<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)
EQUITRAC CORPORATION
(Name of Issuer)
EQUITRAC CORPORATION
CHARGEBACK ACQUISITION CORP.
CORNERSTONE EQUITY INVESTORS IV, L.P.
JOHN T. KANE
GEORGE P. WILSON
SCOTT MODIST
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.
[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 Recapitalization Agreement and Plan of Merger (the "Merger
Agreement"), dated February 17, 1999, among Equitrac, Chargeback Acquisition
Corp. ("Merger
2
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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 (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.
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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 MERGER AND
RECAPITALIZATION"
- ---------------------------------- --------------------------------------------
(b) "SUMMARY -- The Recapitalization and
Merger"; "SUMMARY --Conflicts of Interest";
"SPECIAL FACTORS -- Background of the
Merger"; "SPECIAL FACTORS -- Conflicts of
Interest"; and "THE MERGER AND
RECAPITALIZATION"
- ---------------------------------- --------------------------------------------
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 MERGER AND RECAPITALIZATION --
Consequences of the Recapitalization and
Merger" and "CERTAIN INFORMATION CONCERNING
MERGER SUB AND THE EQUITY INVESTORS"
- ---------------------------------- --------------------------------------------
(d) "SUMMARY -- Financing of the Merger"; "THE
MERGER AND RECAPITALIZATION -- Consequences
of the Recapitalization and Merger"; and
"THE MERGER AND RECAPITALIZATION --
Financing"
- ---------------------------------- --------------------------------------------
(e) "SUMMARY -- The Recapitalization and
Merger"; and "THE MERGER AND
RECAPITALIZATION -- Consequences of the
Recapitalization and Merger"
- ---------------------------------- --------------------------------------------
(f) "SUMMARY -- The Recapitalization and
Merger"; "THE MERGER AND RECAPITALIZATION --
Consequences of the Recapitalization and
Merger"; and "THE MERGER AND
RECAPITALIZATION -- Delisting and
Deregistration of Common Stock"
- ---------------------------------- --------------------------------------------
(g) "SUMMARY -- The Recapitalization and
Merger"; "THE MERGER AND RECAPITALIZATION --
Consequences of the Recapitalization and
Merger"; and "THE MERGER AND
RECAPITALIZATION -- Delisting and
Preregistration of Common Stock"
- ---------------------------------- --------------------------------------------
6. Source and Amount of Funds or Other Consideration.
- ---------------------------------- --------------------------------------------
(a) "SUMMARY -- Financing of the Merger" and
"THE MERGER AND RECAPITALIZATION --
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
MERGER AND RECAPITALIZATION -- Financing"
- ---------------------------------- --------------------------------------------
(2) "SUMMARY -- Financing of the Merger" and
"THE MERGER AND RECAPITALIZATION --
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 MERGER AND RECAPITALIZATION
-- Consequences of the Recapitalization and
Merger"; "THE MERGER AND RECAPITALIZATION
--Federal Income Tax Consequences"; "THE
MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION --
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 MERGER
AND RECAPITALIZATION" 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 MERGER AND
RECAPITALIZATION" 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 MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION -- Consequences of the Recapitalization and
Merger"; and "THE MERGER AND RECAPITALIZATION -- Financing" of the Proxy
Statement is incorporated herein by reference.
(e) The information set forth in "SUMMARY -- The Recapitalization and
Merger"; and "THE MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION -- Consequences of the
Recapitalization and Merger"; and "THE MERGER AND RECAPITALIZATION -- Delisting
and Deregistration of the Stock" of the Proxy Statement is incorporated herein
by reference.
(g) "SUMMARY -- The Recapitalization and Merger"; "THE MERGER AND
RECAPITALIZATION -- Consequences of the Recapitalization and Merger; and "THE
MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION -- Financing" of the Proxy Statement is
incorporated herein by reference.
(2) The information set forth in "SUMMARY -- Financing of the Merger"
and "THE MERGER AND RECAPITALIZATION -- Financing" of the Proxy Statement is
incorporated herein by reference.
(d) Not applicable.
12
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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 MERGER AND RECAPITALIZATION -- Consequences of the
Recapitalization and Merger"; "THE MERGER AND RECAPITALIZATION --Federal Income
Tax Consequences"; "THE MERGER AND RECAPITALIZATION -- 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 MERGER AND RECAPITALIZATION -- 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.
(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.
15
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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.
March 17, 1999 CORNERSTONE EQUITY INVESTORS IV, L.P.
By: /s/ Mark Rossi
--------------------------------
Name: Mark Rossi
Title: Senior Managing Director
EQUITRAC CORPORATION
By: /s/ Scott Modist
--------------------------------
Name: Scott Modist
Title: Senior Vice President Finance and
Chief Financial 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/ Scott Modist
------------------------------------
Scott Modist
/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
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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) 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.
- ----------------------- -------------------------------------------------------
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
February 4, 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 $10,000,000 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 full amount of $50,000,000 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.
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 at 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.
<PAGE> 2
Cornerstone Equity Investors -2- February 4, 1999
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 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 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 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 the
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
-2-
<PAGE> 3
Cornerstone Equity Investors -3- February 4, 1999
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) and (v) the negotiation and delivery of definitive
documentation on or before June 30, 1999.
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 arrangements 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 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.
-3-
<PAGE> 4
Cornerstone Equity Investors -4- February 4, 1999
Your obligations under this letter and the Fee Letter with
respect to fees, indemnifications, 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 benefit 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 February 16, 1999. 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 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:
-4-
<PAGE> 5
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.
Guarantor: 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 $50,000,000 at any time outstanding,
apportioned as follows:
(a) $35,000,000 as a Senior Term Loan with a
final maturity on May 31, 2005 (the "TERM
FACILITY)".
(b) Up to $15,000,000 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 $5,000,000 of
availability under Revolving Facility will
be drawn at Closing Date.
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
-TS-1-
<PAGE> 6
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 At the Borrower's option, any advance made to
Interest Periods: 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 System on any applicable interest
determination date, LlBOR 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),
-TS-2-
<PAGE> 7
as of 11:00 am. (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 each Credit Facility,
based upon a leverage test of Total Debt to
EBITDA, as follows:
Applicable Margin for Eurodollar Advances*
Level Total Debt/EBITDA Applicable Margin
----- ----------------- ----------------
I > x 3.00%
-
II > x, < x 2.75%
-
III > x, < x 2.50%
-
IV < x 2.25%
* 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.
(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 each Credit Facility,
based upon a leverage test of Total Debt to
EBITDA, as follows:
-TS-3
<PAGE> 8
Applicable Margin for Prime Rate Advances*
Level Total Debt/EBITDA Applicable Margin
----- ----------------- ----------------
I > x 1.75%
-
II > x, < x 1.50%
-
III > x, < x 1.25%
-
IV < x 1.00%
* 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% An Unused Commitment fee equal to 0.50% per annum
Commitment Fee: 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.
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.
-TS-4-
<PAGE> 9
(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 Facility
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 commitment under the Credit
Facility under which such borrowing is being
made.
Amortization/ (a) TERM FACILITY - Amortization of the Term
Repayment of the Facility will be in equal quarterly
Credit Facilities: installments in annual aggregate amounts as
listed below:
Year Ending May 31, 2000 $1,350,000
Year Ending May 31, 2001 $3,250,000
Year Ending May 31, 2002 $4,750,000
Year Ending May 31, 2003 $6,000,000
Year Ending May 31, 2004 $8,500,000
Year Ending May 31, 2005 $11,150,000
The first such installment will be due on
November 30, 1999, with the final installment
due on May 31, 2005.
(b) REVOLVING FACILITY - The Revolving Facility
will be payable in full on May 31, 2005.
Optional Commitment The Borrower may, upon at least three
Reduction: business days' notice, terminate in whole or
reduce ratably in part, the unused portion
of the Revolving
-TS-5-
<PAGE> 10
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 (a) 100% of the net cash proceeds (i) from sales
and Commitment of property and assets of the Company and
Reduction: 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 property 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 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, 50% 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 perform 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 Facility to reduce the then remaining
installments thereunder; second, to prepay
advances made to pay drafts under Letter 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.
-TS-6-
<PAGE> 11
Conditions Precedent Those customarily found in credit agreements for
to Initial Extension of similar secured financings and others appropriate
Credit: 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.
(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").
-TS-7-
<PAGE> 12
(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 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 he 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
-TS-8-
<PAGE> 13
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.
Conditions Precedent There shall exist no default under any of the
to Subsequent loan documentation, and the representations and
Extensions of Credit: 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 Those customarily found in credit agreements for
Warranties: 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
-TS-9-
<PAGE> 14
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 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 seemed financings and others appropriate
in the judgment of Fleet, including, without
limitation, (a) failure to pay principal when
due, or to pay
-TS-10-
<PAGE> 15
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 The Borrower shall obtain interest rate
Protection: 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
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
-TS-11-
<PAGE> 16
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.
Assignments and Assignments may be non-pro rata and must be to
Participations: 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)
-TS-12-
<PAGE> 17
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.
-TS-13-
<PAGE> 18
FLEET CORPORATE FINANCE INC.
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
February 5, 1999
Cornerstone Equity Investors, LLC
717 Fifth Avenue, Suite 1100
New York, NY 10022
Attn: Steve Larson
Partner
RE: COMMITMENT LETTER--SENIOR SUBORDINATED NOTEs
Gentlemen:
You have advised Mainsail Capital ("Mainsail"), a division of Fleet
Corporate Finance, Inc. ("Fleet"), that Cornerstone Equity Investors
("Cornerstone" or the "Sponsor") intends to acquire all of the outstanding
shares of Equitrac Corporation ("Equitrac" or the "Issuer") to complete a going
private transaction (the "Transaction"). We understand that this Transaction
has a total consideration (exclusive of fees end expenses of $5.0 million and
excess cash of $15.0 million), of $81.7 million and represents a 7.3x multiple
of estimated pro forma fiscal year end February 28, 1999 adjusted EBITDA of
$11.2 million. We further understand that the transaction includes $50.0
million of senior secured credit facilities (the "Senior Facilities"), of which
$35.0 million will be funded at close. We further understand that certain
shares will be retained by the Issuer; $5.4 million in Redeemable Preferred
(the "Rollover Redeemable Preferred") and $1.8 million of Common Equity (the
"Rollover Common Equity"). We further understand that the Sponsor will
contribute $29.6 million of cash equity (the "Sponsor Contribution") to
complete the Transaction. We understand that the Transaction is expected to
close in May 1999.
Mainsail is pleased to advise you of its commitment to purchase
$10,000,000 of Senior Subordinated Notes (the "SENIOR SUBORDINATED NOTES") 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.
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.
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
<PAGE> 19
Cornerstone Equity Investors
February 5, 1999
Page 2
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 therein. You further
agree to make appropriate officers and representatives of the Issuer and its
subsidiaries available to participate in informational meetings for potential
investors in connection with any such resale at such times and places as
Mainsail may reasonably request.
You represent and warrant and covenant that (i) all information which
has been or is hereafter made available to Mainsail by you or any of your
representatives in connection with the transaction contemplated hereby is end
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 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, and (v) Mainsail being
satisfied with all agreements and documents, including the terms of all equity
and debt securities entered into in connection with the Transaction.
-2-
<PAGE> 20
Cornerstone Equity Investors
February 5, 1999
Page 3
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 involving
Fleet or any such indemnified person as a result of or arising out of or in any
way related to or resulting from 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 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 compensatory damages which may be alleged as a result of this letter or any
of the transaction 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 noted 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 or 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.
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 be changed except pursuant to written agreement signed
by each of the parties hereto.
-3-
<PAGE> 21
Cornerstone Equity Investors
February 5, 1999
Page 4
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 prier written consent of Mainsail. This letter may be executed in
any number of counterparts, each of which shall be an original and all of
which, when taken together, shell constitute one agreement.
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 principle 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 HEREUNDER. 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, for any such suit,
action or proceeding brought in any such court. Cornerstone irrevocably and
unconditionally waive 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 has been brought in an inconvenient forum. A final
judgment in 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.
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) Fleet, at the address set forth on page one hereof, Attention: Timothy C.
Shoer.
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 p.m., New York time, on February 12, 1999. This offer shall terminate at
such time unless prior thereto we shall have received duly signed and completed
copies of such letter.
-4-
<PAGE> 22
Cornerstone Equity Investors
February 5, 1999
Page 5
We look forward to working with you on this transaction.
Very truly yours,
FLEET CORPORATE FINANCE, INC.
By:____________________________
Name: Timothy C. Shoyer
Title: Director
Accepted and agreed to
as of____________________
CORNERSTONE EQUITY INVESTORS.
By:_____________________________
Name
Title:
-5-
<PAGE> 23
SUMMARY OF TERMS AND CONDITIONS
SENIOR SUBORDINATED NOTES
ISSUER: Equitrac Corporation ("Equitrac", "Issuer" or the
"Company").
ISSUE: Senior Subordinated Notes (the "Notes").
PRINCIPAL AMOUNT: $10.0 million.
MATURITY: 7 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 PREPAYMENT:
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: 2% of the principal amount outstanding
After the fourth anniversary, the Notes are
prepayable at par.
-TC-1-
<PAGE> 24
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 101% together with
accrued interest.
REPRESENTATIONS AND
WARRANTIES: The issuer will make 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:
1) Limitation on debt and the incurrence of debt;
2) Maintenance of minimum 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: There 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.
FINANCIAL
STATEMENTS: The Company will provide to the Noteholders:
-TC-2-
<PAGE> 25
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.
REPRESENTATIONS AND
WARRANTIES: Customary representations and warranties for a
senior subordinated note financing.
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 tho 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.
-TC-3-
<PAGE> 26
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 6.5% ownership on a fully diluted
basis at the Close.
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.
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 fifth anniversary of the
Close. Appropriate remedies for the failure to
honor the put shall be agreed upon. Fair Market
Value shall mean the value of the
-TC-4-
<PAGE> 27
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
reclassifications of Common Stock;
3. merger, consolidation, recapitalization and
other similar events; and
4. the issuance or sale of warrants, convertible
securities or Common Stock at an effective
price per share less than fair market value.
