acquiring Equitrac) in the
merger is fair from a financial point of view to such shareholders. Prudential
Securities' opinion is attached as Appendix B to the accompanying proxy
statement. We recommend that you read Prudential Securities' opinion in its
entirety.
In February 1999, Equitrac and Cornerstone entered into a definitive
recapitalization agreement and plan of merger, pursuant to which Cornerstone
would acquire all of the outstanding shares of common stock of Equitrac, other
than certain shares held by John Kane, George Wilson and certain other members
of senior management, for $25.25 per share in cash. For the reasons described in
the accompanying proxy statement, the agreement has been revised to reduce to
$21.00 the per share cash payment that Equitrac's shareholder will be entitled
to receive for their Equitrac common stock. Except for the reduction in the cash
merger consideration, the terms and conditions of the amended and restated
recapitalization agreement and plan of merger are substantially identical to
those of the original agreement.
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVE THAT THE TERMS OF
THE AMENDED AND RESTATED RECAPITALIZATION AGREEMENT AND PLAN OF MERGER ARE FAIR
TO AND IN THE BEST INTERESTS OF EQUITRAC'S SHAREHOLDERS (OTHER THAN MEMBERS OF
EQUITRAC'S SENIOR MANAGEMENT WHO WILL BE PART OF THE INVESTOR GROUP ACQUIRING
EQUITRAC) AND UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS APPROVE AND ADOPT THE
AMENDED AND RESTATED RECAPITALIZATION AGREEMENT AND PLAN OF MERGER.
The accompanying proxy statement explains the amended and restated
recapitalization agreement and plan of merger and the proposed recapitalization
and merger and provides specific information about the parties involved and
their interests. Please read this document carefully.
PLEASE GIVE ALL THIS INFORMATION YOUR CAREFUL ATTENTION. WHETHER OR NOT YOU
PLAN TO ATTEND, IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL
MEETING. A FAILURE TO VOTE WILL COUNT AS A VOTE AGAINST THE RECAPITALIZATION AND
MERGER. ACCORDINGLY, YOU ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ENVELOPE PROVIDED, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING. THIS WILL NOT PREVENT YOU FROM VOTING YOUR
SHARES IN PERSON IF YOU SUBSEQUENTLY CHOOSE TO ATTEND THE SPECIAL MEETING.
Sincerely,
John T. Kane
Chairman of the Board of
Directors
<PAGE> 4
EQUITRAC CORPORATION
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 27, 1999
-------------------------
A special meeting of shareholders of Equitrac Corporation, a Florida
corporation, will be held on July 27, 1999 at , local time, at
, for the following purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Recapitalization Agreement and Plan of Merger (the "Merger
Agreement") dated June 4, 1999 among Equitrac, Chargeback Acquisition Corp.
("Merger Sub"), a Florida corporation formed by Cornerstone Equity
Investors IV, L.P. ("Cornerstone"), and John T. Kane and George P. Wilson.
Pursuant to the Merger Agreement:
- Equitrac will undergo a recapitalization whereby: (1) Equitrac will
amend its Articles of Incorporation to create and authorize the
issuance of preferred stock, (2) Cornerstone, its affiliates and other
investors will make an approximately $24.9 million equity contribution
to Equitrac in exchange for preferred stock, and (3) members of
Equitrac's management, including Messrs. Kane and Wilson, will
exchange some of their shares of Equitrac common stock and stock
options for preferred stock; and then
- Merger Sub will be merged with and into Equitrac pursuant to which:
(1) the holders of Equitrac common stock will be entitled to receive
$21.00 in cash for each of their shares of Equitrac common stock
outstanding at the time of the merger, and (2) the holders of Equitrac
preferred stock as a result of the recapitalization will be entitled
to receive preferred stock and common stock in the surviving
corporation for each of their shares of Equitrac preferred stock
outstanding at the time of the merger. A copy of the Merger Agreement
is attached as Annex A to and is described in the accompanying proxy
statement.
2. To consider and act upon such other matters as may properly come
before the special meeting or any adjournment or postponement thereof.
<PAGE> 5
Shareholders of record of Equitrac common stock at the close of business on
June 18, 1999, will be entitled to notice of, and to vote at, the special
meeting or any adjournment or postponement thereof. A list of shareholders will
be available for inspection for ten days preceding the special meeting at the
office of the Secretary of Equitrac, 836 Ponce de Leon Boulevard, Coral Gables,
Florida, and will be available for inspection at the meeting itself. Approval of
the Merger Agreement and the transactions contemplated thereby, including the
recapitalization and merger, will require the affirmative vote of the holders of
a majority of the shares of Equitrac common stock outstanding on the record
date. A form of proxy and a proxy statement containing more detailed information
about the matters to be considered at the special meeting accompany and form a
part of this notice.
By order of the Board of
Directors,
Sharon Jones
Secretary
Coral Gables, Florida
June , 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. PLEASE DO
NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE> 6
PRELIMINARY COPY, DATED JUNE 17, 1999
EQUITRAC CORPORATION
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 27, 1999
This proxy statement is furnished to shareholders of Equitrac Corporation,
a Florida corporation, in connection with the solicitation of proxies by the
Board of Directors of Equitrac for use at the special meeting of shareholders to
be held on July 27, 1999 at , local time, at , and at
any adjournment or postponement thereof. Proxies in the form enclosed will be
voted at the special meeting, if properly executed, returned to Equitrac prior
to the meeting and not revoked. This proxy statement and the enclosed proxy card
are first being mailed to shareholders of Equitrac on or about June , 1999.
At the special meeting, holders of Equitrac common stock will be asked to
consider and vote upon a proposal to approve the Amended and Restated
Recapitalization Agreement and Plan of Merger (the "Merger Agreement") dated
June 4, 1999 among Equitrac, Chargeback Acquisition Corp. ("Merger Sub"), a
Florida corporation formed by Cornerstone Equity Investors IV, L.P.
("Cornerstone"), and John T. Kane and George P. Wilson. Pursuant to the Merger
Agreement:
- Equitrac will undergo a recapitalization (the "Recapitalization")
pursuant to which: (1) Equitrac will amend its Articles of Incorporation
to create and authorize the issuance of preferred stock, (2) Cornerstone,
its affiliates, and other investors will make an approximately $24.9
million equity contribution to Equitrac in exchange for preferred stock,
and (3) members of Equitrac's management, including Messrs. Kane and
Wilson, will exchange some of their shares of Equitrac common stock
and/or stock options for preferred stock; and then
- Merger Sub will be merged with and into Equitrac (the "Merger") pursuant
to which: (1) the holders of Equitrac common stock will be entitled to
receive $21.00 in cash for each of their shares of Equitrac common stock
outstanding at the time of the Merger, and (2) the holders of Equitrac
preferred stock as a result of the Recapitalization will be entitled to
receive preferred stock and common stock in the surviving corporation for
each of their shares of Equitrac preferred stock outstanding at the time
of the Merger.
In this document, we refer to the Recapitalization and the Merger and the
other transactions contemplated by the Merger Agreement collectively as the
"Transactions." A copy of the Merger Agreement is attached as Appendix A to and
is described in this proxy statement.
The Transactions cannot be completed unless the Merger Agreement is
approved by the holders of a majority of the shares of Equitrac common stock.
Some of the executive officers of Equitrac, who beneficially own approximately
33% of the outstanding shares of Equitrac common stock entitled to vote at the
special meeting, have agreed to vote their shares of Equitrac common stock at
the special meeting in favor of the Merger Agreement. Therefore, holders of only
an additional 17% of the outstanding shares of
<PAGE> 7
Equitrac common stock need to vote in favor of the Merger Agreement for the
Transactions to be approved. Completion of the Transactions is also subject to
the satisfaction of several other conditions, including the surviving
corporation obtaining the necessary financing under existing commitments that
have been obtained on its behalf. Accordingly, even if shareholders approve and
adopt the Merger Agreement, there can be no assurance that the Transactions will
be completed.
The accompanying proxy, unless the shareholder otherwise specifies in the
proxy, will be voted (i) for adoption and approval of the Merger Agreement and
(ii) at the discretion of the proxy holders on any other matter that may
properly come before the meeting or any adjournment or postponement thereof.
Where shareholders have appropriately specified how their proxies are to be
voted, they will be voted accordingly. If any other matter or business is
properly brought before the special meeting, the proxy holders may vote the
proxies in their discretion. The Board of Directors does not know of any such
other matter or business.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A
PROXY IN ANY JURISDICTION FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
PROXY SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF EQUITRAC SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers about the Recapitalization and
Merger.................................................... i
Who Can Help Answer Your Questions.......................... vi
Cautionary Statement Concerning Forward-Looking
Information............................................... vii
Summary..................................................... 1
The Companies............................................. 1
The Recapitalization and Merger........................... 1
The Special Meeting....................................... 2
Record Date; Voting Power; Quorum......................... 2
Vote Required; Security Ownership of Management........... 3
Voting Agreement; Irrevocable Proxy....................... 3
Recommendations of the Board of Directors and Special
Committee.............................................. 3
Opinion of Financial Advisor.............................. 4
Conflicts of Interest..................................... 4
Treatment of Outstanding Stock Options.................... 5
Indemnification........................................... 5
Federal Income Tax Consequences........................... 5
Accounting Treatment...................................... 6
Dissenters' Appraisal Rights.............................. 6
Financing of the Merger................................... 6
The Merger Agreement...................................... 6
Regulatory Approvals...................................... 9
Legal Proceedings......................................... 9
Market Prices for Common Stock and Dividends................ 9
Summary Financial Information............................... 11
Certain Projections of Future Operating Results........... 11
Special Factors............................................. 12
Background of the Merger.................................. 12
Recommendations of the Special Committee and Board of
Directors.............................................. 19
Equity Investors' Purpose and Reasons for the
Recapitalization and Merger............................ 25
Opinion of Financial Advisor.............................. 25
Conflicts of Interest..................................... 29
The Special Meeting......................................... 32
Date, Time and Place...................................... 32
Record Date; Voting Power; Quorum......................... 32
Vote Required; Security Ownership of Management........... 32
Voting Agreement; Irrevocable Proxy....................... 33
Proxies................................................... 33
Solicitation of Proxies................................... 34
The Recapitalization and Merger............................. 34
Financing................................................. 35
Federal Income Tax Consequences........................... 36
Accounting Treatment...................................... 38
Dissenters' Appraisal Rights.............................. 38
Delisting and Deregistration of Common Stock.............. 38
Regulatory Approvals...................................... 38
Legal Proceedings......................................... 38
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Merger Agreement........................................ 38
Overview.................................................. 38
Exchange of Certificates Representing Common Stock........ 39
Treatment of Outstanding Stock Options.................... 40
Representations and Warranties............................ 40
Cornerstone's Guarantee................................... 41
Conduct of Business Pending the Merger.................... 41
No Solicitation........................................... 41
Indemnification........................................... 42
Directors' and Officers' Liability Insurance.............. 42
Conditions to the Merger.................................. 43
Termination of Merger Agreement........................... 44
Fees and Expenses......................................... 44
Estimated Fees and Expenses of the Merger................. 45
Certain Information Concerning Merger Sub and The Equity
Investors................................................. 45
Beneficial Ownership of Common Stock........................ 48
Independent Public Accountants.............................. 49
Documents Incorporated By Reference......................... 49
Available Information....................................... 50
APPENDIX A -- Recapitalization Agreement and Plan of
Merger.................................................... A-1
APPENDIX B -- Opinion of Prudential Securities
Incorporated.............................................. B-1
APPENDIX C -- Amendment to Equitrac's Articles of
Incorporation............................................. C-1
APPENDIX D -- Transactions involving Equitrac's Common Stock
effected by members of the Management Group
since March 1, 1997........................... D-1
</TABLE>
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT
THE RECAPITALIZATION AND MERGER
Q: WHAT WILL HAPPEN IN THE RECAPITALIZATION?
A: In the Recapitalization, two events will occur. First, by voting to approve
the Merger Agreement, shareholders will be approving an amendment to
Equitrac's Articles of Incorporation to authorize the issuance of preferred
stock. This Amendment to Equitrac's Articles of Incorporation is attached
as Appendix C to this proxy statement. Second, Equitrac will issue shares
of preferred stock to Cornerstone, its affiliates and other investors in
exchange for a cash equity contribution of approximately $24.9 million, and
to Messrs. Kane and Wilson and other members of Equitrac's senior
management in exchange for some of their shares of Equitrac common stock
and stock options.
Q: WHAT WILL HAPPEN IN THE MERGER?
A: Immediately after the Recapitalizaton, Merger Sub will be merged with and
into Equitrac, with Equitrac continuing as the surviving corporation. As a
result of the Merger, all of your shares of common stock will be
automatically converted into the right to receive a cash payment of $21.00
per share. In addition, the shares and stock options held by Equitrac's
senior management that are not otherwise exchanged for preferred stock in
the Recapitalization will be converted into the right to receive cash
payments based on a value of $21.00 per share. All shares of preferred
stock held at the effective time by Cornerstone, its affiliates and other
investors and members of Equitrac's management as a result of the
Recapitalization will be automatically converted into the right to receive
shares of common stock and preferred stock of Equitrac as the surviving
corporation.
Q: WHY WAS IT NECESSARY TO AMEND AND RESTATE THE ORIGINAL
AGREEMENT AND REDUCE THE CASH CONSIDERATION TO $21.00 FROM $25.25?
A: In February 1999, Equitrac and Cornerstone entered into a definitive
recapitalization agreement and plan of merger, pursuant to which
Cornerstone would acquire all of the outstanding shares of common stock of
Equitrac, other than certain shares held by John Kane, George Wilson and
certain other members of senior management, for $25.25 per share in cash.
Prior to entering into the original merger agreement, Equitrac had provided
Cornerstone various financial projections, including projections for the
fourth quarter of the fiscal year ending February 28, 1999 and for the
fiscal year ending February 29, 2000. The terms and conditions of the
original merger agreement had been based upon these various projections. In
early April, Equitrac provided Cornerstone its preliminary financial
results for the fourth quarter of fiscal 1999 and its preliminary fiscal
2000 budget, both of which differed from Equitrac's prior projections. On
April 12, 1999, Equitrac received notice from Cornerstone that, based upon
a review of the preliminary fourth quarter results and the preliminary
fiscal 2000 budget, Cornerstone believed that Equitrac had suffered an
"adverse change" under the original merger agreement. Cornerstone also
indicated that as a result of this "adverse change" the financing
commitments necessary to complete the Transactions were no longer
available. On April 21, 1999, Cornerstone advised Equitrac that it would be
willing to proceed with the Transactions on substantially the
i
<PAGE> 11
same terms under the original agreement but at a revised price of $21.00
per share. Prior to accepting Cornerstone's revised proposal, the special
committee and the Board considered a number of alternatives, including
terminating the original merger agreement or seeking a higher price per
share from another party. The special committee and the Board ultimately
decided that it was in the best interest of Equitrac and its shareholders
(other than members of Equitrac's senior management who will be part of the
investor group acquiring Equitrac) to proceed with the Transactions at
$21.00 per share and enter into the Merger Agreement. For a further
discussion of the rationale underlying the decision to proceed with the
Transactions at a lower price, please see "Special Factors -- Background of
the Merger" beginning on page 12.
Q: HOW DO OUR FISCAL 1999 FOURTH QUARTER RESULTS AND
EXPECTED FISCAL 2000 RESULTS DIFFER FROM OUR PRIOR PROJECTIONS?
A: Our fiscal 1999 fourth quarter results for operating income, earnings
before interest, taxes, depreciation and amortization ("EBITDA"), and
EBITDA less capital expenditures were approximately 19%, 7% and 67%,
respectively, lower than anticipated in our prior fourth quarter
projections. Our current expectations are that our fiscal 2000 revenues,
operating income, EBITDA and EBITDA less capital expenditures will be
approximately 7%, 48%, 34% and 52%, respectively, lower than anticipated in
our prior fiscal 2000 projections. In addition, while information
previously provided to Cornerstone estimated that we would have
approximately $14 million of cash on hand at closing, we currently estimate
that we will have approximately $9.5 million of cash on hand at closing.
Q: WHY DIDN'T THE SPECIAL COMMITTEE AND BOARD SEEK A HIGHER
PER SHARE OFFER FROM ANOTHER PARTY AFTER CORNERSTONE REDUCED ITS OFFER TO
$21.00?
A: The original merger agreement prohibited Equitrac from soliciting competing
transactions. Therefore, the special committee and Board, based on the
advice of counsel, believed that unless either Equitrac or Cornerstone
terminated the original merger agreement, soliciting a higher offer from
another party may have been in breach of the agreement and could have
resulted in a claim by Cornerstone for damages. Although the special
committee and Board considered whether Equitrac should seek to terminate
the agreement to be able to solicit other offers, the special committee and
Board believed, based on the advice of counsel, that there was uncertainty
as to whether Equitrac had the legal right to do so and that Cornerstone
would contest any attempted termination. The special committee and Board
also believed that it was unlikely, based on the financial information that
prompted Cornerstone to lower its price, that another party would make a
significantly higher offer that would justify the risks associated with
attempting to terminate the agreement. The original agreement also
permitted Equitrac, without terminating the agreement, to consider
unsolicited offers that the Board determined were more favorable from a
financial point of view to Equitrac's unaffiliated shareholders. However,
the agreement provided that if Equitrac accepted a competing offer, it
would be required to pay Cornerstone a $2.5 million termination fee and
reimburse
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<PAGE> 12
Cornerstone for its costs and expenses. A similar provision is contained in
the Merger Agreement, although the required termination fee has been
reduced to $2.3 million.
Q: WHO WILL OWN EQUITRAC AFTER THE MERGER?
A: After the Merger, Equitrac will become a privately held company owned by an
affiliate of Cornerstone and a related investor (the "Cornerstone Group")
and the members of Equitrac's senior management (the "Management Group"),
whose members are:
John T. Kane
George P. Wilson
Chris Rickborn
Steve Smith
Patrick J. Raftery
Cid Yousefi
John P. Jones
Certain other employees of Equitrac may also become members of the
Management Group. In this document, we refer to the Cornerstone Group and the
Management Group as the "Equity Investors."
Q: WHY HAS THE MANAGEMENT GROUP DECIDED TO RETAIN AN
OWNERSHIP INTEREST IN EQUITRAC FOLLOWING THE MERGER?
A: As a condition to completing the Transactions, Messrs. Kane and Wilson are
required under the terms of the Merger Agreement to retain a portion of
their current ownership interest in Equitrac. Because Messrs. Kane and
Wilson have been integral to Equitrac's success in the past and Cornerstone
believes that their involvement is integral to Equitrac's success in the
future, Cornerstone wants to ensure that Messrs. Kane and Wilson have a
financial interest in the continued success of Equitrac. The other members
of the Management Group have decided to retain an ownership interest in
Equitrac so they can participate as both employees and shareholders in any
success that Equitrac may achieve after the Merger.
Q: WHY WAS THE SPECIAL COMMITTEE FORMED?
A: Because of the potential conflicts of interests of Messrs. Kane and Wilson
by virtue of their being members of both the Equitrac Board and the
Management Group, the Board established a special committee to act on
behalf of the unaffiliated shareholders of Equitrac for the purpose of
negotiating the price and other terms of the Transactions with the Equity
Investors and evaluating the fairness of the Merger Agreement and the
Transactions. The special committee is composed of Peter Marx and Marc
Watson, both of whom are independent directors. If the Transactions are
completed, Messrs. Marx and Watson will receive cash payments of $192,625
and $590,925, respectively, based on a value of $21.00 per share as a
result of the termination of stock options held by them. All other holders
of stock options will also be entitled to receive cash payments based upon
a value of $21.00 per share as a result of the termination of their stock
options upon completion of the Transactions.
Q: WHY IS EQUITRAC BEING ACQUIRED?
A: The Board of Directors of Equitrac and the Equity Investors each believe
that the acquisition is in the best interest of the shareholders of
Equitrac (other than members
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<PAGE> 13
of the Management Group). The Equity Investors believe that as a private
company and with their active participation, Equitrac will have greater
operating flexibility to enhance its future business prospects. In
addition, the Equity Investors believe that the higher debt-to-equity ratio
of Equitrac following the Transactions may allow the value of Equitrac's
equity to increase more rapidly on a percentage basis than would the value
of the equity in an otherwise identical corporation with a lower debt-to-
equity ratio. To review the background and reasons for the Transactions in
greater detail, please see "Special Factors -- Background of Merger"
beginning on page 12.
Q: WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE
TRANSACTIONS TO ME?
A: You will receive an immediate cash premium for your shares of Equitrac
common stock that you may not otherwise receive in the future. You will not
have the opportunity to participate in Equitrac's future earnings and
growth, but you will not bear the risk of any decrease in Equitrac's value.
Q: WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF THE
TRANSACTIONS TO THE EQUITY INVESTORS?
A: Upon completion of the Transactions, the Cornerstone Group will own
approximately 79% of Equitrac for a cash investment of approximately $24.9
million. The Management Group will own approximately 21% of Equitrac for an
investment of approximately $6.7 million consisting of their equity
contribution in the Recapitalization. Like you, the Management Group will
also receive an immediate cash premium for their equity interests in
Equitrac that are not otherwise contributed in the Recapitalization. The
Equity Investors will have the opportunity to participate in Equitrac's
future earnings and growth, but they will bear the risk of any decrease in
Equitrac's value. As a result of the Transactions, Equitrac will have
significant amounts of indebtedness that may reduce the future value of
Equitrac. The Equity Investors expect that Equitrac will be able to repay
this indebtedness with cash generated from its operations, although it may
not be able to do so.
Q: BY VOTING IN FAVOR OF THE MERGER AGREEMENT, WHAT AM I
APPROVING?
A: If you vote in favor of the Merger Agreement, you will be directly
approving both the Recapitalization, including the amendment to Equitrac's
Articles of Incorporation to authorize the issuance of preferred stock, and
the Merger of Merger Sub with and into Equitrac.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive $21.00 in cash, without interest, for each share of your
Equitrac common stock. This is the "Cash Merger Consideration." For
example: If you own 100 shares of Equitrac common stock, upon completion of
the Merger you will receive $2,100 in cash.
Q: HOW MANY VOTES ARE REQUIRED TO APPROVE AND ADOPT THE
MERGER AGREEMENT?
A: Approval of the Merger Agreement requires the affirmative vote of a
majority of the shares of Equitrac common stock outstanding as of the
record date. Therefore, a failure to vote or a vote to abstain will have
the same effect as a vote against the
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<PAGE> 14
Merger Agreement. Messrs. Kane and Wilson, who beneficially own
approximately 33% of the outstanding shares of Equitrac common stock
entitled to vote at the special meeting, have agreed to vote their shares
in favor of the Merger Agreement. Therefore, holders of only an additional
17% of the outstanding shares of Equitrac common stock need to vote in
favor of the Merger Agreement for the Transactions to be approved.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The special meeting will take place on July 27, 1999, at local
time, at .
Q: WHY IS THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
RECOMMENDING THAT I VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT?
A: The special committee and the Board of Directors, based on the
recommendation of the special committee, believe that the terms and
provisions of the Merger Agreement and Transactions are fair to and in the
best interest of Equitrac's shareholders (other than the Management Group).
To review the background and reasons for the Recapitalization and Merger in
greater detail, see pages 12 through 25.
Q: WHEN DO YOU EXPECT THE RECAPITALIZATION AND MERGER TO BE
COMPLETED?
A: We are working to complete the Recapitalization and Merger by the end of
July 1999.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE RECAPITALIZATION AND
MERGER TO ME?
A: There will be no tax consequences of the Recapitalization to you. There
will be tax consequences of the Merger to you. The receipt of the cash
merger consideration by you for your Equitrac common stock will be a
taxable transaction for federal income tax purposes. To review your
potential tax consequences in greater detail, see pages 36 through 38.
The tax consequences of the Merger will depend on your personal situation.
You should consult your tax advisor for a full understanding of the tax
consequences of the Merger to you.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail it
in the enclosed envelope as soon as possible, so that your shares will be
represented at the meeting. If you sign and send in your proxy card and do
not indicate how you want to vote, your proxy will be counted as a vote for
the Merger Agreement. If you fail to return your proxy card or to vote at
the special meeting, the effect will be a vote against the Merger
Agreement.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL
MY BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of Equitrac common stock only if you
provide instructions on how to vote. You should instruct your broker how to
vote your shares, following the directions your broker provides. If you do
not provide instructions to
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<PAGE> 15
your broker, your shares will not be voted and they will not be counted as
votes against the Merger Agreement. However, the effect of not voting your
shares will be a vote against the Merger Agreement.
Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY AFTER I HAVE
MAILED MY SIGNED PROXY CARD?
A: You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send
a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these
methods, you must timely submit your notice of revocation or your new proxy
card to Equitrac. Third, you can attend the special meeting and vote in
person. Simply attending the special meeting, however, will not revoke your
proxy. If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, we will send you written instructions
for exchanging your common stock certificates for the cash merger
consideration.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would like
to ask any additional questions about the Recapitalization and/or Merger, you
should contact Equitrac's information agent:
Corporate Investor Communications, Inc.
(201) 896-1900
111 Commerce Road
Carlstadt, New Jersey 07072-2586
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<PAGE> 16
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT AND OTHER STATEMENTS MADE FROM TIME TO TIME BY
EQUITRAC CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF, OR CURRENT EXPECTATIONS OF EQUITRAC, AS
WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED
BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO THE
MANAGEMENT OF EQUITRAC THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS
DETAILED HEREIN AND: (I) COMPETITIVE PRESSURES IN THE COST RECOVERY, EXPENSE
MANAGEMENT PRODUCTS AND WIRELESS COPIER METER READING INDUSTRIES; (II) THE
IMPACT IN CHANGES OF NEED FOR EQUITRAC'S PRODUCTS; (III) THE ABILITY OF EQUITRAC
TO DEVELOP, DEPLOY AND MARKET NEW PRODUCTS; (IV) EQUITRAC'S BUSINESS AND GROWTH
STRATEGIES; AND (V) GENERAL ECONOMIC CONDITIONS. EXCEPT FOR ITS ONGOING
OBLIGATIONS TO DISCLOSE MATERIAL INFORMATION AS REQUIRED BY THE FEDERAL
SECURITIES LAWS, EQUITRAC DOES NOT UNDERTAKE AN OBLIGATION TO UPDATE OR REVISE
FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN ASSUMPTIONS, THE OCCURRENCE OF
UNANTICIPATED EVENTS, OR CHANGES IN FUTURE OPERATING RESULTS OVER TIME.
vii
<PAGE> 17
SUMMARY
This summary highlights selected information from the Proxy Statement but
may not contain all of the information that is important to you. To understand
the Merger Agreement and the Recapitalization and the Merger fully, you should
read this entire document carefully, as well as the additional documents to
which we refer you. See "Available Information" on page 50. The Merger Agreement
is attached as Appendix A to this Proxy Statement. We encourage you to read the
Merger Agreement as it is the legal document that governs the Recapitalization
and the Merger. We have included page references parenthetically, where
applicable, to direct you to a more complete description of the topics in this
summary.
THE COMPANIES
Equitrac Corporation
836 Ponce de Leon Boulevard
Coral Gables, Florida 33134
(305) 442-2060
Equitrac is a leading provider of computer system solutions to manage
office equipment resources. Equitrac's products are designed to allow users to
automatically track, record and report usage of office equipment. Equitrac's
wireless meter-reading products provide an automated system for copier dealers
and manufacturers to collect meter readings for photocopier lease and
maintenance programs based on cost per copy contracts.
Chargeback Acquisition Corp. ("Merger Sub")
c/o Cornerstone Equity Investors IV, L.P.
717 Fifth Avenue
New York, New York 10022
(212) 753-0901
Merger Sub was organized by Cornerstone Equity Investors IV, L.P., a member
of the Cornerstone Group, for the sole purpose of effecting the Merger. The
Equity Investors, comprised of the Cornerstone Group and the Management Group,
will acquire Equitrac in the Merger.
The membership of the Cornerstone Group and the Management Group is set
forth in "Questions and Answers about the Merger -- Who will own Equitrac after
the Merger?" on page (iii). For further information about the Equity Investors,
see "Certain Information concerning Merger Sub and the Equity Investors"
beginning on page 45.
THE RECAPITALIZATION AND MERGER (PAGE 34)
Mechanics of the Recapitalization. In the Recapitalization:
- Equitrac will amend its Articles of Incorporation to create and authorize
the issuance of preferred stock; and
- the Cornerstone Group will make an approximately $24.9 million equity
contribution to Equitrac in exchange for preferred stock, and the
Management Group will exchange some of their shares of Equitrac common
stock and stock options for preferred stock.
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<PAGE> 18
Mechanics of the Merger. In the Merger:
- Merger Sub will be merged into Equitrac with Equitrac continuing as the
surviving corporation (the "Surviving Corporation");
- each share of Equitrac's common stock will be converted into the right to
receive $21.00 in cash, without interest; and
- each share of Equitrac's preferred stock held by the Equity Investors as
a result of the Recapitalization will be converted into the right to
receive preferred stock and common stock of the Surviving Corporation.
Consequences of the Recapitalization and Merger. As a result of the
Recapitalization and Merger:
- the entire equity interest in Equitrac will be owned by the Equity
Investors (consisting of the Cornerstone Group and the Management Group);
- the unaffiliated shareholders of Equitrac will no longer have any
interest in, and will not be shareholders of Equitrac, and therefore will
not participate in its future earnings and growth.;
- Equitrac will incur significant amounts of indebtedness;
- the Equity Investors will have the opportunity to benefit from any
earnings and growth of Equitrac, and will bear the risk of any decrease
in Equitrac's value; and
- Equitrac's common stock will no longer be traded on The Nasdaq National
Market, price quotations will no longer be available and the registration
of Equitrac's common stock under the Exchange Act, will be terminated.
After such registration is terminated, Equitrac will no longer be
required to file periodic reports with the Commission.
THE SPECIAL MEETING (PAGE 32)
The special meeting will be held on July 27, 1999, at a.m.,
local time, at . At the special meeting, the shareholders of
Equitrac will be asked to consider and vote upon a proposal to approve and adopt
the Merger Agreement and the Transactions.
RECORD DATE; VOTING POWER; QUORUM (PAGE 32)
Shareholders of record of Equitrac common stock at the close of business on
June 18, 1999 are entitled to notice of and to vote at the special meeting. As
of the record date, there were shares of Equitrac common stock
issued and outstanding held by approximately holders of record.
Holders of record of Equitrac common stock on the record date are entitled
to one vote per share on any matter that may properly come before the special
meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of Equitrac common stock entitled to vote at the special
meeting is necessary to constitute a quorum for the transaction of business.
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<PAGE> 19
VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT (PAGE 33)
Under Florida law, the affirmative vote of the holders of a majority of the
shares of Equitrac common stock outstanding on the record date for the special
meeting is required to approve the Merger Agreement. For purposes of determining
whether the Merger Agreement has received a majority vote, abstentions and
broker non-votes (shares held in "street name" through a broker or other nominee
as to which voting instructions with regards to the Merger Agreement have not
been received from the beneficial owners and such broker or other nominee is not
permitted to exercise voting discretion with regards to the Merger Agreement)
will not be included in the vote total, although an abstention and a broker
non-vote will have the effect of a vote against the Merger Agreement.
Abstentions and broker non-votes will, however, be counted for determining
whether there is a quorum.
As of the record date for the special meeting, Equitrac's executive
officers and directors owned, in the aggregate, 1,197,464 shares of Equitrac
common stock or 33.8% of the shares of Equitrac common stock then outstanding.
Of such shares, 1,176,864 are held by Messrs. Kane and Wilson, both of whom have
granted Merger Sub an irrevocable proxy under a voting agreement to vote these
shares in favor of the Merger Agreement. Merger Sub intends to vote these shares
represented by the proxy in favor of the Merger Agreement and the Transactions.
Therefore, holders of only an additional 17% of the outstanding shares of
Equitrac common stock need to vote in favor of the Merger Agreement for the
Transactions to be approved. For a description of the voting agreement and
irrevocable proxy, see "-- Voting Agreement; Irrevocable Proxy" below.
Equitrac's other executive officers and directors have indicated that they will
vote their shares in favor of the Merger Agreement and the Transactions.
VOTING AGREEMENT; IRREVOCABLE PROXY (PAGE 33)
Messrs. Kane and Wilson have entered into a Voting Agreement (the "Voting
Agreement") dated as of February 17, 1999, as amended, whereby they have agreed
to: (i) vote (or cause to be voted) their shares of Equitrac common stock at the
special meeting in favor of the Merger Agreement and the Transactions; and (ii)
vote (or cause to be voted) their shares of Equitrac common stock against any
action or agreement that could reasonably be expected to impede, interfere with,
delay, postpone, or attempt to discourage the Transactions, such as the adoption
by Equitrac of a proposal regarding the acquisition of Equitrac by a third party
by merger, tender offer or otherwise. Under the Voting Agreement, Messrs. Kane
and Wilson also granted an irrevocable proxy to Merger Sub to vote their shares
at the special meeting in favor of the Merger Agreement and the Transactions.
The shares beneficially owned by Messrs. Kane and Wilson represent approximately
33% of the outstanding shares of Equitrac common stock entitled to vote at the
special meeting. Merger Sub intends to vote the shares represented by such proxy
in favor of approval of the Merger Agreement and the Transactions.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS (PAGE 19)
Because of the potential conflicts of interests of two members of the Board
of Directors of Equitrac who are members of the Management Group, the Board
established a special committee to act on behalf of the unaffiliated
shareholders of Equitrac for the purpose of negotiating the price and other
terms of the transactions with the Equity Investors and evaluating the fairness
of the Merger Agreement and the Transactions. The
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<PAGE> 20
special committee is composed of Peter Marx and Marc Watson, both of whom are
independent directors.
The special committee and the Board of Directors, based on the special
committee's recommendation, have each determined that the terms of the Merger
Agreement, which were established through arm's-length negotiations with
Cornerstone, and the Transactions, are fair to, and in the best interests of,
Equitrac and its shareholders (other than the Management Group). Accordingly,
the special committee and the Board of Directors have unanimously approved the
Merger Agreement and unanimously recommend that Equitrac's shareholders vote for
approval and adoption of the Merger Agreement and the Transactions.
OPINION OF FINANCIAL ADVISOR (PAGE 25)
Prudential Securities Incorporated has delivered its written opinion to the
special committee to the effect that, as of June 3, 1999, the cash merger
consideration is fair, from a financial point of view, to Equitrac's
shareholders (other than the Management Group).
A copy of Prudential Securities' opinion, setting forth the assumptions
made, procedures followed, matters considered, and limitations on and scope of
the review by Prudential Securities, is attached as Appendix B to this proxy
statement. You are encouraged to read such opinion in its entirety.
CONFLICTS OF INTEREST (PAGE 29)
In considering the recommendations of the special committee and the Board
of Directors, shareholders should be aware that Messrs. Kane and Wilson, who are
members of the Board of Directors, have interests in the Merger that are
different from the interests of Equitrac shareholders generally and which may
create potential conflicts of interest.
Equity Investment and Cash Payments (Page 29)
Pursuant to the Recapitalization, some of the shares of common stock and
stock options of Equitrac held by members of the Management Group will be
converted into shares of preferred stock of Equitrac. The Recapitalization will
occur immediately prior to the Merger. At the effective time of the Merger, the
shares of the preferred stock held by the Management Group will be converted
into shares of common stock and preferred stock (the "Converted Shares") of the
Surviving Corporation. In addition, members of the Management Group will be
granted options to purchase shares of the Surviving Corporation's common stock
with an exercise price equal to or greater than fair market value at the
effective time (the "New Options"), which options will be subject to time and
performance vesting criteria. The Management Group currently is expected to
consist of 7 members of Equitrac's management, John T. Kane, Chairman of the
Board, George P. Wilson, President and Chief Executive Officer, Chris Rickborn,
Senior Vice President -- Marketing and Technology, Steve Smith, Vice
President -- Business Technology Division, Patrick J. Raftery, Senior Vice
President, U.S. Professional Division, Cid Yousefi, Vice President -- Product
Development, and John P. Jones, Vice President -- Sales, International Division.
It is currently expected that the Management Group will invest an aggregate of
approximately $6.7 million in the Surviving Corporation, consisting of the fair
value of their Converted Shares. A significant number of shares of common stock
and
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<PAGE> 21
options held by members of the Management Group will not be exchanged in the
Recapitalization but will be converted in the Merger into the right to receive
cash merger consideration in the aggregate amount of approximately $22 million.
Following the Merger, it is expected that the Management Group will own, in
the aggregate, Converted Shares representing approximately 21% of each of the
Surviving Corporation's outstanding common stock and preferred stock on a
fully-diluted basis and New Options representing approximately 5% of the
Surviving Corporation's common stock on a fully-diluted basis. The opportunity
to obtain an equity interest in the Surviving Corporation may have presented the
members of the Management Group with actual or potential conflicts of interest
in connection with the Merger.
Employment and Consulting Agreements (Page 31)
George P. Wilson has agreed to terminate his existing employment agreement
with Equitrac upon completion of the Merger and to enter into a one-year
employment agreement, subject to automatic renewals, with the Surviving
Corporation pursuant to which he will serve as President and Chief Executive
Officer of the Surviving Corporation. The terms and conditions of Mr. Wilson's
employment agreement with the Surviving Corporation will be substantially
similar to those of his current employment agreement with Equitrac, except for
the calculation of Mr. Wilson's annual bonus, the reduction of retirement
benefits to which he is entitled and the elimination of certain benefits to
which he is entitled upon a change of control of Equitrac. John T. Kane has
agreed to terminate his existing employment agreement with Equitrac upon
completion of the Merger and to enter into a one-year consulting agreement,
subject to automatic renewals, with the Surviving Corporation which provides for
an annual consulting fee of $24,000 and certain healthcare benefits. As a result
of the termination of Mr. Kane's employment agreement, he will receive a cash
payment of approximately $120,000 that otherwise would have been payable
following his retirement.
TREATMENT OF OUTSTANDING STOCK OPTIONS (PAGE 40)
Under the terms of the Merger Agreement, each holder of outstanding options
(other than those converted into preferred stock by members of the Management
Group in the Recapitalization), whether or not such options are exercisable,
will be entitled to receive an amount in cash equal to the product of (1) the
difference between $21.00 and the weighted average exercise price of such
options and (2) the number of shares of Equitrac common stock subject to such
options. The directors and executive officers of Equitrac who own options will
receive this option consideration as a result of the Merger for all of their
options other than those converted into preferred stock by members of the
Management Group in the Recapitalization.
INDEMNIFICATION (PAGE 42)
The Merger Agreement provides for indemnification and liability insurance
arrangements for the current officers and directors of Equitrac.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 36)
There will be no tax consequences of the Recapitalization to the holders of
Equitrac common stock. There will be tax consequences of the Merger to the
holders of Equitrac
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<PAGE> 22
common stock. The receipt of cash by a shareholder in exchange for his or her
shares of Equitrac common stock pursuant to the Merger will constitute a taxable
transaction to such shareholder for federal income tax purposes and may also be
a taxable transaction under applicable state, local and foreign tax laws. In
general, a shareholder will recognize gain or loss equal to the difference
between $21.00 per share and such shareholder's adjusted tax basis in the shares
exchanged.
All shareholders should read carefully the tax discussion in "The
Recapitalization and Merger -- Federal Income Tax Consequences" beginning on
page 36. They are urged to consult their own tax advisors as to the specific
consequences to them of the Merger under federal, state, local and any other
applicable tax laws.
ACCOUNTING TREATMENT (PAGE 38)
Equitrac expects that the Merger will be treated as a recapitalization for
accounting purposes. As a result, the historical cost basis of Equitrac's assets
and liabilities will not change. The aggregate cost of repurchasing the common
stock will be accounted for as a charge to shareholders' equity.
DISSENTERS' APPRAISAL RIGHTS (PAGE 38)
Equitrac shareholders are not entitled under Florida law or Equitrac's
articles of incorporation to exercise dissenters' appraisal rights in connection
with the Transactions.
FINANCING OF THE MERGER (PAGE 35)
The total amount of funds necessary to fund the Merger and related
transactions is expected to be approximately $85.1 million. These funds are
expected to come from the following sources, although the actual amounts
attributable to these sources may differ at closing:
- an equity investment made by the Cornerstone Group of approximately $24.9
million;
- an equity investment on the part of the Management Group of approximately
$6.7 million, consisting of their Converted Shares (valued at $21.00 per
share);
- cash of Equitrac on hand at the Effective Time of approximately $9.5
million; and
- borrowings by the Surviving Corporation totaling approximately $44.0
million under a senior secured credit facility and senior subordinated
notes.
Cornerstone has received a financing commitment letter from Fleet National
Bank to provide the senior secured credit facility and a financing commitment
letter from Mainsail Capital, an affiliate of Fleet ("Mainsail"), to purchase
senior subordinated notes.
THE MERGER AGREEMENT (PAGE 38)
Conditions to the Merger (Page 43)
Each party's obligation to effect the Merger is subject to the satisfaction
of a number of conditions, most of which may be waived. The most significant
conditions to consummating the Merger include:
6
<PAGE> 23
- approval and adoption of the Merger Agreement by the holders of a
majority of the shares of Equitrac common stock;
- receipt by the Surviving Corporation of sufficient financing pursuant to
Cornerstone's existing financing commitments from Fleet and Mainsail;
- absence of a material adverse change in the business or financial
condition of Equitrac, except that any change that is substantially
consistent with certain of the financial information provided by Equitrac
to Cornerstone and Merger Sub or their representatives before June 4,
1999 shall not be deemed to constitute a material adverse change in the
business or financial condition of Equitrac; and
- the termination or expiration of any applicable waiting period under
federal antitrust laws relating to the Merger.
No Solicitation (Page 41)
The Merger Agreement prohibits Messrs. Kane and Wilson, Equitrac, its
subsidiaries, and any of Equitrac's or its subsidiaries' directors, officers,
employees, agents or representatives from directly or indirectly:
- initiating, soliciting, or encouraging any inquiries, discussions or
making any proposal with a third party with respect to any merger,
consolidation or other business combination involving Equitrac or any
acquisition of any kind of a material portion of the assets or capital
stock of Equitrac or its subsidiaries (a "Competing Transaction"); or
- negotiating, exploring or otherwise communicating in any way with any
third party with respect to any Competing Transaction or entering into or
consummating any agreement arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger.
The Merger Agreement permits Equitrac, prior to the special meeting, to
consider an unsolicited Competing Transaction and to enter into a Competing
Transaction if the following conditions are met: (a) the Equitrac Board
determines in good faith by a majority vote based upon the advice of its outside
counsel that the Board is required to do so by its fiduciary obligations, (b)
Merger Sub has been notified of the Competing Transaction and has been provided
a ten business day period to submit to Equitrac a proposal adjusting the terms
and conditions of the Merger Agreement, but after receiving such proposal, if
any, the Board determines, in its business judgment, that the Competing
Transaction is more favorable to Equitrac's unaffiliated shareholders from a
financial point of view than Merger Sub's revised proposal; and (c) Equitrac
pays Merger Sub a termination fee of $2.3 million plus an amount equal to Merger
Sub's out-of-pocket expenses and costs.
Cornerstone's Guarantee (Page 41)
Cornerstone has guaranteed to Equitrac the performance by Merger Sub of its
obligations under the Merger Agreement subject to a maximum liability of $24.9
million.
7
<PAGE> 24
Termination (Page 44)
The Merger Agreement may be terminated and the Merger abandoned, at any
time prior to the Effective Time, whether before or after approval by Equitrac's
shareholders, by:
- the mutual written consent of Equitrac and Merger Sub;
- either Merger Sub or Equitrac if the Merger has not been consummated by
September 30, 1999, unless the failure by the terminating party to
fulfill any obligation under the Merger Agreement caused or resulted in
the failure of the Merger to be consummated by September 30, 1999;
- Merger Sub if Equitrac's Board of Directors or any committee thereof (a)
withdraws or modifies or refrains from giving its approval or
recommendation of the Merger Agreement or Merger, or (b) approves or
recommends a Competing Transaction;
- Equitrac or Merger Sub if the Equitrac shareholders do not approve the
Merger Agreement at the special meeting;
- Equitrac or Merger Sub if the other party breaches any of its
representations, warranties and agreements under the Merger Agreement and
such breach is not cured within 30 days of notice; or
- Equitrac if it enters into a definitive agreement for a Competing
Transaction after satisfying the conditions described above under "No
Solicitation".
Fees and Expenses (Page 44)
Equitrac and Merger Sub will pay their own fees, costs and expenses
incurred in connection with the Merger Agreement (except that Equitrac will bear
all expenses incurred in connection with this proxy statement, and Equitrac and
Merger Sub shall share equally all expenses incurred by them in connection with
filings made under federal anti-trust laws with the Federal Trade Commission and
Department of Justice). However, Equitrac will pay Merger Sub a termination fee
of $2.3 million plus an amount equal to Merger Sub's costs and expenses if
Equitrac approves, enters into or consummates a Competing Transaction, or if the
Board or the special committee recommends a Competing Transaction or withdraws
its recommendation of the Merger Agreement.
Equitrac also will reimburse Merger Sub for its reasonable costs and
out-of-pocket expenses if the Merger Agreement is terminated because:
- the Merger is not completed by September 30, 1999, unless the failure to
complete the Merger by such date is caused by Merger Sub's failure to
fulfill any obligation under the Merger Agreement;
- the Merger Agreement is not approved by Equitrac's shareholders; or
- there is a breach by Equitrac of a representation, warranty or agreement
under the Merger Agreement that is not cured within 30 days notice.
Merger Sub will reimburse Equitrac for its reasonable costs and
out-of-pocket expenses if the Merger Agreement is terminated because of a breach
by Merger Sub of a
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<PAGE> 25
material representation, warranty or agreement under the Merger Agreement and
such breach is not cured within 30 days of notice.
REGULATORY APPROVALS (PAGE 38)
Equitrac is not aware of any material governmental or regulatory approvals,
other than federal antitrust clearance, which are required for consummation of
the Transactions.
LEGAL PROCEEDINGS (PAGE 38)
Equitrac's counsel was recently notified that a stockholder class action
complaint has been filed in a Florida court by a stockholder purporting to act
individually and on behalf of all public shareholders of Equitrac, other than
the defendants, who are similarly situated. The defendants named in the case are
Equitrac, George P. Wilson, John T. Kane, Marc M. Watson, Peter A. Marx, Scott
Modist, Sharon Jones and James F. Courbier. The plaintiff alleges breach of
fiduciary duties, unjust enrichment and other matters relating to the
defendants' actions in connection with the Transactions. The plaintiff seeks to
have the court certify the complaint as a class action, enjoin consummation of
the Transactions, and award the plaintiff and other alleged class members
compensatory damages and attorneys' fees and other costs. Equitrac believes that
the lawsuit is without merit and intends to vigorously defend the action.
MARKET PRICES FOR COMMON STOCK AND DIVIDENDS
Equitrac's common stock is traded on The Nasdaq National Market under the
symbol "ETRC." The following table sets forth for the fiscal quarter indicated
the high and low closing prices per share of Equitrac's common stock as reported
by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended February 28, 1998
First Quarter.................................... $14.63 $11.50
Second Quarter................................... $16.50 $12.88
Third Quarter.................................... $17.75 $14.38
Fourth Quarter................................... $19.63 $16.63
Fiscal Year ended February 28, 1999
First Quarter.................................... $24.00 $17.00
Second Quarter................................... $20.75 $18.00
Third Quarter.................................... $22.00 $16.50
Fourth Quarter................................... $24.50 $16.50
Fiscal Year ended February 29, 2000
First Quarter.................................... $24.00 $15.50
Second Quarter (through June , 1999)............
</TABLE>
On February 16, 1999, the last trading day prior to the announcement of the
execution of the Merger Agreement, the closing price per share of Equitrac's
common stock as reported by Nasdaq was $20.13. On June , 1999, the last
trading day prior to the date of this proxy statement, the closing price per
share of Equitrac's common stock as reported by Nasdaq was $ .
Equitrac has never paid cash dividends on its common stock.
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<PAGE> 26
During fiscal 1998 and fiscal 1999, Equitrac repurchased 40,000 and 60,100
shares of its common stock at an aggregate cost of $534,000 and $1,190,000,
respectively.
On the record date for the special meeting, there were holders of
record of Equitrac's common stock.
Shareholders should obtain current market price quotations for Equitrac's
common stock in connection with voting their shares of common stock.
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<PAGE> 27
SUMMARY FINANCIAL INFORMATION
The following tables set forth selected financial information for Equitrac
for each of the five fiscal years in the period ended February 28, 1999. Such
information should be read in conjunction with the historical financial
statements of Equitrac and the notes thereto which are incorporated by reference
into this proxy statement.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
Total revenues......................................... $31,224 $33,718 $41,901 $49,784 $55,690
Operating income....................................... 1,754 2,805 3,729 4,487 6,284
Net income............................................. 1,287 1,882 2,614 3,158 4,913
Earnings per common share:
Basic................................................. $ 0.35 $ 0.54 $ 0.77 $ 0.91 $ 1.39
Diluted............................................... 0.34 0.53 0.73 0.85 1.29
Number of shares used in per share computations:
Basic................................................. 3,694 3,481 3,412 3,485 3,531
Diluted............................................... 3,777 3,549 3,583 3,730 3,798
Balance Sheet Data (End of Year):
Cash, cash equivalents and investments................. $ 7,383 $10,423 $10,902 $13,524 $11,119
Working capital........................................ 12,343 12,366 13,159 15,413 17,792
Total assets........................................... 25,436 25,646 30,682 35,114 39,743
Total current liabilities.............................. 3,535 3,671 5,907 6,935 6,682
Long-term debt, net of current portion................. -- -- -- -- --
Total stockholders' equity............................. $21,491 $21,824 $24,775 $28,179 $33,061
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------
FEBRUARY 28, FEBRUARY 28,
1998 1999
------------ ------------
<S> <C> <C>
Book value per common share................................. $8.04 $9.34
Common shares outstanding................................... 3,506,300 3,539,600
</TABLE>
CERTAIN PROJECTIONS OF FUTURE OPERATING RESULTS
In connection with Cornerstone's due diligence review of Equitrac, Equitrac
provided Cornerstone with certain non-public business and financial information.
The non-public information provided by Equitrac included projections of
Equitrac's future operating performance with regard to its well-established
Professional Market cost recovery products and its newer Business Technology
Commercial Market products. Except as otherwise indicated below, these
projections did not give effect to the Recapitalization, the Merger or the
financing of the Merger.
Equitrac does not as a matter of course publicly disclose projections as to
future revenues or earnings. The projections were not prepared with a view to
public disclosure and are included in the proxy statement only because such
information was made available to Cornerstone. Accordingly, it is expected that
there will be differences between actual and projected results, and actual
results may be materially different than those set forth below. The projections
were not prepared with a view to compliance with the published guidelines of the
Commission regarding projections, and were not prepared in accordance with the
guidelines established by the American Institute of Certified Public Accountants
for preparation and presentation of financial projections. In addition, the
projections were not reviewed by an independent public accounting firm.
These forward-looking statements reflect numerous assumptions made by
Equitrac's management especially with respect to Equitrac's Business Technology
Commercial Market products which are still in the early stages of development
and deployment. In addition, factors such as industry performance, market
acceptance of new products, changes in customer preferences, general business,
economic, regulatory, market and financial conditions, all of which are
difficult to predict, may cause the projections or the
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<PAGE> 28
underlying assumptions to be inaccurate. Accordingly, there can be no assurance
that the projections will be realized, and actual results may be materially
greater or less than those contained in the projections. See "Cautionary
Statement Concerning Forward-Looking Information" on page vii.
The inclusion of the projections herein should not be regarded as an
indication that Cornerstone or Equitrac or their respective financial advisors
considered or consider the projections to be a reliable prediction of future
events, and the projections should not be relied upon as such. Equitrac does not
intend to update or otherwise revise the projections to reflect circumstances
existing after the date when made or to reflect the occurrence of future events
even in the event that any or all of the assumptions underlying the projections
are shown to be in error.
In connection with Cornerstone's revised proposal of $21.00 per share,
Equitrac provided to Cornerstone its fiscal 2000 budget, which included the
following projections:
<TABLE>
<CAPTION>
FEBRUARY 29,
2000
------------------
(IN THOUSANDS)
<S> <C>
Total revenues.............................................. $60,877
Operating income............................................ 7,567
EBITDA...................................................... 11,900
EBITDA-capital expenditures................................. 7,200
</TABLE>
The foregoing projections include approximately $675,000 of cost savings
relating to public company expenses and certain employment and consulting
agreements that management believes would be achieved as a result of the
Transactions.
The material assumptions underlying these projections are as follows:
- For Professional Market cost recovery products an increase in revenue of
approximately 10% for the fiscal year ending February 29, 2000.
- For the newer Business Technology Commercial Market products (1) digital
print tracking product sales of approximately $2.2 million for the fiscal
year ending February 29, 2000 (2) OEM Sales of Pitney Bowes AccuTrac Mail
Accounting products of approximately $3.5 million for the fiscal year
ending February 29, 2000 and (3) sales of TelemeTrac of approximately
$1.5 million for the fiscal year ending February 29, 2000.
Subsequent to providing the foregoing projections to Cornerstone, Equitrac
informed Cornerstone that (i) its first quarter revenue and operating income
would be approximately $511,000 and $290,000, respectively, lower than
anticipated in the fiscal 2000 budget, and (ii) its second quarter revenue and
operating income would be approximately $430,000 and $337,000, respectively,
lower than aniticipated in the fiscal 2000 budget. Further, Equitrac informed
Cornerstone that its Business Technology division may not achieve its corporate
print log sales budget of $1.8 million for fiscal 2000.
Cornerstone took this information, together with its own analysis, into
account in determining to enter into the Merger Agreement.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
During the late Spring of 1998, Equitrac's senior management began to
consider whether the company should seek the advice of an investment banking
firm on alternative strategies for the company's future. Messrs. Kane and Wilson
were interested in selling a portion of their Equitrac shareholdings. However,
they felt that selling their shares in the
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<PAGE> 29
stock market was not an attractive option because, in their opinion, the stock
market did not appropriately value Equitrac's shares. They attributed this, in
large part, to two reasons. First, there were no Wall Street analysts that
followed Equitrac, which meant there was no source of independent analysis
available to potential investors. Second, although Equitrac's shares were listed
on The Nasdaq National Market, because of the large stockholdings of management
and several institutions, the trading market for the shares was relatively
inactive.
Equitrac's senior management believed that a sale of all or part of the
company might be a desirable means of providing Equitrac's shareholders a better
return on their investment in the common stock than they could achieve in the
stock market. During May and June 1998, senior management met informally with
Prudential Securities on several occasions to discuss alternative strategies
available to Equitrac, including the possible sale of the company to a strategic
or financial buyer. During this period, Equitrac's senior management also
negotiated with Prudential Securities the terms and conditions on which
Prudential Securities would be willing to act as a financial advisor to
Equitrac. On July 6, 1998, Equitrac formally engaged Prudential Securities to
act as its financial advisor in connection with a possible sale of the company.
During August and early September 1998, Equitrac's management prepared a
confidential offering memorandum concerning Equitrac that would be used by
Prudential Securities, on behalf of Equitrac, to market the company to potential
buyers. The confidential offering memorandum contained a description of
Equitrac's product and services, and historical and projected financial
information.
In the middle of September 1998, Prudential Securities, on behalf of
Equitrac, began contacting parties which they and management believed might have
an interest in acquiring Equitrac. Prudential Securities first contacted a
select number of potential strategic buyers (i.e., companies that might be
interested in acquiring Equitrac to consolidate its products, services and
business organization with their own), offering them an opportunity to effect a
transaction with Equitrac on an exclusive basis. When none of these companies
expressed an interest in exploring a transaction with Equitrac, Prudential
Securities broadened its marketing effort to include both other potential
strategic buyers and financial buyers (private equity funds and investment
companies that might be interested in acquiring Equitrac as a portfolio company
primarily for financial considerations).
Prudential Securities contacted a total of thirteen potential strategic
buyers and twenty-nine potential financial buyers. Of the strategic buyers
contacted, three requested a confidential offering memorandum, and none
expressed further interest in exploring a transaction with Equitrac. Of the
financial buyers contacted, twenty-four requested a confidential offering
memorandum, and many indicated further interest in exploring a transaction.
Once the lack of interest from strategic buyers became clear and it became
apparent that any transaction would likely involve a financial buyer, Messrs.
Kane and Wilson advised Prudential Securities that they would be willing to
participate with a financial buyer in the acquisition of Equitrac so long as
they could sell a substantial portion of their present equity interests in the
acquisition. Prudential Securities made each interested financial buyer aware of
this.
Near the end of October 1998, each of the interested potential buyers was
invited to submit to Prudential Securities by November 12, 1998 a non-binding
indication of interest based on the information provided in the confidential
offering memorandum and publicly
13
<PAGE> 30
available information. Of the twenty-four potential financial buyers, nine,
including Cornerstone, submitted a preliminary indication of interest. The
indications of interest contemplated an acquisition of Equitrac for cash at
prices ranging between $20 and $25 per share of common stock. Each indication of
interest also contemplated that Equitrac's management would retain a significant
equity interest in the surviving corporation and would continue to run the
company. The indications of interest were subject to a variety of conditions,
including further due diligence investigations.
During a meeting held on December 1, 1998, the Board of Directors reviewed
the activities conducted to date by Prudential Securities. Because Messrs. Kane
and Wilson had expressed their interest in participating in a transaction by
retaining an equity interest, and each of the indications of interest received
by Prudential Securities contemplated their participation, the Board decided
that it should appoint a special committee consisting solely of independent
directors to review the indications of interest and any acquisition proposals
made by the potential financial buyers and to negotiate on behalf of Equitrac's
Board and shareholders (other than the Management Group) the terms of any
proposed transaction. Messrs. Peter Marx and Marc Watson were appointed to serve
on this special committee, and Mr. Marx was subsequently appointed chairman of
the special committee.
During the second week of December 1998, Messrs. Kane and Wilson, together
with Messrs. Scott Modist, Chris Rickborn and Steve Smith, Equitrac's Chief
Financial Officer, Senior Vice President -- Marketing and Technology and Vice
President -- Business Technology Division, respectively, made presentations to
representatives of six of the nine potential financial buyers. During these
presentations, management discussed and responded to questions concerning
Equitrac's history and prospects. Each of the potential financial buyers was
also provided with revised financial projections. During these meetings, there
were no negotiations of the terms and conditions of any particular transaction.
Each of these parties was invited to submit to Prudential Securities by December
22, 1998 a revised, non-binding indication of interest based on the information
provided in the confidential offering memorandum and the management
presentations.
Three of the potential financial buyers, including Cornerstone, submitted
revised indications of interest. The range of indicated prices per share of
common stock was between $23 and $26. Each of the indications of interest was
subject to the completion of a more thorough due diligence investigation of
Equitrac.
On December 24, 1998, the special committee held a meeting at which it
discussed the three proposals and the activities of Prudential Securities with
regard to the bidding process. Based on the advice of Prudential Securities, the
special committee authorized Prudential Securities to invite all three
candidates to visit Equitrac at its executive offices in Coral Gables, Florida
and to conduct an in-depth due diligence review of Equitrac's management,
operations, facilities, assets and liabilities.
From mid January through the beginning of February 1999, Cornerstone and
the other two potential financial buyers conducted a due diligence review of
Equitrac. Each of them was provided access to a data room containing copies of
contracts and other financial and business information, and was given access to
Equitrac's senior management to discuss the company's business and operations.
There were no negotiations during this period between Equitrac and any of the
three potential financial buyers. During this period, the special committee
requested Equitrac's counsel, Greenberg Traurig, to prepare a draft merger
agreement containing the general terms and conditions under which the company
would be willing to be acquired. Each of the potential financial buyers was
provided a draft of a merger agreement. The draft agreement set forth the
representations, warranties,
14
<PAGE> 31
covenants and conditions under which Equitrac would be willing to engage in a
merger, but did not contain any provisions relating to management's
participation in the transaction.
Each of the three interested financial buyers was invited by Prudential
Securities to submit by February 8, 1999 a final, binding proposal for the
acquisition of Equitrac. Each party was requested to include in its final
proposal, among other things, the proposed form of the transaction, the value
and form of consideration to be paid for each share of common stock, the sources
of funds to be used for the acquisition (including any proposed investment by
members of Equitrac's management), copies of commitment letters for any
financing required to complete the transaction, a detailed mark-up of the
proposed form of merger agreement, and a description of any other material
conditions or contingencies to the proposed transaction.
The special committee held telephone conference meetings on January 7 and
February 1, 1999, at which Prudential Securities reviewed with the committee by
telephone the status of the bidding process.
On February 8, 1999, a final proposal was submitted by each of the three
interested parties. The proposals contemplated an acquisition of Equitrac for
cash at prices ranging between $23.50 and $24.75 per share of common stock. All
of the proposals specified the amount of cash equity the potential buyer was
willing to commit to the transaction and the amount of equity Equitrac's
management would be expected to contribute to the acquiring entity, in the form
of a rollover of a portion of their common stock. Two of the three proposals
specified the expected sources of other financing. Of the three proposals, the
Cornerstone proposal contemplated the highest per share value to be received by
Equitrac shareholders and a capital structure which involved the incurrence of
the least amount of debt. Each proposal was subject to customary closing
conditions.
On February 9, 1999, Mr. Marx of behalf of the special committee had a
conference call with representatives of Prudential Securities and Greenberg
Traurig to review the proposals. Representatives of Greenberg Traurig reviewed
for Mr. Marx the legal terms of the proposals, including the proposed forms of
merger agreements submitted by two of the three potential buyers. Prudential
Securities' representatives compared the financial terms of the proposals. Mr.
Marx and Prudential Securities generally agreed that the Cornerstone proposal
was the most attractive of the three, because of its price, capital structure
and financing terms. Mr. Marx and Prudential Securities then discussed whether
it would be more prudent to attempt to continue to negotiate with all three
potential buyers or to negotiate exclusively with Cornerstone. Mr. Marx and the
representatives of Prudential Securities concluded that it would be prudent for
Prudential Securities to contact Cornerstone to determine whether it was willing
to increase its per share cash price in consideration of an exclusive
negotiation period to finalize and document the terms of the proposed
transaction.
On February 10, 1999, after discussions with representatives of Prudential
Securities, Cornerstone indicated that it would be willing to increase its offer
by $.50 per share to $25.25 from $24.75 in consideration of an exclusive
negotiation period. That afternoon, the special committee held a meeting at
which Mr. Marx and representatives of Prudential Securities and Greenberg
Traurig advised the special committee of their conference call the previous day
and the process that resulted in Cornerstone's revised proposal. Representatives
of Greenberg Traurig reviewed for the special committee the legal terms of the
proposals, including the proposed forms of merger agreements submitted by two of
15
<PAGE> 32
the three potential buyers. Prudential Securities' representatives compared the
financial terms of the proposals, including Cornerstone's revised proposal.
Prior to adjourning the meeting, the special committee scheduled a meeting for
the following day to further deliberate the proposals.
On February 11, 1999, the special committee, together with representatives
of Prudential Securities and Greenberg Traurig, met by telephone to review the
proposals again, including Cornerstone's revised proposal. They also discussed
generally the terms of the proposed Cornerstone agreement and a timetable for
completing the transaction. At the conclusion of the meeting, the special
committee determined that Equitrac should pursue Cornerstone's proposal and
attempt to complete the transaction as soon as possible.
During the next several days, Greenberg Traurig, on behalf of Equitrac, and
legal counsel retained by Messrs. Kane and Wilson to represent their interests,
negotiated with Cornerstone's counsel the terms and conditions of a definitive
recapitalization and merger agreement and related documents for the transaction.
On February 16, 1999, the special committee, together with representatives
of Prudential Securities and Greenberg Traurig, met to review Cornerstone's
proposal, including the negotiated recapitalization and merger agreement and
related agreements. Greenberg Traurig summarized the material terms of the
agreements for the special committee. Prudential Securities reviewed for the
special committee the bidding process that had resulted in the Cornerstone
proposal, including a review of the three final bids received. Prudential
Securities then presented the special committee with an analysis that it had
performed to produce a range of implied values for Equitrac's common stock.
Prudential Securities concluded by delivering its oral opinion to the special
committee, which it later confirmed in writing, that the cash merger
consideration to be received by Equitrac's shareholders (other than the
Management Group) was fair from a financial point of view to such shareholders.
Based on Prudential Securities' opinion and valuation analysis presented at the
meeting and other factors considered during the meeting, the special committee
unanimously determined that the original merger agreement was fair to and in the
best interest of Equitrac and its unaffiliated shareholders, and recommended
that the Board of Directors approve the original merger agreement and the
Transactions.
Immediately after the special committee's meeting, the Board of Directors
of Equitrac met to receive the report of the special committee. At this meeting,
the special committee unanimously recommended that the Board of Directors adopt
and approve the original merger agreement. After discussing the recommendation
of the special committee, the Board determined that the original merger
agreement was fair and in the best interest of Equitrac and its unaffiliated
shareholders, and unanimously adopted and approved the original merger agreement
and the Transactions. Because of their participation as members of the
Management Group, Messrs. Kane and Wilson abstained from the vote on the
original merger agreement.
On February 17, 1999, prior to the opening of trading on Nasdaq, Equitrac
issued a press release announcing that the Board of Directors, based on the
recommendation of the special committee, had approved the original merger
agreement and the Transactions.
Prior to entering into the original merger agreement, Equitrac had provided
Cornerstone various financial projections, including financial projections for
the fourth quarter of the fiscal year ending February 28, 1999 and for the
fiscal year ending February 29, 2000. The terms and conditions of the original
merger agreement had been
16
<PAGE> 33
based upon these various projections. In early April, Equitrac provided
Cornerstone its preliminary financial results for the fourth quarter of fiscal
1999 and its preliminary fiscal 2000 budget, both of which differed from
Equitrac's prior projections.
On April 12, 1999, Equitrac received notice from Cornerstone that, based
upon a review of the preliminary fourth quarter results and the preliminary
fiscal 2000 budget, Cornerstone believed that Equitrac had suffered an "adverse
change" under the original agreement. Cornerstone also indicated that as a
result of this "adverse change" the financing commitments necessary to complete
the Transactions were no longer available. A number of conversations occurred
that day between members of the special committee and representatives of
Prudential Securities and Greenberg Traurig with regard to Cornerstone's notice.
At a meeting later that day with representatives of Prudential Securities,
Cornerstone indicated that it wanted to proceed with the Recapitalization and
Merger but on revised terms. Cornerstone preliminarily indicated that such
revised terms would result in Equitrac's shareholders receiving between $19.00
to $20.00 per share in cash.
Later that night, the special committee, together with representatives of
Prudential Securities and Greenberg Traurig, met by telephone to discuss
Prudential Securities' meeting with Cornerstone. The special committee also
determined that Equitrac should issue a press release announcing Cornerstone's
notice and the current status of the Transactions. On April 13, 1999, prior to
the opening of trading on Nasdaq, Equitrac issued such a press release.
Between April 13 and April 20, 1999, representatives of Cornerstone had
discussions with the management of Equitrac and conducted further due diligence
on the operations of Equitrac in order to formulate a revised proposal. Mr.
Watson of the special committee met with Cornerstone to discuss the prospects of
a revised proposal. Also during this period, representatives of Cornerstone and
Prudential Securities had informal negotiations concerning a revised proposal to
acquire Equitrac. On April 20, 1999, as a result of these negotiations,
Cornerstone advised Prudential Securities that it intended to deliver a proposal
to the special committee to proceed with the Recapitalization and Merger on
substantially the same terms as under the original merger agreement but at a
revised price of $21.00 per share, and that such revised proposal would be its
best and final offer.
On April 21, 1999, the special committee received the revised proposal from
Cornerstone. That day, the special committee, with representatives of Prudential
Securities and Greenberg Traurig, met to discuss the revised proposal. Greenberg
Traurig reviewed with the members of the special committee their legal duties in
connection with consideration of the revised proposal. The special committee
considered Equitrac's alternatives, including terminating the original merger
agreement and soliciting other offers. Greenberg Traurig advised the special
committee that there was uncertainty as to whether Equitrac had the legal right
to terminate the original merger agreement and, therefore, that Cornerstone
would likely contest any attempted termination. Prudential Securities advised
the special committee that it had requested Cornerstone to consider providing
Equitrac an opportunity to solicit other offers for a brief period
notwithstanding the non-solicitation covenant of the original merger agreement,
but such request had been unavailing. The special committee instructed
Prudential Securities to revisit the request with Cornerstone. The special
committee then considered the revised proposal and determined that it needed
further information about the adequacy of the $21.00 per share price and
revisions to the original merger agreement. Accordingly, the special committee
instructed Prudential Securities to update its analysis of the value of Equitrac
and be in a position to report on the fairness of the revised proposal at such
time as Cornerstone and Equitrac are prepared
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to enter into definitive documentation reflecting the terms of the revised
proposal. The special committee determined to recommend to the Board of
Directors that it authorize Equitrac to proceed with the Recapitalization and
Merger, but conditioned its recommendation on the definitive documentation and
the receipt of a fairness opinion from Prudential Securities.
Following the meeting of the special committee on April 21, 1999, the Board
of Directors, with representatives of Greenberg Traurig, met by telephone to
receive the report of the special committee with regard to the revised proposal.
At this meeting, the special committee made its conditional recommendation to
the Board of Directors. Based solely on the special committee's recommendation,
the Board authorized Equitrac to proceed with the recapitalization and merger at
$21.00 per share, but conditioned its authorization upon approval by the special
committee of the definitive documentation and receipt of a fairness opinion from
Prudential Securities.
On April 22, 1999, prior to the opening of trading on Nasdaq, Equitrac
issued a press release announcing the Board's conditional authorization to
proceed with the Transactions at $21.00 per share.
Between April 23, 1999 and June 3, 1999, Cornerstone and its
representatives conducted further due diligence on Equitrac's business and
operations. During this period, Equitrac provided Cornerstone and its
representatives additional financial information, including revised projections
as to revenues and operating income for the first and second quarters of the
fiscal year ending February 29, 2000 which were lower than those included in
Equitrac's fiscal 2000 budget. Revenues and operating income for the first
fiscal quarter were projected to be approximately 7% and 30%, respectively,
lower than forecasted in the fiscal 2000 budget. Similarly, revenues and
operating income for the second fiscal quarter were projected to be
approximately 5% and 18%, respectively, lower than forecasted in the fiscal 2000
budget. During this period, representatives of Equitrac and Cornerstone
negotiated the proposed Merger Agreement. Cornerstone agreed to revise the
proposed Merger Agreement so that the lower projections for the first and second
fiscal quarters of fiscal year 2000 would not be considered a material adverse
change to Equitrac. Cornerstone reiterated its position that the proposed Merger
Agreement like the original merger agreement did not permit Equitrac to solicit
competing offers, though it did agree to reduce the termination fee, which would
be payable if Equitrac accepted an unsolicited superior offer, to $2.3 million
from $2.5 million. Furthermore, the financial institutions that had committed to
provide the debt financing also had their representatives meet by telephone with
Equitrac's management to conduct further due diligence and were provided by
Cornerstone the lower projections for the first and second fiscal quarters. Both
Cornerstone and the financial institutions ultimately indicated to Equitrac that
they were satisfied with their due diligence review.
On June 2, 1999, the special committee, together with representatives of
Prudential Securities and Greenberg Traurig, met to consider further the $21.00
per share cash price. The special committee considered the revised proposal in
light of Equitrac's lower projections for the first and second fiscal quarters
of fiscal year 2000. The special committee generally discussed with
representatives of Equitrac's management and Prudential Securities these lower
projections. The special committee and Prudential Securities generally discussed
Equitrac's inability to solicit competing offers under the proposed Merger
Agreement. Greenberg Traurig then reviewed with the special committee the
revised terms and conditions of the proposed Merger Agreement, including those
relating to the lower projections and the reduction of the termination fee.
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Later that night, the special committee, together with representatives of
Prudential Securities and Greenberg Traurig, held a meeting at which Prudential
Securities presented an analysis of the $21.00 per share cash price and
indicated that it was prepared to deliver an opinion that the $21.00 per share
cash price was fair, from a financial point of view, to the unaffiliated
shareholders of Equitrac.
On June 3, 1999, Prudential Securities delivered to the special committee
an oral opinion, which was later confirmed in writing as of that date, that the
$21.00 per share cash price was fair, from a financial point of view, to the
unaffiliated shareholders of Equitrac. Based on the Prudential Securities
opinion and the analyses presented by Prudential Securities the night before and
other factors considered during the meeting, the special committee unanimously
decided to recommend approval and adoption of the $21.00 per share cash price
and determined that the Merger Agreement and the Transactions were fair to, and
in the best interests of Equitrac, and its unaffiliated shareholders.
Immediately following the special committee's receipt of Prudential
Securities' opinion, the Board of Directors met to receive the special
committee's report. At this meeting, the special committee unanimously
recommended to the Board of Directors that the Board accept the $21.00 per share
cash price and approve and adopt the Merger Agreement. After discussing the
recommendations of the special committee, the Board determined that the Merger
Agreement was fair and in the best interest of Equitrac and its unaffiliated
shareholders, and unanimously adopted the Merger Agreement and the Transactions.
Because of their participation as members of the Management Group, Messrs. Kane
and Wilson abstained from the vote on the Merger Agreement, just as they had
done with regard to the Board's adoption of the original merger agreement.
On June 4, 1999, Equitrac, following the parties' execution of the Merger
Agreement, issued a press release announcing that the Board, based on the
recommendation of the special committee, had approved the Merger Agreement and
the Transactions.
A more complete description of the factors considered by the special
committee and the Board at their February 16 and their respective June 2 and
June 3 meetings is set forth under the caption "Recommendations of the Special
Committee and Board of Directors" below.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
On February 16, 1999, the special committee unanimously determined that the
original merger agreement was fair to and in the best interests of Equitrac and
its unaffiliated shareholders, and recommended that the Board of Directors
approve and adopt the original merger agreement and that it be recommended to
the shareholders of Equitrac.
On February 16, 1999, the Board, based on the unanimous recommendation of
the special committee, unanimously determined that the original merger agreement
was fair to and in the best interests of the shareholders of Equitrac, and
recommended that the shareholders approve and adopt the Merger Agreement.