No adjustments need be made until cumulative
adjustments amount to 1%.
-TC-5-
<PAGE> 1
Project Chargeback
- -------------------------------------------------------------------------------
Highly Confidential
----------------------------------------------------
Presentation to the Special
Committee of the Board of
Directors
February 16, 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
<PAGE> 3
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
I. Transaction Overview
----------------------------------------------------
<PAGE> 4
Project Chargeback
- ------------------------------------------------------------------------------
Transaction Overview
Synopsis: On July 6, 1998, Chargeback (the "Company") retained
Prudential Securities to seek a buyer for the Company.
After an extensive marketing process, Bedrock, together
with members of the Company's management (the
"Management Investors"), have agreed to acquire
Chargeback through a leveraged recapitalization (the
"Recapitalization").
The Recapitalization: Pursuant to the 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 $25.25 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.
Accounting Treatment: Recapitalization accounting. The historical basis of the
Company's assets and liabilities will not be affected.
<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 options 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
accounting for 12% of the Company's stock.
Timing: Consummation of the transaction will require the
preparation of a merger proxy followed by shareholder
approval. Closing of the transaction is expected by May
31, 1999 (the "Effective Time").
<PAGE> 6
Project Chargeback
- ------------------------------------------------------------------------------
THE RECAPITALIZATION
Step 1: Prior to the Effective time
-----------------
| Public |
| Shareholders and |
| Management |
| Investors |
-----------------
|
|
| Common Stock
|
|
|
Equity Contribution | Reinvested
---------- (Cash) ------------ Common Stock ------------
| Bedrock |----------------+ | Chargeback |+---------------| Management |
| |+---------------- | |---------------+| Investors |
--------- Preference Stock ------------ Preference Stock ------------
o Bedrock contributes o Management
cash in exchange for Investors convert
Preference Stock some of their
Common Stock to
Preference Stock
<PAGE> 7
Project Chargeback
- ------------------------------------------------------------------------------
THE RECAPITALIZATION
Step 2: At the Effective time
MergerCo Merges With and Into the Company:
o All Preference Stock converted into "new" common and preferred stock
o The Company consummates debt financing
o All existing Common Stock canceled in exchange for $25.25 per share in cash
-----------------
| Public |
| Shareholders and |
| Management |
| Investors |
-----------------
| +
| |
"Existing"| | Cash at
Common | | $25.25 per
Stock | | Share
| |
+ |
--------- Preference Stock ------------ Preference Stock -----------
| Bedrock |-----------------+| Chargeback |+------------------| Management |
| |+-----------------| |------------------+| Investors |
--------- "New" Common Stock ------------ "New" Common Stock -----------
and Preferred + and Preferred
Stock | Cash Stock
|
--------
| Lenders|
--------
<PAGE> 8
Project Chargeback
- -------------------------------------------------------------------------------
SIGNIFICANT CONTRACT TERMS
Voting Agreement: To be delivered at the signing by John Kane and George
Wilson, representing approximately 35 percent of the
outstanding Common Stock.
"No Shop" The Company may not, directly or indirectly, solicit,
Provision: 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.
Significant Closing (1) Funding obtained as contemplated by the commitment
Conditions: letters, (2) Approval by a majority of the Company's
shareholders, (3) No Company Material Adverse Effect,
(4) The Company shall have entered into a satisfactory
employment agreement with George Wilson and terminated
the existing employment agreement with John Kane.
Ongoing The Company's existing management is expected to
Management: remain in place, with the exception of John Kane,
who will resign as Chairman upon the closing of
the transaction.
Ongoing Board Seven member board. Members will include John Kane,
Composition: George Wilson, Mark Rossi, Stephen L. Larson, Michael
Najjar, and two additional members to be mutually
decided upon.
<PAGE> 9
Project Chargeback
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SOURCES AND USES OF FUNDS
(000's, except per share data)
- -------------------------------------------------------- ---------------------------------------------------------
Sources Uses
- -------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Excess Cash(1) $ 14,158 Diluted Common Shares Outstanding 3,899
Revolver 5,112
Term Debt 35,000 Offer Price Per Share $ 25.25
Subordinated Debt 10,000
Purchase Price of Equity $98,449
Sponsor Group Equity
Preferred Stock $ 22,553 Plus: Outstanding Debt --
Common Stock 7,447
--------
$ 30,000
Management Investors Rollover Equity
Preferred Stock $6,884
Common Stock 2,295 Transaction Costs 5,000
-------- --------
$ 9,179
TOTAL SOURCES OF FUNDS $103,449 TOTAL USES OF FUNDS $103,449
- -------------------------------------------------------- ---------------------------------------------------------
(1) Estimated 5/31/99 cash balance, per management's projection.
</TABLE>
<PAGE> 10
Project Chargeback
- -------------------------------------------------------------------------------
INITIAL CAPITALIZATION
(000's)
- ---------------------------------------------------------------------
% of Total
Initial Capitalization Amount Sources
- ---------------------------------------------------------------------
Revolver $5,112 5.7%
Term Debt 35,000 39.2%
Subordinated Debt 10,000 11.2%
TOTAL DEBT $50,112 56.1%
Equity Contribution 39,179 43.9%
Total Sources of Funds $89,291 100.0%
- ---------------------------------------------------------------------
<PAGE> 11
Project Chargeback
- -------------------------------------------------------------------------------
Valuation Multiples at Offer Price
(000's, except offer price)
<TABLE>
<CAPTION>
Price Premium Diluted Shares Outstanding 3,899
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Offer Price $25.25
Closing Price Enterprise Value Calculation
2/12/1999 (One Day) $20.25 24.7% Equity Market Value $98,449
2/8/99 (Five Days) $19.50 29.5% Net Debt ($12,988)
1/19/99 (Four Weeks) $18.63 35.6% Enterprise Value: $85,461
</TABLE>
<TABLE>
<CAPTION>
Pro Forma (1) Estimated Estimated Pro Forma (1) Estimated
Latest Twelve Months (2) FYE 2/28/99 FYE 2/28/99 FYE 2/29/00
----------------------- ----------------------- ----------------------- -----------------------
Chargeback Amount (3) Multiple Amount (3) Multiple Amount (3) Multiple Amount (3) Multiple
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues (4) $50,564 1.7x $55,991 1.5x $51,935 1.6x $64,054 1.3x
EBITDA (4) $9,852 8.7x $10,308 8.3x $10,507 8.1x $16,411 5.2x
EBIT (4) $6,386 13.4x $6,672 12.8x $6,887 12.4x $12,146 7.0x
EBITDA - Capex (4) $5,245 16.3x $5,058 16.9x $5,257 16.3x $12,411 6.9x
Net Income (5) $4,515 21.8x $5,121 19.2x $4,739 20.8x $8,164 12.1x
</TABLE>
(1) Pro Forma figures exclude ECS operations and gain on sale of ECS division.
(2) Latest Twelve Months ended 11/30/98.
(3) Source: Company management.
(4) Enterprise value mutltiples.
(5) Equity value multiples.
<PAGE> 12
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
II. Marketing Process
----------------------------------------------------
<PAGE> 13
Project Chargeback
- -------------------------------------------------------------------------------
Chronology of Events
<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
</TABLE>
<PAGE> 14
Project Chargeback
- -------------------------------------------------------------------------------
REVIEW OF THE MARKETING PROCESS
<TABLE>
<CAPTION>
Received Submitted Initial Submitted Initial
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>
<PAGE> 15
Project Chargeback
- -------------------------------------------------------------------------------
SUMMARY OF INDICATIONS RECEIVED
<TABLE>
<CAPTION>
Bidder Preliminary Value Indication Revised Value Indication Final Value Indication
- ------------------- ----------------------------- -------------------- ----------------------
<S> <C> <C> <C>
Bedrock $22.00 - $24.00 $23.50 - $24.50 $24.75 (1)
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
(1) Subsequently raised to $25.25.
</TABLE>
<PAGE> 16
Project Chargeback
- -------------------------------------------------------------------------------
PROPOSED CAPITAL STRUCTURE
<TABLE>
<CAPTION>
Bidder Bidder #2 Bidder #3 Bedrock Initial Bedrock as Revised
Offer Price $24.00 $23.50 $24.75 $25.25
---------------------- ----------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Debt $42,500 50.9% $42,500 52.5% $40,000 45.9% $40,112 44.9%
Subordinated Debt 15,000 18.0% 10,000 12.4% 10,000 11.5% 10,000 11.2%
Total Debt $57,500 68.9% $52,500 64.9% $50,000 57.4% $50,112 56.1%
Equity 26,000 31.1% 28,400 35.1% 37,100 42.6% 39,179 43.9%
Total Capital $83,500 100.0% $80,900 100.0% $87,100 100.0% $89,291 100.0%
</TABLE>
<PAGE> 17
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
III. Company Overview
----------------------------------------------------
<PAGE> 18
Project Chargeback
- -------------------------------------------------------------------------------
MARKET DATA SUMMARY
(000's, except per share data)
Chargeback
----------
Closing Price as of 2/12/99 $20.25
52 Week High (4/16/98) $24.00
52 Week Low (10/29/98) $16.50
Diluted Shares Outstanding (at current price) 3,827
Enterprise Value Calculation
Equity Market Value $77,503
Net Debt ($12,988)
-------------
Enterprise Value: $64,515
EPS
Growth
EPS P/E Rate
FY1998 Actual $0.85 23.8x 16.4%
FY1999 Estimated $1.21 (1) 16.8x 42.1%
FY2000 Projected $2.13 9.5x 76.6%
FY2001 Projected $3.29 6.2x 54.3%
Source: Historical results from Form 10-Q dated 11/30/98. Projected results are
management estimates, including $900,000 of expected cost reductions.
(1) Excludes gain on sale of ECS.
Fiscal year ends February 28.
<PAGE> 19
Project Chargeback
- --------------------------------------------------------------------------------
Historical and Projected Consolidated Income Statements
(000's, except per share data)
<TABLE>
<CAPTION>
1999 Quarterly Summary
--------------------------------------------------------
1998 Q1A Q2A Q3A Q4E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Sales $ 22,528 $ 5,988 $ 7,552 $ 6,913 $ 6,473
Total Service, Support & Rental 27,256 7,270 7,472 7,517 6,804
-------- -------- -------- -------- --------
Total Revenues $ 49,784 $ 13,258 $ 15,025 $ 14,430 $ 13,278
Expenses
Cost of System Sales $ 7,986 $ 1,994 $ 3,289 $ 2,149 $ 1,807
Cost of Service and Support 12,567 3,293 3,507 3,806 3,249
Product Development 2,982 762 711 731 745
Selling Expenses 7,153 1,907 2,003 1,870 1,792
General & Administrative 14,609 3,929 3,894 4,195 3,686
-------- -------- -------- -------- --------
Total Expenses $ 45,297 $ 11,885 $ 13,404 $ 12,750 $ 11,280
Operating Income $ 4,487 $ 1,373 $ 1,621 $ 1,680 $ 1,998
======== ======== ======== ======== ========
Growth Rate 20.3%
Margin 9.0% 10.4% 10.8% 11.6% 15.0%
Depreciation $ 2,688 $ 688 $ 645 $ 761 $ 773
Amortization 1,160 249 171 177 172
-------- -------- -------- -------- --------
EBITDA $ 8,335 $ 2,310 $ 2,437 $ 2,618 $ 2,943
======== ======== ======== ======== ========
Depreciation $ 2,688 $ 688 $ 645 $ 761 $ 773
Amortization 1,160 249 171 177 172
-------- -------- -------- -------- --------
EBIT $ 4,487 $ 1,373 $ 1,621 $ 1,680 $ 1,998
======== ======== ======== ======== ========
Interest Income/(Expense) 616 188 190 185 194
Gain on Asset Disposition 830
Income before Income Taxes 5,102 1,561 1,811 2,695 2,192
Income Taxes (1,944) (593) (688) (1,011) (833)
-------- -------- -------- -------- --------
Net Income $ 3,158 $ 968 $ 1,123 $ 1,684 $ 1,359
======== ======== ======== ======== ========
Growth Rate 21%
Earnings per Share:
Basic $ 0.91 $ 0.28 $ 0.32 $ 0.48 $ 0.38
Diluted $ 0.85 $ 0.25 $ 0.29 $ 0.45 $ 0.36
</TABLE>
{TABLE CONTINUED)
<TABLE>
<CAPTION>
For The Year Ended February 28,
------------------------------------------------------------------------
Forecasted
1999E 2000(1) 2001 2002 2003
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Sales $ 26,927 $ 35,079 $ 45,336 $ 51,926 $ 58,513
Total Service, Support & Rental 29,064 28,975 31,701 34,758 38,155
-------- -------- -------- -------- --------
Total Revenues $ 55,991 $ 64,054 $ 77,036 $ 86,684 $ 96,668
Expenses
Cost of System Sales $ 9,239 $ 10,712 $ 14,175 $ 15,840 $ 17,267
Cost of Service and Support 13,855 13,593 14,492 15,442 16,792
Product Development 2,948 3,350 3,775 4,200 4,575
Selling Expenses 7,572 8,473 9,414 10,178 10,966
General & Administrative 15,704 15,779 16,337 16,881 17,428
-------- -------- -------- -------- --------
Total Expenses $ 49,319 $ 51,908 $ 58,192 $ 62,541 $ 67,029
Operating Income $ 6,672 $ 12,146 $ 18,844 $ 24,143 $ 29,640
======== ======== ======== ======== ========
Growth Rate 48.7% 82.0% 55.1% 28.1% 22.8%
Margin 11.9% 19.0% 24.5% 27.9% 30.7%
Depreciation $ 2,867 $ 3,512 $ 3,522 $ 3,547 $ 3,642
Amortization 769 753 653 551 339
-------- -------- -------- -------- --------
EBITDA $ 10,308 $ 16,411 $ 23,019 $ 28,241 $ 33,621
======== ======== ======== ======== ========
Depreciation $ 2,867 $ 3,512 $ 3,522 $ 3,547 $ 3,642
Amortization 769 753 653 551 339
-------- -------- -------- -------- --------
EBIT $ 6,672 $ 12,146 $ 18,844 $ 24,143 $ 29,640
======== ======== ======== ======== ========
Interest Income/(Expense) 757 1,021 1,476 2,179 3,108
Gain on Asset Disposition 830
Income before Income Taxes 8,259 13,168 20,320 26,322 32,748
Income Taxes (3,138) (5,004) (7,721) (10,002) (12,444)
-------- -------- -------- -------- --------
Net Income $ 5,121 $ 8,164 $ 12,598 $ 16,320 $ 20,304
======== ======== ======== ======== ========
Growth Rate 62% 59% 54% 30% 24%
Earnings per Share:
Basic $ 1.46 $ 2.31 $ 3.56 $ 4.61 $ 5.74
Diluted $ 1.34 $ 2.13 $ 3.29 $ 4.26 $ 5.30
</TABLE>
Source: Historical data from SEC filings. Projected data from management
estimates.