Following the events of April and May and the determination of the Board to
proceed with the Merger and Recapitalization, the special committee held a
meeting on June 2, 1999 and unanimously determined that the revised Merger
Agreement and the Transactions are fair to and in the best interests of Equitrac
and its unaffiliated shareholders, and recommended that the Board of Directors
approve the Merger Agreement and that it be recommended to the shareholders of
Equitrac. On June 3, 1999, based solely on the unanimous recommendation of the
special committee, the Board
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unanimously determined that the revised Merger Agreement and the Transactions
are fair to and in the best interests of the shareholders of Equitrac, and
recommended that the shareholders approve and adopt the Merger Agreement.
During their deliberations in both February and June, the special committee
and Board of Directors were assisted by their financial advisor, Prudential
Securities, and their legal counsel, Greenberg Traurig.
Special Committee Factors. In connection with its initial recommendation
in February 1999, the special committee considered a number of factors,
including, the following:
(1) the historical market prices and recent trading activity of
Equitrac's common stock, in particular the fact that the cash merger
consideration would enable the shareholders to realize a premium over the
prices at which Equitrac's common stock historically had traded; the
original cash merger consideration of $25.25 per share represented an
approximately 35% premium over the average closing price of $18.62 during
the 120 business days prior to February 16, 1999, the date on which the
special committee made its unanimous recommendation to the Board;
(2) results of the process undertaken by Prudential Securities to
identify and solicit indications of interest from selected potential
acquirors with respect to the purchase of Equitrac, including the fact
Cornerstone's proposal was one of only three formal proposals received and
that no potential acquiror or strategic partner had expressed an interest
in engaging in a business combination or other strategic transaction that
would likely be on terms as favorable to Equitrac's shareholders as those
contained in the original merger agreement;
(3) the presentation of Prudential Securities to the special committee
at its February 16, 1999 meeting, as to the sale process and various
financial and other matters;
(4) the oral opinion of Prudential Securities, later confirmed in
writing, addressed and delivered to the special committee on February 16,
1999 as to the fairness from a financial point of view of the original cash
merger consideration to be received by Equitrac's shareholders, other than
the Management Group, pursuant to the original merger agreement.
(5) information with respect to the financial condition, results of
operations, business and prospects of Equitrac, as well as the risks
involved in achieving such prospects, and the general economic and market
conditions affecting Equitrac;
(6) the likelihood of consummation of the Merger, the existence of
signed financing commitments, the proposed structure of the Merger and
anticipated closing date, and the conclusion that Cornerstone is a
significant participant in the capital markets with an established record
of completing transactions;
(7) the fact that consummation of the Merger would preclude the
shareholders from having the opportunity to participate in Equitrac's
future growth prospects as well as actual or potential conflicts of
interests of Messrs. Kane and Wilson and certain other members of the
Management Group who will have the opportunity to benefit from any
increases in the value of Equitrac following the Merger by reason of their
continuing equity interest in the Surviving Corporation;
(8) the terms and conditions of the original merger agreement,
including the ability of Equitrac, to the extent required by fiduciary
obligations of the Board of Directors to Equitrac's shareholders, to
terminate the original merger agreement in
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order to approve a Competing Transaction on terms more favorable to
Equitrac's shareholders than those set forth in the Merger Agreement, upon
the payment to Merger Sub of a $2.5 million termination fee plus its
reasonable costs and expenses; and
(9) the advice of Greenberg Traurig, its legal advisor, with respect
to the terms of the original merger agreement and structure of the
Recapitalization and the Merger.
In connection with its June 1999 recommendation, the special committee
considered the factors enumerated above, as well as the following additional
factors:
(1) the revised cash merger consideration of $21.00 per share
represented an approximately 13% premium over the average closing price of
$18.62 during the 120 business days prior to February 16, 1999, the day
before the original merger agreement was publicly announced;
(2) Equitrac's lower than projected operating income, EBITDA and
EBITDA less capital expenditures for the fourth quarter ended February 28,
1999 and the lower than projected operating income, EBITDA and EBITDA less
capital expenditures anticipated in the fiscal year 2000 budget. The
special committee considered in particular that the lower than originally
projected results for the fourth quarter ended February 28, 1999 and fiscal
year 2000 had not only resulted in Cornerstone's inability to finance the
Transactions under their original terms but would also make it unlikely
that the other potential acquirors that had submitted acquisition proposals
would be able to finance their previously proposed offers or an acquisition
of Equitrac at a price substantially higher than $21.00 per share. The
special committee also considered that the lower projected revenues and
operating income for the first and second quarters of fiscal year 2000 than
anticipated in the fiscal year 2000 budget would further reduce the
likelihood of any potential acquiror from submitting an offer substantially
higher than $21.00 per share. The special committee also determined, based
in part on the foregoing and on Prudential Securities' opinion described
below, that Equitrac's future prospects are adequately reflected in the
cash merger consideration;
(3) the terms and conditions of the revised Merger Agreement which
provide that the lower projections for the first and second quarters of
fiscal year 2000 are not to be considered a material adverse change to
Equitrac;
(4) the terms and conditions of the original merger agreement, which
prohibited Equitrac from soliciting competing transactions. Although the
special committee considered whether Equitrac should seek to terminate the
agreement to be able to solicit other offers, the special committee, upon
advise of legal counsel, believed there was uncertainty as to whether
Equitrac had the legal right to do so and that Cornerstone would contest
any attempted termination. The special committee also believed that
Equitrac's continued ability to consider unsolicited proposals after the
execution of the revised Merger Agreement would act as a "market check" and
confirm to the special committee that no other potential superior offers
were available or, alternatively, would generate one or more superior
offers;
(5) the ability of Equitrac, on the same terms as the original merger
agreement, to terminate the Merger Agreement to approve a Competing
Transaction, but requiring a termination fee of $2.3 million, which had
been reduced from $2.5 million; and
(6) the oral opinion of Prudential Securities, later confirmed in
writing, addressed to and delivered to the special committee on June 3,
1999 as to the fairness from a
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financial point of view of the cash merger consideration to be received by
Equitrac's shareholders, other than the Management Group, pursuant to the
Merger Agreement. A copy of Prudential Securities' June 3, 1999 opinion,
setting forth the assumptions made, matters considered and limitations on
the review undertaken in connection with such opinion, is attached as
Appendix B to this proxy statement and should be read in its entirety.
In view of the various factors considered by the special committee in
connection with its evaluation of the original merger agreement and the revised
Merger Agreement, the special committee did not find it necessary to quantify or
otherwise attempt to assign relative importance to the specific factors
considered in making its determination, nor did it evaluate whether such factors
were of equal importance. However, based upon these factors, the evaluation of
all the relevant information provided to them by Equitrac's financial advisor
and taking into account the existing trading ranges for Equitrac's common stock,
the special committee determined that the Recapitalization and Merger, including
the cash merger consideration, was fair, to Equitrac's unaffiliated
shareholders. In considering the factors described above, individual members of
the special committee may have given different weights to different factors.
Except for paragraph (7) on page 20, the special committee considered the
foregoing factors to be positive factors supporting its determination that the
Recapitalization and Merger are fair and in the best interest of Equitrac's
unaffiliated shareholders. Notwithstanding the negative factors in such
paragraph (7), the special committee believes the Transactions are fair to and
are in the best interest of Equitrac's unaffiliated shareholders. The special
committee believes, based on the Prudential Securities' analysis and opinion,
that Equitrac's future prospects are adequately reflected in the cash merger
consideration, so Equitrac's unaffiliated shareholders will be receiving
immediate value without having to bear the risks of any decrease in the future
value of Equitrac. Although members of the Management Group will have the
opportunity to participate in Equitrac's future prospects, they will bear the
risk of any decrease in Equitrac's value. As of a result of the Transactions,
Equitrac will have significant amounts of indebtedness that may reduce its value
in the future.
The special committee further believes that the following procedural
safeguards were sufficient to ensure that the Recapitalization and Merger were
considered in a manner that was procedurally fair to Equitrac's unaffiliated
shareholders notwithstanding any actual or potentials conflicts of interests of
Messrs. Kane and Wilson and other members of the Management Group: (1) the
special committee consisted entirely of non-management, non-affiliated
independent directors appointed to represent the interests of Equitrac's
unaffiliated shareholders; (2) Greenberg Traurig, Equitrac's outside counsel,
represented the interests of Equitrac's shareholders (other than the Management
Group) in all negotiations relating to the Recapitalization and Merger, whereas
Messrs. Kane and Wilson retained and were represented by separate legal counsel.
Because only one member of the Board, James Courbier, was neither a member of
the special committee nor the Management Group, and the Board had granted the
special committee full authority to negotiate the terms and conditions of the
Merger Agreement on the Board's behalf, the Board did not consider it necessary
to retain separate legal counsel (other than Greenberg Traurig) to represent the
Board's interests; (3) the special committee retained Prudential Securities as
its financial advisor to assist it in evaluating a potential transaction and
received advice from Prudential Securities; (4) the special committee engaged in
extensive deliberations in evaluating the sales process; and (5) the $21.00 per
share cash consideration and the terms and conditions of the Merger Agreement
resulted from arm's-length bargaining between the special committee and its
representatives, on the one hand,
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and Cornerstone and its representatives, on the other hand, and Messrs. Kane and
Wilson and their representatives, on the one hand, and Cornerstone and its
representatives, on the other hand.
The special committee did not specifically consider in its deliberations
the cash payments the members of the special committee will receive as a result
of the termination of stock options held by them pursuant to the Merger. In
addition, the special committee did not specifically consider as part of its
determination as to the fairness of the Recapitalization and the Merger that the
Transactions were not structured to require the approval of at least a majority
of unaffiliated stockholders.
In assessing the fairness of the cash merger consideration under the
original merger agreement and the revised cash merger consideration under the
Merger Agreement and arriving at its opinions, Prudential employed a discounted
cash flow analysis, a comparable companies analysis and a comparable
transactions analysis, as described on pages 25 through 29. Although each
analysis produced a wide range of implied share values for Equitrac common
stock, the special committee recognized that the broad ranges were due to the
fact that none of the comparable companies or the acquired entities used by
Prudential Securities in its analyses are identical to Equitrac. The special
committee, therefore, believes that the wide range of implied share values was
inherent in the methodology chosen by Prudential Securities and should not
affect the special committee's reliance on Prudential Securities' opinion.
The special committee believes that both the original merger agreement and
the Recapitalization and Merger were considered in a manner that was
procedurally fair to Equitrac's shareholders.
Board of Directors Factors. In connection with its February 16, 1999
recommendation, the Board considered the following factors: (1) the
determinations and recommendations of the special committee; (2) the factors
referred to above as having been taken into account by the special committee;
and (3) the fact that the cash merger consideration and the terms and conditions
of the original merger agreement were the result of arm's-length negotiations
between the special committee and Equitrac, on the one hand, and Cornerstone, on
the other hand, and Messrs. Kane and Wilson, on the one hand, and Cornerstone,
on the other hand.
The Board did not consider it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. The Board did not find it necessary to
quantify or otherwise attempt to assign relative importance to the specific
factors considered in making its determination, nor did it evaluate whether such
factors were of equal importance. Rather, the Board reached a general consensus
that the Recapitalization and Merger were advisable and in the best interests of
Equitrac, its unaffiliated shareholders and Equitrac's other constituencies. In
considering the factors described above, individual members of the Board may
have given different weight to different factors. Except for paragraph (7) on
page 20 of the special committee factors, the Board considered the foregoing
factors to be positive factors supporting its determination that the
Recapitalization and Merger are fair and in the best interest of Equitrac's
unaffiliated shareholders. For the same reasons as the special committee, the
Board believes the Transactions are fair notwithstanding such paragraph (7) of
the factors reviewed by the special committee was a negative factor, and, if
taken alone, would not support such a determination. The Board did not
specifically consider in its deliberations the cash payments the members of the
special committee will
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receive as a result of the termination of stock options held by them pursuant to
the Merger. In addition, the Board did not specifically consider as part of its
determination as to the fairness of the Recapitalization and the Merger that the
Transactions were not structured to require the approval of at least a majority
of Equitrac's unaffiliated shareholders.
The Board determined that the Recapitalization and Merger were procedurally
fair because, among other things: (1) the special committee consisted entirely
of non-management, non-affiliated independent directors appointed to represent
the interests of the Equitrac's unaffiliated shareholders; (2) Greenberg
Traurig, Equitrac's outside legal counsel represented the interests of
Equitrac's shareholders (other than the Management Group) in all negotiations
relating to the Recapitalization and Merger, whereas Messrs. Kane and Wilson
retained and were represented by separate legal counsel. Because only one member
of the Board, James Courbier, was neither a member of the special committee nor
the Management Group, and the Board had granted the special committee full
authority to negotiate the terms and conditions of the Merger Agreement on the
Board's behalf, the Board did not consider it necessary to retain separate legal
counsel (other than Greenberg Traurig) to represent the Board's interests; (3)
Equitrac retained Prudential Securities on behalf of the special committee as
the special committee's financial advisor to assist it in evaluating a potential
transaction and received advice from Prudential Securities; (4) the special
committee engaged in extensive deliberations in evaluating the sales process;
and (5) the $21.00 per share cash consideration and the other terms and
conditions of the Merger Agreement resulted from active arm's-length bargaining
between the special committee and its representatives, on the one hand, and
Cornerstone and its representatives, on the other hand, and Messrs. Kane and
Wilson and their representatives, on the one hand, and Cornerstone and its
representatives, on the other hand. The Board believed that such safeguards were
sufficient to assure that the Recapitalization and Merger are fair to, and in
the best interests of Equitrac's unaffiliated shareholders.
Fairness of the Merger. Each of Equitrac, the Management Group and
Cornerstone had previously concluded that the cash merger consideration of
$25.25 per share that Equitrac's unaffiliated shareholders were to receive under
the original merger agreement was fair. Based on the factors set forth above,
Equitrac also believes that the revised merger consideration of $21.00 per share
to be received by its unaffiliated shareholders pursuant to the Merger is fair
from a financial point of view. Messrs. Kane and Wilson and the other members of
the Management Group who are executive officers of Equitrac also believe that
the revised merger consideration of $21.00 per share to be received by
Equitrac's unaffiliated shareholders pursuant to the Merger is fair. Their
belief is based on the following facts: (1) the fact that the special committee
and the Board, based on the factors discussed above, concluded that the Merger
is fair to, and in the best interests of, Equitrac's unaffiliated shareholders,
(2) notwithstanding the fact that Prudential Securities' opinion was addressed
to the special committee and not to them and that they are not entitled to rely
upon such opinion, the fact that Prudential Securities delivered its opinion to
the special committee to the effect that, as of the date of such opinion and
based on and subject to certain limitations, qualifications and assumptions
stated in such opinion, the cash merger consideration to be paid in the Merger
is fair to Equitrac's unaffiliated shareholders from a financial point of view
and (3) the negotiations between Cornerstone and its representatives, on the one
hand, and the special committee and its representatives, on the other hand, and
Messrs. Kane and Wilson and their legal counsel, on the one hand, and
Cornerstone and its representatives, on the other hand, of the terms of the
Merger
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Agreement were in each case conducted on an arm's-length basis. The Management
Group did not specifically consider the cash payments the members of the special
committee will receive as a result of the termination of stock options held by
them pursuant to the Merger as a factor in arriving at their belief as to the
fairness of the Merger. In addition, the Management Group did not specifically
consider as part of its determination as to the fairness of the Recapitalization
and the Merger that the Transactions were not structured to require the approval
of at least a majority of Equitrac's unaffiliated shareholders. The Management
Group did not find it practicable to assign, nor did they assign, relative
weights to the individual factors considered in reaching their conclusion as to
fairness.
Cornerstone also believes that the revised cash merger consideration of
$21.00 per share to be paid in the Merger is fair to Equitrac's unaffiliated
shareholders from a financial point of view. Cornerstone bases its belief upon
(a) the fact that the revised cash merger consideration of $21.00 per share
represented an approximately 13% premium over the average closing price during
the 120 business days prior to February 16, 1999, the day before the original
merger agreement was publicly announced, and (b) the factors considered by the
Board in its determination that the Recapitalization and the Merger were
procedurally fair, as described above. Cornerstone did not specifically consider
the cash payments the members of the special committee will receive as a result
of the termination of stock options held by them pursuant to the Merger as a
factor in arriving at its belief as to the fairness of the Merger. In addition,
Cornerstone did not specifically consider as part of its determination as to the
fairness of the Recapitalization and the Merger that the Transactions were not
structured to require the approval of at least a majority of Equitrac's
unaffiliated shareholders. Cornerstone did not find it practicable to assign,
nor did it assign, relative weights to the individual factors considered in
reaching its conclusion as to fairness. None of the Equity Investors makes any
recommendation as to how Equitrac's shareholders should vote on the
Transactions.
EQUITY INVESTORS' PURPOSE AND REASONS FOR THE RECAPITALIZATION AND MERGER
The purpose of the Equity Investors for engaging in the Transactions is to
gain control of Equitrac. The Equity Investors believe that Equitrac's future
business prospects can be improved through their active participation in the
strategic direction and operations of Equitrac. This assessment is based upon
publicly available information regarding Equitrac, the Equity Investors' due
diligence investigation of Equitrac and the Equity Investors' investment
experience. While the Equity Investors' believe that there will be significant
opportunities associated with their investment in Equitrac, there are also
substantial risks that such opportunities may not be fully realized.
The proposed acquisition of Equitrac has been structured as a
recapitalization and merger in order to permit the redemption of all of
Equitrac's common stock (other than the Converted Shares) and to preserve
Equitrac's corporate identity and existing contractual arrangements with third
parties. The Equity Investors did not consider other alternatives with respect
to the structure of the transaction.
OPINION OF FINANCIAL ADVISOR
On June 3, 1999, Prudential Securities delivered its oral opinion to the
special committee, which opinion was confirmed in writing as of such date, to
the effect that, as of such date, the cash merger consideration was fair, from a
financial point of view to
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Equitrac shareholders other than members of the Management Group. Prudential
Securities presented the financial analysis underlying its opinion at a meeting
of the special committee on June 2, 1999.
A copy of the Prudential Securities opinion, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached to this proxy statement as Annex B and is incorporated herein by
reference. The summary of the Prudential Securities opinion set forth below is
qualified in its entirety by reference to the full text of the Prudential
Securities opinion. Equitrac shareholders are urged to read the Prudential
Securities opinion in its entirety.
The Prudential Securities opinion is directed only to the fairness of the
cash merger consideration to Equitrac shareholders other than members of the
Management Group from a financial point of view. It does not constitute a
recommendation to any shareholder as to how such shareholder should vote at the
meeting or as to any other action such shareholder should take regarding the
Recapitalization and Merger.
In conducting its analysis and arriving at its opinion, Prudential
Securities reviewed such information and considered such financial data and
other factors as Prudential Securities deemed relevant under the circumstances,
including the following:
1. a draft, dated June 2, 1999, of the Merger Agreement, including the
exhibits thereto;
2. certain publicly available historical, financial and operating data for
Equitrac including, but not limited to, (a) the Annual Report to
shareholders and Annual Report on Form 10-K for the fiscal years ended
February 28, 1997, 1998 and 1999, and (b) the Quarterly Report on Form
10-Q for the fiscal quarters ended May 30, 1998, August 31, 1998 and
November 30, 1998;
3. historical stock market prices and trading volume for Equitrac common
stock;
4. certain information relating to Equitrac, including financial forecasts,
prepared by the management of Equitrac;
5. publicly available financial, operating and stock market data concerning
certain companies engaged in business that Prudential Securities deemed
comparable to Equitrac or otherwise relevant to their inquiry;
6. the financial terms of certain recent transactions that Prudential
Securities deemed relevant to their inquiry; and
7. such other financial studies, analyses and investigations that
Prudential Securities deemed appropriate.
Prudential Securities assumed, with Equitrac's consent, that the draft of
the Merger Agreement that they reviewed would conform in all material respects
to the Merger Agreement when in final form.
Prudential Securities discussed with the senior management of Equitrac: (1)
the past and current operating and financial condition of Equitrac; (2) the
prospects for Equitrac, (3) their estimates of Equitrac's future financial
performance and (4) such other matters Prudential Securities deemed relevant.
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In connection with its review and analysis and in the preparation of its
opinion, Prudential Securities relied upon the accuracy and completeness of the
financial and other information publicly available or provided to it by Equitrac
and has not undertaken any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company. With respect to certain financial forecasts Equitrac's management
provided to Prudential Securities for Equitrac, Prudential Securities assumed
that such information, and the assumptions and bases therefor, represented to
Equitrac's management's best then available estimate as to the future financial
performance of Equitrac. Further, the Prudential Securities opinion was based on
economic, financial and market conditions as they existed on the date thereof
and can only be evaluated as of the date of the opinion, and Prudential
Securities assumes no responsibility to update or revise its opinion based upon
events or circumstances occurring after such date.
The Prudential Securities opinion, including Prudential Securities'
presentation of such opinion to the special committee, was one of the many
factors that the special committee took into consideration in making its
determination to recommend adoption of the Merger Agreement. Consequently,
Prudential Securities' analyses described below should not be viewed as
determinative of the opinion of the special committee with respect to the cash
merger consideration.
The Prudential Securities opinion does not address nor should it be
construed to address the relative merits of the Transactions or alternative
business strategies that may be available to Equitrac.
In arriving at its opinion, Prudential Securities performed a variety of
financial analyses, including those summarized herein. The summary set forth
below of the analyses presented to the special committee at the February 16,
1999 meeting does not purport to be a complete description of the analyses
performed. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstance. Therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Prudential Securities believes that its
analyses must be considered as a whole and selecting portions thereof or
portions of the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
the Prudential Securities opinion. Prudential Securities made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Equitrac. Any estimates contained in Prudential Securities' analyses
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Subject to the foregoing, the
following is a summary of the material financial analyses presented by
Prudential Securities to the special committee on June 2, 1999 in connection
with the delivery of the Prudential Securities Opinion.
Discounted Cash Flow Analysis. Prudential Securities considered the
results of a discounted cash flow analysis of Equitrac. For purposes of this
analysis, which was based on the financial projections provided to Prudential
Securities by Equitrac, Prudential Securities bifurcated Equitrac's cash flows
into two components: one based upon Equitrac's
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<PAGE> 44
existing products and one based upon products which Equitrac recently introduced
or expected to be introduced in the future. Prudential Securities calculated the
net present value of each component's projected four-year stream of unlevered
free cash flows and projected terminal value. Projected terminal values were
calculated as a multiple of fiscal year 2003 earnings before interest, taxes,
depreciation and amortization ("EBITDA"). For Equitrac's existing products,
Prudential Securities applied discount rates of 13.9%, 12.4% and 10.9% and
terminal value multiples of 4.7, 5.7 and 6.7. For Equitrac's new products,
Prudential Securities applied discount rates of 70%, 60% and 50% and terminal
value multiples of 8.7, 10.7 and 12.7. This analysis resulted in an implied
range of equity value per share of $17.57 to $27.15.
Comparable Companies Analysis. A comparable companies analysis was
employed by Prudential Securities to establish a range of implied equity values
per share. Prudential Securities analyzed publicly available historical and
projected financial results, including:
- current enterprise value as a multiple of: latest twelve months ("LTM")
revenues, LTM EBITDA, LTM earnings before interest and taxes ("EBIT") and
LTM EBITDA minus capital expenditures ("EBITDA-Capex"); and
- current equity value as a multiple of: LTM net income, projected earnings
per share for the fiscal year ending December 31, 1999 ("1999 EPS") and
projected earnings per share for the fiscal year ending December 31, 2000
("2000 EPS"),
of certain companies considered by Prudential Securities to be reasonably
similar to Equitrac. The companies analyzed included Billing Concepts Corp.,
Brooktrout Technology, Inc., Checkpoint Systems, Inc., Coinmach Laundry Corp.,
Digi International Inc., GTECH Holdings Corp., Kofax Image Products, Inc.,
Mac-Gray Corp., Omtool, Ltd., Peerless Systems Corp., PSC Inc., and Sensormatic
Electronics Corp.
The comparable companies were found to have a range of enterprise value as
a multiple of LTM Revenues of 0.6x to 2.7x; a range of enterprise value as a
multiple of LTM EBITDA of 3.3x to 17.6x; a range of enterprise value as a
multiple of LTM EBIT of 4.1x to 25.5x; a range of enterprise value as a multiple
of LTM EBITDA-Capex of 3.8x to 25.2x; a range of equity value as a multiple of
LTM net income of 9.5x to 24.2x; a range of equity value as a multiple of 1999
EPS of 9.4x to 32.2x; and a range of equity value as a multiple of 2000 EPS of
8.8x to 17.9x. Applying such multiples to Equitrac's LTM revenues, LTM EBITDA,
LTM EBIT, LTM EBITDA-Capex, LTM net income, and Equitrac's projected EPS for the
fiscal years ending February 29, 2000 and February 28, 2001 resulted in an
implied range of equity value per share of $7.93 to $49.61.
Comparable Transactions Analysis. Prudential Securities also analyzed the
consideration paid in several recent merger and acquisition transactions which
Prudential Securities deemed to be reasonably similar to the Recapitalization
and Merger, and considered the multiple of the acquired entity's enterprise
value to its 1999 fiscal year ("LTM") revenues, LTM EBITDA, LTM EBIT and LTM
EBITDA-Capex and the multiple of the acquired entity's equity value to its LTM
net income based upon publicly available information for such transactions. The
transactions considered were the combinations of: (1) Trident International and
Illinois Toolworks, (2) Microdyne Corp. and L-3 Communications Holdings, (3)
Donnelley Enterprise Solutions and Bowne & Company, Inc., (4) IPC Information
Systems Inc., and Cable Systems International, (5) Holmes Protection Group Inc.
and Tyco International Ltd., (6) Shared Technologies Fairchild Inc. and
Intermedia Communications Inc., (7) DH Technology Inc. and Axiohm S.A., and (8)
Colonial Data Technologies and U.S. Order Inc. The comparable transactions were
found to imply for
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<PAGE> 45
the acquired entities a range of enterprise value as a multiple of LTM revenues
of 0.9x to 3.5x; a range of enterprise value as a multiple of LTM EBITDA of 6.1x
to 11.9x; a range of enterprise value as a multiple of LTM EBIT of 7.9x to
19.8x; a range of enterprise value as a multiple of LTM EBITDA-Capex of 7.1x to
21.0x; a range of equity value as a multiple of LTM net income of 12.2x to
29.8x. Applying such multiples to Equitrac's LTM revenues, LTM EBITDA, LTM EBIT,
LTM EBITDA-Capex and LTM net income resulted in an implied range of equity value
per share of $12.84 to $49.29.
None of the comparable companies or the acquired entities used in the above
analyses for comparative purposes is, of course, identical to Equitrac.
Accordingly, a complete analysis of the results of the foregoing calculations
cannot be limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and the acquired entities and other
factors that could affect the operating results for each of the comparable
companies and the consideration paid for each of the acquired entities as well
as that of Equitrac.
The special committee selected Prudential Securities to provide a fairness
opinion because it is a nationally recognized investment banking firm engaged in
the valuation of businesses and their securities in connection with merger and
acquisition transactions and because it has substantial experience in
transactions similar to the Merger. Pursuant to an engagement letter with
Prudential Securities, Equitrac paid Prudential Securities a retainer of $50,000
in July 1998 and an additional $250,000 following delivery of the opinion
rendered in connection with the original merger agreement. An additional fee of
$1,080,000 will be payable upon the consummation of the Merger. In addition, the
engagement letter with Prudential Securities provides that Equitrac will
reimburse Prudential Securities for its out-of-pocket expenses and will
indemnify Prudential Securities and its related persons against certain
liabilities, including liabilities under securities laws, arising out of the
merger or its engagement. In the ordinary course of business, Prudential
Securities may actively trade shares of Equitrac common stock for its own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
CONFLICTS OF INTEREST
In considering the recommendations of the special committee and Board of
Directors, Equitrac's shareholders should be aware that Messrs. Kane and Wilson,
who are members of the Board of Directors have interests in the Merger that are
different from the interests of Equitrac shareholders generally and which may
create potential conflicts of interest.
Equity Investment and Cash Payments. Pursuant to the Recapitalization,
some of the shares of common stock and stock options of Equitrac held by members
of the Management Group will be converted into shares of preferred stock of
Equitrac. The Recapitalization will occur immediately prior to the Merger, and
at the effective time of the Merger, the shares of the preferred stock held by
the Management Group will be converted into the Converted Shares of the
Surviving Corporation. In addition, members of the Management Group will be
granted New Options, which options will be subject to time and performance
vesting criteria. The Management Group is expected to consist of approximately 7
members of Equitrac's management, including John T. Kane, Chairman of the Board,
George P. Wilson, President and Chief Executive Officer, Chris Rickborn, Senior
Vice President -- Marketing and Technology, Steve Smith, Vice President --
Business and Technology, Patrick J. Raftery, Senior Vice President, U.S.
Professional
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<PAGE> 46
Division, Cid Yousefi, Vice President -- Product Development, and John P. Jones,
Vice President -- Sales, International Division.
It is currently expected that the Management Group will invest an aggregate
of approximately $6.7 million in the Surviving Corporation, consisting of the
fair value of their Converted Shares. A significant number of shares of common
stock and options held by members of the Management Group will not be exchanged
in the Recapitalization but will be converted in the Merger into the right to
receive aggregate cash merger consideration of approximately $22 million. The
amount to be invested by and the amount of cash to be received by each member of
the Management Group is set forth below. All such information is estimated and
subject to change prior to closing.
<TABLE>
<CAPTION>
AMOUNT AMOUNT OF
NAME INVESTED($) CASH($)
- ---- ----------- ----------
<S> <C> <C>
John T. Kane............................................... 3,114,720 11,823,030
George P. Wilson........................................... 2,628,045 9,608,349
Chris Rickborn............................................. 149,100 127,400
Steve Smith................................................ 198,450 93,330
Patrick J. Raftery......................................... 308,700 159,283
Cid Yousefi................................................ 105,000 237,713
John P. Jones.............................................. 158,400 --
</TABLE>
As of the record date for the special meeting, the Management Group owned
an aggregate of approximately 1,197,464 shares of Equitrac's common stock and
held options to purchase an aggregate of 346,100 shares of common stock.
Following the Merger, and the consummation of the other transactions
contemplated thereby, including, but not limited to the incurrence of
approximately $44 million of indebtedness, it is expected that the Management
Group will own, in the aggregate, Converted Shares representing approximately
21% of the Surviving Corporation's outstanding common stock and preferred stock
on a fully-diluted basis, and New Options representing approximately 5% of the
Surviving Corporation's common stock on a fully-diluted basis.
In connection with the Merger and related transactions, Equitrac may make
loans to certain members of the Management Group in amounts not to exceed
$50,000 per member. These loans will be secured by shares of common stock of
Equitrac held by these members following the Merger.
Certain Arrangements with the Equity Investors. The Cornerstone Group will
receive shares of common stock and preferred stock representing approximately
79% of the Surviving Corporation's common stock outstanding immediately after
the Merger on a fully-diluted basis for an aggregate consideration of
approximately $24.9 million. Cornerstone will enter into agreements with the
Surviving Corporation that are customary in transactions of this type, including
an advisory agreement with the Surviving Corporation pursuant to which it will
render certain management and advisory services to the Surviving Corporation for
which it will receive from the Surviving Corporation an aggregate fee in an
amount to be determined, which will be customary for transactions of this type.
In connection with the Merger, Surviving Corporation, the Cornerstone Group
and Messrs. Kane and Wilson of the Management Group will enter into a
stockholders agreement, registration rights agreement and subscription
agreement, which will provide for, among other things, restrictions on transfer,
"drag-along" and "tag-along" rights, registration rights, and preemptive rights.
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<PAGE> 47
Employment and Consulting Agreements. George P. Wilson has agreed to
terminate his existing employment agreement with Equitrac upon completion of the
Merger and to enter into a one-year employment agreement, subject to automatic
renewals, with the Surviving Corporation pursuant to which he will serve as
President and Chief Executive Officer of the Surviving Corporation. The terms
and conditions of Mr. Wilson's employment agreement with the Surviving
Corporation will be substantially similar to those of his current employment
agreement with Equitrac, except for the calculation of Mr. Wilson's annual
bonus, the reduction of retirement benefits to which he is entitled and the
elimination of certain benefits to which he is entitled upon a change of control
of Equitrac. John T. Kane has agreed to terminate his existing employment
agreement with Equitrac upon completion of the Merger and to enter into a
one-year consulting agreement, subject to automatic renewals, with the Surviving
Corporation which provides for an annual consulting fee of $24,000 and certain
healthcare benefits. As a result of the termination of Mr. Kane's employment
agreement, he will receive a cash payment of approximately $120,000 that
otherwise would have been payable following his retirement.
Treatment of Stock Options. Under the terms of the Merger Agreement, each
holder of outstanding options (other than options converted into preferred stock
by the Management Group in the Recapitalization), whether or not such options
are exercisable, will be entitled to receive an amount in cash equal to the
product of (1) the difference between $21.00 and the weighted average exercise
price of such options and (2) the number of shares of Equitrac's common stock
subject to such options. The directors and executive officers of Equitrac who
own options will receive this option consideration as a result of the Merger for
all of their options other than those converted by the Management Group in the
Recapitalization. As of June__ , 1999, there were options outstanding to
purchase an aggregate of 644,500 shares of Equitrac's common stock at a weighted
average exercise price of $11.32 per share.
The following table sets forth information as to the options outstanding on
June__ , 1999, for which cash payment will be received upon consummation of the
Merger, and the proceeds expected to be received upon termination of such
options by the directors and executive officers of Equitrac. All such
information is estimated and subject to change prior to closing.
<TABLE>
<CAPTION>
NUMBER CASH
NAME OF OPTIONS PAYMENT($)
- ---- ---------- ----------
<S> <C> <C>
John T. Kane................................................ -- --
George P. Wilson............................................ -- --
Jim Courbier................................................ 5,000 52,625
Peter Marx.................................................. 15,000 192,625
Marc Watson................................................. 33,000 590,925
Scott J. Modist............................................. 24,000 215,480
Chris Rickborn.............................................. 20,822 95,838
Steve Smith................................................. 2,946 40,822
Patrick J. Raftery.......................................... 15,080 121,419
Cid Yousefi................................................. 10,833 40,272
John P. Jones............................................... -- --
All directors and executive officers as a group (11
persons).................................................. 126,681 1,350,006
</TABLE>
Director and Officer Indemnification and Insurance. The Merger Agreement
provides that the Surviving Corporation generally will indemnify all directors
and officers of Equitrac to the fullest extent permitted by Florida law and in
the Articles of Incorporation and Bylaws of Equitrac, as in effect as of the
date of the Merger Agreement, from and
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<PAGE> 48
against all liabilities, costs, expenses and claims arising out of actions taken
prior to the Merger in performance of their duties as directors and officers of
Equitrac. The Merger Agreement further provides that, except as may be limited
by applicable law, for a period of six years after the Merger the
indemnification obligations set forth in Equitrac's Articles of Incorporation
and Bylaws shall survive the Merger and shall not be amended or modified by
either Equitrac or the Surviving Corporation in a manner adverse to the rights
of former and current officers and directors of Equitrac with respect to matters
occurring prior to the Merger. In addition, the Merger Agreement provides that
the Surviving Corporation will maintain in effect, for three years or until
expiration of the applicable statute of limitations but in no event longer than
four years, after the Merger to maintain directors' and officers' liability
insurance for the benefit of its directors and officers who are currently
covered under Equitrac's directors' and officers' liability insurance on terms
not materially less favorable than the existing insurance coverage; provided,
however, the Surviving Corporation is not required to pay an annual premium in
excess of 200% of the last annual premium paid by Equitrac prior to the date of
the Merger Agreement.
Special Committee and Board Compensation. Compensation paid to the members
of the special committee and the Board for services rendered in their capacity
as members of the special committee or the Board for the period from December
1998 through June 1999, including, among other things, their analysis and
evaluation of the proposal of the Equity Investors as well as their negotiation
of the terms of the Merger Agreement, amounted to $25,087 for Mr. Marx and
$1,500 for Mr. Watson.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will be held on July 27, 1999, at a.m., local
time, at [ ]. At the special meeting, Equitrac shareholders will be
asked to consider and vote upon a proposal to approve and adopt the Merger
Agreement and the Transactions.
RECORD DATE; VOTING POWER; QUORUM
Shareholders of record of Equitrac common stock at the close of business on
June 18, 1999 are entitled to notice of and to vote at the special meeting. As
of the record date, there were shares of Equitrac common stock issued and
outstanding held by approximately holders of record.
Holders of record of Equitrac common stock on the record date are entitled
to one vote per share on any matter that may properly come before the special
meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of Equitrac common stock entitled to vote at the special
meeting is necessary to constitute a quorum for the transaction of business.
VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT
Under Florida law, the affirmative vote of the holders of a majority of the
shares of Equitrac common stock outstanding on the record date is required to
approve the Merger Agreement and the Transactions. For purposes of determining
whether the Merger Agreement and the Transactions have received a majority vote,
abstentions and broker
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<PAGE> 49
non-votes (shares held in "street name" through a broker or other nominee as to
which voting instructions with regards to the Merger Agreement and the
Transactions have not been received from the beneficial owners and such broker
or other nominee is not permitted to exercise voting discretion with regards to
the Merger Agreement or the Transactions) will not be included in the vote
total, although an abstention and a broker non-vote will have the effect of a
vote against the Merger Agreement and the Transactions. Abstentions and broker
non-votes will, however, be counted for determining whether there is a quorum.
As of the record date for the special meeting, Equitrac's executive
officers and directors owned, in the aggregate, 1,197,664 shares of Equitrac
common stock or 33.8% of the votes represented by the shares of Equitrac common
stock then outstanding. Of such shares, 1,176,864 are held by Messrs. Kane and
Wilson, both of whom have granted Merger Sub an irrevocable proxy under a voting
agreement to vote these shares in favor of the Merger Agreement and the
Transactions. Therefore, holders of only an additional 17% of the outstanding
shares of Equitrac common stock need to vote in favor of the Merger Agreement
for the Transactions to be approved. Equitrac's other executive officers and
directors have indicated that they will vote their shares in favor of the Merger
Agreement and the Transactions. See "Beneficial Ownership of Common Stock" on
page 48.
VOTING AGREEMENT; IRREVOCABLE PROXY
Under the Voting Agreement, Messrs. Kane and Wilson will: (i) vote (or
cause to be voted) their shares of Equitrac common stock at the special meeting
in favor of the Merger Agreement and the Transactions; and (ii) vote (or cause
to be voted) their shares of Equitrac common stock against any action or
agreement that could reasonably be expected to impede, interfere with, delay,
postpone, or attempt to discourage the Transactions, such as the adoption by
Equitrac of a proposal regarding the acquisition of Equitrac by a third party by
merger, tender offer or otherwise. Under the Voting Agreement, Messrs. Kane and
Wilson also granted an irrevocable proxy to Merger Sub to vote their shares at
the special meeting in favor of the Merger Agreement. The shares beneficially
owned by such shareholders represent approximately 33% of the outstanding shares
of Equitrac common stock entitled to vote at the special meeting. Merger Sub
intends to vote the shares represented by such proxy in favor of approval of the
Merger Agreement and the Transactions.
PROXIES
Shareholders are requested to complete, date and sign the accompanying form
of proxy and return it promptly in the enclosed postage-paid envelope.
Any shareholder giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted at the special meeting. A later
dated proxy or written notice of revocation given prior to the vote at the
special meeting to the Secretary of Equitrac will serve to revoke such proxy.
Also, a shareholder who attends the special meeting in person may, if he or she
wishes, vote by ballot at the special meeting, thereby canceling any proxy
previously given. Mere presence at the special meeting will not serve to revoke
any proxy previously given.
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<PAGE> 50
SOLICITATION OF PROXIES
In addition to the use of mails, proxies may be solicited by persons
regularly employed by Equitrac, by personal interview, telephone and telegraph.
Such persons will receive no additional compensation for such services, but will
be reimbursed for any out-of-pocket expenses incurred by them in connection with
such services. Arrangements may also be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of shares of common stock held of record by
such persons, and Equitrac may reimburse such persons for reasonable
out-of-pocket expenses incurred by them in connection therewith.
Equitrac will bear the costs of the special meeting and of soliciting
proxies therefor. Equitrac may engage a proxy solicitor to assist in the
solicitation of proxies.
THE RECAPITALIZATION AND MERGER
Mechanics of the Recapitalization. In the Recapitalization:
- Equitrac will amend its Articles of Incorporation to create and authorize
the issuance of preferred stock; and
- the Cornerstone Group will make an approximately $24.9 million equity
contribution to Equitrac in exchange for preferred stock, and the
Management Group will exchange some of their shares of Equitrac common
stock and stock options for preferred stock.
Mechanics of the Merger. In the Merger:
- Merger Sub will be merged into Equitrac, and Equitrac will be the
Surviving Corporation;
- each share of Equitrac's common stock will be converted into the right to
receive $21.00 in cash, without interest; and
- each share of Equitrac' preferred stock held by the Equity Investors as a
result of the Recapitalization will be converted into the right to
receive shares of preferred stock and common stock of the Surviving
Corporation.
Consequences of the Recapitalization and Merger. As a result of the
Recapitalization and Merger:
- the entire equity interest in Equitrac will be owned by the Equity
Investors (consisting of the Cornerstone Group and the Management Group);
- the unaffiliated shareholders of Equitrac will no longer have any
interest in, and will not be shareholders of Equitrac, and therefore will
not participate in its future earnings and growth;
- Equitrac will incur significant amounts of indebtedness;
- the Equity Investors will have the opportunity to benefit from any
earnings and growth of Equitrac, and will bear the risk of any decrease
in Equitrac's value;
- Equitrac's common stock will no longer be traded on The Nasdaq National
Market, price quotations will no longer be available and the registration
of Equitrac's
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<PAGE> 51
common stock under the Exchange Act will be terminated. After such
registration is terminated, Equitrac will no longer be required to file
periodic reports with the Commission;
- the present Board of Directors of Equitrac will be replaced by the Board
of Directors of Merger Sub which is comprised of Messrs. Kane and Wilson,
Mark Rossi, Stephen L. Larson and Michael E. Najjar. Mr. Wilson will be
entitled to designate one member of the Board of Directors of the
Surviving Corporation prior to the consummation of an initial public
offering of the Surviving Corporation's common stock and so long as he
owns at least 4% of the Surviving Corporation's common stock on a fully
diluted basis; and
- the officers of Equitrac will be the officers of the Surviving
Corporation after the Effective Time. See "Certain Information Concerning
Merger Sub and the Equity Investors" on page .
The Equity Investors expect that, following consummation of the Merger, the
business and operations of Equitrac will be continued substantially as they are
currently being conducted. The Board of Directors and management of Equitrac
will, however, continue to evaluate Equitrac's business, operations, corporate
structure and organization and will make such changes as they deem appropriate.
As a result of the borrowings to be incurred to finance the Merger and
Equitrac's post-Merger operations, Equitrac will be significantly leveraged. As
a result, Equitrac's financial and operating flexibility may be reduced.
FINANCING
The total amount of funds necessary to fund the Merger and related
transactions is expected to be approximately $85.1 million. These funds are
expected to come from the following sources, although the actual amounts
attributable to these sources may differ at closing:
- an equity investment made by the Cornerstone Group of approximately $24.9
million;
- an equity investment on the part of the Management Group of approximately
$6.7 million, consisting of the Converted Shares (valued at $21.00 per
share);
- cash of Equitrac on hand at the Effective Time estimated to be $9.5
million; and
- borrowings by Equitrac totaling approximately $44.0 million under senior
secured credit facility and senior subordinated notes (collectively the
"Debt Financing") described below.
Senior Secured Credit Facility. Cornerstone has obtained a commitment from
Fleet to provide Equitrac with a senior secured credit facility (the "Senior
Facility") in an aggregate amount of $46 million. The Senior Facility will be
comprised of (i) a $30 million senior term loan maturing May 31, 2005 and (ii) a
$16 million revolving credit facility (the "Revolver") maturing May 31, 2005.
The Revolver will have a sublimit available for the issuance of letters of
credit and a sub-facility in an amount to be agreed upon by the parties.
Equitrac and its subsidiaries will be the borrower under the Senior
Facility and all present and future subsidiaries of Equitrac, and if Equitrac is
owned by a holding company or companies, such holding company or companies will
guarantee the Senior Facility. In
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<PAGE> 52
addition, the Senior Facility will be secured by (i) substantially all of the
assets of Equitrac (including its subsidiaries) and each of the guarantors and
(ii) a pledge of all of the capital stock of Equitrac's present and future
domestic subsidiaries and 65% of the capital stock of Equitrac's present and
future foreign subsidiaries.
The interest rates under the Senior Facility will be, at Equitrac's option,
either (i) the Prime Rate (higher of Fleet's prime lending rate or 1/2 of 1% per
annum in excess of the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System) plus an applicable
margin or (ii) Euro Rate (LIBOR 360 day basis)) plus an applicable margin. The
initial applicable margins for the first six months will be fixed. Thereafter,
the applicable margins will be the rate per annum above the Prime Rate or Euro
Rate within four levels, which vary based upon a leverage test of Equitrac's
total debt to earnings before interest, taxes, depreciation and amortization
("EBITDA").
The documents for the Senior Facility will contain affirmative, negative
and financial covenants and events of default customary for credit facilities of
a size and type similar to the Senior Facility.
The funding of the Senior Facility is subject to the satisfaction of
customary conditions for similar secured financing and others appropriate in the
judgment of Fleet.
Senior Subordinated Notes. Cornerstone has obtained a commitment from
Mainsail to purchase from Equitrac on a fully underwritten basis $9.0 million
aggregate principal amount of 11.75% Senior Subordinated Notes due 2006 (the
"Senior Notes") to assist in financing the Merger. The Senior Notes will bear
interest at 11.75% per annum compounded quarterly and will mature in 2006. The
Senior Notes will be senior to all future and other existing indebtedness of
Equitrac, other than senior bank debt such as the Senior Facility. Prior to the
fourth anniversary, the Senior Notes are prepayable at par plus accrued interest
together with a prepayment premium on the principal amount outstanding ranging
from 1% to 4%. After the fourth anniversary, no prepayment premium shall be
payable.
The documents for the Senior Notes will contain affirmative, negative and
financial covenants, representations and warranties and events of default
customary for senior subordinated note financing.
The Senior Notes will be bundled with detachable warrants that will be
exercisable at a nominal exercise price into shares of Equitrac's common stock
representing 8% of the common stock outstanding on a fully diluted basis at the
Effective Time. The warrants will be exercisable for a term of ten years
commencing on the earlier of third anniversary of the Effective Time or upon the
occurrence of certain events, including the date on which Equitrac files a
registration statement with the Commission for a public securities offering.
Consummation of the Senior Note offering is subject to the satisfaction of
customary conditions for similar senior subordinated note offerings.
FEDERAL INCOME TAX CONSEQUENCES
Although there will be no federal income tax consequences of the
Recapitalization to the holders of Equitrac common stock, there will be federal
income tax consequences of the Merger to the holders of the Equitrac common
stock. The material tax consequences of the Merger are summarized in the
following discussion, which is based on the current
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<PAGE> 53
provisions of the Internal Revenue Code, existing and proposed Treasury
Regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change. Any change, which may or may not be
retroactive, could alter the tax consequences to the holders of Equitrac common
stock as described herein. The following discussion is addressed to a
shareholder that holds Equitrac common stock as a capital asset and that, for
federal income tax purposes, is a U.S. citizen or resident or a domestic
corporation, partnership, trust or estate. This summary does not purport to deal
with all aspects of taxation that may be relevant to a particular shareholder in
light of his, her or its particular circumstances, to a shareholder who holds
both common and preferred stock prior to the Merger, or to certain types of
taxpayers subject to special treatment under the federal income tax law,
including financial institutions, broker-dealers, foreign persons (including a
foreign person that is a partner in a U.S. partnership), persons holding
Equitrac common stock as part of a straddle, "synthetic security" or other
integrated investment (including a "conversion transaction") or persons who
acquired their Equitrac common stock through the exercise of an employee stock
option or otherwise as compensation.
A holder of Equitrac common stock will recognize capital gain or loss for
federal income tax purposes on each share of Equitrac common stock exchanged for
the cash merger consideration pursuant to the Merger. The amount of gain or loss
recognized on a share will be equal to the difference between $21.00 and the
holder's basis in the share. The gain or loss will be long-term capital gain or
loss in the case of shares held for more than one year as of the date of the
Merger. In the case of individuals, certain trusts and estates, net capital gain
for a taxable year (that is, the excess of net long-term capital gain for the
taxable year over any net short-term capital loss for the year) is subject to a
maximum federal income tax rate of 20 percent. Receipt of the cash merger
consideration in exchange for Equitrac common stock pursuant to the Merger also
may be a taxable transaction under applicable state, local and foreign tax laws.
A holder of Equitrac common stock may be subject to backup withholding at
the rate of 31 percent with respect to the cash merger consideration received
pursuant to the Merger, unless the holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates that fact or
(b) provides a correct taxpayer identification number ("TIN"), certifies as to
no loss of exemption from backup withholding and otherwise complies with the
applicable requirements of the backup withholdings rules. To prevent the
possibility of backup withholding on payments made to certain holders with
respect to shares of Equitrac common stock pursuant to the Merger, each holder
must provide the Paying Agent with his, her or its correct TIN by completing a
Form W-9 or Substitute Form W-9. A holder of Equitrac common stock that does not
provide his, her or its correct TIN may be subject to penalties imposed by the
Internal Revenue Service (the "IRS"), as well as to backup withholding. Any
amount withheld under these rules will be refundable or creditable against the
holder's federal income tax liability, provided the required information is
furnished to the IRS. Equitrac (or its agent) will report to the holders of
Equitrac common stock and to the IRS the amount of any "reportable payments," as
defined in Section 3406 of the Code, and the amount of tax, if any, withheld
with respect thereto.
The federal income tax consequences set forth in this proxy statement are
for general information only. The tax consequences for a particular shareholder
will depend upon the facts and circumstances applicable to that shareholder.
Accordingly, each shareholder is urged to consult his, her or its own tax
adviser to determine the tax consequences of the
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Merger to the shareholder in light of his, her or its particular circumstances,
including the applicability and effect of state, local, foreign and other tax
laws and any possible changes in those laws. The foregoing discussion may not
apply to shares received pursuant to the exercise of employee stock options or
otherwise as compensation.
ACCOUNTING TREATMENT
Equitrac expects that the Merger will be accounted for as a
recapitalization for accounting purposes. As a result, the historical cost basis
of Equitrac's assets and liabilities will not change. The aggregate cost of
repurchasing the common stock will be accounted for as a charge to shareholders'
equity.
DISSENTERS' APPRAISAL RIGHTS
Equitrac's shareholders are not entitled under the Florida law or
Equitrac's articles of incorporation to exercise dissenters' appraisal rights in
connection with the Transactions.
DELISTING AND DEREGISTRATION OF COMMON STOCK
Following the Merger, Equitrac's common stock will be no longer traded on
the Nasdaq National Market, price quotations will no longer be available and the
registration of Equitrac's common stock under the Exchange Act will be
terminated. After such registration is terminated, Equitrac will no longer be
required to file periodic reports with the Commission.
REGULATORY APPROVALS
Equitrac is not aware of any material governmental or regulatory approvals,
other than federal antitrust clearance, which are required for consummation of
the Transactions.
LEGAL PROCEEDINGS
Equitrac's counsel was recently notified that a stockholder class action
complaint has been filed in a Florida court by a stockholder purporting to act
individually and on behalf of all public shareholders of Equitrac, other than
the defendants, who are similarly situated. The defendants named in the case are
Equitrac, George P. Wilson, John T. Kane, Marc M. Watson, Peter A. Marx, Scott
Modist, Sharon Jones and James F. Courbier. The plaintiff alleges breach of
fiduciary duties, unjust enrichment and other matters relating to the
defendants' actions in connection with the Transactions. The plaintiff seeks to
have the court certify the complaint as a class action, enjoin consummation of
the Transactions, and award the plaintiff and other alleged class members
compensatory damages and attorneys' fees and other costs. Equitrac believes that
the lawsuit is without merit and intends to vigorously defend the action.
THE MERGER AGREEMENT
OVERVIEW
The terms and conditions of the Recapitalization and the Merger are set
forth in the Merger Agreement, the complete text of which is attached as
Appendix A to this proxy
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statement and is incorporated herein by reference. The summary of the Merger
Agreement contained in this proxy statement does not purport to be complete and
is subject to and qualified in its entirety by reference to the complete text of
such document.
In the Recapitalization:
- Equitrac will amend its Articles of Incorporation to create and authorize
the issuance of preferred stock; and
- the Cornerstone Group will make an approximately $24.9 million equity
contribution to Equitrac in exchange for preferred stock and the
Management Group will exchange some of their shares of Equitrac common
stock and stock options for preferred stock.
In the Merger:
- Merger Sub will be merged into Equitrac, and Equitrac will be the
Surviving Corporation upon completion of the Merger; and
- each share of Equitrac's common stock will be converted into the right to
receive $21.00 in cash, without interest, and each share of Equitrac's
preferred stock held by the Equity Investors as a result of the
Recapitalization will be converted into the right to receive shares of
preferred stock and common stock of the Surviving Corporation.
As a result of the Transactions, Equitrac will incur significant amounts of
indebtedness.
EXCHANGE OF CERTIFICATES REPRESENTING COMMON STOCK
Instructions with regard to the surrender of Equitrac's stock certificates,
together with a letter of transmittal to be used for this purpose, will be
mailed to Equitrac's shareholders as promptly as practicable after the
completion of the Merger. In order to receive the cash merger consideration,
shareholders will be required to surrender their stock certificates, together
with a duly completed and executed letter of transmittal, to a paying agent (the
"Paying Agent") designated by Merger Sub and approved by Equitrac. Promptly
after completion of the Merger, the cash merger consideration will be deposited
in trust with the Paying Agent. Upon receipt of such stock certificates and
letter of transmittal, the Paying Agent will deliver the cash merger
consideration to the registered holder or his transferee of the shares of
Equitrac's common stock. No interest will be paid or accrued on the amounts
payable upon the surrender of stock certificates.
Shareholders should not submit their stock certificates for exchange until
the instructions and letter of transmittal are received.
After the effective time of the Merger, there will be no further transfers
on the stock transfer books of Equitrac of the shares of Equitrac's common stock
that were outstanding immediately prior to the Merger. If a certificate
representing such shares is presented for transfer, subject to compliance with
the requisite transmittal procedures, it will be canceled and exchanged for the
cash merger consideration.
Each certificate representing shares of Equitrac's common stock immediately
prior to the effective time of the Merger will, at such effective time, be
deemed for all purposes to
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represent only the right to receive the cash merger consideration into which the
shares of Equitrac's common stock represented by such certificate were converted
in the Merger.
Any cash merger consideration delivered or made available to the Paying
Agent and not exchanged for stock certificates within 180 days after the Merger
will be returned by the Paying Agent to the Surviving Corporation, which will
thereafter act as Paying Agent. If any certificates representing shares of
Equitrac common stock are not surrendered within five years after the Merger
then the unclaimed cash merger consideration payable in exchange for such
certificates shall, to the extent permitted under applicable abandoned property,
escheat or similar law, become the property of the Surviving Corporation, free
and clear of all claims or interests of any person previously entitled thereto.
None of Merger Sub, Messrs. Kane and Wilson, Equitrac or the Paying Agent will
be liable to a holder of shares of Equitrac's common stock for any of the cash
merger consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
TREATMENT OF OUTSTANDING STOCK OPTIONS
The Merger Agreement provides that each holder of outstanding options
(other than those converted into preferred stock by certain members of the
Management Group in the Recapitalization), whether or not such options are
exercisable, will be entitled to receive an amount in cash equal to the product
of (1) the difference between $21.00 and the average weighted exercise price of
such options and (2) the number of shares of Equitrac's common stock subject to
such options. As of June__ , 1999, there were options outstanding to purchase an
aggregate of 644,500 shares of Equitrac's common stock at a weighted average
exercise price of $11.32 per share. The director and executive officers who hold
options will receive this option consideration as a result of the Merger for all
of their options other than those converted into preferred stock by the
Management Group in the Recapitalization. See "Special Factors -- Conflicts of
Interest" on page 29.
REPRESENTATIONS AND WARRANTIES
Equitrac has made representations and warranties in the Merger Agreement
regarding, among other things its organization and good standing, authority to
enter into the transactions, its capitalization, its financial statements, the
absence of certain changes in its business since February 28, 1999, the content
and submission of forms and reports required to be filed by Equitrac with the
Commission, requisite governmental and other consents and approvals, compliance
with all applicable laws, absence of litigation to which Equitrac is a party,
brokers and finders fees, requisite tax filings, absence of defaults under
material contracts, employee benefit plans, and environmental matters.
Merger Sub has made representations and warranties in the Merger Agreement
regarding, among other things, its organization and good standing, authority to
enter into the transactions, the requisite governmental and other consents and
approvals, financing, litigation and the accuracy of information supplied by it
for submission on forms and reports required to be filed by Equitrac with the
Commission.
Messrs. Kane and Wilson have made representations and warranties in the
Merger Agreement regarding their authority to enter into the transactions,
requisite governmental and other consents and approvals and the ownership of
their shares of Equitrac common stock.
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CORNERSTONE'S GUARANTEE
Under the Merger Agreement, Cornerstone agreed to absolutely and
unconditionally guarantee to Equitrac the performance by Merger Sub of its
covenants, duties and obligations thereunder; provided, that Cornerstone's
aggregate liability to Equitrac shall not exceed, in the aggregate $24.9
million. The Cornerstone guarantee shall be a continuing guaranty and will
remain in effect until the earliest of (1) the effective time of the Merger, (2)
except for any obligation of Merger Sub to reimburse Equitrac for Equitrac's
reasonable out-of-pocket expenses and costs incurred in the event of termination
of the Merger Agreement due to a breach by Merger Sub of any of its
representations, warranties or agreements, and (3) the time that Cornerstone
has, taken together with any amounts funded in connection with the
Recapitalization, incurred and satisfied liabilities equal to or exceeding $24.9
million.
CONDUCT OF BUSINESS PENDING THE MERGER
Equitrac has agreed that during the period from the date of the Merger
Agreement to the effective time of the Merger, except as set forth in its
disclosure schedules to the Merger Agreement or otherwise provided in the Merger
Agreement, unless consented to by Merger Sub, it shall, and shall cause its
subsidiaries, to, among other things, conduct its business in the ordinary
course and in a manner consistent in all material respects with past practice
and to use its commercially reasonable efforts to preserve intact its current
business organizations, keep available the services of its current officers,
employees and consultants, preserve its relationships with customers, suppliers,
licensors, licensees, contractors and other persons with which it or its
subsidiaries has significant business relations and maintain all insurance
necessary to the conduct of its business as currently conducted. Equitrac has
further agreed that it shall not, and shall cause its subsidiaries not to, to
take, without the prior written consent of Merger Sub, enumerated actions which
include the following:
- declare or pay any dividends on or make any other distributions in
respect of any of its capital stock;
- acquire (including, without limitation, by merger, consolidation or
acquisition of stock or assets) or agree to acquire any corporation,
partnership, limited liability company, or other business organization or
division thereof;
- incur or agree to incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations or any person, or
make any loans, advances or capital contributions to or investments in,
any other person, except in the ordinary course of business consistent
with past practice and in an amount not in excess of $150,000; and
- authorize capital expenditures which are, in the aggregate, in excess of
$500,000.
NO SOLICITATION
The Merger Agreement prohibits Messrs. Kane and Wilson, Equitrac, its
subsidiaries, and any of Equitrac's or its subsidiaries' directors, officers,
employees, agents or representatives from directly or indirectly: (i)
initiating, soliciting, or encouraging any inquiries, discussions or making any
proposal with respect to any merger, consolidation or
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other business combination involving Equitrac or any acquisition of any kind of
a material portion of the assets or capital stock of Equitrac or its
subsidiaries (a "Competing Transaction"); or (ii) negotiating, exploring or
otherwise communicating in any way with any third party with respect to any
Competing Transaction or entering into or consummating any agreement arrangement
or understanding requiring it to abandon, terminate or fail to consummate the
Merger.
However, prior to the special meeting (or any postponement thereof),
Equitrac (including, but not limited to, the officers and directors of the
Company who may be Messrs. Kane and Wilson) may, if Equitrac's Board of
Directors determines in good faith by a majority vote, based upon the advice of
its outside counsel, that failing to take such action would constitute a breach
of the fiduciary duties of the Board of Directors under applicable law, in
response to a Competing Transaction from any person that was not solicited by
Equitrac and that did not otherwise result from the breach of Equitrac's
obligations to refrain from soliciting any Competing Transaction, and upon
notifying Merger Sub of the particulars of such Competing Transaction and
otherwise complying with these obligations, (x) furnish information with respect
to the Equitrac to such person pursuant to a customary confidentiality agreement
and (y) participate in discussion or negotiations with such person regarding any
Competing Transaction; provided that such proposal is not subject to conditions
that are materially different from those set forth in the Merger Agreement and
such proposal is, in the business judgment of Equitrac's Board of Directors,
more favorable to Equitrac's shareholders (other than Messrs. Kane and Wilson)
from a financial point of view than the transactions contemplated by the Merger
Agreement (including any adjustments to the terms and conditions of the Merger
Agreement proposed by Merger Sub in response to such Competing Transaction).
INDEMNIFICATION
The Merger Agreement provides that the Surviving Corporation generally will
indemnify all directors and officers of Equitrac to the fullest extent permitted
by Florida law and in the Articles of Incorporation and Bylaws of Equitrac, as
in effect as of the date of the Merger Agreement, from and against all
liabilities, costs expenses and claims arising out of actions taken prior to the
effective time of the Merger in performance of their duties as directors and
officers of Equitrac in connection with the Merger Agreement.
The Merger Agreement further provides that, except as may be limited by
applicable law, for a period of six years from and after the Effective Time the
indemnification obligations set forth in Equitrac's Articles of Incorporation
and Bylaws shall survive the Merger and shall not be amended or modified by
either Equitrac or the Surviving Corporation in a manner adverse to the rights
of former and current officers and directors of Equitrac with respect to matters
occurring prior to the Effective Time. In addition, Equitrac and the Surviving
Corporation have agreed that, except as may be limited by applicable laws, the
indemnification obligations of Equitrac as set forth in other indemnification
agreements to which it is a party and as disclosed on Equitrac's disclosure
schedule to the Merger Agreement, shall not be amended, repealed or otherwise
modified after the Effective Time except as permitted by the terms and
provisions of those agreements.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Merger Agreement provides that the Surviving Corporation shall maintain
in effect, for three years or until the applicable statute of limitations
expires but in no event
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longer than four years after the Merger, directors' and officers' liability
insurance policies covering the persons who are currently covered in their
capacities as such directors and officers (the "Covered Parties") by Equitrac's
current directors' and officers' policies and on terms not materially less
favorable than the existing insurance coverage with respect to matters occurring
prior to the Merger; provided, however, in the event the annual premium for such
coverage exceeds an amount equal to 200% of the last annual premium paid
immediately prior to the date hereof by Equitrac for such coverage, the
Surviving Corporation shall notify the Covered Parties who shall then elect as a
group either (i) to allow the Surviving Corporation to obtain as much comparable
insurance as possible for an annual premium equal to 200% of the last annual
premium paid immediately prior to the date hereof by Equitrac, or (ii) to seek
coverage from another carrier, in which event the Surviving Corporation shall
reimburse the Covered Parties the cost of such alternate coverage up to an
amount equal to 200% of the last annual premium paid immediately prior to the
date hereof by the Equitrac for such coverage.
CONDITIONS TO THE MERGER
Each party's respective obligations to effect the Merger is subject to
satisfaction of the following conditions:
- the approval and adoption of the Merger Agreement by the affirmative vote
of the holders of a majority of the outstanding shares of Equitrac's
common stock in accordance with Florida Law and Equitrac's Articles of
Incorporation;
- the waiting period under federal antitrust laws applicable to the Merger
shall have expired or terminated;
- no order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction shall have been enacted, entered, issued,
promulgated or enforced by any Governmental Authority or a court of
competent jurisdiction which has the effect of making the Merger illegal
or otherwise prohibiting consummation of the Merger or of limiting or
restricting the Surviving Corporation's or Merger Sub's conduct or
operation of the business of Equitrac after the Merger; and
- all other necessary and material governmental and regulatory clearances,
consents, or approvals shall have been received.
The obligations of Merger Sub, on the one hand, and Equitrac and Messrs.
Kane and Wilson, on the other hand, to consummate the Merger are subject to the
satisfaction or waiver of further conditions including:
- Equitrac and Messrs. Kane and Wilson, and Merger Sub, as the case may be,
shall have performed all of its obligations under the Merger Agreement
required to be performed by it at or prior to the Effective Time;
- each of the representations and warranties of Equitrac and Messrs. Kane
and Wilson, and Merger Sub, as the case may be, contained in the Merger
Agreement shall be true and correct, in each case as of the Closing Date
as if made at and as of such time;
- the Surviving Corporation shall have obtained the debt financing on the
terms and conditions set forth in the commitment letters from Fleet and
Mainsail or otherwise obtained debt financing sufficient to consummate
the Merger and to pay all fees and expenses in connection therewith and
to provide working capital for the Surviving Corporation, all on terms
reasonably satisfactory to the Surviving Corporation and the Cornerstone
Group; and
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- since the date of the Merger Agreement, no event shall have occurred
which has or which would reasonably be expected to have a material
adverse effect on Equitrac and Merger Sub, as the case may be, except
that any changes, effects, occurrences, conditions or developments that
are substantially consistent with certain of the financial information
provided by Equitrac to Cornerstone and Merger Sub or their
representatives before June 4, 1999 shall not be deemed to have a
material adverse effect on Equitrac.
TERMINATION OF MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned, at any
time prior to the effective time of the Merger, whether before or after approval
by Equitrac's shareholders, by:
- the mutual written consent of Equitrac and Merger Sub;
- either Merger Sub or Equitrac if the Merger has not been consummated by
September 30, 1999, unless the failure by the terminating party to
fulfill any obligation under the Merger Agreement caused or resulted in
the failure of the Merger to be consummated by September 30, 1999;
- Merger Sub if Equitrac's Board of Directors (or any committee thereof),
(a) withdraws or modifies or refrains from giving its approval or
recommendation of the Merger Agreement or Merger, or (b) approves or
recommends Competing Transactions;
- Equitrac or Merger Sub if the Equitrac shareholders do not approve the
Merger Agreement at the special meeting;
- Equitrac or Merger Sub if the other party breaches any of its
representations, warranties and agreements under the Merger Agreement and
such breach is not cured within 30 days of notice; and
- by Equitrac if it accepts a Competing Transaction and enters into a
definitive agreement with respect thereto after satisfying the following
conditions: (a) the Equitrac Board determines in good faith by a majority
vote based upon the advice of its outside counsel that the Board is
required to do so by its fiduciary obligations, (b) Merger Sub has been
notified of the Competing Transaction and has been provided a ten
business day period to submit to Equitrac a proposal adjusting the terms
and conditions of the Merger Agreement, but after receiving such proposal
the Board determines, in its business judgment, that the Competing
Transaction is more favorable to Equitrac's unaffiliated shareholders
from a financial point of view then Merger Sub's revised proposal; and
(c) Equitrac pays Merger Sub a termination fee of $2.3 million plus an
amount equal to Merger Sub's out-of-pocket expenses and costs.
FEES AND EXPENSES
Equitrac and Merger Sub will pay their own fees, costs, and expenses
incurred in connection with the Merger Agreement (except that Equitrac will bear
all expenses incurred in connection with this proxy statement and Equitrac and
Merger Sub shall share equally all expenses incurred by them in connection with
anti-trust filings with the Federal Trade Commission and Department of Justice).
However, Equitrac will pay Merger Sub a
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termination fee of $2.3 million plus an amount equal to Merger Sub's costs and
expenses if Equitrac approves, enters into, or consummates a Competing
Transaction, or if the Board or the special committee recommends a Competing
Transaction or withdraws its recommendation of the Merger Agreement.
Equitrac also will reimburse Merger Sub for its reasonable costs and
out-of-pocket expenses if the Merger Agreement is terminated because: (1) the
Merger is not completed by September 30, 1999 unless the failure to complete the
Merger by such date is caused by Merger Sub's failure to fulfill any of its
obligations under the Merger Agreement; (ii) the Merger Agreement is not
approved by Equitrac's shareholders; or (iii) there is a breach by Equitrac of a
representation, warranty or agreement under the Merger Agreement that is not
cured within 30 days notice.
Merger Sub will reimburse Equitrac for its reasonable costs and
out-of-pocket expenses if the Merger Agreement is terminated because of a breach
by Merger Sub of a representation, warranty or agreement under the Merger
Agreement and such breach is not cured within 30 days notice
ESTIMATED FEES AND EXPENSES OF THE MERGER
Estimated fees and expenses incurred or to be incurred by the Surviving
Corporation in connection with the Merger are approximately as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------------
<S> <C>
Advisory fees and expenses(1)............................... $ 1,475,000
Debt financing fees and expenses(2)......................... 1,250,000
Legal fees and expenses(3).................................. 800,000
Paying Agent fees and expenses.............................. 10,000
Transaction fees and expenses............................... 800,000
Accounting fees and expenses................................ 12,000
Proxy solicitation fees and expenses........................ 10,000
Securities and Exchange Commission filing fee............... 17,815
Printing and mailing costs.................................. 75,000
Miscellaneous expenses...................................... 50,185
Total....................................................... $ 4,500,000
</TABLE>
- -------------------------
(1) Includes the fees and expenses of Prudential Securities Incorporated.
(2) Includes the fees and expenses of Fleet National Bank and Mainsail Capital.
(3) Includes the estimated fees and expenses of counsel for Equitrac, and the
Cornerstone Group. Also includes the estimated fees and expenses of counsel
for Messrs. Kane and Wilson, which are expected to be reimbursed by the
Surviving Corporation following the Merger.
CERTAIN INFORMATION CONCERNING
MERGER SUB AND THE EQUITY INVESTORS
Merger Sub. Merger Sub is a Florida corporation incorporated on February
16, 1999 at the direction of Cornerstone for the purpose of the Recapitalization
and the Merger. It is anticipated that Merger Sub will not have any significant
assets or liabilities prior to the effective date of the Merger nor engage in
any activities other than those involving the Transactions.
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The services of Cornerstone and its affiliates in connection with the
Transactions include forming Merger Sub, planning the capital structure of
Merger Sub and the Surviving Corporation, obtaining commitments for debt
financing and negotiating definitive agreements with respect to the financing
and negotiation of the Merger Agreement.
Cornerstone. Cornerstone Equity Investors, LLC ("Cornerstone Equity") is
the general partner of Cornerstone. Since 1984, Cornerstone Equity has managed
four funds with aggregate committed capital of $1.2 billion and has invested in
over 80 companies through management buyouts and expansion financings. The firm
specializes in sponsoring management buyouts of growth companies in the business
services, technology, healthcare and consumer products industries.
Management Group. The Management Group is expected to consist of
approximately 7 members of management, including Messrs. Kane, Wilson, Rickborn,
Smith, Raftery, Yousefi and Jones. Each member of the Management Group is a
citizen of the United States and has a business address at 836 Ponce de Leon
Boulevard, Coral Gables, Florida 33134. Information relating to transactions
involving Equitrac's common stock effected by or on behalf of each member of the
Management Group and his respective affiliates since March 1, 1997 through the
date of this proxy statement is set forth on Appendix D to this proxy statement.
For further information concerning the Management Group, see "Special
Factors -- Conflicts of Interest."
Subsequent to the consummation of the Merger, it is anticipated that the
directors and executive officers of the Surviving Corporation will be as
follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
George P. Wilson....................... President and Chief Executive Officer
Chris Rickborn......................... Senior Vice President -- Marketing and Technology
Patrick J. Raftery..................... Senior Vice President, U.S. Professional Division
Steve Smith............................ Vice President -- Business Technology Division
John P. Jones.......................... Vice President -- Sales, International Division
Cid Yousefi............................ Vice President -- Product Development
John T. Kane........................... Director
Mark Rossi............................. Director
Stephen L. Larson...................... Director
Michael E. Najjar...................... Director
</TABLE>
Set forth below is a brief description of the business experience for each
of the new directors of the Surviving Corporation:
Mark Rossi, co-founded the predecessor of Cornerstone in 1984. Mr. Rossi's
industry focus is on Technology and Consumer Products. Mr. Rossi currently
serves on the Board of Directors of Accolade, Inc., Automata, Inc., Centurion
International, Inc., True Temper Sports, MCMS, Inc., Nest Entertainment, Inc.,
Maxwell Technologies, Inc. and StorMedia, Inc. He received his B.A. degree from
Saint Vincent College and his M.B.A. from the Kellogg School at Northwestern
University.
Stephen L. Larson, joined Cornerstone Equity Investors in April 1998. Prior
to joining, he served as Managing Director of C.F. Capital Corporation, a
Connecticut-based merchant bank where he actively managed acquisitions and
corporate finance in consolidating industries. Mr. Larson also acted as an
intermediary in financing mid-size companies. He currently serves on the Board
of Directors of VIPS Inc. Mr. Larson is a
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CPA and a graduate of the University of Illinois, where he received his B.S. and
the University of Chicago where he received his M.B.A.
Michael E. Najjar, was previously associated with Advanta Partners prior to
joining Cornerstone in 1997. Prior to that, Mr. Najjar worked at Donaldson,
Lufkin & Jenrette in the corporate finance department. Mr. Najjar's industry
focus is on Technology and Business Services. Mr. Najjar currently serves as a
Director of Automata, Inc., International Language Engineering Corp., and MCMS,
Inc. Mr. Najjar is a graduate of Cornell University, where he received his B.A.,
and the Wharton School at the University of Pennsylvania, where he received his
M.B.A.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Equitrac's common stock as of May 31, 1999 for (1) each person who
is known by Equitrac to own beneficially more than 5% of the outstanding shares
of common stock, (2) the Chief Executive Officer and the four other most highly
compensated executive officers of Equitrac, (3) each director of Equitrac, and
(4) all of the directors and executive officers of Equitrac as a group. Except
pursuant to applicable community property laws and except as otherwise
indicated, each shareholder identified in the table possesses sole voting and
investment power with respect to its or his shares.