(1) Fiscal Year 2000 ends on February 29.
<PAGE> 20
Project Chargeback
- --------------------------------------------------------------------------------
Historical and Projected Consolidated Balance Sheets
(000's, except per share data)
<TABLE>
<CAPTION>
1999 Quarterly Summary
---------- -------------------------------------
1998 Q1A Q2A Q3A Q4E
---------- -------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 5,819 $ 4,993 $2,473 $2,701 $14,276
Restricted Cash - - - - 150
Short Term Investment Securities 5,208 6,770 6,121 6,600 -
Accounts Receivable 8,178 8,243 9,454 10,864 10,106
Inventories 2,465 3,694 3,940 3,530 3,900
Deferred Income Taxes 234 832 1,014 1,130 1,198
Other Current Assets 444 379 409 388 425
------ ------- ------ ------- -------
Total Current Assets 22,348 24,911 23,411 25,213 30,056
NON-CURRENT ASSETS
Investment Securities 2,497 2,490 3,905 3,687 -
Property Plant & Equipment 6,418 6,647 7,306 8,009 8,751
Intangible Assets, Net 3,111 2,862 2,654 2,468 2,296
Deferred Income Taxes 556 648 623 637 649
Other Assets 184 187 203 238 238
------- ------- ------- ------- -------
Total Non-Current Assets 12,766 12,834 14,691 15,039 11,933
TOTAL ASSETS: 35,114 37,745 38,102 40,252 41,989
======= ======= ======= ======= =======
LIABILITIES
Accounts Payable 1,720 1,999 2,255 1,426 1,800
Accrued Expenses 3,878 4,880 4,714 6,179 6,115
Unearned Income 1,337 1,213 979 781 849
Total Liabilities 6,935 8,092 7,948 8,386 8,764
OWNERS' EQUITY
Common Stock and Addt'l Paid in Capital 11,529 12,090 12,559 12,730 12,730
Retained Earnings 18,830 19,798 20,921 22,605 23,964
Cumulative Translation Adjustment (45) (48) (153) (92) (92)
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 33,225
TOTAL LIABILITIES & EQUITY: 35,114 37,745 38,102 40,252 41,989
======= ======= ======= ======= =======
</TABLE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
For The Year Ended by February 28,
-----------------------------------------------------------
Forecasted
1999 2000(1) 2001 2002 2003
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $14,276 $21,727 $30,513 $46,611 $63,404
Restricted Cash 150 - - - -
Short Term Investment Securities - - - - -
Accounts Receivable 10,106 9,652 11,608 13,062 14,566
Inventories 3,900 4,035 6,274 5,246 7,312
Deferred Income Taxes 1,198 1,975 3,048 3,948 4,912
Other Current Assets 425 576 693 780 870
------- ------- ------- ------- -------
Total Current Assets 30,056 37,965 52,136 69,647 91,064
NON-CURRENT ASSETS
Investment Securities - - - - -
Property Plant & Equipment 8,751 9,239 9,467 9,670 9,778
Intangible Assets, Net 2,296 1,543 890 339 -
Deferred Income Taxes 649 1,317 2,032 2,632 3,275
Other Assets 238 256 308 347 387
------- ------- ------- ------- -------
Total Non-Current Assets 11,933 12,354 12,697 12,988 13,440
TOTAL ASSETS: 41,989 50,320 64,833 82,635 104,504
======= ======= ======= ======= =======
LIABILITIES
Accounts Payable 1,800 2,284 2,560 2,752 2,949
Accrued Expenses 6,115 4,672 5,237 5,629 6,033
Unearned Income 849 1,975 3,048 3,948 4,912
Total Liabilities 8,764 8,931 10,846 12,329 13,894
OWNERS' EQUITY
Common Stock and Addt'l Paid in Capital 12,730 12,730 12,730 12,730 12,730
Retained Earnings 23,964 32,128 44,726 61,046 81,349
Cumulative Translation Adjustment (92) (92) (92) (92) (92)
Unrealized Gain on Investment Securities, Net - - - - -
Treasury Stock (3,377) (3,377) (3,377) (3,377) (3,377)
-------- ------- ------- ------- -------
Total Owners' Equity 33,225 41,389 53,987 70,307 90,610
TOTAL LIABILITIES & EQUITY: 41,989 50,320 64,833 82,635 104,504
======== ======== ======== ======== ========
</TABLE>
Source: Historical data from SEC filings. Projected data from management
estimates.
(1) Fiscal Year 2000 ends on February 29.
<PAGE> 21
Project Chargeback
- -------------------------------------------------------------------------------
Chargeback Price Volume Chart
(Graphic omitted)
Graph depicting the daily prices of shares of Chargeback from February 13, 1998
to February 12, 1999.
Graph depicting the trading volume of shares of Chargeback from February 13,
1998 to February 12, 1999.
Source: IDD Information Services/Tradeline
<PAGE> 22
Project Chargeback
- -------------------------------------------------------------------------------
Chargeback Trading Volume
(Graphic omitted)
Graph depicting what percent of the total volume of shares, traded from February
13, 1998 to February 12, 1999, traded at specified prices.
Graph shows aggregate trading volume of 1,310,300 cumulative shares, which
represents 37% of the 3,540,000 shares outstanding as reported on 2/12/99.
Source: IDD Information Services/Tradeline
<PAGE> 23
Project Chargeback
- -------------------------------------------------------------------------------
Chargeback vs. Nasdaq Composite Index
(Based on Closing Prices for last 5 years)
(Graphic omitted)
Graph comparing the closing price of Chargeback to the closing price of the
NASDAQ from February 14, 1994 to February 12, 1999.
Source: IDD Information Services/Tradeline
<PAGE> 24
Project Chargeback
- -------------------------------------------------------------------------------
Chargeback vs. Various Indices
(Graphic omitted)
Graph depicting the closing prices from February 13, 1998 to February 12, 1999
of Chargeback, the S&P 500, and the NASDAQ as a percentage of what their
respective closing prices were on February 13, 1998.
Source: IDD Information Services/Tradeline
Ownership Summary
- --------------------------------------------------------------------------------
Chargeback Affiliates
- --------------------------------------------------------------------------------
Common % of
Beneficial Owner Stock Owned (1) Outstanding
- ------------------------------------- ------------------ -------------
John T. Kane 727,750 20.6%
George P. Wilson
Wilson Family Partnership 116,414 3.3%
Kane Family Trust 35,200 *
Owned Outright 372,500 10.5%
------------------ -------------
Total Executives 1,251,864 35.4%
Patrick J. Raftery 1,800 *
Chris Rickborn 2,500 *
Cid Yousefi 9,400 *
John P. Jones 5,400 *
------------------ -------------
Total Employees 1,270,964 35.9%
------------------ -------------
Marc M. Watson 3,000 0.1%
James F. Courier 8,000 0.2%
------------------- -------------
Outside Board Members 11,000 0.3%
------------------ ---------------
Total Employees and Board Members 1,281,964 36.2%
================== ===============
- --------------------------------------------------------------------------------
Chargeback Institutional Investors
- --------------------------------------------------------------------------------
Common % of
Beneficial Owner Stock Owned(2) Outstanding
- ------------------------------------ -------------------- -------------------
FMR Corporation 349,000 9.9%
SafeCo Corporation 314,000 8.9%
Laifer Capital Management, Inc. 304,000 8.6%
Dimensional Fund Advisors Inc. 120,000 3.4%
Barclays Bank PLC 69,000 1.9%
Scudder Kemper Investments, Inc. 26,000 *
Mellon Bank Corporation 15,000 *
Bear, Stearns & Company 2,000 *
Donaldson, Lufkin & Jenrette, Inc. 1,000 *
Bankers Trust Company 1,000 *
-------------------- -------------------
Total Institutional Holdings 1,201,000 33.9%
==================== ===================
Ownership Summary
- -----------------
Total Employees and Board Members 1,281,964 36.2%
Total Institutional Holdings 1,201,000 33.9%
Retail Float 1,056,536 29.8%
-------------------- ------------------
Total Shares Outstanding (3) 3,539,500 100.0%
==================== ==================
- --------------------------------------------------
* Less than 0.1%.
(1)Source: Ownership numbers provided by the Company.
Excludes outstanding options.
(2)Source: Vickers database on February 10, 1999
(3)Source: Form 10-Q dated November 30, 1998.
<PAGE> 25
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
IV. Valuation Summary
----------------------------------------------------
<PAGE> 26
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
A. Methodology
----------------------------------------------------
Methodology
o Reviewed historical and projected operational information provided by
Chargeback's management. Discussed the Company's historical results, future
growth opportunities, and other matters which we considered relevant to our
analysis with management.
o Reviewed the Company's historical and projected financial information, as
provided by the Company.
o Analyzed qualitative factors associated with the transaction, including
existing management profile and stock ownership.
o Analyzed the stock trading history of Chargeback.
o Valued the Company based on a discounted cash flow analysis.
o Compared and analyzed the Company's financial and operational performance
with selected publicly traded small-capitalization technology and business
services companies and valued the Company based on implied multiples from
these companies.
o Analyzed recent mergers and acquisitions involving small-capitalization
technology and business services companies and valued the Company based on
implied multiples from these transactions.
<PAGE> 27
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
B. Composite Implied
Valuation
----------------------------------------------------
<PAGE> 28
Project Chargeback
- -------------------------------------------------------------------------------
Composite Valuation Summary
(Graphic omitted)
Graph depicting the offer price to the range and median of the implied share
prices under the following valuations methods: DCF analysis, comparable
companies, comparable transaction multiples, and comparable transaction
premiums.
<PAGE> 29
Project Chargeback
- -------------------------------------------------------------------------------
Summary of Implied Prices of All Valuation Methodologies
- --------------------------------------
Offer Price $ 25.25
- --------------------------------------
High Median Mean Low
------- ------- ------- -------
Discounted Cash Flows $ 30.48 $ 26.28 $ 26.30 $ 22.46
Comparable Company Multiples
LTM Revenue $ 35.05 $ 17.75 $ 18.92 $ 9.76
LTM EBITDA 33.79 22.56 22.04 12.42
LTM EBIT 37.44 23.33 22.12 11.01
LTM EBITDA - Capex 31.34 16.15 17.99 9.64
LTM Net Income 44.26 19.54 21.54 7.61
1999 EPS 48.41 28.55 28.19 14.35
2000 EPS 45.79 36.06 35.51 25.12
------- ------- ------- -------
Mean $ 39.44 $ 23.42 $ 23.76 $ 12.84
Comparable Transaction Multiples
LTM Revenue $ 48.57 $ 24.97 $ 27.92 $ 15.08
LTM EBITDA 33.41 26.94 27.32 18.83
LTM EBIT 35.74 24.01 24.93 16.30
LTM EBITDA - Capex 31.56 21.49 22.64 12.83
LTM Net Income 34.50 19.74 21.37 14.11
------- ------- ------- -------
Mean $ 36.76 $ 23.43 $ 24.84 $ 15.43
Comparable Transaction Premiums
One Day Earlier $ 36.12 $ 23.31 $ 25.67 $ 20.25
One Week Earlier 35.75 28.09 27.32 19.50
Four Weeks Earlier 34.20 24.94 24.82 18.63
------- ------- ------- -------
Mean $ 35.36 $ 25.45 $ 25.94 $ 19.46
<PAGE> 30
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
C. Discounted Cash Flow
Analysis
----------------------------------------------------
<PAGE> 31
Project Chargeback
- -------------------------------------------------------------------------------
Projected Unlevered Free Cash Flows
<TABLE>
<CAPTION>
(000's) Fiscal Years Ended February 28,
-------------------------------------------------
2000 (1) 2001 2002 2003
Free Cash Flow:
<S> <C> <C> <C> <C>
Operating Income (EBIT) $12,146 $18,844 $24,143 $29,640
Less: Income Taxes @ 38.0% (4,616) (7,161) (9,174) (11,263)
------- -------- -------- --------
Tax-Adjusted Operating Income $ 7,531 $11,683 $14,969 $18,377
Plus: Depreciation & Amortization 4,265 4,175 4,098 3,981
Less: Capital Expenditures (4,000) (3,750) (3,750) (3,750)
-------- -------- -------- --------
Cash Flow before Changes to Working Capital 7,796 12,108 15,316 18,607
(Increase)/Decrease in Working Capital (1,129) (4,237) (569) (3,742)
-------------------------------------------------
Free Cash Flow $ 6,667 $ 7,871 $14,748 $14,866
-------------------------------------------------
Source: Management projections.
(1) Fiscal Year 2000 ends February 29.