<TABLE>
<CAPTION>
SHARES
NAME BENEFICIALLY OWNED PERCENT OWNED
- ---- ------------------ -------------
<S> <C> <C>
John T. Kane...................................... 744,416(1)(3) 20.5
George P. Wilson.................................. 615,780(2)(3) 16.9
Fidelity Low-Priced Stock Fund.................... 353,000(4) 9.9
Safeco Corporation................................ 390,500(4) 11.0
Peak Investment Limited Partnership............... 214,900(4) 6.1
Marc M. Watson.................................... 36,000(3) 1.0
James F. Courbier................................. 13,000(3) *
Peter Marx........................................ 16,000(3) *
Scott J. Modist................................... 24,200(3) *
Patrick J. Raftery................................ 40,000(3) 1.1
John P. Jones..................................... 10,400(3) *
All directors and executive officers
as a group (11 persons)......................... 1,561,596(3) 40.1
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares.
(1) Includes (i) 646,750 shares of Common Stock directly owned and (ii) 6,000
shares of Common Stock owned by Mr. Kane's spouse.
(2) Includes (i) 372,500 shares of Common Stock directly owned, (ii) 116,414
shares owned by a general partnership, the sole managing partner of which is
a corporation all the outstanding stock of which is owned by Mr. Wilson and
(iii) 35,200 shares of Common Stock held in trust, of which the trustee is
Mr. Wilson, for the Kane family.
(3) Includes shares of Common Stock subject to stock options exercisable as of
May 31, 1999 or within 60 days thereof in the following amounts: John T.
Kane (91,666), George P. Wilson (91,666), James F. Courbier (5,000), Marc M.
Watson (33,000), Peter Marx (15,000), Scott J. Modist (24,000), Patrick J.
Raftery (38,200), John P. Jones (5,000), and all directors and executive
officers as a group (353,432).
(4) Based solely upon reports of beneficial ownership filed by the named person
with the Commission.
48
<PAGE> 65
INDEPENDENT PUBLIC ACCOUNTANTS
Equitrac's consolidated balance sheet as of February 28, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the two year period ended February 28, 1999,
incorporated by reference in this proxy statement, have been audited by Arthur
Andersen LLP, independent public accountants. Equitrac's consolidated balance
sheet as of February 28, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended February 28,
1997, incorporated by reference in this proxy statement, have been audited by
Coopers & Lybrand L.L.P., independent public accountants. A representative of
Arthur Andersen LLP will not be at the special meeting.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission by Equitrac (
File No. 0-2189) are incorporated by reference in this proxy statement:
- Annual Report on Form 10-K, as amended, for the year ended February 28,
1999; and
- Current Report on Form 8-K, dated June 4, 1999.
All documents filed by Equitrac with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act after the date hereof and prior
to the date of the special meeting shall be deemed to be incorporated by
reference herein and shall be a part hereof from the date of filing of such
documents. Any statements contained in a document incorporated by reference
herein or contained in this proxy statement shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated by
reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
This proxy statement incorporates documents by reference which are not
presented herein or delivered herewith. Such documents (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference)
are available, without charge, to any person, including any beneficial owner, to
whom this proxy statement is delivered, on written or oral request to Equitrac
at 836 Ponce de Leon Boulevard, Coral Gables, Florida 33134 Attn: Investor
Relations Department (telephone number 305-442-2060). Such documents will be
provided to such person by first class mail or other equally prompt means within
one business day of receipt of such request. In order to ensure delivery of the
documents prior to the special meeting, requests should be received by July ,
1999.
49
<PAGE> 66
AVAILABLE INFORMATION
Equitrac, Merger Sub, the Equity Investors and the Management Group have
filed with the Commission a Rule 13e-3 Transaction Statement on Schedule 13E-3
(including any amendments thereto, the "Schedule 13E-3") under the Exchange Act
with respect to the Merger. This proxy statement does not contain all of the
information set forth in the Schedule 13E-3 and the exhibits thereto, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Equitrac is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission.
Schedule 13E-3 and the exhibits thereto, as well as such reports, proxy
statements and other information filed by Equitrac, can be inspected and copied
at the Commission's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms.
Equitrac's SEC filings are also available to the public from commercial
document retrieval services and at the internet web site maintained by the
Commission at http://www.sec.gov.
50
<PAGE> 67
APPENDIX A
------------------------
AMENDED AND RESTATED
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
AMONG
CHARGEBACK ACQUISITION CORP.
SHAREHOLDERS
AND
EQUITRAC CORPORATION
------------------------
JUNE 4, 1999
<PAGE> 68
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE RECAPITALIZATION AND THE MERGER........................... A-5
Section 1.1 Issuance of Preference Stock............................ A-5
Section 1.2 Debt Financing.......................................... A-5
Section 1.3 The Merger.............................................. A-5
Section 1.4 Effective Time; Closing................................. A-6
Section 1.5 Effect of the Merger.................................... A-6
Section 1.6 Articles of Incorporation; By-laws...................... A-6
Section 1.7 Directors and Officers.................................. A-6
Section 1.8 Additional Actions...................................... A-7
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES;
DEPOSIT................................................................ A-7
Section 2.1 Effect on Capital Stock and Company Stock Options....... A-7
Section 2.2 Exchange of Certificates................................ A-9
Section 2.3 Company Stock Options; Plans............................ A-11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-11
Section 3.1 Organization and Qualification; Subsidiaries............ A-11
Section 3.2 Articles of Incorporation and By-laws................... A-12
Section 3.3 Capitalization.......................................... A-12
Section 3.4 Authority Relative to this Agreement.................... A-13
Section 3.5 No Conflict; Required Filings and Consents.............. A-13
Section 3.6 SEC Filings; Financial Statements; Undisclosed
Liabilities............................................. A-14
Section 3.7 Absence of Certain Changes or Events.................... A-15
Section 3.8 Absence of Litigation................................... A-16
Section 3.9 Stockholder Vote Required............................... A-17
Section 3.10 Opinion of Financial Advisor............................ A-17
Section 3.11 Brokers................................................. A-17
Section 3.12 Company Action; State Takeover Statutes................. A-17
Section 3.13 Information Supplied.................................... A-17
Section 3.14 Environmental Matters................................... A-17
Section 3.15 Real Property........................................... A-18
Section 3.16 Personal Property....................................... A-19
Section 3.17 Contracts............................................... A-19
Section 3.18 Insurance Policies...................................... A-20
Section 3.19 Compliance with Laws.................................... A-20
Section 3.20 Tax Matters............................................. A-20
Section 3.21 Employment Agreements................................... A-22
Section 3.22 Change of Control Provisions............................ A-22
Section 3.23 Employees............................................... A-22
Section 3.24 Permits................................................. A-22
Section 3.25 Employee Benefit Plans.................................. A-22
Section 3.26 Intellectual Property Rights............................ A-23
Section 3.27 Year 2000............................................... A-24
Section 3.28 Appraisal Rights........................................ A-24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MERGER SUB................. A-25
Section 4.1 Organization and Qualification; Subsidiaries............ A-25
Section 4.2 Charter Documents and By-laws........................... A-25
Section 4.3 Authority Relative to this Agreement.................... A-25
Section 4.4 No Conflict; Required Filings and Consents.............. A-25
Section 4.5 Interim Operations of Merger Sub........................ A-26
Section 4.6 Information Supplied.................................... A-26
</TABLE>
A-1
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 4.7 Brokers................................................. A-26
Section 4.8 Financing............................................... A-26
Section 4.9 Litigation.............................................. A-27
Section 4.10 Capitalization.......................................... A-27
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS............ A-27
Section 5.1 No Conflict; Required Filings and Consents.............. A-27
Section 5.2 Ownership of Owned Shares............................... A-28
ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER....................... A-28
Section 6.1 Conduct of Business by the Company Pending the Merger... A-28
ARTICLE VII ADDITIONAL AGREEMENTS....................................... A-30
Section 7.1 Shareholders' Meeting................................... A-30
Section 7.2 Preparation of Proxy Statement.......................... A-31
Section 7.3 Appropriate Action; Consents; Filings; Further
Assurances.............................................. A-32
Section 7.4 Access to Information; Confidentiality.................. A-33
Section 7.5 No Solicitation......................................... A-34
Section 7.6 Indemnification and Insurance........................... A-36
Section 7.7 Notification of Certain Matters......................... A-37
Section 7.8 Public Announcements.................................... A-38
Section 7.9 Employment Agreements................................... A-38
Section 7.10 Assistance with Financing............................... A-39
Section 7.11 Stockholder Approval.................................... A-39
Section 7.12 Exchange Act and NASDAQ Filings......................... A-39
Section 7.13 Noncompetition; Nonsolicitation......................... A-39
Section 7.14 Representations......................................... A-40
Section 7.15 Voting Agreement........................................ A-40
Section 7.16 Guarantee............................................... A-40
ARTICLE VIII CONDITIONS TO THE MERGER................................... A-41
Section 8.1 Conditions to the Obligations of Each Party............. A-41
Section 8.2 Conditions to the Obligations of Merger Sub............. A-41
Section 8.3 Conditions to the Obligations of the Company and the
Shareholders............................................ A-43
Section 8.4 Conditions to the Obligations of the Investors.......... A-44
Section 8.5 Conditions to the Obligations of the Shareholders....... A-44
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER............................ A-44
Section 9.1 Termination............................................. A-44
Section 9.2 Method of Termination; Effect of Termination............ A-45
Section 9.3 Fees and Expenses....................................... A-46
Section 9.4 Amendment............................................... A-47
Section 9.5 Waiver.................................................. A-47
ARTICLE X GENERAL PROVISIONS............................................ A-47
Section 10.1 Non-Survival of Representations, Warranties and
Agreements.............................................. A-47
Section 10.2 Notices................................................. A-48
Section 10.3 Certain Definitions..................................... A-49
Section 10.4 Accounting Terms........................................ A-51
Section 10.5 Severability............................................ A-51
Section 10.6 Entire Agreement; Assignment............................ A-51
</TABLE>
A-2
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 10.7 Parties in Interest..................................... A-51
Section 10.8 Specific Performance.................................... A-51
Section 10.9 Governing Law........................................... A-51
Section 10.10 Headings................................................ A-52
Section 10.11 Counterparts............................................ A-52
Section 10.12 Construction............................................ A-52
Section 10.13 Obligations of the Shareholders......................... A-52
Section 10.14 Interpretation; Schedules and Exhibits.................. A-52
</TABLE>
A-3
<PAGE> 71
AMENDED AND RESTATED RECAPITALIZATION
AGREEMENT AND PLAN OF MERGER
This Amended and Restated Recapitalization Agreement and Plan of Merger
dated June 4, 1999 (this "Agreement") among Chargeback Acquisition Corp., a
Florida corporation, ("Merger Sub"), Equitrac Corporation, a Florida corporation
(the "Company"), and for purposes of Articles I, V, VII and VIII only, John T.
Kane and George P. Wilson (collectively, the "Shareholders").
WHEREAS, the parties hereto have entered into that certain Recapitalization
Agreement and Plan of Merger, dated as of February 17, 1999 (the "Original
Agreement");
WHEREAS, the parties hereto desire to amend and restate the Original
Agreement in its entirety as set forth below;
WHEREAS, Merger Sub is a new corporation formed by Cornerstone Equity
Investors IV, L.P. ("Cornerstone") and/or its affiliates;
WHEREAS, the Board of Directors of the Company has deemed it advisable in
connection with the transactions contemplated by this Agreement and subject to
the terms and conditions hereof that the Company amend its Articles of
Incorporation (the "Preference Amendment") to provide for the authorization to
create and issue up to (i) 2,000,000 shares of Series A Preferred Stock, $0.01
par value (the "Series A Preference Stock"), of the Company and (ii) 2,000,000
shares of Series B Preferred Stock, $0.01 par value (the "Series B Preference
Stock" and, together with the Series A Preference Stock, the "Preference Stock")
of the Company;
WHEREAS, immediately prior to the Effective Time (as defined below), the
Shareholders shall convert an aggregate of 273,465 shares of their Common Stock,
par value $0.01, of the Company (the "Company Common Stock") into Series B
Preference Stock in the amounts set forth on Exhibit A;
WHEREAS, immediately prior to the Effective Time, Cornerstone, its
affiliates and/or other investors (the "Investors") shall make a $24,826,327
equity contribution into the Company for shares of Series A Preference Stock;
WHEREAS, the respective Boards of Directors of the Company and Merger Sub
have approved and declared advisable a merger (the "Merger") of Merger Sub with
and into the Company upon the terms and subject to the conditions set forth in
this Agreement, with the Company surviving the Merger (the "Surviving
Corporation"), and the Board of Directors of the Company has recommended that
the holders of shares of Company Common Stock (as such term is defined in
Section 3.03) approve the Merger and the other transactions contemplated by this
Agreement upon the terms of this Agreement;
WHEREAS, the Boards of Directors of Merger Sub and Company have determined
that the Merger is in furtherance of and consistent with their respective
long-term business strategies and is fair to and in the best interests of their
respective stockholders;
WHEREAS, the Merger described herein is subject to the approval of a
majority of the outstanding shares of Company Common Stock and satisfaction of
certain other conditions described in this Agreement;
A-4
<PAGE> 72
WHEREAS, it is intended that the transactions contemplated by this
Agreement be recorded as a recapitalization of the Company for financial
reporting purposes; and
WHEREAS, the Surviving Corporation shall, contemporaneously with the
Merger, obtain the debt financing (the "Debt Financing") described in the
Commitment Letters (as defined below) to fund a portion of the Merger
Consideration (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained and intending to be legally bound hereby, Merger
Sub, the Shareholders and the Company hereby agree as follows:
ARTICLE I
THE RECAPITALIZATION AND THE MERGER
Section 1.1 Issuance of Preference Stock
(a) Authorization. Upon the terms and subject to the conditions set
forth in this Agreement, immediately prior to the Effective Time, the
Company shall have amended its Articles of Incorporation to authorize the
creation, issuance and sale of Preference Stock.
(b) Conversion of Company Common Stock into Preference Stock. Upon the
terms and subject to the conditions set forth in this Agreement,
immediately prior to the Effective Time, the Shareholders agree to convert
an aggregate of 273,465 shares of Company Common Stock into Series B
Preference Stock (the "Preference Exchange"), as set forth on Exhibit A,
such that immediately after the Equity Contribution and the Preference
Exchange, the Shareholders will own an aggregate of 18.79% of the issued
and outstanding Preference Stock of the Company, as adjusted pursuant to
Section 2.01(f).
(c) Equity Contribution. Upon the terms and subject to the conditions
set forth in this Agreement, immediately prior to the Effective Time,
Cornerstone agrees, by affixing the signature of its duly authorized
officer on the signature page attached hereto, to make an aggregate equity
contribution of $24,826,327 into the Company (the "Equity Contribution") in
exchange for that number of shares of Series A Preference Stock such that
immediately after the Equity Contribution and the Preference Exchange,
Cornerstone will own 81.21% of the issued and outstanding Preference Stock
of the Company, as adjusted pursuant to Section 2.01(f). Notwithstanding
anything to the contrary contained herein, Cornerstone may assign a portion
of its obligations pursuant to this Section 1.01 to the other Investors,
but, in no event, shall such assignment relieve Cornerstone of its
obligations under the Guarantee or this Agreement if such assignee does not
perform such obligations.
Section 1.2 Debt Financing. Contemporaneously with the Merger, the
Surviving Corporation will consummate the Debt Financing.
Section 1.3 The Merger. Upon the terms and subject to the conditions set
forth in Article VII, and in accordance with Section 607.1101 of the Florida
Business Corporation Act ("Florida Law"), at the Effective Time (as defined
below), Merger Sub shall be merged with and into the Company. As a result of the
Merger, the separate corporate existence of Merger Sub shall cease, and the
Company shall be the surviving corporation of the Merger (the "Surviving
Corporation").
A-5
<PAGE> 73
Section 1.4 Effective Time; Closing. As promptly as practicable, and in no
event later than five business days after the satisfaction or, if permissible,
waiver of the conditions set forth in Article VII (other than those conditions
that can only be satisfied on the Closing Date (as defined below)), including,
without limitation, the approval of the Merger by an affirmative vote of a
majority of the holders of the outstanding shares of the Company Common Stock
(as defined below), the parties hereto shall cause the Merger to be consummated
by filing articles of merger (the "Articles of Merger") with the Secretary of
State of the State of Florida, in such form as is required by, and executed in
accordance with, Section 607.1105 of Florida Law. The term "Effective Time"
means the date and time of the filing of the Articles of Merger with the
Secretary of State of the State of Florida (or such later time as may be agreed
by the parties hereto and specified in the Articles of Merger). Immediately
prior to the filing of the Articles of Merger, a closing will be held at the
offices of Kirkland & Ellis, Citicorp Center, 153 East 53rd Street, New York,
New York 10022 (or such other place as the parties may agree) (the date on which
such closing takes place being the "Closing Date").
Section 1.5 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Florida Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, immunities, privileges, powers and franchises of
the Company and Merger Sub shall vest in the Surviving Corporation, without
further act or deed, and all debts, liabilities, obligations, restrictions,
disabilities and duties of each of the Company and Merger Sub shall become the
debts, liabilities, obligations, restrictions, disabilities and duties of the
Surviving Corporation.
Section 1.6 Articles of Incorporation; By-Laws.
(a) From and after the Effective Time, subject to the terms of Section
7.06, at the Effective Time, the Articles of Incorporation of the Surviving
Corporation shall be the Articles of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time until thereafter amended in
accordance with its terms and as provided by applicable Law and this
Agreement, except that, as of the Effective Time, Article I of such
Articles of Incorporation shall be amended to read as follows: "The name of
the Corporation is Equitrac Corporation."
(b) From and after the Effective Time, subject to the terms of Section
7.06, at the Effective Time, the By-laws of the Company, as in effect
immediately prior to the Effective Time, shall be the By-laws of the
Surviving Corporation until thereafter amended as provided by applicable
Law, the Articles of Incorporation of the Surviving Corporation and such
By-laws.
Section 1.7 Directors and Officers.
(a) Directors. From and after the Effective Time, the directors of
Merger Sub immediately prior to the Effective Time shall be the directors
of the Surviving Corporation until the earlier of their resignation or
removal or until their respective successors are duly elected and
qualified, as the case may be, in accordance with the Articles of
Incorporation and By-laws of the Surviving Corporation, applicable Law and
this Agreement.
(b) Officers. From and after the Effective Time, the officers of the
Company immediately prior to the Effective Time shall be the officers of
the Surviving Corporation and shall hold office until the earlier of their
resignation or removal or
A-6
<PAGE> 74
until their respective successors are duly elected and qualified, as the
case may be, in accordance with the Articles of Incorporation and By-laws
of the Surviving Corporation, applicable Law and this Agreement.
Section 1.8 Additional Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any further deeds,
assignments or assurances in law or any other acts are necessary or desirable to
(a) vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its rights, title or interest in, to or under any of the rights,
properties or assets of the Company or its subsidiaries, or (b) otherwise carry
out the provisions of this Agreement, the Company and its officers and directors
shall be deemed to have granted to the Surviving Corporation an irrevocable
power of attorney to execute and deliver all such deeds, assignments or
assurances in law and to take all acts necessary, proper or desirable to vest,
perfect or confirm title to and possession of such rights, properties or assets
in the Surviving Corporation and otherwise to carry out the provisions of this
Agreement, and the officers and directors of the Surviving Corporation are
authorized in the name of the Company or otherwise to take any and all such
action.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES; DEPOSIT
Section 2.1 Effect on Capital Stock and Company Stock Options. As of the
Effective Time, by virtue of the Merger and without any action on the part of
the holder of any Company Common Stock or any shares of capital stock of Merger
Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of
capital stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive $1,000.
(b) Cancellation of Company Owned Stock. All shares of Company Common
Stock and Preference Stock (if any) that are held in the treasury of the
Company or by any wholly owned subsidiary of the Company shall be canceled
and retired and shall cease to exist without any consideration payable
therefor.
(c) Conversion of Company Common Stock. Each share of Company Common
Stock issued and outstanding immediately prior to Effective Time (other
than shares of the Company Common Stock referred to in Section 2.01(b))
shall be converted into (as provided in and subject to the limitations set
forth in this Article II) the right to receive from the Surviving
Corporation in cash, without interest, $21.00 (the "Merger Consideration")
without interest thereon upon surrender of the certificate previously
representing such share of Company Common Stock. As of the Effective Time,
all such shares of Company Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such share of Company Common
Stock shall cease to have any rights with respect thereto, except the right
to receive the cash into which their shares of Company Common Stock have
been converted by the Merger as provided in this Section 2.01(c).
(d) Conversion of Preference Stock.
(i) Each share of Series A Preference Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Series A
Preference Stock to be canceled pursuant to Section 2.01(b)) shall be
converted
A-7
<PAGE> 75
into (as provided in and subject to the limitations set forth in this
Article II) and become one fully paid and nonassessable share of Common
Stock, par value $0.01, of the Surviving Corporation (the "Surviving
Corporation Common Stock") and one fully paid and nonassessable share of
Series A Preferred Stock, par value $0.01, of the Surviving Corporation
(the "Surviving Corporation Series A Preferred Stock") having the terms
set forth on Exhibit B hereof and otherwise being acceptable to
Shareholders and Cornerstone, upon the surrender of the certificates
previously representing such shares of Series A Preference Stock, such
that immediately after the consummation of the Merger, the Investors in
the aggregate will own 81.21% of the issued and outstanding Surviving
Corporation Common Stock and 81.21% of the issued and outstanding
Surviving Corporation Preferred Stock (as defined below).
(ii) Each share of Series B Preference Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Series B
Preference Stock to be canceled pursuant to Section 2.01(b)) shall be
converted into (as provided in and subject to the limitations set forth
in this Article II) and become one fully paid and nonassessable share of
Surviving Corporation Common Stock and one fully paid and nonassessable
share of Series B Preferred Stock, par value $0.01, of the Surviving
Corporation (the "Surviving Corporation Series B Preferred Stock" and,
together with the Surviving Corporation Series A Preferred Stock, the
"Surviving Corporation Preferred Stock") having the terms set forth on
Exhibit B hereof and otherwise being acceptable to Shareholders and
Cornerstone, upon the surrender of the certificates previously
representing such shares of Series B Preference Stock, such that
immediately after the consummation of the Merger, the Shareholders in
the aggregate will own 18.79% of the issued and outstanding Surviving
Corporation Common Stock and 18.79% of the issued and outstanding
Surviving Corporation Preferred Stock.
(e) Conversion of Company Stock Options. Each Company Stock Option (as
defined in Section 2.03(a) hereof), issued and outstanding immediately
prior to the Effective Time shall be converted into (as provided in and
subject to the limitations set forth in this Article II) the right to
receive from the Surviving Corporation the Option Consideration (as defined
in Section 2.03(a) hereof) without interest thereon. As of the Effective
Time, all such Company Stock Options shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of any such Company Stock Option shall cease to have any rights
with respect thereto, except the right to receive the cash into which their
Company Stock Options have been converted by the Merger as provided in this
Section 2.01(e) and Section 2.03(a).
(f) Notwithstanding any provision to the contrary, to the extent
requested by Merger Sub, the parties agree to amend this Agreement prior to
Closing to permit shares of Company Common Stock and/or Company Stock
Options (as defined below) owned by certain employees of the Company to be
converted into shares of Series B Preference Stock with corresponding
adjustments to be made to this Agreement.
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Section 2.2 Exchange of Certificates.
(a) Paying Agent. Prior to the Effective Time, Merger Sub shall, with
the approval of the Company, designate a bank or trust company to act as
paying agent in the Merger (the "Paying Agent").
(b) At the Closing, Merger Sub shall deliver:
(i) to each Person identified on a list to be provided to Merger
Sub by the Company no later than five days before the Closing who shall
have surrendered to the Company and the Merger Sub at the Closing one or
more certificates, which immediately prior to the Effective Time,
represented shares of Company Common Stock (such certificates, the
"Certificates"), the amount of cash into which the shares of Company
Common Stock represented by the Certificates so surrendered have been
converted pursuant to the provisions of this Article II;
(ii) to the Shareholders who shall have surrendered to the Merger
Sub at the Closing the certificates which, immediately prior to the
Effective Time, represented all of the shares of outstanding Series B
Preference Stock, the securities of the Surviving Corporation into which
the shares of Series B Preference Stock represented by such certificates
have been converted pursuant to the provisions of this Article II; and
(iii) to the Paying Agent, for the benefit of the holders of
Company Common Stock not so listed, funds in the aggregate amount into
which such shares of Company Common Stock shall have been converted
pursuant to the provisions of this Article II.
(c) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall mail to each holder of
record (other than the Investors) of Certificates not surrendered pursuant
to Section 2.02(b), (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the address specified
therein and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Paying Agent, together with such letter
of transmittal, duly executed, and such other documents as may reasonably
be required by the Paying Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor from the Paying Agent the amount
of cash into which the shares of Company Common Stock theretofore
represented by such Certificate shall have been converted pursuant to
Section 2.01, and the Certificate so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of the shares of Company
Common Stock that is not registered in the transfer records of the Company,
payment may be made to a person other than the person in whose name the
Certificate so surrendered is registered, if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes
required by reason of the payment to a person other than the registered
holder of such Certificate or establish to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.02, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the amount of cash, without interest,
into which the shares of Company Common Stock theretofore represented by
such Certificate shall have been converted pursuant to Section 2.01.
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No interest will be paid or will accrue on the cash payable upon the
surrender of any Certificate. In the event any Certificate shall have been
lost, stolen or destroyed, upon making of an affidavit of that fact by the
Person claiming such Certificate to be lost, stolen or destroyed, the
Surviving Corporation will pay in exchange for such lost, stolen or
destroyed Certificate, the cash payable in respect of the shares
represented by such Certificate as determined in accordance with this
Article II, except that when authorizing such payment, the Board of
Directors of the Surviving Corporation, may, in its discretion and as a
condition precedent to such payment, require the owner of such lost, stolen
or destroyed Certificate to deliver a bond in such sum as it may reasonably
direct as indemnity against any claim that may be made against the
Surviving Corporation or the Paying Agent with respect to such Certificate.
(d) Merger Sub, Surviving Corporation and Paying Agent shall be
entitled to deduct and withhold from the Merger Consideration otherwise
payable or issuable pursuant to this Agreement to any holder of Company
Common Stock such amount as Merger Sub, Surviving Corporation or Paying
Agent is required to deduct and withhold with respect to such payment or
issuance under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to
the holder of Company Common Stock in respect of which such deduction and
withholding was made.
(e) No Further Ownership Rights in Company Common Stock. All cash paid
upon the surrender of Certificates in accordance with the terms of this
Article II shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of Company Common Stock theretofore
represented by such Certificates. At the Effective Time, the stock transfer
books of the Company shall be closed, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Paying Agent
for any reason, they shall be canceled and exchanged as provided in this
Article II.
(f) No Liability. At any time following the expiration of six months
after the Effective Time, the Surviving Corporation shall be entitled to
require the Paying Agent to deliver to it any funds (including any interest
received with respect thereto) which had been made available to the Paying
Agent and which have not been disbursed to holders of Certificates, and
thereafter such holders shall be entitled to look to the Surviving
Corporation (subject to any applicable abandoned property, escheat or
similar law) only as general creditors thereof with respect to the Merger
Consideration payable upon due surrender of their Certificates, without any
interest thereon; provided, however, with respect to any Certificates which
shall not have been surrendered prior to five years after the Closing Date,
the unclaimed cash payable in exchange for such Certificates shall, to the
extent permitted by applicable abandoned property, escheat or similar law,
become the property of the Surviving Corporation, free and clear of all
claims or interests of any Person previously entitled thereto.
Notwithstanding the foregoing, none of Merger Sub, the Shareholders, the
Company or the Paying Agent shall be liable to any person in respect of any
cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
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Section 2.3 Company Stock Options; Plans.
(a) Except as set forth in this Section 2.03 and except to the extent
that Merger Sub and the holder of any option otherwise agree, the Surviving
Corporation shall promptly after the Effective Time pay to each holder of
an outstanding option to purchase Company Common Stock (a "Company Stock
Option") issued pursuant to the Company's Amended and Restated 1992 Stock
Option Plan or the Company's 1992 Director's Stock Option Plan
(collectively, the "Company Stock Option Plans"), in settlement of each
such Company Stock Option, whether or not exercisable or vested, an amount
in respect thereof equal to the product of (x) the excess, if any, of the
Merger Consideration over the exercise price of each such Company Stock
Option, and (y) the number of shares of Company Common Stock subject to the
Company Stock Option immediately prior to its settlement (the "Option
Consideration") (such payment to be net of applicable withholding taxes).
Upon receipt of the Option Consideration, the Company Stock Option shall be
canceled. The surrender of a Company Stock Option to the Company in
exchange for the Option Consideration shall be deemed a release of all
rights the holder had or may have had in respect of that Company Stock
Option.
(b) Prior to the Effective Time, the Company shall use its best
efforts to obtain any consents from holders of the Company Stock Options
and make any amendments to the terms of the Company Stock Option Plans or
arrangements that are necessary to give effect to the transactions
contemplated by Section 2.01(e) and this Section 2.03.
(c) Except as may otherwise be agreed by Merger Sub and the Company,
the Company Stock Option Plans shall terminate as of the Effective Time,
and no holder of Company Stock Options or any participant in the Company
Stock Option Plans shall have any rights thereunder to acquire any equity
securities of the Company, the Surviving Corporation or any subsidiary
thereof.
(d) Except as may otherwise be agreed by Merger Sub and the Company,
all other plans, programs or arrangements providing for the issuance or
grant of any other interest in respect of the capital stock of the Company
or any of its subsidiaries shall terminate as of the Effective Time, and no
participant in any such plans, programs or arrangements shall have any
rights thereunder to acquire any equity securities of the Company, the
Surviving Corporation or any subsidiary thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in a separate disclosure schedule referring to the
Sections contained in this Agreement, which has been delivered by the Company to
Merger Sub prior to the execution of this Agreement (the "Company Disclosure
Schedule"), the Company hereby represents and warrants to Merger Sub that:
Section 3.1 Organization and Qualification; Subsidiaries.
(a) Each of the Company and its subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power and
authority and all necessary governmental approvals to own, lease and
operate the properties and assets it currently owns, operates or holds
under lease and to carry on its business as it is now being
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conducted. Each of the Company and its subsidiaries is duly qualified or
licensed as a foreign corporation to do business, and is in good standing,
in each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or
licensed and in good standing that would not, individually or in the
aggregate, have a Company Material Adverse Effect. The term "Company
Material Adverse Effect" means, when used in connection with the Company,
any change, effect, event, occurrence, condition or development that is or
is reasonably likely to be materially adverse to (i) the business, assets,
liabilities, properties, results of operations, prospects or condition
(financial or otherwise) of the Company and its subsidiaries, taken as a
whole (excluding industry and general economic changes) or (ii) the ability
of the Company to perform its obligations under this Agreement.
(b) Except as set forth in Section 3.01 of the Company Disclosure
Schedule, the Company does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or similar interest in, any corporation,
partnership, limited liability company, joint venture or other business
association or entity. All outstanding shares of stock of each subsidiary
of the Company have been duly authorized and validly issued and are fully
paid and non-assessable, and are owned, directly or indirectly, by the
Company free and clear of any Liens, and there are no outstanding options,
warrants, convertible securities, calls, rights, commitments, preemptive
rights or agreements or instruments or understandings of any character,
obligating any subsidiary of the Company to issue, deliver or sell, or
cause to be issued, delivered or sold, contingently or otherwise,
additional shares of such subsidiary or any securities or obligations
convertible or exchangeable for such shares or to grant, extend or enter
into any such option, warrants, convertible security, call, right,
commitment, preemptive right or agreement.
Section 3.2 Articles of Incorporation and By-Laws. The Company has
heretofore furnished to Merger Sub complete and correct copies of its Articles
of Incorporation and By-laws, each as amended to the date hereof. Such Articles
of Incorporation and By-laws are in full force and effect. The Company is not in
violation of any provision of its Articles of Incorporation or By-laws.
Section 3.3 Capitalization. The authorized capital stock of the Company
consists of (i) 15,000,000 shares of Common Stock par value $0.01 per share
("Company Common Stock"), and (ii) no shares of Preference Stock as of the date
hereof (and 2,000,000 shares of Series A Preference Stock and 2,000,000 shares
of Series B Preference Stock after giving effect to the Preference Amendment).
As of the date hereof, there are 3,539,600 shares of Company Common Stock issued
and outstanding and no shares of Preference Stock issued or outstanding. Section
3.03 of the Company Disclosure Statement identifies and describes the number of
shares of Company Common Stock to be received upon exercise or conversion and
the exercise or conversion price of each outstanding Company Stock Option (the
"Company Common Stock Equivalents"). Except for the Company Common Stock
Equivalents or as contemplated by this Agreement, there are no existing options,
warrants, convertible securities, calls, subscriptions, or other rights or other
agreements or commitments obligating the Company to issue, transfer or sell, or
caused to be issued, transferred or sold, contingently or otherwise, any shares
of capital stock of the Company or any other securities convertible into or
evidencing the right to subscribe for any such shares. Except as identified and
described in Section 3.03 of the Company Disclosure Statement, there are no
outstanding stock appreciation rights or similar
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phantom equity securities with respect to the capital stock of the Company. All
issued and outstanding shares of Company Common Stock are duly authorized and
validly issued, fully paid, non-assessable and free of preemptive rights with
respect thereto. All shares of Preference Stock to be issued to (i) the
Shareholders pursuant to the Preference Exchange and (ii) the Investors in
connection with the Equity Contribution, shall, when issued, be duly authorized
and validly issued, fully paid, non-assessable and free of preemptive rights
with respect thereto. The Company has not had more than 300 shareholders of
record at any time during the three (3) years preceding the date hereof.
Section 3.4 Authority Relative to this Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the Transactions. The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement or to consummate the
Transactions (other than, with respect to the Merger and the Preference
Amendment, the adoption of this Agreement and the Preference Amendment by the
holders of a majority of the shares of Company Common Stock and the filing and
recordation of appropriate merger documents and the Preference Amendment as
required by Florida Law). This Agreement has been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by Merger Sub, constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
Section 3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company does
not, and the consummation by the Company of the Transactions will not (i)
conflict with or violate the Articles of Incorporation or By-laws of the
Company or any of its subsidiaries, (ii) conflict with or violate any
domestic (federal, state or local) or foreign law, rule, regulation, order,
judgment or decree (collectively, "LAWS") applicable to the Company, its
subsidiaries or by which any of its properties or assets is bound or
affected, except for such conflicts or violations that, individually or in
the aggregate, would not have a Company Material Adverse Effect, or (iii)
result in a violation or breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under,
or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any property or
asset of the Company or its subsidiaries pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise
or other instrument or obligation to which the Company or its subsidiaries
is a party or by which the Company, its subsidiaries or any of its
properties or assets is bound or affected, except as disclosed in Section
3.05(a) of the Company Disclosure Schedule and except for any violations,
such breaches, defaults or other occurrences that, individually or in the
aggregate, would not have a Company Material Adverse Effect and will not
prevent or delay the consummation of the Transactions.
(b) Except as disclosed in Section 3.05(b) of the Company Disclosure
Schedule, the execution and delivery of this Agreement by the Company do
not, and the consummation by the Company of the Transactions will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental
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or subdivision thereof, or any administrative, governmental or regulatory
authority, agency, commission, tribunal or body, domestic, foreign or
supranational, except (i) for applicable requirements, if any, of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Securities Act of 1933, as amended (the "Securities Act"), state securities
or "blue sky" laws ("Blue Sky Laws"), the rules of the National Association
of Securities Dealers ("NASD"), state takeover laws, the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations thereunder (the "HSR
Act"), and filing and recordation of appropriate merger documents as
required by Florida Law, and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, individually or in the aggregate, is not reasonably likely
to have a Company Material Adverse Effect.
Section 3.6 SEC Filings; Financial Statements; Undisclosed Liabilities.
(a) The Company has filed all forms, reports and documents required to
be filed by it with the Securities and Exchange Commission (the "SEC")
since March 1, 1995 and has made available to the Merger Sub all
registration statements filed by the Company with the SEC, including all
exhibits filed in connection therewith (on all forms applicable to the
registration of securities) since March 1, 1995 and prior to the date of
this Agreement (collectively, the "Company SEC Reports"). As of their
respective dates, the Company SEC Reports (i) complied in all material
respects with the requirements of the Securities Act or the Exchange Act,
as the case may be, and the rules and regulations thereunder and (ii) did
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which
they were made, not misleading. The Company will deliver to the Merger Sub
as soon as they become available true and complete copies of any Company
SEC Reports filed subsequent to the date hereof and prior to the Effective
Time.
(b) Each of the financial statements (including, in each case, any
notes and schedules thereto) contained in the Company SEC Reports complied
as to form with the applicable accounting requirements and rules and
regulations of the SEC and was prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods indicated (except as may be indicated in the
notes thereto), and each fairly presented in all material respects the
consolidated financial position, results of operations and cash flows of
the Company and the consolidated Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein in accordance with
GAAP (subject, in the case of unaudited statements (the "Interim Financial
Statements"), to normal and recurring year-end adjustments none of which
would, individually or in the aggregate, have a Company Material Adverse
Effect).
(c) Since February 28, 1999, except as disclosed in the Company SEC
Reports and Section 3.06 of the Company Disclosure Statement, there has not
been any Company Material Adverse Effect, or any event, condition or
development which the Company believes is reasonably likely to result in a
Company Material Adverse Effect; provided, however, that any changes,
effects, events, occurrences, conditions or developments substantially
consistent with items 1, 2, 3, 4, 7, 9 and 10 of the Disclosed Information
(as defined in Section 8.02(f)) shall not be deemed to constitute a Company
Material Adverse Effect.
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(d) Neither the Company nor its subsidiaries have any material
liabilities or obligations (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated and whether due or to become due,
including any liability for taxes) other than such liabilities or
obligations (i) disclosed in the Company Disclosure Statement, (ii) that
have been specifically disclosed or provided for in the most recent audited
consolidated balance sheet of the Company filed with the SEC, (iii) that
have been incurred in the ordinary course of business consistent with past
practice since the date of the most recent audited consolidated balance
sheet of the Company filed with the SEC, or (iv) that are not required by
GAAP to have been included in the Company's consolidated balance sheet and
would not, individually or in the aggregate, have a Company Material
Adverse Effect.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed in
Section 3.07 of the Company Disclosure Statement or the Company SEC Reports or
as contemplated by this Agreement, since February 28, 1999, neither the Company
nor its subsidiaries have, directly or indirectly:
(a) redeemed, purchased, otherwise acquired, or agreed to redeem,
purchase or otherwise acquire, any shares of capital stock of the Company,
or declared, set aside or paid any dividend or otherwise made a
distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock;
(b) authorized for issuance, issued, sold, delivered, granted or
issued any options, warrants, calls, subscriptions or other rights for, or
otherwise agreed or committed to issue, sell, deliver or grant any shares
of any class of capital stock of the Company or any securities convertible
into or exchangeable or exercisable for shares of any class of capital
stock of the Company or its subsidiaries, other than pursuant to and in
accordance with (i) the Company Stock Option Plans or (ii) the terms of the
Company Common Stock Equivalents listed in Section 3.03 of the Company
Disclosure Statement;
(c) (i) except in the ordinary course of business and consistent with
past practice, created or incurred any indebtedness for borrowed money,
(ii) assumed, guaranteed, endorsed or otherwise as an accommodation become
responsible for the obligations of any other individual, firm or
corporation, made any loans or advances to any other individual, firm or
corporation, (iii) entered into any commitment or transaction material to
the Company or its subsidiaries, (iv) incurred any liabilities except for
liabilities which, individually and in the aggregate, would not have a
Company Material Adverse Effect; or (v) mortgaged, pledged or subjected to
any lien or encumbrance, any asset having a book or market value in excess
of $500,000;
(d) instituted any change in its accounting methods, principles or
practices;
(e) revalued any of its respective assets, including without
limitation, writing down the value of inventory or writing off notes or
accounts receivables except for amounts previously reserved as reflected in
the February 28, 1999 balance sheet;
(f) suffered any damage, destruction or loss, whether covered by
insurance or not, except for such as would not, individually and in the
aggregate, have a Company Material Adverse Effect;
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(g) suffered any adverse change, or any development involving a
prospective adverse change, except for those changes or prospective changes
which, individually and in the aggregate, would not have a Company Material
Adverse Effect; provided, however, that any changes, effects, events,
occurrences, conditions or developments substantially consistent with items
1, 2, 3, 4, 7, 9 and 10 of the Disclosed Information (as defined in Section
8.02(f)) shall not be deemed to constitute a Company Material Adverse
Effect;
(h) granted any increase in the base compensation of, or made any
other material change in the employment terms for, any of its directors,
officers and employees, except for increases or changes reflecting or based
upon changed responsibilities or duties made in the ordinary course of
business consistent with past practice;
(i) adopted, modified or terminated any bonus, profit-sharing,
incentive, severance or other plan or contract for the benefit of any of
its directors, officers and employees other than changes which do not
materially increase the aggregate cost of such plan or contract;
(j) except for provision of services or sales in the ordinary course
of business and consistent with past practice and except for the sale of
the Company's computer service division, (i) sold, leased, licensed,
transferred or otherwise disposed of any of its assets or property having a
book or market value, in excess of $250,000 or (ii) entered into, or
consented to the entering into of, any agreement granting a preferential
right to sell, lease or otherwise dispose of any of such assets;
(k) entered into any new line of business, or incurred or committed to
incur any capital expenditures, obligations or liabilities in connection
therewith in excess of $1,000,000 in the aggregate;
(l) acquired or agreed to acquire by merging or consolidating with, or
agreed to acquire by purchasing a substantial portion of the assets of, or
in any other manner, any business of any other person;
(m) made any cancellation or waiver of (i) any right material to the
operation of the business of the Company or its subsidiaries, or (ii) any
debts or claims against any affiliate of the Company;
(n) made any disposition of, or failed to keep in effect any material
right in, to or for the use of any material patent, trademark, service
mark, trade name, copyright or trade secret of the Company or its
subsidiaries;
(o) entered into any agreement, arrangement or transaction with any
affiliate of the Company; or
(p) agreed to (i) do any of the things described in the preceding
clauses (a) through (o) other than as expressly contemplated or provided
for in this Agreement or (ii) take, whether in writing or otherwise, any
action which, if taken prior to the date of this Agreement, would have made
any representation or warranty in this Article III untrue or incorrect.
Section 3.8 Absence of Litigation. Except as disclosed in the Company SEC
Reports or in Section 3.08 of the Company Disclosure Schedule, there is no
claim, action, proceeding or investigation pending or, to the Company's
Knowledge, threatened against
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the Company, its subsidiaries, or any of its properties or assets, before any
court, arbitrator or Governmental Authority, which, individually or when
aggregated with other claims, actions, proceedings or investigations or product
liability claims (or claims, actions, proceedings or investigations which are
reasonably likely to result from facts and circumstances that have given rise to
such a claim, action, proceeding or investigation), would have a Company
Material Adverse Effect. As of the date hereof, neither the Company nor its
subsidiaries nor any of its properties or assets is subject to any order, writ,
judgment, injunction, decree, determination or award having, individually or in
the aggregate, a Company Material Adverse Effect.
Section 3.9 Stockholder Vote Required. The affirmative vote of the holders
of a majority of the outstanding shares of Company Common Stock is the only vote
of the holders of any class or series of capital stock of the Company necessary
to approve the Merger, this Agreement, the Preference Amendment and the
transactions contemplated hereby.
Section 3.10 Opinion of Financial Advisor. The Company has received the
opinion, dated as of the date hereof, of Prudential Securities Incorporated (the
"Company Financial Advisor"), to the effect that the Merger Consideration is
fair to the Company stockholders (other than the Shareholders) from a financial
point of view.
Section 3.11 Brokers. No broker, finder or investment banker (other than
the Company Financial Advisor) is entitled to any brokerage, finder's or other
fee or commission in connection with the Merger based upon arrangements made by
or on behalf of the Company. The Company has heretofore furnished to Merger Sub
a complete and correct copy of all agreements between the Company and the
Company Financial Advisor pursuant to which such firm would be entitled to any
payment relating to the Merger, and there has been no amendments to such
agreements.
Section 3.12 Company Action; State Takeover Statutes. The Company's Board
of Directors (at a meeting duly called and held) has by requisite vote of
directors (i) approved and adopted this Agreement and the Transactions, and such
approval is sufficient to render inapplicable to this Agreement and the
Transactions, the provisions of Sections 607.0901, 607.0902 and 607.1302 of the
Florida Law to the extent, if any, any such section is applicable to this
Agreement and the Transactions and (ii) agreed to recommend that the
stockholders of the Company approve and adopt this Agreement and the
Transactions.
Section 3.13 Information Supplied. The Proxy Statement (as defined below)
and any other document to be filed with the SEC or any Governmental Authority in
connection with the Transactions(the "Other Filings") will not, at the
respective times filed with the SEC or other Governmental Authority contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances in which they were made, not misleading. The Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations thereunder.
Section 3.14 Environmental Matters.
(a) With respect to the Leased Premises, neither the Company nor its
subsidiaries has caused or allowed the generation, treatment, storage or
disposal of hazardous wastes or substances (as such terms are defined in
any applicable Law with respect to environmental matters and including
petroleum and petroleum by-products)
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at such location other than materials incidental to the operation of the
Company's business that have been and are currently used in compliance with
applicable Law, except where such noncompliance would not have a Company
Material Adverse Effect.
(b) Each of the Company and its subsidiaries has complied with all
applicable Law with respect to environmental matters, except where such
noncompliance would not have a Company Material Adverse Effect.
(c) Since January 1, 1995, neither the Company nor its subsidiaries
have received any written notice from any Governmental Authority or any
other person alleging that the Company or its subsidiaries is liable under
or in breach of any applicable Law with respect to environmental matters,
except where such liability or breach would not have a Company Material
Adverse Effect.
(d) Except as disclosed in Section 3.14 of the Company Disclosure
Statement, to the Company's Knowledge, neither the Company nor its
subsidiaries have either expressly or by operation of law, assumed,
undertaken or otherwise become subject to any liability of any other person
under applicable Law with respect to environmental matters, including
without limitation any obligation for corrective or remedial action.
Section 3.15 Real Property.
(a) Section 3.15 of the Company Disclosure Statement identifies by
street address all real estate leased, subleased or otherwise occupied
pursuant to an agreement (the "Leases") by the Company or its subsidiaries
involving an amount in excess of $150,000 in annual rent (the "Leased
Premises"). The Leased Premises are leased to the Company or its
subsidiaries pursuant to written leases, copies of which have been made
available to Merger Sub. With respect to each Lease: (i) the Company or its
subsidiaries, as applicable, have a good and valid leasehold interest in
and to all of the Leased Premises, and, to the Company's Knowledge, such
leasehold interest is subject to no Liens other than those disclosed on
Section 3.15 of the Company Disclosure Statement and those which would not
have a material adverse effect on the Company's leasehold interest; (ii)
each Lease is in full force and effect and is enforceable in accordance
with its terms and neither the Company nor its subsidiaries have assigned,
transferred, conveyed, mortgaged, deeded in trust, or encumbered any
interest in such Lease; (iii) there exists no default by the Company or
condition which, with the giving of notice, the passage of time or both,
could become a default by the Company under any Lease; and (iv) except as
disclosed on Section 3.15 of the Company Disclosure Statement, no consent,
waiver, approval or authorization is required from the landlord under any
Lease as a result of the execution of this Agreement or the consummation of
the transactions contemplated hereby.
(b) The Leased Premises constitute all of the real property owned,
leased, occupied or otherwise utilized in connection with the business of
the Company or its subsidiaries as currently conducted. The Leased Premises
are in good condition and repair (subject to normal wear and tear) and is
sufficient and appropriate for the conduct of business by the Company and
its subsidiaries. To the Company's Knowledge, (i) all permits, licenses and
other approvals necessary to the current occupancy and use of the Leased
Premises have been obtained, are in full force and effect had have not been
violated by the Company in any material respect and
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(ii) there exists no violation by the Company of any material covenant,
condition, restriction, easement, agreement or order affecting any portion
of the Leased Premises. All facilities located on the Leased Premises are
supplied with adequate utilities and other services necessary for the
conduct of the Company's business as currently conducted. There is no
pending or, to the Knowledge of the Company, threatened condemnation
proceeding, or material lawsuit or administrative action affecting an
portion of the Leased Premises to which the Company or its subsidiaries is
a named party.
Section 3.16 Personal Property.
(a) Each of the Company and its subsidiaries has good title to all
personalty of any kind or nature which the Company or its subsidiaries
purport to own, free and clear of all Liens, except for (i) Liens disclosed
on Section 3.16 of the Company Disclosure Statement, (ii) Liens for
non-delinquent taxes and non-delinquent statutory liens arising other than
by reason of default, (iii) statutory Liens of landlords, liens of
carriers, warehousemen, mechanics and materialmen incurred in the ordinary
course of business for sums not yet due; (iv) Liens incurred or deposits
made in the ordinary course of business in connection with worker's
compensation, unemployment insurance and other types of social security,
(v) purchase money Liens, and (vi) Liens which do not materially detract
from the value or use of said personalty. The Company and its subsidiaries,
as lessees, have the right under valid and subsisting leases to use,
possess and control all personalty leased by and material to the Company or
its subsidiaries as now used, possessed and controlled by the Company or
its subsidiaries, as applicable.
(b) All machinery, equipment and other tangible assets currently being
used by the Company or its subsidiaries which are owned or leased by the
Company or its subsidiaries are in good operating condition, maintenance
and repair, ordinary wear and tear excepted, are usable in the ordinary
course of business and are reasonably adequate and suitable for the uses to
which they are being put, except where any other condition of any
machinery, equipment or other tangible asset would not have a Company
Material Adverse Effect.
Section 3.17 Contracts. Section 3.17 of the Company Disclosure Statement is
a complete list of all written agreements of the Company or its subsidiaries
(other than contracts or leases for the sale in the ordinary course of business
of the Company's services or products) that are currently in effect (except for
those set forth in clause (x) below) and that are (i) leases, sales contracts
and other agreements with respect to any property, real or personal, of the
Company or its subsidiaries which provide for the receipt or expenditure by the
Company or its subsidiaries after the date of this Agreement, of more than
$150,000; (ii) contracts or commitments for capital expenditures or acquisitions
in excess of $150,000 for one project or set of related projects; (iii)
guarantees of third party obligations; (iv) agreements (including non
competition agreements) which restrict the kinds of businesses in which the
Company or its subsidiaries may engage or the geographical area in which any of
them may conduct their business; (v) indentures, mortgages, loan agreements or
other agreements relating to the borrowing of money by the Company, the granting
of Liens by the Company or lines of credit by the Company, in each case,
involving an amount in excess of $150,000; (vi) collective bargaining
agreements; (vii) material licenses, agreements, assignments or contracts
(whether as licensor or licensee, assignor or assignee) relating to any patent
and trademark rights; (viii) brokerage or finder's agreements; (ix) joint
venture agreements, partnership
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agreements or similar agreements; (x) stock purchase agreements, asset purchase
agreements or other acquisition or divestiture agreements executed within the
last five years, in each case, involving an amount in excess of $150,000; (xi)
employment, consulting or management agreements; or (xii) agreements or other
arrangements with any director or executive officer of the Company or its
affiliates (other than customary at will employment arrangements) (all items
required to be disclosed in Section 3.17 of the Company Disclosure Statement
being hereinafter referred to as "Contracts"). True and correct copies of all
the Contracts have been made available to Merger Sub. Except as disclosed in
Section 3.17 of the Company Disclosure Statement, (i) all Contracts are valid
and subsisting and in full force and effect, and each of the Company and its
subsidiaries has duly performed its obligations thereunder in all material
respects to the extent such obligations have accrued, and (ii) no breach or
default thereunder by the Company, its subsidiaries, or, to the Company's
Knowledge, by any other party thereto, has occurred, except where such breach or
default would not reasonably be expected to have a Company Material Adverse
Effect.
Section 3.18 Insurance Policies. Section 3.18 of the Company Disclosure
Statement contains a summary description of all material insurance policies of
the Company and its subsidiaries, and each such policy is in full force and
effect. No written notice of cancellation or termination has been received by
the Company or its subsidiaries with respect to any such policy. To the
Knowledge of the Company, there are no pending claims against such insurance by
the Company or its subsidiaries as to which the insurers have denied coverage or
otherwise reserved rights.
Section 3.19 Compliance with Laws. Except for matters relating to
environmental matters (which are the subject of Section 3.14), neither the
Company nor its subsidiaries are in violation of or have violated or failed to
comply with any Law or Judgment applicable to its business or operations, except
for violations and failures to comply that would not, individually or in the
aggregate, be reasonably likely to result in a Company Material Adverse Effect.
Section 3.20 Tax Matters.
(a) The Company and each subsidiary of the Company has filed all Tax
Returns that it was required to file prior to the date hereof. All such Tax
Returns were correct and complete in all respects. All Taxes owed by any of
the Company and each subsidiary of the Company (whether or not shown on any
Tax Return) have been paid. None of the Company or any subsidiary of the
Company currently is the beneficiary of any extension of time within which
to file any Tax Return. No claim has ever been made by an authority in a
jurisdiction where any of the Company or any subsidiary of the Company does
not file Tax Returns that the Company so not filing is or may be subject to
taxation by that jurisdiction. To the Company's Knowledge, there are no
security interests on any of the assets of any of the Company or any
subsidiary of the Company that arose in connection with any failure (or
alleged failure) to pay any Tax.
(b) Each of the Company and each subsidiary of the Company has
withheld and paid all Taxes required to have been withheld and paid by
applicable Law.
(c) To the Company's Knowledge, there is no dispute or claim
concerning any Tax liability of any of the Company or any subsidiary of the
Company. Section 3.20 of the Company Disclosure Statement lists all
federal, state and foreign income Tax
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Returns filed with respect to any of the Company and any subsidiary of the
Company for taxable periods ended on or after December 31, 1995, indicates
those Tax Returns that have been audited, and indicates those Tax Returns
that currently are the subject of audit. The Company has delivered to the
Investor correct and complete copies of all federal income Tax Returns,
examination reports, and statements of deficiencies assessed against or
agreed to by any of the Company or any subsidiary of the Company since
December 31, 1996.
(d) None of the Company nor any subsidiary of the Company has waived
any statute of limitations in respect of Taxes or agreed to any extension
of time with respect to a Tax assessment or deficiency.
(e) None of the Company nor any subsidiary of the Company has filed a
consent under Code sec.341(f) concerning collapsible corporations. None of
the Company nor any subsidiary of the Company has made any payments, is
obligated to make any payments, or is 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. None of the Company nor any subsidiary
of the Company has 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). Each of the Company and any
subsidiary of the Company has disclosed on its federal, state, local and
foreign Tax Returns all positions taken therein that could give rise to a
substantial understatement of, federal, state, local and foreign Tax within
the meaning of Code sec.6662 or similar provisions under any state, local
or foreign Law. None of the Company nor any subsidiary of the Company is a
party to any Tax allocation or sharing agreement. Neither the Company nor
any subsidiary of the Company has been a member of an affiliated group
filing a consolidated federal income Tax Return other than a group the
common parent of which is the Company.
(f) None of the Company nor any subsidiary of the Company has any
liability for the Taxes of any person other than the Company and the
subsidiaries of the Company (i) under Treas. Reg. sec.1.1502-6 (or any
similar provision of state, local, or foreign law), (ii) as a transferee or
successor, (iii) by contract, or (iv) otherwise.
(g) Except as disclosed on Section 3.20(h) of the Company Disclosure
Statement, none of the Company nor any subsidiary of the Company will be
required to make an adjustment to taxable income under Code sec.481 (or any
similar provision of state, local, or foreign law) for any period ending on
or after the Closing Date by reason of a voluntary change in accounting
method initiated by the Company or any subsidiary of the Company on or
prior to the Closing Date and neither the Internal Revenue Service nor any
other governmental authority has initiated or proposed any such change in
accounting method.
(h) Except as disclosed on Section 3.20(i) of the Company Disclosure
Statement, none of the Company nor any subsidiary of the Company is a
"controlled foreign corporation" within the meaning of Code sec.957.
(i) None of the Company nor any subsidiary of the Company owns an
interest in an entity either treated as a partnership or whose separate
existence is ignored for federal income tax purposes.
Section 3.21 Employment Agreements. Except as disclosed on Section 3.21 of
the Company Disclosure Statement, there are no employment, consulting, severance
or
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indemnification arrangements, agreements or understandings between the Company
and any directors, officers, or other employees of the Company.
Section 3.22 Change of Control Provisions. Except as disclosed on Section
3.22 of the Company Disclosure Statement, none of the arrangements, agreements
or understandings set forth in Article III hereof and none of the Company's
employee benefit plans, programs or arrangements contain any provision that
would become operative as the result of a change of control of the Company or
that will become operative as a result of the Transactions.
Section 3.23 Employees. To the Knowledge of the Company, as of the date of
this Agreement, no key employee, or group of employees, of the Company or its
subsidiaries has any plans to terminate employment with the Company. Each of the
Company and its subsidiaries has complied in all material respects with all laws
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity and collective bargaining, and does not have any
labor relations problems (including, without limitation, threatened or actual
strikes or work stoppages or material grievances) other than such problems that
would not have a Company Material Adverse Effect.
SECTION 3.24 Permits. Each of the Company and its subsidiaries has all
Permits, except for those Permits the failure to have would not, individually or
in the aggregate, have a Company Material Adverse Effect. Section 3.24 of the
Company Disclosure Statement contains a complete list of the material Permits,
exclusive of any Permits with respect to state or local sales, use or other
Taxes or business or occupational licenses. To the Knowledge of the Company, all
of the Permits are in full force and effect except where the failure to be so in
effect would not have a Company Material Adverse Effect. No outstanding notice
of cancellation or termination has been delivered to the Company or its
subsidiaries in connection with any such Permit nor, to the Knowledge of the
Company, has any such cancellation or termination been threatened. To the
Knowledge of the Company, no application, action or proceeding for the
modification of any such Permits is pending or threatened that may result in the
revocation, modification, nonrenewal or suspension of any material Permits. Each
of the Company and its subsidiaries has filed when due all documents required to
be filed with any Governmental Authority in connection with such Permits and, at
the time of the filing thereof, all such filings were accurate and complete in
all material respects.
Section 3.25 Employee Benefit Plans.
(a) Section 3.25 of the Company Disclosure Statement contains a list
of each employee benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), and each
plan, program, policy, practice, arrangement or contract (whether group or
individual) providing for payments, deferred compensation or benefits or
reimbursements to employees or former employees (or their beneficiaries or
dependents) of the Company or with respect to which the Company has any
liability or potential liability. For purposes of this Section 3.25,
"Company" shall be deemed to include any entity required to be aggregated
with the "Company" under Section 414(b), (c), (m) or (o) of the Code or
Section 4001 of ERISA, at any relevant time. Each item listed in Section
3.25 of the Company Disclosure Statement is a "Benefit Plan."
(b) Each Benefit Plan that is intended to be qualified within the
meaning of Section 401(a) of the Code has received a determination from the
Internal Revenue
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Service (the "IRS") that such Benefit Plan is qualified under Section
401(a) of the Code, and, to the Company's Knowledge, nothing has occurred
since the date of such determination that could adversely affect the
qualification of such Benefit Plan.
(c) The Company does not have any liability or potential liability
(including, but not limited to, withdrawal liability) with respect to (i)
any "employee pension benefit plan" (as such term is defined in Section
3(2) of ERISA) that is subject to Section 302 of Title I of ERISA, Title IV
of ERISA or Section 412 of the Code, or (ii) any "multiemployer plan" (as
such term is defined in Section 3(37) of ERISA).
(d) Except as disclosed on Section 3.25 of the Company Disclosure
Statement, none of the Benefit Plans obligates the Company to pay any
separation, severance, termination or similar benefit solely as a result of
any transaction contemplated by this Agreement or solely as a result of a
change in control or ownership within the meaning of Section 280G of the
Code.
(e) Each Benefit Plan and any related trust, insurance contract or
fund has been maintained, funded and administered in compliance in all
material respects with its respective terms and in compliance in all
material respects with all applicable laws and regulations, including, but
not limited to, ERISA and the Code.
(f) The Company has complied with the health care continuation
requirements of Part 6 of Subtitle B of Title I of ERISA; and the Company
has no obligation under any Benefit Plan or otherwise to provide health or
life insurance benefits to former employees of the Company or any other
person, except as specifically required by Part 6 of Subtitle B of Title I
of ERISA.
(g) With respect to each Benefit Plan, the Company has provided the
Merger Sub with true, complete and correct copies of (to the extent
applicable) (i) all documents pursuant to which the Benefit Plan is
maintained, funded and administered, (ii) the most recent annual report
(Form 5500 series) filed with the IRS (with applicable attachments), (iii)
the most recent financial statement, (iv) the most recent summary plan
description provided to participants, and (v) the most recent determination
letter received from the IRS.
(h) With respect to each Benefit Plan, all required or recommended (in
accordance with historical practices) payments, premiums, contributions,
reimbursements or accruals for all periods (or partial periods) ending
prior to or as of the Closing shall have been made or properly accrued on
the November 30, 1998 balance sheet. None of the Benefit Plans has any
material unfunded liabilities.
Section 3.26 Intellectual Property Rights.
(a) Section 3.26 of the Company Disclosure Statement sets forth a
complete and correct list of all: (i) patented or registered Intellectual
Property Rights and pending patent applications and other applications for
registrations of Intellectual Property Rights owned or filed by or on
behalf of the Company or its subsidiaries; (ii) all trade names and
unregistered trademarks and service marks owned or used by the Company or
its subsidiaries and material to the conduct of its business; and (iii) all
material licenses or similar agreements or arrangements for Intellectual
Property Rights to which the Company or its subsidiaries is a party (either
as a licensor or licensee).
(b) Except as disclosed in Section 3.26 of the Company Disclosure
Statement: (i) each of the Company and its subsidiaries owns and possesses
all right, title and
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interest in and to, or has a valid and enforceable license to use, all of
the Intellectual Property Rights necessary for the operation of the
business of the Company and its subsidiaries as currently conducted free
and clear of all encumbrances, licenses or other restrictions; (ii) no
claim by any third party contesting the validity, enforceability, use or
ownership of any of the material Intellectual Property Rights owned or used
by the Company or its subsidiaries has been made, is currently outstanding
or is threatened, and to the Knowledge of the Company, there are no grounds
for the same; (iii) the loss or expiration of any Intellectual Property
Right owned or used by the Company or its subsidiaries would not have a
Company Material Adverse Effect, and no such loss or expiration is
threatened, pending or reasonably foreseeable; (iv) neither the Company nor
its subsidiaries have received any notices of, and, to the Company's
Knowledge, there is no infringement or misappropriation by, or conflict
with, any third party with respect to the Intellectual Property Rights
owned or used by the Company or its subsidiaries (including, without
limitation, any demand or request that the Company or its subsidiaries
license any rights from a third party); (v) neither the Company nor its
subsidiaries, to the Company's Knowledge, have infringed, misappropriated
or otherwise conflicted with any Intellectual Property Rights or other
rights of any third parties and, to the Company's Knowledge, there is no
infringement, misappropriation or conflict which will occur as a result of
the continued operation of the business of the Company and its subsidiaries
as currently conducted and as currently proposed to be conducted; and (vi)
each of the Company and its subsidiaries has taken commercially reasonable
steps to protect, maintain and safeguard the material Intellectual Property
Rights owned or used by the Company or its subsidiaries.
Section 3.27 Year 2000. The Company is currently in the process of
implementing a new enterprise wide information system that is designed to be
Year 2000 Compliant (as defined below) (and that, to the Company's Knowledge, is
Year 2000 Compliant) (the "New System"), which will replace all of the computer
software computer firmware, computer hardware (whether general or special
purpose), and other similar or related items of automated, computerized, and/or
software system(s) that are material to the Company's financial and
informational systems (collectively, the "System Software"). The Company expects
to complete the implementation of the New System on or before June 30, 1999, and
the Company is using and will continue to use commercially reasonable efforts to
complete such implementation on or before June 30, 1999. To the best of the
Company's Knowledge, except as disclosed on Section 3.27 of the Company
Disclosure Statement, all current versions of the product lines sold, licensed,
rendered, or otherwise provided by the Company or its subsidiaries to customers
in the conduct of their businesses are Year 2000 Compliant. "Year 2000
Compliant" means, with respect to any System Software, that such System Software
will (i) operate prior to, during and after the calendar year 2000 without error
relating to the date related data, and (ii) properly recognize and indicate
dates in the calendar year 2000 and beyond as both input and output.
Section 3.28 Appraisal Rights. None of the holders of shares of Company
Common Stock has any appraisal or dissenter rights under Florida Law in
connection with this Agreement, the Merger, the Preference Amendment or the
other Transactions.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
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Except as disclosed in a separate disclosure schedule referring to the
Sections contained in this Agreement, which has been delivered by the Merger Sub
to the Company prior to the execution of this Agreement (the "Merger Sub
Disclosure Schedule"), Merger Sub hereby represents and warrants to the Company
that:
Section 4.1 Organization and Qualification; Subsidiaries. Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted. Merger
Sub is duly qualified or licensed as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of the properties
owned, leased or operated by it or the nature of its business makes such
qualification or licensing necessary, except for such failures to be so
qualified or licensed and in good standing that, individually or in the
aggregate, would not have a Merger Sub Material Adverse Effect. The term "Merger
Sub Material Adverse Effect" means, when used in connection with the Merger Sub,
any change, effect, event, occurrence, condition or development that is or is
reasonably likely to be materially adverse to (i) the business, assets,
liabilities, properties, results of operations, prospects or condition
(financial or otherwise) of the Merger Sub (excluding industry and general
economic changes) or (ii) the ability of Merger Sub to perform its obligations
under this Agreement.
Section 4.2 Charter Documents and By-Laws. Merger Sub has heretofore
furnished to the Company a complete and correct copy of the Articles of
Incorporation and By-laws, each as amended to date, of Merger Sub. Such charter
documents are in full force and effect. Merger Sub is not in violation of any
provision of its charter documents.
Section 4.3 Authority Relative to this Agreement. Merger Sub has all
necessary corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the Transactions. The
execution and delivery of this Agreement by Merger Sub and the consummation by
Merger Sub of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
Transactions (other than, with respect to the Merger, the filing and recordation
of appropriate merger documents as required by Florida Law). This Agreement has
been duly and validly executed and delivered by Merger Sub and, assuming the due
authorization, execution and delivery by the Company, constitutes a legal, valid
and binding obligation of Merger Sub enforceable against Merger Sub in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
Section 4.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Merger Sub does
not, and the consummation of the Transactions by Merger Sub will not (i)
conflict with or violate the charter documents, By-laws or other
organizational documents of Merger Sub, (ii) conflict with or violate any
Law applicable to Merger Sub or by which any property or asset of Merger
Sub is bound or affected, except for such conflicts or violations which
would not, individually or in the aggregate, have a Merger Sub Material
Adverse Effect, or (iii) result in a violation or any breach of or
constitute a default (or an event which with notice or lapse of time or
both would become a
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default) under any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which Merger Sub is a party or by which Merger Sub or any property or asset
of Merger Sub is bound or affected, except for any such breaches or
defaults which, individually or in the aggregate, would not have a Merger
Sub Material Adverse Effect.
(b) The execution and delivery of this Agreement by Merger Sub does
not, and the consummation of this Agreement by Merger Sub will not require
any consent, approval, authorization or permit of, or filing with or
notification to, any government or subdivision thereof, or any
administration, governmental or regulatory authority, agency, commission,
tribunal or body, domestic, foreign or supranational, except (i) for
applicable requirements, if any, of the Exchange Act, the Securities Act,
Blue Sky Laws, the rules of any applicable stock exchange, state takeover
laws, the pre-merger notification requirements of the HSR Act, and filing
and recordation of appropriate merger documents as required by Florida Law
or any other applicable state law, and (ii) where the failure to obtain
such other consents, approvals, authorizations, or permits, or to make such
filings or notifications, individually or in the aggregate is not
reasonably likely to have a Merger Sub Adverse Effect.
Section 4.5 Interim Operations of Merger Sub. Merger Sub was formed solely
for the purpose of engaging in the transactions contemplated hereby, has engaged
in no other business activities (other than those incident to its organization
and the execution of this Agreement) and has conducted its operations only as
contemplated hereby.
Section 4.6 Information Supplied. None of the information supplied or to be
supplied by Merger Sub specifically for inclusion or incorporation by reference
in the Proxy Statement or the Other Filings, at the respective time filed with
the SEC or such other Governmental Authority, and, in addition, in the case of
the Proxy Statement, at the date it is first mailed to the Company's
shareholders or at the time of the Shareholders Meeting (as defined below),
contains or will contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section 4.7 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of Merger Sub.
Section 4.8 Financing. Cornerstone has received written commitments from
(a) Fleet National Bank, ("Fleet"), dated April 23, 1999 and as amended June 3,
1999 (the "Fleet Commitment Letter"), pursuant to which Fleet has committed,
subject to the terms and conditions contained therein, to provide up to
$46,000,000 in financing for the Transactions and (b) Mainsail Capital, an
affiliate of Fleet ("Mainsail"), dated April 23, 1999 and as amended June 3,
1999 (the "Mainsail Commitment Letter" and, together with the Fleet Commitment
Letter, the "Commitment Letters"), pursuant to which Mainsail has committed,
subject to the terms and conditions contained therein, to provide up to
$9,000,000 in financing for the Transactions. The proceeds from the Debt
Financing, to the extent funded pursuant to the Commitment Letters, together
with the Equity Contribution, shall provide sufficient funds to pay, pursuant to
the Merger, the Merger Consideration and the Option Consideration and to pay all
fees and expenses related to the Transactions. Merger Sub and/or the Investors
have delivered true, correct and complete copies of the Commitment Letters to
the Company.
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Section 4.9 Litigation. There is no (i) claim, action, suit or proceeding
pending or, to the best knowledge of the Merger Sub threatened against Merger
Sub, before any court, arbitrator or Governmental Authority, or (ii) outstanding
judgment, order, writ, injunction or decree of any court, arbitrator or
Governmental Authority in a proceeding to which Merger Sub or any of its assets
is subject except, in the case of clauses (i) and (ii) above, such as would not,
individually or in the aggregate, have a Merger Sub Material Adverse Effect.
Section 4.10 Capitalization. Immediately prior to the Effective Time, the
authorized capital stock of Merger Sub will consist of shares of Common Stock,
par value $0.01 per share and shares of preferred stock, par value $0.01 per
share. Except as provided in, or contemplated by, this Agreement, there are no
authorized or outstanding options, warrants, convertible securities, calls,
rights, commitments, preemptive rights or agreements or instruments or
understandings of any character, to which Merger Sub is a party or by which
Merger Sub is bound, obligating Merger Sub to issue, deliver or sell, or cause
to be issued, delivered or sold, contingently or otherwise, additional shares of
capital stock of Merger Sub or any securities or obligations convertible into or
exchangeable for such shares or to grant, extend or enter into any such option,
warrant, convertible security, call, right commitment, preemptive right or
agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder hereby severally but not jointly represents and warrants
to the Company that:
Section 5.1 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by such Shareholder
does not, and the consummation of the Transactions by such Shareholder will
not, (i) violate any Law applicable to such Shareholder, (ii) prevent or
materially delay the consummation of the Merger or (iii) result in a
violation or any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which such Shareholder is a
party.
(b) The execution and delivery of this Agreement by such Shareholder
does not, and the consummation of the Transactions by such Shareholder will
not, require any consent, approval, authorization or permit of, or filing
with or notification to, any government or subdivision thereof, or any
administrative, governmental or regulatory authority, agency, commission,
tribunal or body, domestic, foreign or supranational, except for applicable
requirements, if any, of the Exchange Act, the Securities Act, Blue Sky
Laws, the rules of any applicable exchange, state takeover laws, the pre-
merger notification requirements of the HSR Act, and filings and
recordation of appropriate merger documents as required by Florida Law or
any other applicable state law.