</TABLE>
<PAGE> 32
Project Chargeback
- -------------------------------------------------------------------------------
Discounted Cash Flow Implied Valuation
(000's, except per share data)
<TABLE>
<CAPTION>
Terminal PV of PV of
Value Free PV of Aggregate Less: PV of Equity
Multiple of Discount Cash Flow Terminal Present Total Plus: Equity per
2003 EBITDA Rate(1) 1999-2003(2) Value Value Debt Cash (4) Value Share(3)
----------- ------- ------------ ----- ----- ---- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15.9% 31,593 49,503 81,096 - 12,988 94,084 24.13
- ---------------------
6.0x 17.4% 30,719 47,020 77,739 - 12,988 90,727 23.27
- ---------------------
18.9% 29,885 44,691 74,576 - 12,988 87,564 22.46
15.9% 31,593 61,878 93,472 - 12,988 106,460 27.30
- ---------------------
7.5x 17.4% 30,719 58,775 89,494 - 12,988 102,482 26.28
- ---------------------
18.9% 29,885 55,864 85,749 - 12,988 98,737 25.32
15.9% 31,593 74,254 105,847 - 12,988 118,835 30.48
- ---------------------
9.0x 17.4% 30,719 70,530 101,249 - 12,988 114,237 29.30
- ---------------------
18.9% 29,885 67,036 96,922 - 12,988 109,910 28.19
-----------------------------
Mean $ 26.30
-----------------------------
</TABLE>
(1) As of 2/12/99, weighted average cost of capital was 17.36% based on
company's industry peer group. See calculation in appendix.
(2) Free cash flow discounted using the half year convention.
(3) Assumes diluted shares outstanding as of 2/12/99 of 3.899 million.
(4) Based on the quarter ended 11/30/98.
<PAGE> 33
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
D. Comparable Companies
Analysis
----------------------------------------------------
<PAGE> 34
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Companies Summary Valuation
[Graphic omitted]
Graph comparing the offer price to the mean and range of the implied share price
of comparable companies based on the following operating parameters:
LTM Revenue, LTM EBITDA, LTM EBIT, LTM EBITDA-Capex, LTM Net Income, CY1999E
EPS, and CY2000E EPS.
<PAGE> 35
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Companies Summary Valuation Matrix
(000's, except per share data)
Offer Price $25.25
<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) $50,564(2) $9,852(2) $6,386(2) $5,245(2) $4,515(2) $2.13(3) $3.29(3)
-----------------------------------------------------------------------------------------
Comparable Companies Valuation Multiples
-----------------------------------------------------------------------------------------
High 2.4x 12.1x 20.8x 20.8x 38.2x 22.7x 13.9x
Median 1.1x 7.6x 12.2x 9.5x 16.9x 13.4x 11.0x
Mean 1.2x 7.4x 11.5x 10.9x 18.6x 13.2x 10.8x
Low 0.5x 3.6x 4.7x 4.7x 6.6x 6.7x 7.6x
-----------------------------------------------------------------------------------------
-------------------------------------------
Plus: Cash (4) $12,988 $12,988 $12,988 $12,988
-------------------------------------------
-----------------------------------------------------
Diluted Shares Outstanding (5) 3,899 3,899 3,899 3,899 3,899
-----------------------------------------------------
Implied Equity Value Per Share Mean
-----------------------------------------------------------------------------------------
High $35.05 $33.79 $37.44 $31.34 $44.26 $48.41 $45.79 $39.44
Median 17.75 22.56 23.33 16.15 19.54 28.55 36.06 23.42
Mean 18.92 22.04 22.12 17.99 21.54 28.19 35.51 23.76
Low 9.76 12.42 11.01 9.64 7.61 14.35 25.12 12.84
-----------------------------------------------------------------------------------------
</TABLE>
(1) Parameters exclude ECS figures.
(2) Chargeback financial information for the latest twelve months is for the
twelve months ended 11/30/98.
(3) Chargeback financial projections for CY1999 and CY2000 are for the fiscal
years ended 2/29/00 and 2/28/01, respectively.
(4) Based on the quarter ended 11/30/98.
(5) Calculated using the treasury stock method and an offer price of $25.25.
<PAGE> 36
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Companies Summary Valuation Matrix
(000's, except per share data)
<TABLE>
<CAPTION>
Market Values (1) EBITDA Three-Year Growth
--------------------------------- ----------------
Per
Ticker Share Equity Enterprise Margin Revenue EBITDA
- ---------------------------------- --------------------------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. BILL $10.00 $348,166 $232,429 27.4% 25.7% 26.5%
Brooktrout Technology, Inc. BRKT $10.94 $123 $110,682 10.9% 37.6% 13.1%
Checkpoint Systems, Inc. CKP $9.31 $294,004 $424,046 15.4% 21.0% 19.5%
Digi International Inc. DGII $6.59 $96,741 $108,481 15.7% 3.5% 1.1%
FLIR Systems, Inc. FLIR $20.88 $255,350 $290,655 17.7% 23.3% 27.4%
Kofax Image Products, Inc. KOFX $8.69 $46,884 $23,397 18.1% 16.5% 18.9%
Omtool, Ltd. OMTL $4.31 $55,319 $34,586 10.3% 99.3% 88.6%
Peerless Systems Corp. PRLS $9.25 $105,282 $78,396 23.6% 38.3% NM
PSC Inc. PSCX $8.63 $115,650 $202,678 18.2% 35.4% 54.2%
Sensormatic Electronics Corp. SRM. $10.44 $781,897 $1,200,697 13.1% 3.5% (4.7%)
Telxon Corp. TLXN $9.38 $151,165 $242,822 13.0% 7.1% 12.0%
- ---------------------------------- --------------------------------- -------- -----------------
- ---------------------------------- --------------------------------- -------- ------------------
Chargeback (Trading Multiples) $20.25 $ 77,503 $ 64,515 19.5% 16.8% 21.4%
- ---------------------------------- --------------------------------- -------- ------------------
-------- ---------------
High 27.4% 99.3% 88.6%
Median 15.7% 23.3% 19.2%
Mean 16.7% 28.3% 25.7%
Low 10.3% 3.5% (4.7%)
------ ---------------
Chargeback (Implied Multiple at Offer Price)
</TABLE>
(TABLE CONTINUED)
<PAGE> 37
<TABLE>
<CAPTION>
------------------------------------------------- -----------------
Based on
Based on Latest Twelve Months Results Forward Results
------------------------------------------------- -----------------
Equity
Value Equity Value
Enterprise Value Multiples Multiples Multiples
--------------------------------------- --------- ----------------
EBITDA - Net CY1999E CY2000E
(000's, except per share data) Revenue EBITDA EBIT CAPEX Income EPS EPS
- ------------------------------ -------------------------------------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. 1.4x 5.0x 5.8x 6.7x 12.5x 11.5x N/A
Brooktrout Technology, Inc. 1.1x 10.1x 13.9x 13.9x 16.9x 12.9x 10.2x
Checkpoint Systems, Inc. 1.2x 7.6x 14.1x 9.5x 17.0x 13.9x 11.0x
Digi International Inc. 0.6x 3.6x 5.1x 5.1x 6.6x 6.7x N/A
FLIR Systems, Inc. 2.1x 12.1x 16.4x 16.4x 32.5x 11.7x N/A
Kofax Image Products, Inc. 0.7x 3.6x 4.7x 4.7x 12.3x 9.7x N/A
Omtool, Ltd. 1.1x 10.7x 20.8x 20.8x 30.0x 22.7x 13.9x
Peerless Systems Corp. 2.4x 10.4x 12.2x 12.2x 19.7x 17.5x N/A
PSC Inc. 0.9x 5.1x 7.7x 7.7x 11.0x 9.1x 7.6x
Sensormatic Electronics Corp. 1.2x 9.4x 19.1x 16.5x 38.2x 16.6x 11.2x
Telxon Corp. 0.5x 3.8x 6.4x 6.4x 8.0x 42.6x * N/A
- ------------------------------ -------------------------------------- ------ -----------------
- ------------------------------ -------------------------------------- ------- -------------------
Chargeback (Trading Multiples) 1.3x 6.5x 10.1x 12.3x 17.2x 9.5x(2) 6.2x(2)
- ------------------------------ -------------------------------------- ------- -------------------
-------------------------------------- ------- -------------------
2.4x 12.1x 20.8x 20.8x 38.2x 22.7x 13.9x
1.1x 7.6x 12.2x 9.5x 16.9x 13.4x 11.0x
1.2x 7.4x 11.5x 10.9x 18.6x 13.2x 10.8x
0.5x 3.6x 4.7x 4.7x 6.6x 6.7x 7.6x
-------------------------------------- ------- -------------------
-------------------------------------- ------- --------------------
1.7x 8.7x 13.4x 16.3x 21.8x 11.8x 7.7x
-------------------------------------- ------- --------------------
</TABLE>
* Outliers excluded from summary statistics.
Summary Statistics Exclude Chargeback.
(1) As of February 12, 1999.
(2) 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.
<PAGE> 38
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
E. Comparable Companies
Analysis - Multiples
----------------------------------------------------
<PAGE> 39
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Transactions Summary Valuation
(Graphic omitted)
Graph comparing the offer price to the mean and range of the implied share price
of comparable transactions based on the following operating parameters:
LTM Revenue, LTM EBITDA, LTM EBIT, LTM EBITDA-Capex, LTM Net Income.
<PAGE> 40
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Transactions Summary Valuation Matrix
(000's, except per share data)
- -------------------------
Offer Price $ 25.25
- -------------------------
<TABLE>
<CAPTION>
Enterprise Value / Equity Value /
------------------------------------------------------ -------------
LTM LTM
LTM LTM LTM EBITDA - Net
Revenue EBITDA EBIT Capex Income
--------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------
Chargeback Operating Parameters (1)(2) $50,564 $ 9,852 $ 6,386 $ 5,245 $ 4,515
---------------------------------------------------------------------
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(3) $12,988 $12,988 $12,988 $12,988
---------------------------------------------------
---------------------------------------------------------------------
Diluted Shares Outstanding(4) 3,899 3,899 3,899 3,899 3,899
---------------------------------------------------------------------
Implied Equity Value Per Share Mean
--------------------------------------------------------------------- -------
High $ 48.57 $ 33.41 $ 35.74 $ 31.56 $ 34.50 $ 36.76
Median 24.97 26.94 24.01 21.49 19.74 23.43
Mean 27.92 27.32 24.93 22.64 21.37 24.84
Low 15.08 18.83 16.30 12.83 14.11 15.43
--------------------------------------------------------------------- -------
</TABLE>
(1) Chargeback financial information for the latest twelve months ended
11/30/98.
(2) Parameters exclude ECS figures.
(3) Based on the quarter ended 11/30/98.
(4) Calculated using the treasury stock method and an offer price of $25.25.
<PAGE> 41
Project Chargeback
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Comparable Transactions Valuation Summary (1)
(000's, except per share data)
Target Target
Acquiror Description
- ---------------------------------------------------------------------------------------
<S> <C>
- ---------------------------------------------------------------------------------------
Trident International Inc (3) Designs, manufactures and markets piezoelectric
impulse ink jet subsystems including printheads
inks and other related components
Illinois Toolworks Inc.
- ---------------------------------------------------------------------------------------
Microdyne Corp Designs products for use in data gathering and
analysis, and provides outsourced technical
services for electronic product companies.
L-3 Communications Holdings
- ---------------------------------------------------------------------------------------
Donnelley Enterprise Solutions Single-source provider of integrated information
management services to professional service
organizations, primarily law firms, investment
Bowne & Company, Inc. banks and accounting firms.
- ---------------------------------------------------------------------------------------
IPC Information Systems Inc. Leader in providing integrated telecommunications
equipment and services that facilitate the execution
of transactions by the financial trading
Cable Systems International community.
- ---------------------------------------------------------------------------------------
Holmes Protection Group Inc. Provider of security alarm monitoring services
and designs, sells, installs and services
Tyco International Ltd. electronic security systems.
- ---------------------------------------------------------------------------------------
</TABLE>
(TABLE CONTINUED)
<PAGE> 42
LTM Valuation Multiplier
(000's, except per share data)
<TABLE>
<CAPTION>
Shares Out.
Announced EV Revenue EBITDA EBIT EBITDA-CAPEX Net Income
Target Effective PP EV/Rev. EV/EBITDA EV/EBIT EV/EBITDA-CAPEX PP/Net Inc.
Acquiror Attitude Price/Share Hist Growth(2) Hist Growth(2) Hist Growth(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Trident International Inc 1/6/99 7.3 $32,832 $11,422 $10,187 $10,325 $7,066
Pending $114,534 3.5x 10.0x 11.2x 11.1x 17.0x
Illinois Toolworks Inc. Friendly $120,421 12.5% 24.2% 29.3%
$16.500
- -----------------------------------------------------------------------------------------------------------------------------------
Microdyne Corp 12/3/98 13.1 $58,310 $7,307 $5,673 $4,305 $4,688
1/8/99 $86,982 1.5x 11.9x 15.3x 20.2x 14.0x
L-3 Communications Holdings Friendly $65,519 36.1% 13.7% 5.4%
$5.000
- -----------------------------------------------------------------------------------------------------------------------------------
Donnelley Enterprise Solutions 5/27/98 5.1 $113,543 $2,558 ($3,964) ($3,520) ($3,282)
7/7/98 $105,915 0.9x 41.4x* NM NA NM
Bowne & Company, Inc. Friendly $106,126 29.6% NM NM
$21.000
- -----------------------------------------------------------------------------------------------------------------------------------
IPC Information Systems Inc. 12/19/97 11.0 $272,927 $28,550 $17,649 $11,785 $7,775
4/30/98 $247,298 0.9x 8.7x 14.0x 21.0x 29.8x
Cable Systems International Friendly $231,634 14.5% NM NM
$21.000
- -----------------------------------------------------------------------------------------------------------------------------------
Holmes Protection Group Inc. 12/28/97 6.9 $62,354 $4,440 ($6,420) ($5,862) ($4,070)
2/19/98 $142,486 2.3x 32.1x* NM NM NM
Tyco International Ltd. Friendly $117,141 NM NM NM
$17.000
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE> 43
Project Chargeback
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Comparable Transactions Valuation Summary (1)
(000's, except per share data)
- ------------------------------------------------------------------------------------
Target Target
Acquiror Description
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
Shared Technologies Fairchild Inc. Provider of shared telecommunication services
and telecommunication system to tenants of
Intermedia Communications Inc. modern, multi-tenant office buildings.