Section 5.2 Ownership of Owned Shares. Such Shareholder is the sole record
and beneficial owner of the Owned Shares owned by such Shareholder, free and
clear of any liens or encumbrances and free of any other limitation or
restriction (including, without limitation, any restriction on the right to
vote, sell or otherwise dispose of the Owned
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Shares or any interest therein) except pursuant to this Agreement or applicable
securities Laws. The Owned Shares constitute all of the capital stock of the
Company owned of record or beneficially owned by such Shareholder.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, between the date of this Agreement and the
Effective Time, except as set forth in Section 6.01 of the Company Disclosure
Schedule or as otherwise expressly provided for in this Agreement, unless Merger
Sub shall otherwise agree in writing, the Company shall, and shall cause its
subsidiaries, to conduct its business in the ordinary course and in a manner
consistent in all material respects with past practice. The Company shall, and
shall cause its subsidiaries to, use all commercially reasonable efforts to (i)
preserve intact its business organization, (ii) keep available the services of
the current officers, employees and consultants of the Company and its
subsidiaries, (iii) preserve the current relationships of the Company and its
subsidiaries with customers, distributors, suppliers, licensors, licensees,
contractors and other persons with which the Company or its subsidiaries has
significant business relations, (iv) maintain all assets in good repair and
condition (except for ordinary wear and tear) other than those disposed of in
the ordinary course of business, (v) maintain all insurance necessary to the
conduct of the Company's business as currently conducted, (vi) maintain its
books of account and records in the usual, regular and ordinary manner, (vii)
maintain and protect all of its material Intellectual Property Rights in a
manner consistent in all material respects with past practice and (viii)
complete the implementation of the New System on or before June 30, 1999. By way
of amplification and not limitation, except as contemplated by this Agreement,
or as set forth in Section 6.01 of the Company Disclosure Schedule, the Company
shall not, and shall cause its subsidiaries not to, between the date of this
Agreement and the Effective Time, directly or indirectly do, or propose to do,
any of the following without the prior written consent of Merger Sub:
(a) amend or otherwise change its Articles of Incorporation or
By-laws, except to the extent contemplated by the Preference Amendment;
(b) issue, sell, pledge, dispose of, grant or encumber, or authorize
the issuance, sale, pledge, disposition, grant or encumbrance of, (i) any
shares of capital stock of any class of the Company (other than in
connection with the Preference Exchange or the Equity Contribution) or its
subsidiaries, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of such capital stock, or any
other ownership interest (including, without limitation, any phantom
interests), of the Company or its subsidiaries or (ii) any assets of the
Company or its subsidiaries, except for sales in the ordinary course of
business consistent with past practice and other asset sales for
consideration or having a fair market value aggregating not more than
$150,000;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, or propose to redeem, purchase or otherwise acquire,
directly or indirectly, any of its capital stock, other than in connection
with the Preference Exchange;
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(e) acquire (including, without limitation, by merger, consolidation
or acquisition of stock or assets) or agree to acquire any corporation,
partnership, limited liability company, or other business organization or
division thereof;
(f) (i) incur or agree to incur any indebtedness for borrowed money or
issue any debt securities or assume, guarantee or endorse, or otherwise as
an accommodation become responsible for, the obligations of any person, or
make any loans, advances, or capital contributions to or investments in,
any other person, except in the ordinary course of business consistent with
past practice and in an amount not in excess of $150,000; or (ii) authorize
capital expenditures which are, in the aggregate, in excess of $500,000;
(g) acquire, or agree to acquire, sell, lease or dispose of any Real
Estate or other material assets, other than sales or leases of fixed assets
(other than Real Estate) or sales of inventory, in each case, in the
ordinary course of business consistent with past practice;
(h) enter into, establish, adopt, amend or renew any material
employment, consulting, severance or similar agreement or arrangements with
any director, officer, or employee, or grant any salary or wage increase
(other than in the ordinary course consistent with past practice);
(i) establish, adopt, amend or increase benefits under any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, welfare benefit contract, plan or arrangement
(other than as may be required by applicable law);
(j) enter into any labor or collective bargaining agreement,
memorandum of understanding, grievance settlement or any other agreement or
commitment to or relating to any labor union;
(k) discharge or satisfy any material Lien or pay or satisfy any
material obligation or liability (fixed or contingent) except in the
ordinary course of business consistent with past practice, or commence any
voluntary petition, proceeding or action under any bankruptcy, insolvency
or other similar law;
(l) make or institute any change in accounting procedures or practices
in its accounting procedures and practices unless mandated by GAAP;
(m) take any action that, if taken after February 28, 1999 but prior
to the date hereof, would have required to be disclosed in Section 3.07 of
the Company Disclosure Statement (provided that, notwithstanding anything
contained herein, no Company Material Adverse Effect which occurred prior
to the date hereof would have to be listed on Section 3.07 of the Company
Disclosure Statement);
(n) enter into any agreement or other arrangement with any director,
officer, employee or stockholder of the Company, its subsidiaries or any
affiliate of the foregoing, except in the ordinary course of business
consistent with past practice;
(o) enter into any agreement or other arrangement that is reasonably
likely to be material to the business of the Company or its subsidiaries,
except in the ordinary course of business consistent with past practice;
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(p) make or change any election, change an annual accounting period,
adopt or change any accounting method, file any amended Tax Return, enter
into any closing agreement, settle any Tax claim or assessment relating to
the Company or its subsidiaries, surrender any right to claim a refund of
Taxes, consent to any extension or waiver of the limitation period
applicable to any Tax claim or assessment relating to the Company or its
subsidiaries, fail to timely file any Tax Return, take a position on a Tax
Return not in keeping with prior practice or take any other similar action,
or omit to take any action relating to the filing of any Tax Return or the
payment of any Tax, if such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission could
have the effect of increasing the present or future Tax liability or
decreasing any present or future Tax asset of the Company or its
subsidiaries;
(q) take any action or omit to take any action which would result in a
violation of any applicable Law or would cause a breach of any agreement,
contract or commitment, which violation or breach would have a Company
Material Adverse Effect;
(r) license, assign or otherwise transfer to any person or entity any
rights to any material Intellectual Property Rights owned or used by the
Company or its subsidiaries, except in the ordinary course of business
consistent with past practice;
(s) fail to maintain or enforce any material Intellectual Property
Rights owned or used by the Company or its subsidiaries, except in the
ordinary course of business consistent with past practice; or
(t) authorize or propose, or agree to take, any of the foregoing
actions prohibited under Section 6.01.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Shareholders' Meeting.
(a) Subject to the provisions of Section 7.05 and Section 9.01, the
Company shall, consistent with applicable law, call and hold a meeting of
the holders of shares of Company Common Stock (the "Shareholders' Meeting")
as promptly as practicable for the purpose of voting upon the approval and
adoption of this Agreement and the Transactions. The Company, through its
Board of Directors or a committee thereof, shall recommend to its
shareholders approval and adoption of this Agreement and the Transactions,
which recommendation shall be contained in the Proxy Statement (as defined
below); provided, however, that the Board of Directors of the Company or a
committee thereof may fail to make its recommendation to the shareholders
of the Company or may withdraw, modify or change its recommendation to the
shareholders of the Company, in accordance with Section 7.05(b). The
Company shall solicit from the holders of shares of Company Common Stock
proxies in favor of the approval and adoption of the Merger, and shall take
all other action necessary or advisable to secure the vote or consent of
such holders required by Florida Law.
(b) Merger Sub shall vote (or consent with respect to) any shares of
Company Common Stock beneficially owned by it, or with respect to which it
has the power
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(by agreement, proxy or otherwise) or cause to be voted (or to provide a
consent), in favor of the approval and adoption of this Agreement at any
meeting of the shareholders of the Company at which this Agreement shall be
submitted for approval and adoption and at all adjournments or
postponements thereof (or, if applicable, by any action of the shareholders
of the Company by consent in lieu of a meeting).
Section 7.2 Preparation of Proxy Statement.
(a) The Company shall, as soon as practicable, but in any event within
thirty (30) days after the date hereof, prepare and file (after providing
Merger Sub with a reasonable opportunity to review and comment thereon)
preliminary proxy materials (including, without limitation, a Schedule
13e-3 filing, if required to be filed under the Exchange Act) relating to
the meeting of the holders of shares of Company Common Stock to be held in
connection with the Transactions (together with any amendments thereof or
supplements thereto, the "Proxy Statement") (or, if requested by Merger Sub
and applicable, an information statement in lieu of a proxy statement
pursuant to Rule 14C under the Exchange Act, with all references herein to
the Proxy Statement being deemed to refer to such information statement, to
the extent applicable) with the SEC and shall use its commercially
reasonable efforts to respond to any comments of the SEC (after providing
Merger Sub with a reasonable opportunity to review and comment thereon) and
to cause the Proxy Statement to be mailed to the Company's shareholders as
promptly as practicable after responding to all such comments to the
satisfaction of the staff. The Company shall notify Merger Sub promptly of
the receipt of any comments from the SEC and of any request by the SEC for
amendments or supplements to the Proxy Statement or for additional
information and shall supply Merger Sub with copies of all correspondence
between the Company or any of its representatives, on the one hand, and the
SEC, on the other hand, with respect to the Proxy Statement or the
Transactions. The Company will cause the Proxy Statement to comply in all
material respects with the applicable provisions of the Exchange Act and
the rules and regulations thereunder applicable to the Proxy Statement and
the solicitation of proxies for the Shareholders' Meeting (including any
requirement to amend or supplement the Proxy Statement) and each party
shall furnish to the other such information relating to it and its
affiliates and the Transactions and such further and supplemental
information as may be reasonably requested by the other party. If at any
time prior to the Shareholders Meeting there shall occur any event that
should be set forth in an amendment or supplement to the Proxy Statement,
the Company shall promptly prepare and mail to its shareholders such an
amendment or supplement; provided, that no such amendment or supplement to
the Proxy Statement will be made by the Company without providing the
Merger Sub the reasonable opportunity to review and comment thereon and
without the approval of Merger Sub, which approval shall not be
unreasonably withheld. The Company and its counsel shall permit Parent and
its counsel to participate in all communications with the SEC and its
staff, including all meetings and telephone conferences, relating to the
Proxy Statement, this Agreement or the Transactions.
(b) The Company agrees to include in the Proxy Statement the unanimous
recommendation of the voting members of the Company's Board of Directors,
subject to any modification, amendment or withdrawal thereof, and
represents that the Company's Financial Advisor has, subject to the terms
of its engagement letter with the Company, consented to the inclusion of
references to its opinion in the Proxy Statement.
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Section 7.3 Appropriate Action; Consents; Filings; Further Assurances.
(a) The Company and Merger Sub shall use their commercially reasonable
efforts to (i) take, or cause to be taken, all appropriate action and do,
or cause to be done, all things necessary, proper or advisable under
applicable Law or otherwise to consummate the Transactions and make
effective the Merger as promptly as practicable, (ii) take all reasonable
actions required for the consummation of the financing of the transactions
contemplated hereby by Merger Sub; provided, however, that the
effectiveness of any such action by the Company shall be conditioned upon
consummation of the Merger, (iii) obtain expeditiously from any
Governmental Authorities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by
Merger Sub or the Company or any of their Subsidiaries in connection with
the authorization, execution and delivery of this Agreement and the
consummation of the Transactions, and (iv) as promptly as practicable, make
all necessary filings, and thereafter make any other required submissions,
with respect to this Agreement and the Transactions required under (A) the
Securities Act and the Exchange Act, and any other applicable federal or
state securities Laws, (B) the HSR Act and any related governmental request
thereunder and (C) any other applicable Law; provided, that Merger Sub and
the Company shall cooperate with each other in connection with the making
of all such filings, including providing copies of all such documents to
the non-filing party and its advisors prior to filing. From the date of
this Agreement until the Effective Time, each party shall promptly notify
the other party in writing of any pending or, to the knowledge of the first
party, threatened action, proceeding or investigation by any Governmental
Authority or any other person (i) challenging or seeking material damages
in connection with the Merger or the conversion of the Company Common Stock
into cash pursuant to the Merger or (ii) seeking to restrain or prohibit
the consummation of the Transactions or otherwise limit the right of
Surviving Corporation to own or operate all or any portion of the
businesses or assets of the Company or its Subsidiaries, which in either
case would have a Company Material Adverse Effect prior to or after the
Effective Time, or a Surviving Corporation Material Adverse Effect after
the Effective Time. The term "Surviving Corporation Material Adverse
Effect" means, when used in connection with the Surviving Corporation, any
change, effect, event, occurrence, condition or development that is or is
reasonably likely to be materially adverse to the business, assets,
liabilities, properties, results of operations, prospects or condition
(financial or otherwise) of the Surviving Corporation or its subsidiaries,
taken as a whole.
(b) The Company, the Shareholders and Merger Sub shall furnish to each
other all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable Law (including
all information required to be included in the Proxy Statement) in
connection with the transactions contemplated by this Agreement.
(c) Each of Merger Sub and the Company shall give (or shall cause its
respective subsidiaries to give) any notices to third parties and use, and
cause its respective subsidiaries to use, their reasonable efforts to
obtain any third party consents, (A) necessary, proper or advisable to
consummate the Transactions, (B) disclosed or required to be disclosed in
the Company Disclosure Schedule or (C) required to prevent a Company
Material Adverse Effect from occurring prior to
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or after the Effective Time or a Surviving Corporation Material Adverse
Effect from occurring after the Effective Time.
(i) In the event that Merger Sub or the Company shall fail to
obtain any third party consent described in subsection (c)(i) above, it
shall use its commercially reasonable efforts, and shall take any such
actions reasonably requested by the other party, to minimize any adverse
effect upon the Company and Merger Sub, their respective subsidiaries,
and their respective businesses resulting, or which could reasonably be
expected to result after the Effective Time, from the failure to obtain
such consent.
(d) If any state takeover statute or similar statute or regulation
becomes applicable to this Agreement or any of the Transactions, the
Company and Merger Sub will take all action necessary to ensure that the
Merger and the other Transactions may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger and the
other Transactions.
(e) If at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement,
including the execution of additional documents, the proper officers and
directors of each party to this Agreement (including the Shareholders)
shall take all such necessary action. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company, any other
actions to vest, perfect or confirm of record or otherwise in the Surviving
Corporation any and all right, title and interest in, to and under any of
the rights, properties or assets of the Company acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the
Merger.
Section 7.4 Access to Information; Confidentiality.
(a) The Company and Merger Sub shall comply with, and shall cause
their respective Representatives (as defined below) to comply with, to the
extent permitted by applicable Law, all of their respective obligations
under the Confidentiality Agreement dated November 6, 1998 (the
"Confidentiality Agreement") between the Company and Merger Sub.
Notwithstanding the Confidentiality Agreement, the Company acknowledges
that Merger Sub may cause an information memorandum to be prepared and used
in connection with the consummation of the financing of the Transactions;
provided, that any recipient of such information memorandum shall be
subject to customary confidentiality requirements.
(b) Subject to the Confidentiality Agreement, from the date hereof to
the Effective Time, the Company shall (and shall cause each of its
subsidiaries to) provide to Merger Sub (and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives, collectively, "Representatives") access to all information
and documents which Merger Sub may reasonably request regarding the
business, assets, liabilities, employees and other aspects of the Company
or its subsidiaries.
(c) From the date hereof to the Effective Time, the Company shall (and
shall cause each of its subsidiaries to): (i) provide to Merger Sub and its
Representatives access at reasonable times upon prior notice to the
officers, employees, agents, properties, offices and other facilities of
the Company and its subsidiaries and to the
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books and records thereof and (ii) furnish promptly such information
concerning the business, properties, contracts, assets, liabilities,
personnel and other aspects of the Company and its subsidiaries as Merger
Sub or its Representatives may reasonably request.
(d) No investigation by Merger Sub, whether prior to the execution of
this Agreement or pursuant to this Section 7.04, shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
Section 7.5 No Solicitation.
(a) The Company and the Shareholders shall not, and the Company shall
cause its subsidiaries not to, and the Company agrees that it shall not
authorize nor permit any of its directors, officers, employees, agents or
representatives to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing or disclosing non-public information) any
inquiries, discussions or the making of any proposal with respect to any
merger, consolidation or other business combination involving the Company
or acquisition of any kind of a material portion of the assets or capital
stock of the Company or its subsidiaries (a "Competing Transaction") or
negotiate, explore or otherwise communicate in any way with any person
(other than Merger Sub or its directors, officers, employees and
representatives) with respect to any Competing Transaction or enter into or
consummate any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other
transaction contemplated by this Agreement; provided, however, that prior
to the vote of the shareholders of the Company for approval of the Merger,
the Company (including, but not limited to, the officers and directors of
the Company who may be Shareholders) may, if and so long as the Company's
Board of Directors determines in good faith by a majority vote, based upon
the advice of its outside counsel that failing to take such action would
constitute a breach of the fiduciary duties of the Company's Board of
Directors under applicable law, in response to a Competing Transaction from
any person that was not solicited by the Company and that did not otherwise
result from the breach of this Section 7.05, and subject to compliance with
Section 7.05(c), (x) furnish information with respect to the Company to
such person pursuant to a customary confidentiality agreement and (y)
participate in discussion or negotiations with such person regarding any
Competing Transaction; provided, that such proposal is not subject to
conditions that are materially different from those set forth in this
Agreement and such proposal is, in the business judgment of the Board of
Directors of the Company, more favorable to the stockholders of the Company
(other than the Shareholders) from a financial point of view than the
transactions contemplated by this Agreement (including any adjustments to
the terms and conditions of such transactions proposed by Merger Sub is
response to such Competing Transaction pursuant to Section 7.05(b) below).
(b) Neither the Company (or any of its subsidiaries) nor the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Merger
Sub, the approval, adoption or recommendation by the Board of Directors of
the Company or any such committee of this Agreement, the Merger or the
other Transactions, (ii) approve or recommend, or propose to approve or
recommend, any Competing Transaction, (iii) approve or recommend, or
propose to approve or recommend, or execute or enter into, any letter of
intent, agreement in principle, merger agreement, acquisition agreement,
option
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agreement or other relating to any Competing Transaction or propose or
agree to do any of the foregoing, or (iv) submit any Competing Transaction
at the Shareholder's Meeting for purposes of voting upon approval and
adoption of the Competing Transaction; provided, however, that prior to the
vote of the shareholders of the Company for approval of the Merger, the
Company may, to the extent required by the fiduciary obligations of the
Board of Directors of the Company, as determined in good faith by a
majority vote of the Board of Directors of the Company based on the advice
of its outside counsel, and after compliance with the following sentence,
terminate this Agreement pursuant to Section 9.01(g) (provided that
concurrently with such termination the Company enters into a definitive
agreement containing the terms of a Competing Transaction). If the Company
shall exercise its right to terminate this Agreement pursuant to this
Section 7.05(b), the Company shall deliver to Merger Sub (or at Merger
Sub's direction, to Cornerstone) (i) by check or wire transfer of same day
funds in the amount of (A) Merger Sub's Reimbursable Expenses (as defined
in Section 9.03(b)) as the same may have been estimated by Merger Sub in
good faith prior to the date of such delivery (subject to an adjustment
payment between the parties upon Merger Sub's definitive determination of
such Merger Sub's Reimbursable Expenses and (B) the amount of Termination
Fee as provided in Section 9.03(c) and (ii) written acknowledgment from the
Company and from the other person to the Competing Transaction that the
Company and such other person have irrevocably waived any right to contest
such payment. Notwithstanding anything in this Agreement to the contrary,
the Company may only exercise its right to terminate this Agreement
pursuant to this Section 7.05(b) at a time that is after the tenth business
day following Merger Sub's receipt of written notice (the "Competing
Notice") advising Merger Sub that the Board of Directors of the Company is
prepared, subject to any action taken by Merger Sub pursuant to this
sentence, to cause the Company to accept a Competing Transaction,
specifying the material terms and conditions of such Competing Transaction
and identifying the person making such Competing Transaction (it being
understood and agreed that any amendment or modification of a Competing
Transaction shall result in a new Competing Transaction for which a new ten
business day period following a new notice referred to above shall be
required under this sentence); provided, however, that Merger Sub shall
have the right during such ten business day period after receipt of the
Competing Notice to offer to adjust the terms and conditions of the
Transactions by tendering to the Company a new proposal for such terms and
conditions (the "Revised Proposal"); provided, further, that if the Revised
Proposal, in the business judgment of the Board of Directors of the
Company, is substantially the same as the Competing Transaction, or is more
favorable to the stockholders of the Company (other than the Shareholders)
from a financial point of view than the Competing Transaction, then,
subject only to the amendment of this Agreement to incorporate the terms
and conditions of the Revised Proposal, the Company shall reject the
Competing Transaction and recommend to its shareholders the approval and
adoption of the Revised Proposal.
(c) The Company promptly (and in any event within 12 hours of the
relevant event) shall advise Merger Sub orally and in writing of any
Competing Transaction or any inquiry with respect to or that could
reasonably be expected to lead to any Competing Transaction and the
identity of the person making any such Competing Transaction or inquiry,
and, in each case, the terms and conditions thereof, including any
amendment or other modification to the terms of any such Competing
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Transaction or inquiry. The Company shall keep Merger Sub fully apprised of
the status of any proposal relating to a Competing Transaction on a current
basis.
(d) The Company shall not cancel, terminate, amend, modify or waive
any of the terms of any confidentiality or standstill agreement executed
with respect to the Company by any other party prior to the date of this
Agreement.
Section 7.6 Indemnification and Insurance.
(a) The Surviving Corporation and the Company agree that, except as
may be limited by applicable Laws, for six years from and after the
Effective Time, the indemnification obligations set forth in the Company's
Articles of Incorporation and the Company's By-Laws, in each case as of the
date of this Agreement, shall survive the Merger and shall not be amended,
repealed or otherwise modified after the Effective Time in any manner that
would adversely affect the rights thereunder of the individuals who on or
at any time prior to the Effective Time were entitled to indemnification
thereunder with respect to matters occurring prior to the Effective Time.
In addition, the Surviving Corporation and Company agree that, except as
may be limited by applicable Laws, the indemnification obligations of the
Company as set forth in other indemnification agreements to which it is a
party and as disclosed in Section 7.06 of the Company Disclosure Statement,
shall not be amended, repealed or otherwise modified after the Effective
Time except as permitted by the terms and provisions of those agreements.
(b) The Company shall maintain in effect, for three years or until the
applicable statute of limitations expires but in no event longer than four
years, from and after the Effective Time, directors' and officers'
liability insurance policies covering the persons who are currently covered
in their capacities as such directors and officers (the "Covered Parties")
by the Company's current directors' and officers' policies and on terms not
materially less favorable than the existing insurance coverage with respect
to matters occurring prior to the Effective Time; provided, however, in the
event the annual premium for such coverage exceeds an amount equal to 200%
of the last annual premium paid immediately prior to the date hereof by the
Company for such coverage, the Surviving Corporation shall notify the
Covered Parties who shall then elect as a group either (i) to allow the
Surviving Corporation to obtain as much comparable insurance as possible
for an annual premium equal to 200% of the last annual premium paid
immediately prior to the date hereof by the Company, or (ii) to seek
coverage from another carrier, in which event the Surviving Corporation
shall reimburse the Covered Parties the cost of such alternate coverage up
to an amount equal to 200% of the last annual premium paid immediately
prior to the date hereof by the Company for such coverage.
(c) In addition to, and not in lieu of the foregoing, the Surviving
Corporation shall indemnify, defend and hold harmless all officers and
directors of the Company (the "Indemnified Parties") to the fullest extent
permitted by Florida Law and in the Articles of Incorporation and By-laws
of the Company, as in effect as of the date hereof, from and against all
liabilities, costs, expenses and claims (including without limitation
reasonable legal fees and disbursements, which shall be paid, reimbursed or
advanced by the Surviving Corporation in a manner consistent with
applicable provisions of the Surviving Corporation's By-laws) arising out
of the actions taken prior to the Effective Time in performance of their
duties as directors or officers of the Company, in connection with the
Merger and other transactions contemplated
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hereby, which may be asserted against the Indemnified Parties from and
after the date of this Agreement provided, however, that Surviving
Corporation's obligations to the Indemnified Parties under this Section
7.06(d) shall not be effective until consummation of the Merger; provided,
further, that the Surviving Corporation shall not have any obligation
hereunder to any Indemnified Party if the indemnification of such
Indemnified Party in the manner contemplated hereby is determined pursuant
to a final non-appealable judgment rendered by a court of competent
jurisdiction to be prohibited by applicable Law or if the indemnification
of the Indemnified Party is not within the power of the Surviving
Corporation under Florida Law.
(d) In the event that any action, suit, proceeding or investigation
relating thereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Time, the parties hereto
agree to cooperate and use their respective reasonable efforts to
vigorously defend against and respond thereto.
Section 7.7 Notification of Certain Matters. From and after the date of
this Agreement until the Effective Time, each party hereto shall promptly notify
the other parties hereto of:
(a) the occurrence, or non-occurrence, of any event the occurrence or
non-occurrence of which would be reasonably likely to cause any (i)
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (ii) any material covenant or any
condition to the obligations of any party to effect the Merger not to be
complied with or satisfied;
(b) the failure of any party hereto to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
pursuant to this Agreement;
(c) the receipt of any notice or other communication from any person
alleging that the consent of such person is or may be required in
connection with the Transactions;
(d) the receipt of any notice or other communication from any
Governmental Authority in connection with the Transactions; and
(e) any actions, suits, claims, investigations or proceedings commenced or,
to the knowledge of the party, threatened against, relating to or involving or
otherwise affecting the Company or Merger Sub, which relates to the consummation
of the Transactions;
in each case, to the extent such event or circumstance is or becomes known
to the party required to give such notice; provided, however, that the delivery
of any notice pursuant to this Section 7.07 shall not be deemed to be an
amendment of this Agreement or any Section in the Company Disclosure Schedule or
the Merger Sub Disclosure Statement and shall not cure any breach of any
representation or warranty requiring disclosure of such matter prior to the date
of this Agreement.
Section 7.8 Public Announcements. Merger Sub and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or any of the Transactions. Prior to
the Closing, Merger Sub and the Company shall not issue any such press release
or make any such public statement without the prior consent of the other (which
consent shall not be unreasonably withheld), except as may be required by Law or
any listing agreement with the NASD or any national securities exchange to which
Merger Sub or the Company is a party and, in such
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case, shall use reasonable effects to consult with all the parties hereto prior
to such release or statement being issued. The parties shall agree on the text
of a joint press release by which Merger Sub and the Company will announce the
execution of this Agreement.
Section 7.9 Employment Agreements.
(a) From and after the Effective Time, Merger Sub shall cause the
Surviving Corporation to honor all employment, severance, termination and
retirement agreements to which the Company is a party, as such agreements
are in effect on the date hereof.
(b) Merger Sub shall cause the Surviving Corporation, for a period of
one year following the Effective Date, to offer compensation and benefits
to Company's employees that are substantially equivalent to the
compensation and benefits that such employees enjoyed before the Effective
Time; provided, that nothing in this Section 7.09 shall obligate the
Surviving Corporation to renew any employment agreements after their
expiration or termination; provided, further, that nothing in this sentence
shall be deemed to limit or otherwise affect the right of the Surviving
Corporation to terminate employment or change the place of work,
responsibilities, status or designation of any employee as the Surviving
Corporation may determine in the exercise of its business judgment and in
compliance with applicable laws and subject to Section 7.09(a).
(c) Prior to the Effective Time, John T. Kane and the Company agree to
terminate (i) the Employment Agreement, dated June 12, 1997 and amended May
27, 1998 ("Kane's Previous Employment Agreement"), by and between the
Company and John T. Kane, and (ii) the Trust Agreement, dated October 7,
1998 (the "Trust Agreement") by and between the Company and Delaware
Charter Guarantee & Trust Company, as trustee (the "Trustee") with respect
to John T. Kane, and upon such termination, the liabilities and obligations
of the Company and such Shareholder under such agreements shall be
extinguished. In consideration for terminating these agreements pursuant to
this Section 7.09(c), the Company shall cause the Trustee to pay to John T.
Kane, the amount accumulated in such trust for his benefit as of the date
the Trust Agreement is terminated.
(d) Prior to the Effective Time, George P. Wilson and the Company agree to
(i) terminate the Employment Agreement, dated June 12, 1997 and amended May 27,
1998 ("Wilson's Previous Employment Agreement"), by and between the Company and
George P. Wilson and upon such termination, the liabilities and obligations of
the Company and such Shareholder under such agreement shall be extinguished and
(ii) amend the Trust Agreement with respect to George P. Wilson to eliminate the
requirement that, upon a Change of Control (as defined in the Trust Agreement),
the Company make an irrevocable contribution to the trust sufficient to pay the
retirement benefits that George P. Wilson would have been entitled pursuant to
Wilson's Previous Employment Agreement.
Section 7.10 Assistance with Financing. In order to assist with the
financing of the Transactions, at or prior to Closing, the Company shall, and
shall cause its subsidiaries to, take such commercially reasonable steps as are
necessary to cause the following to occur:
(a) At Cornerstone's request, with respect to each of the Leased
Premises, the Company shall deliver to Merger Sub a nondisturbance
agreement, a consent and waiver and/or an estoppel letter executed by the
landlord, lessor, landlord and/or
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licensor of such Leased Premise, in each case, in form and substance
reasonably acceptable to Merger Sub;
(b) At Cornerstone's request, the Company shall furnish such financial
statements as may be reasonably requested by Merger Sub in connection with
the financing of the Transactions;
(c) At Cornerstone's request, the Company shall take or cause to be
taken any other actions necessary to consummate the financing of the
Transactions; and
(d) No actions taken by or on behalf of the Company in connection with
its obligation under this Section 7.10 or arising as a result of the taking
of such action shall constitute a breach of any representation or warranty
of the Company contained in this Agreement for any purpose hereunder.
Notwithstanding anything to the contrary set forth herein, the
effectiveness of any such actions by the Company shall be conditioned upon
the consummation of the Merger.
Section 7.11 Stockholder Approval. The Company shall take all action
necessary in accordance with Florida Law and its Article of Incorporation and
By-laws to obtain the requisite approval and adoption of this Agreement and the
Transactions by the stockholders of the Company.
Section 7.12 Exchange Act and NASDAQ Filings. Unless an exemption shall be
expressly applicable to the Company, or unless Merger Sub agrees otherwise in
writing, the Company will file with the SEC and the National Association of
Security Dealers ("NASD") all reports required to be filed by it pursuant to the
rules and regulations of the SEC and NASD (including, without limitation, all
required financial statements). Such reports and other information shall comply
in all material respects with all of the requirements of the SEC and NASD rules
and regulations, and when filed, will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 7.13 Noncompetition; Nonsolicitation. For a period of three (3)
years from and after the Closing, the Shareholders shall not, directly or
indirectly, (i) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, as stockholder or partner or any
other similar capacity with any business which is in competition with or
potential competition with the business of the Company as conducted immediately
prior to the consummation of Merger, or (ii) solicit, employ, retain as a
consultant, interfere with or attempt to entice away from the Company, the
Surviving Corporation, or any successor to any of the foregoing, any individual
who is, has agreed to be or within one year of such solicitation, employment,
retention, interference or enticement has been, employed or retained by the
Company, the Surviving Corporation, or any successor to any of the foregoing in
a supervisory or more senior capacity. Ownership of not more than 2% of the
outstanding stock of any publicly traded company shall not, in and of itself, be
a violation of this Section 7.13. The restrictive covenant contained in this
Section 7.13 is a covenant independent of any other provision of this Agreement,
and the existence of any claim which the Shareholders may allege against Merger
Sub, the Company, the Surviving Corporation or any of their affiliates, whether
based on this Agreement or otherwise, shall not prevent the enforcement of this
covenant. The Shareholders agree that a breach of this Section 7.13 shall cause
irreparable harm to Merger Sub, the Company, the Surviving Corporation and their
affiliates, that Merger
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Sub's, the Company's and the Surviving Corporation's remedies at law for any
breach or threat of breach of the provisions of this Section 7.13 shall be
inadequate, and that Merger Sub, the Company and/or the Surviving Corporation
shall be entitled to an injunction or injunctions to prevent breaches of this
Section 7.13 and to enforce specifically the terms and provisions hereof, in
addition to any other remedy to which Merger Sub, the Company and/or the
Surviving Corporation may be entitled at law or in equity. The three year period
shall be tolled during any period of violation of this Section 7.13 and during
any other period required for litigation during which Merger Sub, the Company
and/or the Surviving Corporation seeks to enforce this covenant. In the event
that this Section 7.13 shall be determined by an court of competent jurisdiction
to be unenforceable by reason of its extending for too long a period of time or
over too large a geographical area or by reason of its being too extensive in
any other respect, it shall be interpreted to extend only over the longest
period of time for which it may be enforceable, and/or over the largest
geographical area as to which it may be enforceable and/or to the maximum extent
in all other aspects as to which it may be enforceable, all as determined by
such court in such action.
Section 7.14 Representations. Each of the Company and the Merger Sub (a)
will use reasonable best efforts to take all action necessary to render true and
correct as of the Closing its respective representations and warranties
contained in this Agreement, (b) will refrain from taking any action that would
render any such representation or warranty untrue or incorrect as of such time
and (c) will perform or cause to be satisfied each agreement, covenant or
condition to be performed or satisfied by it.
Section 7.15 Voting Agreement. Each of the Shareholders and Merger Sub
shall comply with all of their respective obligations under the Voting
Agreement.
Section 7.16 Guarantee. Cornerstone will be a substantial equity investor
in the Surviving Corporation. In that regard, Cornerstone has a substantial
interest in and a desire to assure that the Company enter into this Agreement
and that the Transactions are consummated. Therefore, as a material inducement
to the Company to enter into this Agreement and to consummate the Transactions,
Cornerstone, by affixing the signature of its duly authorized officer on the
signature page attached hereto, hereby guarantees (the "Guarantee"), absolutely
and unconditionally as a primary obligor, to the Company, the performance by
Merger Sub of its covenants, duties and obligations hereunder ("Merger Sub
Obligations"); provided, that Cornerstone's aggregate liability to the Company
due to the Merger Sub Obligations shall not exceed, in the aggregate, the Equity
Contribution. The Guarantee shall be a continuing guaranty and shall remain in
effect until the earliest of (i) the Effective Time, (ii) except for any
obligation of Merger Sub pursuant to Section 9.03(d) hereof, the termination of
this Agreement and (iii) the time that Cornerstone has, taken together with any
amounts funded in connection with the Equity Contribution, incurred and
satisfied liabilities equal to or exceeding $24,826,327.
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.1 Conditions to the Obligations of Each Party. The obligations of
the Company, Merger Sub and the Shareholders to consummate the Merger are
subject to the satisfaction (or, if permitted by applicable Law, waiver by the
party for whose benefit such condition exist) of the following conditions:
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(a) this Agreement and the Transactions shall have been approved and
adopted by the affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock in accordance with Florida Law
and the Company's Articles of Incorporation;
(b) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(c) no order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been enacted, entered, issued,
promulgated or enforced by any Governmental Authority or a court of
competent jurisdiction which has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger or of limiting or
restricting the Surviving Corporation's or Merger Sub's conduct or
operation of the business of the Company after the Merger; and
(d) all other necessary and material governmental and regulatory
clearances, consents, or approvals shall have been received.
Section 8.2 Conditions to the Obligations of Merger Sub. The obligations of
Merger Sub to consummate the Merger are subject to the satisfaction or, if
permitted by applicable Law, waiver by Merger Sub of the following further
conditions:
(a) The Company shall have performed all of its obligations hereunder
required to be performed by it at or prior to the Effective Time; (ii) each
of the representations and warranties of the Company contained in this
Agreement shall be true and correct, in each case as of the Closing Date as
if made at and as of such time; and (iii) Merger Sub shall have received a
certificate signed by an executive officer of the Company as to compliance
with the conditions set forth in this paragraph 8.02(a);
(b) Merger Sub shall have received an opinion, dated on or about the
Closing Date, of Greenberg Traurig, P.A., similar in form and substance to
opinions normally given in transactions of this kind and which is
reasonably satisfactory to Merger Sub;
(c) Each of the Shareholders shall have performed all of his
obligations hereunder required to be performed by it at or prior to the
Effective Time, including its obligation to consummate the Preference
Exchange; (ii) each of the representations and warranties of the
Shareholders contained in this Agreement shall be true and correct, in each
case as of the Closing Date, as if made at and as of such time; and (iii)
Merger Sub shall have received a certificate signed by the Shareholders as
to compliance with the conditions set forth in this paragraph 8.02(c);
(d) Shareholders shall have executed and delivered a Stockholders
Agreement in form and substance reasonably satisfactory to Merger Sub,
containing the terms set forth in the term sheet annexed hereto as Exhibit
C;
(e) Surviving Corporation shall have obtained the Debt Financing on
the terms and conditions set forth in the Commitment Letters or otherwise
obtained debt financing sufficient to consummate the Transactions and to
pay all fees and expenses in connection therewith and to provide working
capital for the Surviving Corporation, all on terms reasonably satisfactory
to the Surviving Corporation and the Investors;
(f) Each of the Company's revenues, taken as a whole, and earnings
before interest and taxes ("Operating Income"), taken as a whole, for the
first fiscal quarter
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of the fiscal year ending February 29, 2000 shall have been substantially
consistent with the projected revenues, taken as a whole, and Operating
Income, taken as a whole, set forth on the information listed on Section
8.02(f) of the Company Disclosure Schedule (the "Disclosed Information"),
which Disclosed Information was previously provided by the Company to
Merger Sub and Cornerstone or their representatives;
(g) Since the date of this Agreement, no event shall have occurred
which has or which would reasonably be expected to have a Company Material
Adverse Effect; provided, however, that any changes, effects, events,
occurrences, conditions or developments substantially consistent with items
3, 4, 7, 9 and 10 of the Disclosed Information shall not be deemed to
constitute a Company Material Adverse Effect;
(h) The Company shall have amended its Articles of Incorporation in
connection with the Preference Amendment;
(i) The Shareholders shall have converted an aggregate of 273,465
shares of Company Common Stock into that number of shares of Series B
Preference Stock such that immediately after the Equity Contribution and
the Preference Exchange, the Shareholders will own an aggregate of 18.79%
of the issued and outstanding Preference Stock of the Company, as adjusted
pursuant to Section 2.01(f);
(j) The Company shall have issued to the Investors in exchange for the
Equity Contribution that number of shares of Series A Preference Stock such
that immediately after the Equity Contribution and the Preference Exchange,
the Investors will own 81.21% of the issued and outstanding Preference
Stock of the Company, as adjusted pursuant to Section 2.01(f);
(k) All Company Stock Options shall be extinguished and as of
immediately prior to Closing, the Company shall have no liability or
obligation with respect to any such Company Stock Options, except as
provided in Section 2.03;
(l) All outstanding indebtedness for borrowed money of the Company
shall be paid in full, (ii) any letters of credit of the Company shall be
terminated and (iii) the Company shall have obtained (x) the release of all
liens or encumbrances on the capital stock of the Company and all assets
securing such Indebtedness and (y) the release of all guarantees by the
Company of indebtedness of any other person for borrowed money. At the
Closing, the Company shall provide or arrange to be provided to Merger Sub
all releases and other documents in form and substance reasonably
satisfactory to Merger Sub demonstrating the release of such liens,
encumbrances and guarantees;
(m) At the Closing, (i) the Company and George P. Wilson shall execute
and deliver the form of Employment Agreement attached hereto as Exhibit D
(with such amendments as the Company and George P. Wilson shall mutually
agree upon, the "Employment Agreement"), (ii) Wilson's Previous Employment
Agreement shall terminate, and all obligations and liabilities of the
Company and George P. Wilson under such agreement shall be extinguished and
(iii) the Trust Agreement shall, with respect to George P. Wilson, be
amended to eliminate the requirement that, upon a Change of Control (as
defined in the Trust Agreement), the Company make an irrevocable
contribution to the trust sufficient to pay the retirement benefits that
George P. Wilson would have been entitled pursuant to Wilson's Previous
Employment Agreement;
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(n) Each of (i) Kane's Previous Employment Agreement and (ii) the
Trust Agreement, with respect to John T. Kane, shall terminate, and all
obligations and liabilities of the Company and John T. Kane under such
agreement shall be extinguished; and
(o) The Company shall have obtained all consents, authorizations,
approvals and waivers from third parties, in form reasonably acceptable to
Merger Sub, which are necessary in order to enable (i) the consummation of
the Transactions and (ii) the Surviving Corporation to conduct their
business in all material respects after the Closing Date on the same basis
as conducted prior to the date hereof, in each case, except for those
failure of which to obtain would not have a Company Material Adverse
Effect.
Section 8.3 Conditions to the Obligations of the Company and the
Shareholders. The obligations of the Company and the Shareholders to consummate
the Merger are subject to the satisfaction or, if permitted by applicable Law,
waiver by the Company or the Shareholders, as the case may be, of the following
further conditions:
(a) Merger Sub shall have performed all of their respective
obligations hereunder required to be performed by them at or prior to the
Effective Time; (ii) each of the representations and warranties of Merger
Sub contained in this Agreement shall be true and correct, in each case as
of the Closing Date as if made at and as of such time; and (iii) the
Company and Shareholders shall have received a certificate signed by an
executive officer of Merger Sub as to compliance with the conditions set
forth in this paragraph 8.03(a):
(b) The Company shall have received an opinion, dated on or about the
Closing Date, of Kirkland & Ellis, similar in form and substance to
opinions normally given in transactions of this kind and which is
reasonably satisfactory to the Company;
(c) Investors shall have made the Equity Contribution in exchange for
the Series A Preference Stock;
(d) Investors shall have executed and delivered a Stockholders
Agreement in form and substance reasonably satisfactory to Shareholders,
containing the terms set forth in the term sheet annexed hereto as Exhibit
C;
(e) Surviving Corporation shall have obtained the Debt Financing on
the terms and conditions set forth in the Commitment Letters or otherwise
obtained debt financing sufficient to consummate the Transactions and to
pay all fees and expenses in connection therewith and to provide working
capital for the Surviving Corporation;
(f) The Company shall have obtained all consents, authorizations,
approvals and waivers from third parties which are necessary in order to
enable (i) the consummation of the Transactions and (ii) the Surviving
Corporation to conduct their business in all material respects after the
Closing Date on the same basis as conducted prior to the date hereof, in
each case, except for those failure of which to obtain would not have a
Company Material Adverse Effect; and
(g) With respect to the obligations of the Company, the Shareholders
shall have converted an aggregate of 273,465 shares of Company Common Stock
into that number of shares of Series B Preference Stock such that
immediately after the Preference Exchange and the Equity Contribution, the
Shareholders will own an
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aggregate of 18.79% of the issued and outstanding Preference Stock of the
Company, as adjusted pursuant to Section 2.01(f).
Section 8.4 Conditions to the Obligations of the Investors. The obligations
of Investors to make the Equity Contribution are subject to the satisfaction or,
if permitted by applicable Law, waiver by the Investor of the following
conditions:
(a) the conditions set forth in Section 8.01 of this Agreement; and
(b) the conditions set forth in paragraphs (a), (c), (d), (e), (f),
(g), (h), (i), (j), (l) and (o) of Section 8.02, except that the references
to Merger Sub in paragraphs (a), (c), (d), (l), and (o) shall be replaced
by a reference to the Investors.
Section 8.5 Conditions to the Obligations of the Shareholders. The
obligations of the Shareholders to consummate the Preference Exchange are
subject to the satisfaction, or if, permitted by applicable Law, waiver by the
Shareholders of the following conditions:
(a) the conditions set forth in Section 8.01 of this Agreement;
(b) the conditions set forth in paragraphs (e), (h) and (o) of Section
8.02;
(c) the conditions set forth in paragraphs (a) (other than
subparagraph (iii)) and (d) of Section 8.03; and
(d) the Company shall have executed and delivered the Employment
Agreement with George P. Wilson and shall have entered into a consulting
services agreement with John T. Kane containing the terms set forth in the
term sheet annexed hereto as Exhibit E.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement and the transactions
contemplated hereby by the shareholders of the Company:
(a) by written consent of the Company and Merger Sub;
(b) by Merger Sub or the Company if (i) the waiting period applicable to
the consummation of the Merger under the HSR Act shall not have expired or been
terminated prior to September 30, 1999, (ii) any court of competent jurisdiction
in the United States or other United States Governmental Authority shall have
issued an order (other than a temporary restraining order), decree or ruling, or
taken any other action, restraining, enjoining or otherwise prohibiting the
Merger (provided, however, that neither party may terminate this Agreement
pursuant to this Section 9.01(b)(ii) prior to September 30, 1999 if the party
subject to such order, decree or ruling is using its reasonable best efforts to
have such order, decree or ruling removed, unless such order, decree or ruling
shall have become final and non-appealable), or (iii) the Effective Time shall
not have occurred on or before September 30, 1999; provided, that the right to
terminate this Agreement under this Section 9.01(b) shall not be available to
any party
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whose failure to fulfill any obligation under this Agreement has been the cause
of or resulted in the failure of the Effective Time to occur on or before such
date;
(c) by Merger Sub or the Company, if the Shareholders' Meeting shall
have been held and the holders of outstanding shares of Company Common
Stock shall have failed to approve and adopt this Agreement at such meeting
(including any adjournment or postponement thereof); provided, that the
right to terminate this Agreement under this Section 9.01(c) shall not be
available to the Company if its failure to fulfill any obligation under
this Agreement has been the cause of or resulted in the failure to obtain
such shareholder approval;
(d) by Merger Sub if the Board of Directors of the Company or any
committee thereof (i) shall withdraw, modify in a manner adverse to Merger
Sub, or refrain from giving its approval or recommendation of this
Agreement or any of the Transactions or (ii) recommends a Competing
Transaction with respect to the Company to the Company's stockholders
pursuant to Section 7.05;
(e) by the Company, upon a breach of any representation, warranty, or
agreement set forth in this Agreement such that the condition set forth in
Section 8.03(a) would not be satisfied; provided, however, that, if such
breach is curable by Merger Sub through the exercise of its best efforts
and Merger Sub continues to exercise such best efforts, the Company may not
terminate this Agreement under this Section 9.01(e) for a period of 30 days
from the date on which the Company delivers to Merger Sub written notice
setting forth in reasonable detail the circumstances giving rise to such
breach;
(f) by Merger Sub, upon a breach of any representation, warranty, or
agreement set forth in this Agreement such that the condition set forth in
Section 8.02(a) or Section 8.02(c) would not be satisfied; provided,
however, that, if such breach is curable by the Company or the
Shareholders, as the case may be, through the exercise of its best efforts
and the Company or the Shareholders, as the case may be, continues to
exercise such best efforts, Merger Sub may not terminate this Agreement
under this Section 9.01(f) for a period of 30 days from the date on which
Merger Sub delivers to the Company or the Shareholders, as the case may be,
written notice setting forth in reasonable detail the circumstances giving
rise to such breach; or
(g) by the Company in accordance with Section 7.05(b).
Section 9.2 Method of Termination; Effect of Termination.
(a) Any such right of termination hereunder shall be exercised by
written notice of termination given by the terminating party to the other
parties hereto in the manner hereinafter provided in Section 10.02. Any
such right of termination shall not be an exclusive remedy hereunder but
shall in addition to any other legal or equitable remedies that may be
available to any non-defaulting party hereto arising out of any default
hereunder by any other party hereto.
(b) Except as provided in Section 10.01, in the event of the
termination of this Agreement pursuant to Section 9.01, this Agreement
shall forthwith become void, there shall be no liability under this
Agreement on the part of any of the parties hereto or any of their
respective officers or directors and all rights and obligations of any
party hereto shall cease, except for (i) fraud and (ii) as set forth in
Section 9.03; provided, however, that nothing herein shall relieve any
party from liability for, or be
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deemed to waive any rights of specific performance of this Agreement
available to a party by reason of, any intentional breach by the other
party or parties of this Agreement.
Section 9.3 Fees and Expenses.
(a) In the event that it is judicially determined that termination of
this Agreement was caused by an intentional breach of this Agreement, then,
in addition to the remedies at law or equity for breach of this Agreement,
the party so found to have intentionally breached this Agreement shall
indemnify and hold harmless the other parties for their respective costs,
fees and expenses of their counsel, accountants, financial advisors and
other experts and advisors as well as fees and expenses incident to the
negotiation, preparation and execution of this Agreement and the attempted
financing and consummation of the Transactions, the related documentation
and the shareholders' meetings and consents ("Costs").
(b) In the event that this Agreement is terminated pursuant to
paragraphs (b), (c), (d), (f) or (g) of Section 9.01, the Company shall,
within five business days of such termination, pay Merger Sub (or at Merger
Sub's direction, to Cornerstone) by wire transfer of immediately available
funds to an account specified by Merger Sub in reimbursement for Merger
Sub's expenses an amount in cash equal to the aggregate amount of (i) the
Costs incurred in connection with pursuing the transactions contemplated by
this Agreement (including without limitation, legal, accounting, investment
banking and commitment fees) and (ii) out-of-pocket expenses (together with
such Costs, the "Reimbursable Expenses"), in each case, of Merger Sub and
Cornerstone (as such Reimbursable Expenses may be estimated by Merger Sub
in good faith prior to the date of such payment, subject to an adjustment
payment between the parties upon Merger Sub's definitive determination of
such Reimbursable Expenses); provided, however, that Merger Sub shall have
no right to receive Reimbursable Expenses pursuant to this Section 9.03(b)
if Merger Sub's failure to fulfill any obligation under this Agreement
caused or resulted in the termination of this Agreement. For purposes of
this Agreement, Merger Sub's Reimbursable Expenses shall include the Costs
and out-of-pocket expenses of Cornerstone incurred in connection with this
Agreement or on behalf of Merger Sub.
(c) In the event that this Agreement is terminated by Merger Sub or
the Company pursuant to Section 9.01(d) or Section 9.01(g), the Company
shall, within five business days of such termination, pay Merger Sub (or at
Merger Sub's direction, to Cornerstone) by wire transfer of immediately
available funds to an account specified by Merger Sub a payment in the
amount equal to $2,300,000 (the "Termination Fee").
(d) In the event that this Agreement is terminated pursuant to
paragraph (e) of Section 9.01, Merger Sub shall, within five business days
of such termination, pay the Company in reimbursement for the Company's
expenses an amount in cash equal to the aggregate amount of the Company's
Reimbursable Expenses (as such Reimbursable Expenses may be estimated by
the Company in good faith prior to the date of such payment, subject to an
adjustment payment between the parties upon the Company's definitive
determination of such Reimbursable Expenses); provided, however, that the
Company shall have no right to receive Reimbursable Expenses pursuant to
this Section 9.03(d) if the Company's failure to fulfill any obligation
under this Agreement caused or resulted in the termination of this
Agreement.
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(e) Except as provided in this Section 9.03, all expenses incurred by
the parties hereto shall be borne solely and entirely by the party which
has incurred the same; provided, however, that (i) the Company shall bear
all expenses related to printing, filing and mailing the Proxy Statement
and all SEC and other regulatory filing fees incurred in connection with
the Proxy Statement, and (ii) Merger Sub and the Company shall bear equally
all expenses incurred by the parties hereto and their respective
affiliates, if applicable, in connection with any filing under the HSR Act
due to the transactions contemplated herein.
Section 9.4 Amendment. This Agreement may be amended by the parties hereto
at any time prior to the Effective Time; provided, that after the approval and
adoption of this Agreement by the stockholders of the Company, no amendment may
be made which would (a) change the amount or the type of Merger Consideration to
be received by the shareholders of the Company pursuant to the Merger, (b)
change any other term or condition of the Agreement if such change would
materially and adversely affect the Company or the holders of shares of Company
Common Stock or Preference Stock or (c) without the vote of the stockholders
entitled to vote on the matter, change any term of the Articles of Incorporation
of the Company. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any obligation or other
act of any other party hereto, (b) waive any inaccuracy in the representations
and warranties of the other party contained herein or in any document,
certificate or writing delivered by the other party pursuant hereto and (c)
waive compliance with any agreement or condition to its obligations (other than
the conditions set forth in paragraphs (a) and (b) of Section 8.01) contained
herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement and any
certificate delivered pursuant hereto by any person shall terminate at the
Effective Time or upon the termination of this Agreement pursuant to Section
9.01, as the case may be, except that the agreements set forth in Articles I and
II and Sections 7.03(e), 7.06, 7.09, 7.10, 7.13 and 7.14 shall survive the
Effective Time indefinitely, and those set forth in Sections 7.08, 9.02 and 9.03
and this Article X shall survive termination indefinitely.
Section 10.2 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by facsimile
or by registered or certified mail (postage prepaid, return receipt requested)
or by a nationally recognized overnight courier service to the respective
parties at the following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 10.02): if
to Merger Sub:
Cornerstone Equity Investors L.L.C.
717 Fifth Avenue
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New York, New York 10022
Telecopy: (212) 826-6798
Attention: Mark Rossi, Michael Najjar and Stephen Larson
with copies to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022
Telecopy: (212) 446-4900
Attention: Frederick Tanne
if to the Company:
Equitrac Corporation
836 Ponce de Leon Boulevard
Coral Gables, Florida 33134
Telecopy: (305) 442-0687
Attention: George P. Wilson
with copies to:
Greenberg Traurig, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Telecopy: (305) 579-0717
Attention: Kenneth C. Hoffman, Esq.
Section 10.3 Certain Definitions.
(a) "Affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by,
or is under common control with, such specified person;
(b) "Beneficial Owner" with respect to any shares means a person who
shall be deemed to be the beneficial owner of such shares (i) which such
person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly
or indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of consideration rights, exchange rights, warrants or options, or
otherwise, or (B) the right to vote pursuant to any agreement, arrangement
or understanding or (iii) which are beneficially owned, directly or
indirectly, by any other persons with whom such person or any of its
affiliates or associates or any person with whom such person or
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any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
any such shares;
(c) "Business Day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of Miami, Florida;
(d) "Code" means the Internal Revenue Code of 1986, as amended;
(e) "Control" (including the terms "Controlled By" and "Under Common
Control With") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise;
(f) "Governmental Authority" means any United States (federal, state
or local), foreign or supra-national Government, or governmental,
regulatory or administrative authority, agency or commission;
(g) "Intellectual Property Rights" means all patents, patent
applications and patent disclosures; all inventions (whether or not
patentable and whether or not reduced to practice); all trademarks, service
marks, trade dress, trade names and corporate names and all the goodwill
associated therewith; all mask works; all registered and unregistered
statutory and common law copyrights; all registrations, applications and
renewals for any of the foregoing; and all trade secrets, confidential
information, ideas, formulae, compositions, know-how, manufacturing and
production processes and techniques, research information, drawings,
specifications, designs, plans, improvements, proposals, technical and
computer data, documentation and software, financial business and marketing
plans, customer and supplier lists and related information, marketing
materials and all other proprietary rights;
(h) "Knowledge" means the actual knowledge, after reasonable
investigation, of any of John T. Kane, Chairman of the Board of Directors,
George P. Wilson, President and Chief Executive Officer, Scott J. Modist,
Chief Financial Officer and, for purposes of Section 3.20 only, Lilly
O'Brien, the Tax Manager;
(i) "Lien" shall mean, with respect to any property or asset, any
mortgage, pledge, security interest, lien (statutory or other), charge,
encumbrance or other similar restrictions or limitations of any kind or
nature whatsoever on or with respect to such property or asset;
(j) "Owned Shares" means the aggregate shares of Company Common Stock
owned beneficially and of record by the Shareholders as of the date hereof
(as such number may be reduced as a result of the conversion of shares into
Series B Preference Stock as contemplated by this Agreement);
(k) "Permits" shall mean all franchises, licenses, authorizations,
approvals, permits, consents or other rights granted by an Governmental
Authority and all certificates of convenience or necessity, immunities,
privileges, licenses, concessions, consents, grants, ordinances and other
rights, of every character whatsoever required for the conduct of business
and the use of properties by the Company as currently conducted or used.
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<PAGE> 117
(l) "Person" means an individual, corporation, limited liability
company, partnership, limited partnership, syndicate, person (including,
without limitation, a "person" as defined in Section 13(d)(3) of the
Exchange Act), trust, association or entity or government, political
subdivision, agency or instrumentality of a government;
(m) "Real Estate" means, with respect to the Company or any
Subsidiary, as applicable, all of the fee or leasehold ownership right,
title and interest of such person, in and to all real estate and
improvements owned or leased by any such person and which is used by any
such person in connection with the operation of its business;
(n) "Subsidiary" or "Subsidiaries" of any person means any
corporation, partnership, joint venture or other legal entity of which such
person (either above or through or together with any other subsidiary),
owns, directly or indirectly, 50% or more of the stock or other equity
interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such
corporation or other legal entity;
(o) "Tax" or "Taxes" means federal, state, county, local, foreign or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications,
real or personal property, capital stock, license, payroll, wage or other
withholding, employment, social security, severance, stamp, occupation,
alternative or add-on minimum, estimated and other taxes of any kind
whatsoever (including deficiencies, penalties, additions to tax, and
interest attributable thereto) whether disputed or not;
(p) "Tax Return" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and including
any amendment thereof; and
(q) "Transactions" means the Merger, the Preference Amendment and the
other transactions contemplated hereby this Agreement.
(r) "Voting Agreement" means that certain Voting Agreement, dated as
February 17, 1999, by and among Merger Sub and the Shareholders, as
amended.
Section 10.4 Accounting Terms. All accounting terms used herein which are
not expressly defined in this Agreement shall have the respective meanings given
to them in accordance with GAAP.
Section 10.5 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of Law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the Merger is not affected in any manner materially adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the Merger be
consummated as originally contemplated to the fullest extent possible.
Section 10.6 Entire Agreement; Assignment. This Agreement (including the
Exhibits, the Merger Sub Disclosure Schedule and the Company Disclosure
Schedule, which are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein) and the Confidentiality Agreement
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and
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<PAGE> 118
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof. This Agreement amends and restates the
Original Agreement in its entirety. This Agreement shall not be assigned by
operation of law or otherwise without the prior written consent of the other
parties, except that Merger Sub may assign all or any of its rights and
obligations hereunder to any affiliate of Merger Sub, and Merger Sub and the
Company may assign their respective rights and obligations hereunder as
collateral security to any person providing financing to Merger Sub and/or the
Company; provided, that no such assignment shall change the amount or nature of
the Merger Consideration or relieve the assigning party of its obligations
hereunder if such assignee does not perform such obligations.
Section 10.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Section 7.06 (which is intended to be for the benefit of
the persons covered thereby and may be enforced by such persons).
Section 10.8 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to specific performance of the terms hereof, in addition to any other remedy
at law or in equity.
Section 10.9 Governing Law. The provisions of this agreement and the
documents delivered pursuant hereto shall be governed by and construed in
accordance with the laws of the State of Florida (excluding any conflict of law
rule or principle that would refer to the laws of another jurisdiction). Each
party hereto irrevocably submits to the jurisdiction of the Circuit Court of the
State of Florida, Miami-Dade County, in any action or proceeding that is
otherwise permitted under this Agreement or any other agreement executed in
connection with this Agreement, and each party hereby irrevocably agrees that
all claims in respect of any such action or proceeding must be brought and/or
defended in such court; provided, however, that matters which are under the
exclusive jurisdiction of the Federal courts shall be brought in the Federal
District Court for the Southern District of Florida. Each party hereto consents
to service of process by any means authorized by the applicable law of the forum
in any action brought under or arising out of this Agreement, and each party
irrevocably waives, to the fullest extent each may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court. Each party hereto hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, trial by
jury in any suit, action or proceeding arising hereunder.
Section 10.10 Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
Section 10.11 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
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Section 10.12 Construction. This Agreement and any documents or instruments
delivered pursuant hereto or in connection herewith shall be construed without
regard to the identity of the person who drafted the various provisions of the
same. Each and every provision of this Agreement and such other documents and
instruments shall be construed as though all of the parties participated equally
in the drafting of the same. Consequently, the parties acknowledge and agree
that any rule of construction that a document is to be construed against the
drafting party shall not be applicable either to this Agreement or such other
documents and instruments.
Section 10.13 Obligations of the Shareholders. Notwithstanding anything to
the contrary set forth herein, the representations and warranties of each
Shareholder shall be limited to those set forth in Article V hereof. The
obligations of the Shareholders under this Agreement shall be limited to those
set forth in Sections 1.01(b), 7.03(b), 7.03(e), 7.05(a), 7.09(c), 7.09(d), 7.13
and 7.15 hereof. The conditions governing the obligations of the Shareholder
shall be governed by Sections 8.01, 8.03 and 8.05 hereof. Notwithstanding
anything to the contrary set forth herein, the Shareholders shall have no other
obligations under this Agreement. Notwithstanding anything to the contrary set
forth herein, it is understood that the obligations of the Shareholders under
this Agreement are limited to acts or omissions by such Shareholder in its
capacity as a stockholder of the Company and not in its capacity as an officer
or director of the Company.
Section 10.14 Interpretation; Schedules and Exhibits. For purposes of this
Agreement, all representations and warranties contained herein shall be deemed
to have been made as of the date hereof, except for representations and
warranties contained herein that speak as of a specific date (which
representation and warranty shall speak as of such specific date). The schedules
and exhibits attached to the Original Agreement shall be deemed to be the
schedules and exhibits to this Agreement except that (a) Sections 3.06 and
8.02(f) of the Company Disclosure Schedule attached hereto shall be added to the
Company Disclosure Schedule attached to the Original Agreement and (b) Sections
3.03, 3.07, 3.08, 3.17, 3.17(viii), 3.21 and 3.25 of the Company Disclosure
Schedule attached hereto replaces Sections 3.03, 3.07, 3.08, 3.17, 3.17(viii),
3.21 and 3.25 of the Company Disclosure Schedule, respectively, attached to the
Original Agreement.
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<PAGE> 120
In Witness Whereof, Merger Sub, Shareholders and the Company have caused
this Agreement to be executed as of the date first written above by their
respective officers thereunto duly authorized.
CHARGEBACK ACQUISITION CORP.
By: /s/ STEPHEN L. LARSON
-----------------------------------
Name: Stephen L. Larson
Title: Secretary
EQUITRAC CORPORATION
By: /s/ GEORGE P. WILSON
-----------------------------------
Name: George P. Wilson
Title: President and Chief
Executive
Officer
FOR PURPOSES OF ARTICLES I, V,
VII AND VIII ONLY
SHAREHOLDERS
By: /s/ JOHN T. KANE
-----------------------------------
Name: John T. Kane
Title:
/s/ GEORGE P. WILSON
--------------------------------------
Name: George P. Wilson
Title:
CORNERSTONE EQUITY INVESTORS IV, L.P.
HEREBY JOINS THIS AGREEMENT FOR THE EXPRESS
AND LIMITED PURPOSE SET FORTH IN SECTION 1.01(c)
AND SECTION 7.16 HEREOF.
CORNERSTONE EQUITY INVESTORS IV, L.P.
By: Cornerstone IV, L.L.C.
Its: General Partner
By: /s/ STEPHEN L. LARSON
----------------------------------
Name: Stephen L. Larson
Title: Managing Director
A-53
<PAGE> 121
APPENDIX B
Prudential Securities Incorporated
One New York Plaza, New York, NY 10292
(212) 778-1000
PRIVATE AND CONFIDENTIAL
June 3, 1999
The Special Committee of the Board of Directors
Equitrac Corporation
836 Ponce de Leon Boulevard
Coral Gables, Florida 33134
Members of the Special Committee of the Board of Directors:
We understand that Equitrac Corporation, a Florida corporation (the
"Company"), and Chargeback Acquisition Corporation ("Acquisition Corp."), a
Florida corporation and wholly-owned subsidiary of Cornerstone Equity Investors
IV, L.P., a Delaware limited partnership ("Cornerstone") propose to enter into
an Amended and Restated Recapitalization Agreement and Plan of Merger (the
"Agreement"), pursuant to which Acquisition Corp. will merge with and into the
Company (the "Merger"). In addition, Cornerstone, John T. Kane, Chairman of the
Board of Directors and George P. Wilson, President and Chief Executive Officer,
will enter into the Agreement for certain limited purposes specified therein.
Pursuant to the Agreement, immediately prior to the effective time of the
Merger, a portion of the Company's common stock, par value $0.01 per share (the
"Company Common Stock"), held by Messrs. Kane and Wilson, and to the extent the
Agreement is amended pursuant to section 2.01(f) thereof, certain other senior
executives of the Company (together with Messrs. Kane and Wilson, the
"Management Investors"), will be converted into newly issued shares of preferred
stock, par value $0.01 per share, of the Company. At the effective time of the
Merger, each then outstanding share of Company Common Stock will be converted
into the right to receive $21.00 in cash (the "Consideration").
You have requested our opinion as to the fairness from a financial point of
view of the Consideration to be received by the holders of the Company Common
Stock (other than the Management Investors) in the Merger.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:
(i) a draft, dated June 2, 1999, of the Agreement, including the
exhibits thereto;
(ii) certain publicly available historical, financial and operating
data for the Company including, but not limited to, (a) the Annual Reports
to shareholders and Annual Reports on Form 10-K for the fiscal years ended
February 28, 1997, 1998 and 1999, and (b) the Quarterly Reports on Form
10-Q for the fiscal quarters ended May 30, 1998, August 31, 1998 and
November 30, 1998;
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<PAGE> 122
Prudential Securities Incorporated
June 3, 1999
Page 2
(iii) historical stock market prices and trading volumes for the
Company Common Stock;
(iv) certain information relating to the Company, including financial
forecasts, prepared by the management of the Company;
(v) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed comparable to
the Company or otherwise relevant to our inquiry;
(vi) the financial terms of certain recent transactions, we deemed
relevant to our inquiry; and
(vii) such other financial studies, analyses and investigations we
deemed appropriate.
We have assumed, with your consent, that the draft of the Agreement we
reviewed will conform in all material respects to the Agreement when in final
form.
We have met with the senior management of the Company to discuss (i) the
past and current operating and financial condition of the Company, (ii) the
prospects for the Company, (iii) their estimates of the Company's future
financial performance and (iv) such other matters we deemed relevant.
In connection with our review and analysis and in arriving at our opinion,
we have relied upon the accuracy and completeness of the financial and other
information provided to us by the Company and have not undertaken any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of the Company. With respect to
certain financial forecasts provided to us by the management of the Company, we
have assumed that such information (and the assumptions and bases therefor)
represents the Company's management's best currently available estimate as to
the future financial performance of the Company. Further, our opinion is
necessarily based on economic, financial and market conditions as they exist and
can only be evaluated as of the date hereof and we assume no responsibility to
update or revise our opinion based upon events or circumstances occurring after
the date hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Merger or alternative business strategies that may be
available to the Company.
As you know, we have been retained by the Company on behalf of the Special
Committee to render this opinion and will receive a fee for such service, a
portion of which fee is contingent upon the consummation of the Merger. In the
ordinary course of business we may actively trade the shares of Company Common
Stock for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
B-2
<PAGE> 123
Prudential Securities Incorporated
June 3, 1999
Page 3
This letter and the opinion expressed herein are for the use of the Special
Committee of the Board of Directors of the Company. This opinion does not
constitute a recommendation to the stockholders of the Company as to how such
stockholders should vote in connection with the Merger or as to any other action
such stockholders should take regarding the Merger. This opinion may not be
reproduced, summarized, excerpted from or otherwise publicly referred to or
disclosed in any manner without our prior written consent; except that the
Company may include this opinion in its entirety in any proxy statement relating
to the Merger sent to the Company's stockholders and filed with the Securities
and Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Consideration to be received by the holders of the Company
Common Stock (other than the Management Investors) in the Merger is fair to such
holders from a financial point of view.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
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<PAGE> 124
APPENDIX C
AMENDMENT TO
ARTICLES OF INCORPORATION
OF EQUITRAC CORPORATION
Resolved, that Article III of the Amended and Restated Articles of
Incorporation of Equitrac be amended to read in its entirety as follows:
The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is Fifteen Million (15,000,000) shares,
consisting of Fourteen Million (14,000,000) shares of Common Stock, par
value $.01 per share (the "Common Stock"), and One Million (1,000,000)
shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock").
A. PROVISIONS RELATING TO THE PREFERRED STOCK.
1. General. The Preferred Stock may be issued from time to time in one or
more classes or series, the shares of each class or series to have such
designations and powers, preferences and rights, and qualifications, limitations
and restrictions thereof as are stated and expressed herein and in the
resolution or resolutions providing for the issue of such class or series
adopted by the Board of Directors (the "Board") as hereinafter prescribed.
2. Preferences. Authority is hereby expressly granted to and vested in the
Board to authorize the issuance of the Preferred Stock from time to time in one
or more classes or series, to determine and take necessary proceedings fully to
effect the issuance and redemption of any such Preferred Stock and, with respect
to each class or series of the Preferred Stock, to fix and state, by resolution
or resolutions from time to time adopted providing for the issuance thereof, the
following:
(a) whether or not the class or series is to have voting rights, full
or limited, or is to be without voting rights;
(b) the number of shares to constitute the class or series and the
designations thereof;
(c) the preferences and relative, participating, optional or other
special rights, if any, and the qualifications, limitations or restrictions
thereof, if any, with respect to any class or series;
(d) whether or not the shares of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the time
or times at which and the terms and conditions upon which, such shares
shall be redeemable and the manner of redemption;
(e) whether or not the shares of a class or series shall be subject to
the operation of retirement or sinking funds to be applied to the purchase
or redemption of such shares for retirement, and if such retirement or
sinking fund or funds be established, the annual amount thereof and the
terms and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock of
the Corporation or other property, the conditions upon which and the times
when such dividends are payable, the preference to or the relation to the
payment of the
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<PAGE> 125
dividends payable on any other class or classes or series of stock, whether
or not such dividend shall be cumulative or noncumulative, and, if
cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof that the holders
of any class or series thereof shall be entitled to receive upon the
voluntary or involuntary dissolution of, or upon any distribution of the
assets of, the Corporation;
(h) whether or not the shares of any class or series shall be
convertible into, or exchangeable for, the shares of any other class or
classes or of any other series of the same or any other class or classes of
the Corporation and the conversion price or prices or ratio or ratios or
the rate or rates at which such conversion or exchange may be made, with
such adjustments, if any, as shall be stated and expressed or provided for
in such resolution or resolutions; and
(i) such other special rights and protective provisions with respect
to any class or series as the Board may deem advisable.
3. The shares of each class or series of the Preferred Stock may vary from
the shares of any other class or series thereof in any or all of the foregoing
respects. The Board may increase the number of shares of Preferred Stock
designated for any existing class or series by a resolution adding to such class
or series authorized and unissued shares of the Preferred Stock not designated
for any other class or series. The Board may decrease the number of shares of
the Preferred Stock designated for any existing class or series by a resolution,
subtracting from such series unissued shares of the Preferred Stock designated
for such class or series, and the shares so subtracted shall become authorized,
unissued and undesignated shares of the Preferred Stock.
B. PROVISIONS RELATING TO THE COMMON STOCK.
1. Voting Rights. Except as otherwise required by law or as may be
provided by the resolutions of the Board authorizing the issuance of any class
or series of the Preferred Stock, as hereinabove provided, all rights to vote
and all voting power shall be vested exclusively in the holders of the Common
Stock.
2. Dividends. Subject to the rights of the holders of the Preferred Stock,
the holders of the Common Stock shall be entitled to receive when, as and if
declared by the Board, out of funds legally available therefor, dividends and
other distributions payable in cash, property, stock (including shares of any
class or series of the Corporation, whether or not shares of such class or
series are already outstanding) or otherwise.
3. Liquidating Distributions. Upon any liquidation, dissolution or
winding-up of the Corporation, whether voluntary or involuntary, and after the
holders of the Preferred Stock shall have been paid in full the amounts to which
they shall be entitled, if any, or a sum sufficient for such payment in full
shall have been set aside, the remaining net assets of the Corporation shall be
distributed pro rata to the holders of the Common Sock in accordance with their
respective rights and interests, to the exclusion of the holders of the
Preferred Stock."
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<PAGE> 126
APPENDIX D
TRANSACTIONS INVOLVING EQUITRAC'S COMMON STOCK EFFECTED
BY MEMBERS OF THE MANAGEMENT GROUP AND THEIR RESPECTIVE
AFFILIATES SINCE MARCH 1, 1997 THROUGH THE DATE
OF THE PROXY STATEMENT
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
TRANSACTION DATE SHARES PRICE SALE PRICE
----------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1. John Kane........................ Sale* 4/22/97 1,400 13.25
Option Grant 5/19/97 30,000 12.00
Sale 7/31/97 22,000 15.00
Sale 7/31/97 13,000 14.50
Sale 11/4/97 25,000 16.00
Gift 11/3/97 2,000
Sale 2/19/98 34,750 17.44
Option Grant 4/8/98 20,000 19.63
Sale 5/20/98 34,500 20.44
Sale* 8/7/98 1,000 10.00
Gift 2/12/99 70,000
Gift 2/12/99 4,000
Transfer** 2/12/99 600,000
2. George Wilson.................... Option Grant 5/19/97 30,000 12.00
Sale 11/4/97 25,000 16.00
Gift 11/5/97 6,250
Sale 2/19/98 34,750 17.44
Option Grant 4/8/98 20,000 19.63
Sale 5/20/98 34,500 20.44
Transfer** 2/12/99 370,500
3. Scott Modist..................... Option Grant 5/19/97 15,000 12.00
Cashless Exercise of Options 2/12/98 12,000 4.25 17.44
(sale through broker to pay
exercise price)
Option Grant 4/8/98 12,000 19.63
4. Chris Rickborn................... Option Grant 5/19/97 15,000 12.00
Recipient of Gift* 7/15/97 6,800
Sale* 7/22/97 5,000 15.00
Recipient of Gift*** 11/3/97 1,000 by child
Option Grant 4/8/98 12,000 19.63
Sale* 5/19/98 300 20.25
Cashless Exercise of Options 8/3/98 3,000 4.25 20.00
(sale through broker to pay
exercise price)
Stock Sale 8/3/98 1,000 20.00
5. Steve Smith...................... Option Grant 5/19/97 2,500 12.00
6. Patrick Raftery.................. Option Grant 5/19/97 7,500 12.00
Option Grant 2/28/99 7,500 19.63
</TABLE>
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<PAGE> 127
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
TRANSACTION DATE SHARES PRICE SALE PRICE
----------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
7. Cid Yousefi...................... Option Grant 5/19/97 15,000 12.00
Cashless Exercise of Options 7/18/97 3,000 7.00 13.63
(sale through broker to pay
exercise price)
Cashless Exercise of Options 4/22/98 1,000 7.00 21.25
(sale through broker to pay
exercise price)
Option Grant 4/8/98 7,500 19.63
Cashless Exercise of Options 5/11/98 1,000 7.00 20.50
(sale through broker to pay
exercise price)
Cashless Exercise of Options 5/12/98 300 9.00 20.75
(sale through broker to pay
exercise price)
Cashless Exercise of Options 5/13/98 1,700 9.00 20.50
(sale through broker to pay
exercise price)
Cashless Exercise of Options 5/20/98 8,000 9.00 20.44
(sale through broker to pay
exercise price)
8. John Jones....................... Cashless Exercise of Options 4/28/97 4,000 4.25 13.00
(sale through broker to pay
exercise price)
Cashless Exercise of Options 9/5/97 2,800 1.78
(sale through broker to pay
exercise price)
Cashless Exercise of Options 2/12/98 5,000 9.00 17.44
(sale through broker to pay
exercise price)
Cashless Exercise of Options 2/12/98 2,000 7.00 17.44
(sale through broker to pay
exercise price)
</TABLE>
- -------------------------
* By such person's spouse.
** Transfer of shares to the person by the trustee of a trust in which such
shares were held for the benefit of such person.
*** By such person's child.
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<PAGE> 128
EQUITRAC CORPORATION
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints George P. Wilson and John T. Kane, and
either of them, proxies (each with full power of substitution) to vote, as
indicated below and in their discretion upon such other matters as may properly
come before the meeting, all shares which the undersigned would be entitled to
vote at the special meeting of shareholders of Equitrac to be held on July 27,
1999, at __________, local time, at [_________________________], and at any
adjournment or postponement thereof, as indicated on the reverse side.
1. A proposal to approve and adopt the Merger Agreement and the
Transactions described in the accompanying proxy statement.
/ / FOR / / AGAINST / / ABSTAIN
CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THIS PROXY
ALSO DELEGATES DISCRETIONARY AUTHORITY WITH RESPECT TO ANY OTHER BUSINESS WHICH
MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF
AND MATTERS INCIDENT TO THE CONDUCT OF THE SPECIAL MEETING.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING DATED JUNE __, 1999 AND THE ACCOMPANYING PROXY STATEMENT.
PLEASE SIGN AND DATE THIS PROXY BELOW
Date: , 1999
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PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
ON LEFT. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, GUARDIAN OR
CORPORATE OFFICIAL, PLEASE GIVE FULL
TITLE.