- ------------------------------------------------------------------------------------
DH Technology Inc Leading designer, manufacturer and marketer of
impact transaction printing mechanisms, impact
Axiohm S.A. and thermal transaction printers.
- ------------------------------------------------------------------------------------
Colonial Data Technologies Designs, develops and markets telecommunications
products that support network services being
US Order Inc developed and implemented by
telephone operating companies.
- ------------------------------------------------------------------------------------
</TABLE>
(TABLE CONTINUED)
<PAGE> 44
(000's, except per share data) Shares Out.
- -------------------------------- Announced EV
Target Effective PP
Acquiror Attitude Price/Share
- ------------------------------------------------------------
Shared Technologies Fairchild Inc. 11/20/97 17.2
12/29/97 $513,180
Intermedia Communications Inc. Friendly $257,642
$15.000
- ------------------------------------------------------------
DH Technology Inc 7/15/97 8.5
8/21/97 $172,089
Axiohm S.A. Friendly $213,114
$25.000
- ------------------------------------------------------------
Colonial Data Technologies 8/7/96 15.5
11/8/96 $135,059
US Order Inc Friendly $146,055
$9.437
- ------------------------------------------------------------
(TABLE CONTINUED)
<PAGE> 45
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
LTM Valuation Multiplier
(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> <C>
- -------------------------------------------------------------------------------------------------------------------------
Shared Technologies Fairchild Inc. $188,125 $44,232 $25,933 $32,254 ($6,765)
2.7x 11.6x 19.8x 15.9x 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 8.6x 10.8x 10.9x 19.3x
Axiohm S.A. 21.9% 28.6% 29.0%
- -------------------------------------------------------------------------------------------------------------------------
Colonial Data Technologies $ 78,288 $22,014 $17,053 $19,125 $11,990
1.7x 6.1x 7.9x 7.1x 12.2x
US Order Inc 106.3% 148.7% 203.4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary Statistics
- ---------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Legend
- ------ High 3.5x 11.9x 19.8x 21.0x 29.8x
LTM = Latest Twelve Months Median 1.7x 9.3x 12.6x 13.5x 17.0x
PP = Purchase Price Mean 1.9x 9.5x 13.2x 14.4x 18.5x
EV =Enterprise Value Low 0.9x 6.1x 7.9x 7.1x 12.2x
- --------------------------- ------------------------------------------------------------------------
------------------------------------------------------------------------
Chargeback's Implied Multiple at Offer Price 0.7x 8.7x 13.4x 16.3x 21.8x
------------------------------------------------------------------------
</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.
<PAGE> 46
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
F. Comparable Companies
Premiums Analysis
----------------------------------------------------
<PAGE> 47
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Transactions Premiums Summary Valuation
(Graphic omitted)
Graph comparing the offer price to the range and medium of comparable
transaction premiums one day, one week, and four weeks earlier.
<PAGE> 48
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Transactions Premiums Summary Valuation Matrix
- ------------------------
Offer Price $25.25
- ------------------------
Offer Price as a Premium to
Closing Stock Price
-------------------------------
One One Four
Day Week Weeks
Earlier Earlier Earlier
------- ------- -------
------------------------------
Chargeback Closing Price (1)(2) $20.25 $19.50 $18.63
------------------------------
Comparable Companies Valuation Multiples
---------------------------
High 78.4% 83.3% 83.6%
Median 15.1% 44.1% 33.9%
Mean 26.8% 40.1% 33.3%
Low (14.2%) (5.6%) (27.4%)
---------------------------
Implied Equity Value Per Share Mean
---------------------------- ------
High $36.12 $35.75 $34.20 $35.36
Median $23.31 $28.09 $24.94 $25.45
Mean $25.67 $27.32 $24.82 $25.94
Low $20.25 $19.50 $18.63 $19.46
---------------------------- ------
(1) Source: Bloomberg.
(2) Chargeback closing prices on 2/12/99, 2/8/99 and 1/19/99, respectively.
<PAGE> 49
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Transactions Premiums Summary Valuation Matrix
<TABLE>
<CAPTION>
---------------------------- --------------------------
Closing Price Prior to Offer Premium /
Announcement (Discount)
---------------------------- ------------------------
Effective Announce Target Name Share 1 Day 1 Week 4 Weeks 1 Day 1 Week 4 Weeks
Date Date Acquiror Name Price Earlier Earlier Earlier Earlier Earlier Earlier
---- ---- ------------------------------- ----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pending 01/06/99 Trident International Inc. $16.50 $9.25 $9.00 $9.25 78.4% 83.3% 78.4%
Illinois Toolworks Inc.
01/08/99 12/03/98 Microdyne Corp. $5.00 $4.31 $3.13 $3.47 15.9% 60.0% 44.1%
L-3 Communications Holdings
07/07/98 05/27/97 Donnelley Enterprise Solutions $21.00 $13.06 $13.00 $11.44 60.8% 61.5% 83.6%
Bowne & Company, Inc.
4/30/98 12/19/97 IPC Information Systems Inc. $21.00 $18.38 $16.00 $18.38 14.3% 31.3% 14.3%
Cable Systems International
02/19/98 12/28/97 Holmes Protection Group Inc. $17.00 $18.00 $18.00 $18.50 (5.6%) (5.6%) (8.1%)
Tyco International Ltd.
12/29/97 11/20/97 Shared Technologies Fairchild Inc. $15.00 $14.00 $11.38 $12.13 7.1% 31.9% 23.7%
Intermedia Communications Inc.
08/21/97 7/15/97 DH Technology Inc. $25.00 $15.88 $16.00 $15.88 57.5% 56.3% 57.5%
Axiohm S.A.
11/08/96 08/07/96 Colonial Data Technologies $9.44 $11.00 $9.25 $13.00 (14.2%) 2.0% (27.4%)
US Order Inc.
- ------------------------------------------------------ -------- ---------------------------- ------------------------
2/16/99 Chargeback (1) $25.25 $20.25 $19.50 $18.63 24.7% 29.5% 35.6%
Bedrock
- ------------------------------------------------------ -------- ---------------------------- ------------------------
-----------------------
High 78.4% 83.3% 83.6%
Median 15.1% 44.1% 33.9%
Mean 26.8% 40.1% 33.3%
Low (14.2%) (5.6%) (27.4%)
-----------------------
</TABLE>
Source: Stock prices from Bloomberg.
Summary Statistics Exclude Chargeback.
(1) Chargeback closing prices on 2/12/99, 2/8/99 and 1/19/99, respectively.
<PAGE> 50
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
Appendices
----------------------------------------------------
<PAGE> 51
Project Chargeback
- -------------------------------------------------------------------------------
----------------------------------------------------
A. Comparable Companies
Descriptions
----------------------------------------------------
<PAGE> 52
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Company Descriptions
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.
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.
<PAGE> 53
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Company Descriptions
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.
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.
<PAGE> 54
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Company Descriptions
FLIR Systems, Inc. FLIR Systems, Inc. designs, manufactures, and
markets thermal imaging and broadcast camera
systems worldwide for a wide variety of
applications in the commercial and government
markets. Thermal imaging systems detect infrared
radiation, or heat, emitted directly by all
objects and materials and enable the operator to
see objects in total darkness, in adverse weather
conditions and through obscurants such as smoke
and haze. Government applications include public
safety (law enforcement and drug interdiction,
search and rescue, border patrol and maritime
patrol, and environmental protection) and defense
(surveillance, reconnaissance and navigation
assistance). Commercial applications include
electronic news-gathering, non-destructive testing
and evaluation, research and development,
manufacturing process control, condition
monitoring and image analysis.
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.
<PAGE> 55
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.
<PAGE> 56
Project Chargeback
- -------------------------------------------------------------------------------
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.
<PAGE> 57
Project Chargeback
- -------------------------------------------------------------------------------
Comparable Company Descriptions
Telxon Corporation Telxon Corporation designs, manufactures,
integrates, markets and supports transaction-based
wireless workforce automation systems. The
Company's mobile computing devices and wireless
local area network products are integrated with
its customers' host enterprise computer systems
and third-party wide area networks, enabling
mobile workers to process data on a real-time
basis at the point of transaction. Telxon's
products are sold worldwide for use in key supply
chain vertical markets, including retail,
manufacturing, warehouse/ distribution,
transportation/logistics and route sales.
<PAGE> 58
Project Chargeback
- -------------------------------------------------------------------------------
COMPARABLE COMPANY STATISTICS
<TABLE>
<CAPTION>
LTM FYE Shares
(millions, except per share data) Notes Date Date Out.
- ----------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C>
Billing Concepts Corp. (a) (b) 12/31/98 9/30/98 34.4
Brooktrout Technology, Inc. (c) 12/31/98 12/31/98 10.8
Checkpoint Systems, Inc. (c) 12/31/98 12/31/98 31.2
Digi International Inc. (a)(c)(d)(e) 12/31/98 9/30/98 14.6
FLIR Systems, Inc. (e) (f) (g) 9/30/98 12/31/97 11.9
Kofax Image Products, Inc. (c) 12/31/98 6/30/98 5.3
Omtool, Ltd. (c) (e) (h) 12/31/98 12/31/98 12.5
Peerless Systems Corp. (i) 10/31/98 1/31/98 11.0
PSC Inc. (c) (e) (j) 12/31/98 12/31/98 11.9
Sensormatic Electronics Corp. (c) 12/31/98 6/30/98 74.9
Telxon Corp. (g) (k) (l) 9/30/98 3/31/98 16.1
- ----------------------------------- ------------------------------------------------------
- ----------------------------------- ------------------------------------------------------
Chargeback (Trading Multiples) (m) (n) 11/30/98 2/28/98 3.8
- ----------------------------------- ------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Latest Twelve Month Results
---------------------------------------------------------------------------------
Results
- ----------------------------------- ---------------------------------------------------------------------------------
EBITDA - Net Tangible Total
(millions, except per share data) Revenue EBITDA EBIT CAPEX Income Book Value Debt
- ----------------------------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Billing Concepts Corp. $167.8 $46.0 $38.2 $34.7 $27.9 $88.3 $2.6
Brooktrout Technology, Inc. $100.9 $11.0 $8.0 $6.5 $7.3 $49.4 $0.0
Checkpoint Systems, Inc. $362.4 $55.7 $30.1 $44.5 $17.3 $249.1 $166.0
Digi International Inc. $191.7 $30.2 $21.3 $25.0 $14.7 $63.5 $22.1
FLIR Systems, Inc. $136.1 $24.1 $17.8 $8.7 $7.9 $103.8 $37.9
Kofax Image Products, Inc. $35.7 $6.4 $5.0 $5.3 $3.8 $29.2 $0.0
Omtool, Ltd. $31.1 $3.2 $1.7 $1.8 $1.8 $27.0 $0.0
Peerless Systems Corp. $32.0 $7.6 $6.4 $3.5 $5.3 $38.6 $0.0
PSC Inc. $217.2 $39.6 $26.3 $34.1 $10.5 ($6.9) $93.2
Sensormatic Electronics Corp. $975.4 $127.8 $62.8 $72.9 $20.5 $340.7 $526.2
Telxon Corp. $490.1 $63.5 $38.0 $23.2 $18.8 $122.2 $137.0
- ----------------------------------- ------------------------------------------------------------------------------------
- ----------------------------------- ------------------------------------------------------------------------------------
Chargeback (Trading Multiples) $50.6 $9.9 $6.4 $5.2 $4.5 $29.4 $0.0
- ----------------------------------- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Latest Fiscal Year Results
------------------------------------
Results Per Share Results
------------------------------------ ------------------------
(millions, except per share data) Revenue EBITDA EBIT CY1999 CY2000
- ----------------------------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------- ------------------------------------ ------------------------
Billing Concepts Corp. $160.8 $47.5 $39.0 $0.87 N/A
Brooktrout Technology, Inc. $100.9 $11.0 $8.0 $0.85 $1.07
Checkpoint Systems, Inc. $362.4 $55.7 $30.1 $0.67 $0.85
Digi International Inc. $182.9 $31.9 $24.1 $0.98 N/A
FLIR Systems, Inc. $91.8 $14.4 $11.0 $1.78 N/A
Kofax Image Products, Inc. $33.4 $5.9 $4.4 $0.90 N/A
Omtool, Ltd. $31.1 $3.2 $1.7 $0.19 $0.31
Peerless Systems Corp. $25.4 $6.9 $6.0 $0.53 N/A
PSC Inc. $217.2 $39.6 $26.3 $0.95 $1.13
Sensormatic Electronics Corp. $986.9 $126.3 $62.0 $0.63 $0.93
Telxon Corp. $465.9 $59.5 $34.3 $0.22 N/A
- ----------------------------------- ------------------------------------ ----------------------
- ----------------------------------- ------------------------------------ ----------------------
Chargeback (Trading Multiples) $44.4 $9.1 $5.9 $2.13 $3.29
- ----------------------------------- ------------------------------------ ----------------------
</TABLE>
See explanation of footnotes on the following page.
<PAGE> 59
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 amounts are as of September 30, 1998.
(b) Capital expenditures for the quarter ended December 31, 1998 are estimated
to be the same as for the quarter ended September 30, 1998.
(c) Depreciation, amortization and capital expenditures for the quarter ended
December 31, 1998 are estimated to be the same as the corresponding
amounts for the quarter ended September 30, 1998.
(d) 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.
(e) Interest expense is estimated based information disclosed in reports on
Forms 10-Q and 10-K.
(f) FLIR acquired a private company on 12/1/97. LTM results include the
operating results of those companies from the acquisition date through
9/30/98, but exclude nonrecurring charges of $52.5 million for write-off
of acquired in-process research & development and write-off of duplicative
inventory.
(g) Capital expenditures includes capitalized software costs.
(h) Total debt is as of September 30, 1998.
(i) The three-year CAGR is for the 3.08-year period from the year ended
12/31/94 to the year ended 1/31/98.
(j) Market value of preferred stock is estimated to be its liquidation value.
(k) LTM results exclude nonrecurring charges of $5.5 million for takeover
defenses and transactions with a business partner, and nonrecurring gains
of $0.5 million for other nonoperating income.
(l) LTM results exclude the cumulative effect of an accounting change.
(m) LTM results exclude the operating results from, and gain on sale of, a
division sold on 11/30/98.
(n) CY1999 and CY2000 EPS projections are prepared by management and represent
the fiscal years ending 2/29/00 and 2/28/01, respectively.
<PAGE> 60
Project Chargeback
- -------------------------------------------------------------------------------
---------------------------------------
B. Weighted Average Cost
of Capital
---------------------------------------
<PAGE> 61
Project Chargeback
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CAPITAL STRUCTURE ANALYSIS
(millions)
------------------------------------------------------------------------------------------------------
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. 2.6 348.2 350.7 0.7% 99.3% 0.7% 1.53 1.53
Brooktrout Technology Inc. - 123.0 123.0 0.0% 100.0% 0.0% 1.57 1.57
Checkpoint Systems, Inc. 166.0 294.0 460.0 36.1% 63.9% 56.5% 0.65 0.57
Digi International Inc. 22.1 96.7 118.8 18.6% 81.4% 22.8% 1.33 1.24
FLIR Systems, Inc. 37.9 255.4 293.2 12.9% 87.1% 14.8% 1.17 1.12
Kofax Image Products, Inc. - 46.9 46.9 0.0% 100.0% 0.0% 0.58 0.58
Omtool, Ltd. 0.0 55.3 55.3 0.0% 100.0% 0.0% 1.99 1.99
Peerless Systems Corp. - 105.3 105.3 0.0% 100.0% 0.0% 2.62 2.62
PSC Inc. 93.2 115.6 208.9 44.6% 55.4% 80.6% 0.93 0.80
Sensormatic Electronics
Corp. 526.2 781.9 1,308.1 40.2% 59.8% 67.3% 1.08 0.94
Telxon Corp. 129.2 151.2 280.4 46.1% 53.9% 85.5% 1.14 0.97
- ----------------------------------------------------------------------------------------------------------------------------------
Mean $88.8 $215.8 $304.6 18.1% 81.9% 29.8% 1.33 1.27
Median $22.1 $123.0 $208.9 12.9% 87.1% 14.8% 1.17 1.12
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
- --------------------------------------------------------------------------------
(1) Market value of equity as of 02/12/99.
(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)]
<PAGE> 62
Project Chargeback
- -------------------------------------------------------------------------------
WACC Calculation
<TABLE>
<S> <C> <C> <C> <C>
WACC Calculation Inputs: Selected Unlevered Beta (Mean Value) 1.27
% Equity (%E) 81.88% Risk-Free Rate (Rf) (1) 5.58%
% Debt (%D) 18.12% Risk Premium (Rm-Rf) (2) 7.80%
Debt/Equity 22.13% Tax Rate 38.00%
Small Stock Risk Premium (SSR) (3) 3.30%
Beta (Levered)
-------
BL=Bu*[1+((1-t)*D/E)] 1.44 Cost of Debt
-------
Pre-Tax Cost of Debt (Kd) (4) 8.00%
Cost of Equity
------- --------------------------------------------------
Ke=Rf+BL*(Rm-Rf)+SSR 20.10% WACC=[((Kd)*(%D))*(1-t)]+((Ke*(%E)) 17.36%
------- --------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 20-year Treasury as of 2/12/99.
(2) Ibbotson Associates. Stock Bonds and Inflation, 1997 Yearbook. Large
company common stocks total returns minus long term government bond total
returns.
(3) Ibbotson Associates. Stock Bonds and Inflation, 1997 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 2/12/99.
<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
(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 .
(4) Proposed maximum aggregate value of transaction:
$89,077,045.
(5) Total fee paid:
$17,815.40
/ / 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
April __, 1999
Dear Shareholders:
You are cordially invited to attend a special meeting of shareholders
of Equitrac Corporation to be held on May __, 1999 at ____ local time at
_______________.
At this special meeting, you will be asked to consider and vote to
approve the 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 $25.25 in cash for each of their shares of common stock.
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. 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.
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 February 16, 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 $25.25 per share to 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.
<PAGE> 3
THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS BELIEVE THAT THE TERMS
OF THE 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
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER.
The accompanying proxy statement explains the 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 MAY __, 1999
---------------------
A special meeting of shareholders of Equitrac Corporation, a Florida
corporation, will be held on May __, 1999 at _________, local time, at
_____________, for the following purposes:
1. To consider and vote upon a proposal to approve the Recapitalization
Agreement and Plan of Merger (the "Merger Agreement") dated February 17, 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:
o 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 $30 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
o Merger Sub will be merged with and into Equitrac pursuant to
which: (1) the holders of Equitrac common stock will be entitled
to receive $25.25 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.
Shareholders of record of Equitrac common stock at the close of
business on March 31, 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
<PAGE> 5
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
_____ __, 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 MARCH 18, 1999
EQUITRAC CORPORATION
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY __, 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 May __, 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 __________, 1999.
At the special meeting, holders of Equitrac common stock will be asked
to consider and vote upon a proposal to approve the Recapitalization Agreement
and Plan of Merger (the "Merger Agreement") dated February 17, 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:
o 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 $30 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
o 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 $25.25 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.
<PAGE> 7
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. 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 by Cornerstone 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
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<S> <C>
Questions and Answers about the Recapitalization and Merger..........................i
Who Can Help Answer Your Questions...................................................v
Cautionary Statement Concerning Forward-Looking Information.........................vi
Summary..............................................................................1
The Companies.....................................................................1
The Recapitalization and Merger...................................................2
The Special Meeting...............................................................3
Record Date; Voting Power; Quorum.................................................3
Vote Required; Security Ownership of Management...................................3
Voting Agreement; Irrevocable Proxy...............................................4
Recommendations of the Board of Directors and Special Committee...................4
Opinion of Financial Advisor......................................................5
Conflicts of Interest.............................................................5
Federal Income Tax Consequences...................................................6
Accounting Treatment..............................................................7
Dissenters'Appraisal Rights.......................................................7
Financing of the Merger...........................................................7
The Merger Agreement..............................................................8
Regulatory Approvals.............................................................10
Market Prices for Common Stock and Dividends.....................................10
Summary Financial Information.......................................................12
Certain Projections of Future Operating Results..................................13
Special Factors.....................................................................15
Background of the Merger.........................................................15
Recommendations of the Special Committee and Board of Directors..................20
Equity Investors'Purpose and Reasons for the Recapitalization and Merger.........23
Opinion of Financial Advisor.....................................................23
Conflicts of Interest............................................................28
The Special Meeting.................................................................31
Date, Time and Place.............................................................31
Record Date; Voting Power; Quorum................................................31
Vote Required; Security Ownership of Management..................................32
Voting Agreement; Irrevocable Proxy..............................................32
Proxies..........................................................................33
Solicitation of Proxies..........................................................33
The Merger And Recapitalization.....................................................33
Financing........................................................................35
Federal Income Tax Consequences..................................................37
Accounting Treatment.............................................................38
Dissenters'Appraisal Rights......................................................39
Delisting and Deregistration of Common Stock.....................................39
Regulatory Approvals.............................................................39
The Merger Agreement................................................................39
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Page
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<S> <C>
Overview.........................................................................39
Exchange of Certificates Representing Common Stock...............................40
Treatment of Outstanding Options.................................................41
Representations and Warranties...................................................41
Cornerstone's Guarantee..........................................................41
Conduct of Business Pending the Merger...........................................42
No Solicitation..................................................................42
Indemnification..................................................................44
Directors'and Officers'Liability Insurance.......................................44
Conditions to the Merger.........................................................44
Termination of Merger Agreement..................................................46
Fees and Expenses................................................................46
Estimated Fees and Expenses of the Merger........................................47
Certain Information Concerning Merger Sub And The Equity Investors..................47
Beneficial Ownership of Common Stock................................................50
Independent Public Accountants......................................................51
Documents Incorporated By Reference.................................................51
Available Information...............................................................52
APPENDIX A - Recapitalization Agreement and Plan of Merger
APPENDIX B- Opinion of Prudential Securities Incorporated
APPENDIX C - Amendment to Equitrac's Articles of Incorporation
APPENDIX D - Transactions involving Equitrac's Common Stock effected by members
of the Management Group since March 1, 1997
</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 $30 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 $25.25 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: 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:
THE MANAGEMENT GROUP
John T. Kane
George P. Wilson
Scott J. Modist
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."
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<PAGE> 11
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 $25.25 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 $2,525 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 Merger Agreement.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The special meeting will take place on May ___, 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: In the opinion of the special committee and the Board of Directors, 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 ___through
___.
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 May 1999.
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<PAGE> 12
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 __ through __.
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 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.
iii
<PAGE> 13
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.
iv
<PAGE> 14
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
v
<PAGE> 15
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.
vi
<PAGE> 16
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 "WHERE YOU CAN FIND MORE INFORMATION" ON
PAGE ___. 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 TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF THE
TOPICS IN THIS SUMMARY.
THE COMPANIES (PAGE ___)
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 ___. For further information about the Equity Investors,
see "Certain Information concerning Merger Sub and the Equity Investors"
beginning on page ____.
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<PAGE> 17
THE RECAPITALIZATION AND MERGER (PAGE__)
MECHANICS OF THE RECAPITALIZATION. In the Recapitalization:
o Equitrac will amend its Articles of Incorporation to create and
authorize the issuance of preferred stock; and
o the Cornerstone Group will make an approximately $30 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:
o Merger Sub will be merged into Equitrac with Equitrac continuing as the
surviving corporation (the "Surviving Corporation");
o each share of Equitrac's common stock will be converted into the right
to receive $25.25 in cash, without interest; and
o 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:
2
<PAGE> 18
o the entire equity interest in Equitrac will be owned by the Equity
Investors (consisting of the Cornerstone Group and the Management
Group);
o 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.;
o Equitrac will incur significant amounts of indebtedness;
o 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
o 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 __)
The special meeting will be held on ____ ___, 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 ___)
Shareholders of record of Equitrac common stock at the close of
business on March 31, 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 (PAGE __)
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
3
<PAGE> 19
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, _______ shares of Equitrac
common stock or ____ % of the shares of Equitrac common stock then outstanding.
Of such shares, ______ 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.
For a description of the voting agreement and irrevocable proxy, see "--Voting
Agreement; Irrevocable Proxy on page ____ , and "The Special Meeting--Voting
Agreement; Irrevocable Proxy" on page ____. 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 __)
Messrs. Kane and Wilson have entered into a Voting Agreement (the
"Voting Agreement") dated as of February 17, 1999, 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 BOARD OF DIRECTORS AND SPECIAL COMMITTEE (PAGE __)
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 special committee is composed
of Peter Marx and Marc Watson, both of whom are independent directors.
The special committee and the Board of Directors 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
4
<PAGE> 20
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 __)
Prudential Securities Incorporated has delivered its written opinion to
the special committee to the effect that, as of February 16, 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 ___)
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 ___)
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 8 members of Equitrac's management, John T. Kane, Chairman of the
Board, George P. Wilson, President and Chief Executive Officer, Scott J. Modist,
Senior Vice President-Finance and Chief Financial Officer, Chris Rickborn,
Senior Vice President-Marketing and Technology, Steve Smith, Vice
President-Business Technology Division, Patrick J. Raftery, Vice
President-Sales, 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 $9 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
cash merger consideration in the aggregate amount of approximately $26 million.
5
<PAGE> 21
Following the Merger, it is expected that the Management Group will
own, in the aggregate, Converted Shares representing approximately 22% 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 ___)
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 (PAGE ___)
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 $25.25 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 ___)
The Merger Agreement provides for indemnification and liability
insurance arrangements for the current officers and directors of Equitrac.
FEDERAL INCOME TAX CONSEQUENCES (PAGE ___)
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 common stock. The receipt of cash by a shareholder in
exchange for his or her
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<PAGE> 22
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 $25.25 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
___. 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 ___)
Equitrac expects that the Merger will be treated as a recapitalization
for accounting purposes because it will not constitute a change of control under
generally accepted accounting principles. 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 ___)
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 ___)
The total amount of funds necessary to fund the Merger and related
transactions is expected to be approximately $103 million. These funds are
expected to come from the following sources:
o an equity investment made by the Cornerstone Group of
approximately $30 million;
o an equity investment on the part of the Management Group of
approximately $9 million, consisting of their Converted Shares
(valued at $25.25 per share);
o cash of Equitrac on hand at the Effective Time of approximately
$14 million; and
o borrowings by the Surviving Corporation totaling approximately $50
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.
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<PAGE> 23
THE MERGER AGREEMENT (PAGE ___)
CONDITIONS OF THE MERGER (PAGE ___)
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:
o approval and adoption of the Merger Agreement by the holders of a
majority of the shares of Equitrac common stock;
o receipt by the Surviving Corporation of sufficient financing
pursuant to Cornerstone's existing financing commitments from
Fleet and Mainsail;
o absence of a material adverse changes in the business or financial
condition of Equitrac; and
o the termination or expiration of any applicable waiting period
under federal antitrust laws relating to the Merger.
NO SOLICITATION (PAGE ___)
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:
o 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
o 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.
8
<PAGE> 24
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 $2.5 million plus an amount equal to Merger
Sub's out-of-pocket expenses and costs.
CORNERSTONE GUARANTEE (PAGE ___)
Cornerstone has guaranteed to Equitrac the performance by Merger Sub of
its obligations under the Merger Agreement subject to a maximum liability of $30
million.
TERMINATION (PAGE ___)
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:
o the mutual written consent of Equitrac and Merger Sub;
o either Merger Sub or Equitrac if the Merger has not been
consummated by August 31, 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 August 31, 1999;
o 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;
o Equitrac or Merger Sub if the Equitrac shareholders do not approve
the Merger Agreement at the special meeting;
o 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
o Equitrac if it enters into a definitive agreement for a Competing
Transaction after satisfying the conditions described above under
"No Solicitation".
9
<PAGE> 25
FEES AND EXPENSES (PAGE __)
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 $2.5 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:
o the Merger is not completed by August 31, 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;
o the Merger Agreement is not approved by Equitrac's shareholders;
or
o 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 material representation, warranty or agreement under the
Merger Agreement and such breach is not cured within 30 days of notice.
REGULATORY APPROVALS (PAGE __)
Equitrac is not aware of any material governmental or regulatory
approvals, other than federal antitrust clearance, which are required for
consummation of the Transactions.
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:
Fiscal Year Ended February 28, 1998 High Low
- ----------------------------------- ---- ---
First Quarter $14.63 $11.50
Second Quarter $16.50 $12.88
Third Quarter $17.75 $14.38
Fourth Quarter $19.63 $16.63
10
<PAGE> 26
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 (through March __, 1999)
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 March __, 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.
During fiscal 1998 and the first 9 months of 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, 1998
and for the nine months ended November 30, 1997 and November 30, 1998. 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. Selected financial information for Equitrac as of and
for the nine months ended November 30, 1997 and November 30, 1998 has been
derived from the unaudited historical financial statements of Equitrac and, in
the opinion of Equitrac's management, includes all adjustments (consisting only
of normal recurring adjustments) that are considered necessary for a fair
presentation of the operating results for such interim periods. Results for the
interim periods are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
----------------------------------------------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1994 1995 1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 29,122 $ 31,224 $ 33,718 $ 41,901 $ 49,784 $ 36,543 $ 42,713
Operating income 1,897 1,754 2,805 3,729 4,487 3,212 4,674
Net income 1,357 1,287 1,882 2,614 3,158 2,255 3,775
Earnings per common share:
Basic $ 0.37 $ 0.35 $ 0.54 $ 0.77 $ 0.91 $ 0.66 $ 1.07
Diluted 0.36 0.34 0.53 0.73 0.85 0.62 1.00
Number of shares used in per
share computations:
Basic 3,670 3,694 3,481 3,412 3,485 3,397 3,514
Diluted 3,785 3,777 3,549 3,583 3,730 3,650 3,785
Balance Sheet Data (End of
Year):
Cash, cash equivalents and
investments $ 7,182 $ 7,383 $ 10,423 $ 10,902 $ 13,524 $ 11,736 $ 12,988
Working capital 11,873 12,343 12,366 13,159 15,413 14,162 16,827
Total assets 22,848 25,436 25,646 30,682 35,114 33,011 40,252
Total current liabilities 2,137 3,535 3,671 5,907 6,935 6,210 8,386
Long-term debt, net of
current portion -- -- -- -- -- -- --
Total stockholders' equity $ 20,273 $ 21,491 $ 21,824 $ 24,775 $ 28,179 $ 26,801 $ 31,866
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
FEBRUARY 28, FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Book value per common share $7.14 $8.04 $7.69 $9.02
Common shares outstanding 3,469,500 3,506,300 3,487,300 3,533,300
</TABLE>
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<PAGE> 28
CERTAIN PROJECTIONS OF FUTURE OPERATING RESULTS
In connection with the 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. 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 and other potential investors in
connection with their due diligence investigation of Equitrac. 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. The material assumptions underlying the projections are
as follows:
o For Professional Market cost recovery products (1) an increase in
revenue of approximately 7.5% per year and (2) the cost of system
sales and the cost of service and support as a percentage of the
related revenue decreasing slightly after the fiscal year ending
February 28, 2000.
o For the newer Business Technology Commercial Market products (1)
digital print tracking products sales of approximately $2.2 million,
$4.5 million, $6.0 million and $ 7.5 million for the fiscal years
ending February 28, 2000, 2001, 2002 and 2003, respectively, (2) OEM
Sales of Pitney Bowes AccuTrac Mail Accounting products of
approximately $3.5 million, $4.5 million, $5.0 million and $ 5.6
million for the fiscal years ending February 28, 2000, 2001, 2002,
and 2003, respectively and (3) sales of TelemeTrac contributing
approximately $1.4 million, $3.4 million, $4.5 million and $6.0
million to operating income for the fiscal years ending February 28,
2000, 2001, 2002, and 2003, respectively.
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 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 ____.
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<PAGE> 29
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.
14
<PAGE> 30
Equitrac provided to Cornerstone the following projections:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
Total revenues $55,991 $64,054 $77,036 $86,684 $96,668
Operating income 6,672 12,146 18,844 24,143 29,640
Net income 5,121 8,164 12,598 16,320 20,304
Earnings per share:
Basic 1.46 2.31 3.56 4.61 5.74
Diluted 1.34 2.13 3.29 4.26 5.30
</TABLE>
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 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
15
<PAGE> 31
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 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. Messrs. Peter
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<PAGE> 32
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, each of the potential
financial buyers was provided a draft of a merger agreement, prepared by
Equitrac's counsel, Greenberg Traurig, containing the general terms and
conditions under which the company would be willing to be acquired by them.
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
17
<PAGE> 33
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 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.
18
<PAGE> 34
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 Merger Agreement and the Transactions are fair
to and in the best interest of Equitrac and its unaffiliated shareholders, and
recommended that the Board of Directors approve the 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 Merger Agreement and the Transactions. After
discussing the recommendation of the special committee, the Board determined
that the Merger Agreement and the Transactions are fair and in the best interest
of Equitrac and its unaffiliated shareholders, and unanimously adopted and
approved the Merger Agreement and the Transactions. Because of their interests
in the Transactions, Messrs. Kane and Wilson abstained from the vote on the
Merger Agreement.
A more complete description of the factors considered by the special
committee is set forth under the caption "Recommendations of the special
committee and Board of Directors" on pages ___ through ___.
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<PAGE> 35
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
On February 16, 1999, the special committee unanimously determined that
the 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 and adopt the 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 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, 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 recommendation, 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 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 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 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' 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 carefully in
its entirety;
20
<PAGE> 36
(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 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 Merger Agreement
in 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 Merger Agreement and structure of the Recapitalization and the
Merger.
In view of the various factors considered by the special committee in
connection with its evaluation of the Merger Agreement and the cash merger
consideration, 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 above paragraph (7), 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.
The special committee believes that 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 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
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<PAGE> 37
and conditions of the 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) 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.
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) the special committee and Board were represented by Greenberg
Traurig, Equitrac's outside legal counsel, whereas Messrs. Kane and Wilson
retained and were represented by separate legal counsel; (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 $25.25 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. Based on the factors set forth above, Equitrac
believes that the consideration 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 consideration 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
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<PAGE> 38
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 Agreement were in each case conducted on an arm's-length basis. 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 cash merger
consideration 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 cash merger consideration represented an approximately 35%
premium over the average closing price during the 120 business days prior to
February 16, 1999, 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 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 February 16, 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 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 February 16,
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
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<PAGE> 39
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 February 15, 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 and 1998, 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. 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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<PAGE> 40
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 February 16, 1999 in
connection with the delivery of the Prudential Securities Opinion.
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<PAGE> 41
DISCOUNTED CASH FLOW ANALYSIS. Prudential Securities considered the
results of a discounted cash flow analysis of Equitrac. Prudential Securities
calculated the net present value of the Company's projected five-year stream of
unlevered free cash flows and projected terminal value multiple of 2003 earnings
before interest, taxes, depreciation and amortization ("EBITDA"), based on the
financial projections provided to Prudential Securities by the Company.
Prudential Securities applied discount rates of 15.9%, 17.4% and 18.9% and
terminal value multiples of 6.0x, 7.5x and 9.0x 2003 EBITDA. This analysis
resulted in a range of implied share prices of $22.46 to $30.48.
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:
o 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
o current equity value as a multiple of: LTM net income, projected
earnings per share for the fiscal year ending February 29, 2000
("1999 EPS") and projected earnings per share for the fiscal year
ending February 28, 2001 ("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., Digi International Inc.,
FLIR Systems, Inc., Kofax Image Products, Inc., Omtool, Ltd., Peerless Systems
Corp., PSC Inc., Sensormatic Electronics Corp. and Telxon Corp.
The comparable companies were found to have a range of enterprise value
as a multiple of LTM Revenues of 0.5x to 2.4x; a range of enterprise value as a
multiple of LTM EBITDA of 3.6x to 12.1x; a range of enterprise value as a
multiple of LTM EBIT of 4.7x to 20.8x; a range of enterprise value as a multiple
of LTM EBITDA-Capex of 4.7x to 20.8x; a range of equity value as a multiple of
LTM net income of 6.6x to 38.2x; a range of equity value as a multiple of 1999
EPS of 6.7x to 22.7x; a range of equity value as a multiple of 2000 EPS of 7.6x
to 13.9x. Applying such multiples to Equitrac's LTM revenues, LTM EBITDA, LTM
EBIT, LTM EBITDA-Capex, LTM net income, 1999 EPS and 2000 EPS resulted in an
implied range of equity value per share of $7.61 to $48.41.
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 LTM revenues, LTM EBITDA, LTM EBIT and LTM
EBITDA-Capex and the multiple of the acquired
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<PAGE> 42
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, (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, (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 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 for the equity value per share of
$12.83 to $48.57.
COMPARABLE TRANSACTIONS PREMIUMS ANALYSIS. Prudential Securities also
analyzed the consideration paid in the comparable transactions as a premium to
the closing stock price for the acquired company one day, one week and four
weeks prior to the announcement of the comparable transaction. In the comparable
transactions, the consideration paid for the acquired company represent a
premium of -14.2% to 78.4% over the closing stock price for the acquired company
one day prior to announcement of the transaction, -5.6% to 83.3% over the
closing stock price for the acquired company one week prior to the announcement
of the transaction and -27.4% to 83.6% percent over the closing stock price for
the acquired company four weeks prior to the announcement of the transaction.
Applying such premiums to Equitrac's closing stock prices one day, one week and
four weeks prior to February 15, 1999 (February 12, 1999, February 8, 1999 and
January 19, 1999, respectively) resulted in an implied range of share prices of
$18.63 to $36.12.
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 upon the delivery of the Prudential
Securities opinion. An additional fee of $1,462,500 will
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<PAGE> 43
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 8
members of Equitrac's management, including John T. Kane, Chairman of the Board,
George P. Wilson, President and Chief Executive Officer, Scott J. Modist, Senior
Vice President-Finance and Chief Financial Officer, Chris Rickborn, Senior Vice
President-Marketing and Technology, Steve Smith, Vice President-Business and
Technology, Patrick J. Raftery, Vice President-Sales, 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 $9 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 $26
million. The amount to be invested by and the amount of cash to be received by
each member of the Management Group is set forth below:
AMOUNT AMOUNT OF
NAME INVESTED ($) CASH ($)
---- ------------ --------
John T. Kane 4,040,000 15,049,488
George P. Wilson 3,408,750 10,655,079
Scott J. Modist 325,343 108,457
Chris Rickborn 300,138 127,238
Steve Smith 279,073 93,032
Patrick J. Raftery 478,456 159,489
Cid Yousefi 240,938 237,350
John P. Jones 202,600 --
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As of the record date for the special meeting, the Management Group
owned an aggregate of approximately 1,197,664 shares of Equitrac's common stock
and held options to purchase an aggregate of 265,432 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 $50 million of indebtedness, it is expected that the Management
Group will own, in the aggregate, Converted Shares representing approximately
22% 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.
CERTAIN ARRANGEMENTS WITH THE EQUITY INVESTORS. The Cornerstone Group
will receive shares of common stock and preferred stock representing
approximately 71% of the Surviving Corporation's common stock outstanding
immediately after the Merger on a fully-diluted basis for an aggregate
consideration of approximately $30 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> 45
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 $25.25 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 February 17, 1999, there were options outstanding to
purchase an aggregate of 618,000 shares of Equitrac's common stock at a weighted
average exercise price of $10.96 per share.
The following table sets forth information as to the options
outstanding on February 17, 1999, for which cash payment will be received upon
consummation of the Merger, and the proceeds expected to be received upon
termination of such options by the directors and executive officers of Equitrac:
<TABLE>
<CAPTION>
NUMBER CASH
NAME OF OPTIONS PAYMENT ($)
---- ---------- -----------
<S> <C> <C>
John T. Kane.................................................. -- --
George P. Wilson.............................................. -- --
Jim Courbier.................................................. 5,000 73,875
Peter Marx.................................................... 15,000 256,375
Marc Watson................................................... 33,000 731,175
Scott J. Modist............................................... 14,710 103,408
Chris Rickborn................................................ 13,650 89,363
Steve Smith................................................... 1,274 29,907
Patrick J. Raftery ........................................... 6,948 114,039
Cid Yousefi................................................... -- --
John P. Jones................................................. -- --
All directors and executive officers as a group
(11 persons)................................................ 89,582 1,398,142
</TABLE>
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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 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 February 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 $13,337 for Mr.
Marx and $1,500 for Mr. Watson.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will be held on __________, 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 March 31, 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.
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<PAGE> 47
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 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, _______ shares of Equitrac
common stock or ____ % of the votes represented by the shares of Equitrac common
stock then outstanding. Of such shares, ______ 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. 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 ___.
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.
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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.
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 MERGER AND RECAPITALIZATION
MECHANICS OF THE RECAPITALIZATION. In the Recapitalization:
o Equitrac will amend its Articles of Incorporation to create and
authorize the issuance of preferred stock; and
o the Cornerstone Group will make an approximately $30 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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MECHANICS OF THE MERGER. In the Merger:
o Merger Sub will be merged into Equitrac, and Equitrac will be the
Surviving Corporation;
o each share of Equitrac's common stock will be converted into the
right to receive $25.25 in cash, without interest; and
o 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.
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CONSEQUENCES OF THE RECAPITALIZATION AND MERGER. As a result of the
Recapitalization and Merger:
o the entire equity interest in Equitrac will be owned by the Equity
Investors (consisting of the Cornerstone Group and the Management
Group);
o 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;
o Equitrac will incur significant amounts of indebtedness;
o 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;
o 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;
o 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
o 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 $103 million. These funds are
expected to come from the following sources:
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o an equity investment made by the Cornerstone Group of
approximately $30 million;
o an equity investment on the part of the Management Group of
approximately $9 million, consisting of the Converted Shares
(valued at $25.25 per share);
o cash of Equitrac on hand at the Effective Time estimated to be $14
million; and
o borrowings by Equitrac totaling approximately $50 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 $50 million. The Senior Facility
will be comprised of (i) a $35 million senior term loan maturing May 31, 2005
and (ii) a $15 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 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 $10.0 million
aggregate
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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 6.5% 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 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
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merger consideration pursuant to the Merger. The amount of gain or loss
recognized on a share will be equal to the difference between $25.25 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 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 because it will not constitute a change
of control under generally accepted accounting principles. 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.
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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.
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 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:
o Equitrac will amend its Articles of Incorporation to create and
authorize the issuance of preferred stock; and
o the Cornerstone Group will make an approximately $30 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:
o Merger Sub will be merged into Equitrac, and Equitrac will be the
Surviving Corporation upon completion of the Merger; and
o each share of Equitrac's common stock will be converted into the
right to receive $25.25 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.
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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 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.
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TREATMENT OF OUTSTANDING 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 $25.25 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 February 17, 1999, there were options outstanding to
purchase an aggregate of 618,000 shares of Equitrac's common stock at a weighted
average exercise price of $10.96 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 ____.
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 November 30,
1998, 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.
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 $30 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
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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 $30
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:
o declare or pay any dividends on or make any other distributions in
respect of any of its capital stock;
o 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;
o 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
o 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 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
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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 Executive Shareholders) 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).
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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 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:
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o 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;
o the waiting period under federal antitrust laws applicable to the
Merger shall have expired or terminated;
o 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
o 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:
o 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;
o 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;
o 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
o 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.
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<PAGE> 61
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:
o the mutual written consent of Equitrac and Merger Sub;
o either Merger Sub or Equitrac if the Merger has not been
consummated by August 31, 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 August 31, 1999;
o 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;
o Equitrac or Merger Sub if the Equitrac shareholders do not approve
the Merger Agreement at the special meeting;
o 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
o 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 $2.5 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 termination fee of $2.5 million plus an
amount equal to Merger Sub's costs and expenses if Equitrac approves, enters
into, or consummates a Competing
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<PAGE> 62
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 August 31, 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:
AMOUNT
DESCRIPTION (IN MILLIONS)
----------- ------------
Advisory fees and expenses(1)............................. $____________
Debt financing fees and expenses(2).......................
Legal fees and expenses(3)................................
Paying Agent fees and expenses............................
Transaction fees and expenses.............................
Accounting fees and expenses..............................
Proxy solicitation fees and expenses......................
Securities and Exchange Commission filing fee.............
Printing and mailing costs................................
Miscellaneous expenses....................................
Total..................................................... $ [_____]
(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
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<PAGE> 63
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.
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 8 members of management, including Messrs. Kane, Wilson , Modist,
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 Managment 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."
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<PAGE> 64
Subsequent to the consummation of the Merger, it is anticipated that
the directors and executive officers of the Surviving Corporation will be as
follows:
NAME POSITION
- ---- --------
George P. Wilson President and Chief Executive
Officer
Scott J. Modist Senior Vice President - Finance and
Chief Financial Officer
Chris Rickborn Senior Vice President - Marketing
and Technology
Patrick J. Raftery Vice President - Sales, 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
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.
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<PAGE> 65
Mr. Larson is a 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.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of Equitrac's common stock as of February 28, 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 734,416(1)(3) 20.3
George P. Wilson 605,780(2)(3) 16.7
Fidelity Lowe-Priced Stock Fund 350,000(4) 9.9
Safeco Corporation 313,500(4) 8.9
Peak Investment Limited Partnership 214,900(4) 6.1
Laifer Capital Management, Inc. 206,200(4) 5.8
Marc M. Watson 36,000(3) 1.0
James F. Courbier 13,000(3) *
Peter Marx 16,000(3) *
Scott J. Modist 19,200(3) *
Patrick J. Raftery 40,000(3) 1.1
John P. Jones 10,400(3) *
All directors and executive officers 39.6
as a group (11 persons) 1,526,596(3)
</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.
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<PAGE> 66
(3) Includes shares of Common Stock subject to stock options exercisable as of
February 28, 1999 or within 60 days thereof in the following amounts: John
T. Kane (81,666), George P. Wilson (81,666), James F. Courbier (5,000),
Marc M. Watson (33,000), Peter Marx (15,000), Scott J. Modist (19,000),
Patrick J. Raftery (38,200), John P. Jones (5,000), and all directors and
executive officers as a group (318,432).
(4) Based solely upon reports of beneficial ownership filed by the named person
with the Commission.
INDEPENDENT PUBLIC ACCOUNTANTS
Equitrac's consolidated balance sheet as of February 28, 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended February 28, 1998, 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 each of the years in the two year period 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:
o Annual Report on Form 10-K for the year ended February 28, 1998;
o Quarterly Reports on Form 10-Q for the quarterly periods ended May
31, 1998, August 31, 1998 and November 30, 1998; and
o Current Report on Form 8-K, dated February 17, 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
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<PAGE> 67
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 _____________, 1999.
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.
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APPENDIX A
- --------------------------------------------------------------------------------
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
AMONG
CHARGEBACK ACQUISITION CORP.
SHAREHOLDERS
AND
EQUITRAC CORPORATION
- --------------------------------------------------------------------------------
February 17, 1999
<PAGE> 69
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I The Recapitalization and the Merger............................................................... A-4
SECTION 1.1 Issuance of Preference Stock............................................................... A-4
SECTION 1.2 Debt Financing............................................................................. A-5
SECTION 1.3 The Merger;................................................................................ A-5
SECTION 1.4 Effective Time; Closing.................................................................... A-5
SECTION 1.5 Effect of the Merger....................................................................... A-5
SECTION 1.6 Articles of Incorporation; By-Laws......................................................... A-5
SECTION 1.7 Directors and Officers..................................................................... A-6
SECTION 1.8 Additional Actions......................................................................... A-6
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-8
SECTION 2.3 Company Stock Options; Plans............................................................... A-11
ARTICLE III Representations and Warranties of the Company................................................... A-12
SECTION 3.1 Organization and Qualification; Subsidiaries............................................... A-12
SECTION 3.2 Articles of Incorporation and By-Laws...................................................... A-13
SECTION 3.3 Capitalization............................................................................. A-13
SECTION 3.4 Authority Relative to this Agreement....................................................... A-13
SECTION 3.5 No Conflict; Required Filings and Consents................................................. A-14
SECTION 3.6 SEC Filings; Financial Statements; Undisclosed Liabilities................................. A-15
SECTION 3.7 Absence of Certain Changes or Events....................................................... A-16
SECTION 3.8 Absence of Litigation...................................................................... A-18
SECTION 3.9 Stockholder Vote Required.................................................................. A-18
SECTION 3.10 Opinion of Financial Advisor............................................................... A-18
SECTION 3.11 Brokers.................................................................................... A-18
SECTION 3.12 Company Action; State Takeover Statutes.................................................... A-18
SECTION 3.13 Information Supplied....................................................................... A-19
SECTION 3.14 Environmental Matters...................................................................... A-19
SECTION 3.15 Real Property.............................................................................. A-19
SECTION 3.16 Personal Property.......................................................................... A-20
SECTION 3.17 Contracts.................................................................................. A-21
SECTION 3.18 Insurance Policies......................................................................... A-22
SECTION 3.19 Compliance with Laws....................................................................... A-22
SECTION 3.20 Tax Matters................................................................................ A-22
SECTION 3.21 Employment Agreements...................................................................... A-24
SECTION 3.22 Change of Control Provisions............................................................... A-24
SECTION 3.23 Employees.................................................................................. A-24
SECTION 3.24 Permits.................................................................................... A-24
SECTION 3.25 Employee Benefit Plans..................................................................... A-25
SECTION 3.26 Intellectual Property Rights............................................................... A-26
SECTION 3.27 Year 2000.................................................................................. A-27
SECTION 3.28 Appraisal Rights........................................................................... A-27
ARTICLE IV Representations and Warranties of Merger Sub..................................................... A-27
SECTION 4.1 Organization and Qualification; Subsidiaries................................................ A-27
SECTION 4.2 Charter Documents and By-laws............................................................... A-28
SECTION 4.3 Authority Relative to this Agreement........................................................ A-28
SECTION 4.4 No Conflict; Required Filings and Consents.................................................. A-28
SECTION 4.5 Interim Operations of Merger Sub............................................................ A-29
SECTION 4.6 Information Supplied........................................................................ A-29
SECTION 4.7 Brokers..................................................................................... A-29
SECTION 4.8 Financing................................................................................... A-29
SECTION 4.9 Litigation.................................................................................. A-30
SECTION 4.10 Capitalization.............................................................................. A-30
ARTICLE V Representations and Warranties of the Shareholders................................................ A-30
SECTION 5.1 No Conflict; Required Filings and Consents.................................................. A-30
SECTION 5.2 Ownership of Owned Shares................................................................... A-31
ARTICLE VI Conduct of Business Pending the Merger........................................................... A-31
SECTION 6.1 Conduct of Business by the Company Pending the Merger....................................... A-31
ARTICLE VII Additional Agreements........................................................................... A-34
</TABLE>
A-1
<PAGE> 70
<TABLE>
<CAPTION>
<S> <C>
SECTION 7.1 Shareholders' Meeting................................................ A-34
SECTION 7.2 Preparation of Proxy Statement....................................... A-34
SECTION 7.3 Appropriate Action; Consents; Filings; Further Assurances............ A-34
SECTION 7.4 Access to Information; Confidentiality............................... A-35
SECTION 7.5 No Solicitation...................................................... A-37
SECTION 7.6 Indemnification and Insurance........................................ A-38
SECTION 7.7 Notification of Certain Matters...................................... A-40
SECTION 7.8 Public Announcements................................................. A-42
SECTION 7.9 Employment Agreements................................................ A-43
SECTION 7.10 Assistance with Financing............................................ A-44
SECTION 7.11 Stockholder Approval................................................. A-44
SECTION 7.12 Exchange Act and NASDAQ Filings...................................... A-44
SECTION 7.13 Noncompetition; Nonsolicitation...................................... A-44
SECTION 7.14 Representations...................................................... A-45
SECTION 7.15 Voting Agreement..................................................... A-45
SECTION 7.16 Guarantee............................................................ A-45
ARTICLE VIII Conditions to the Merger................................................. A-46
SECTION 8.1 Conditions to the Obligations of Each Party.......................... A-46
SECTION 8.2 Conditions to the Obligations of Merger Sub.......................... A-46
SECTION 8.3 Conditions to the Obligations of the Company and the Shareholders.... A-48
SECTION 8.4 Conditions to the Obligations of the Investors....................... A-50
SECTION 8.5 Conditions to the Obligations of the Shareholders.................... A-50
ARTICLE IX Termination, Amendment and Waiver.......................................... A-50
SECTION 9.1 Termination.......................................................... A-50
SECTION 9.2 Method of Termination; Effect of Termination......................... A-52
SECTION 9.3 Fees and Expenses.................................................... A-52
SECTION 9.4 Amendment............................................................ A-53
SECTION 9.5 Waiver............................................................... A-54
ARTICLE X General Provisions........................................................ A-54
SECTION 10.1 Non-Survival of Representations, Warranties and Agreements........... A-54
SECTION 10.2 Notices.............................................................. A-54
SECTION 10.3 Certain Definitions.................................................. A-55
SECTION 10.4 Accounting Terms..................................................... A-58
SECTION 10.5 Severability......................................................... A-58
SECTION 10.6 Entire Agreement; Assignment......................................... A-58
SECTION 10.7 Parties in Interest.................................................. A-58
SECTION 10.8 Specific Performance................................................. A-59
SECTION 10.9 Governing Law........................................................ A-59
SECTION 10.10 Headings............................................................ A-59
SECTION 10.11 Counterparts........................................................ A-59
SECTION 10.12 Construction........................................................ A-59
SECTION 10.13 Obligations of the Shareholders..................................... A-60
</TABLE>
A-2
<PAGE> 71
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER
RECAPITALIZATION AGREEMENT AND PLAN OF MERGER dated February
17, 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, 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 295,000 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 $30,275,720
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;
A-3
<PAGE> 72
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;
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 295,000 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
19.75% 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 $30,275,720 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 80.25% 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
A-4
<PAGE> 73
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").
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
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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 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.
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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, $25.25 (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 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 80.25%
of the issued and outstanding Surviving Corporation Common
Stock and 80.25%
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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
19.75% of the issued and outstanding Surviving Corporation
Common Stock and 19.75% 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.
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:
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(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
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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. 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
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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.
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
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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 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
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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 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 preceeding 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
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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 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
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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 October 31, 1998, except as disclosed in the Company
SEC Reports, 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.
(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
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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 November 30, 1998, 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 November 30, 1998 balance sheet;
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(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;
(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;
(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
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(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 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
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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) 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
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$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 (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
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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 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
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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 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
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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 ss.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 ss.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
ss.897(c)(2) during the applicable period specified in Code
ss.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 ss.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. ss.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 ss.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 ss.957.
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(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 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.
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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 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
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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 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
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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
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
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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 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.
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(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 February 4, 1999 (the
"FLEET COMMITMENT LETTER"), pursuant to which Fleet has committed, subject to
the terms and conditions contained therein, to provide up to $50,000,000 in
financing for the Transactions and (b) Mainsail Capital, an affiliate of Fleet
("MAINSAIL"), dated February 5, 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 $10,000,000 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
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the Investors have delivered true, correct and complete copies of the Commitment
Letters to the Company.
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, contigently 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,
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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 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;
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(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;
(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);
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(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 November 30, 1998 but
prior to the date hereof, would have required to be disclosed in
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;
(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;
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(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 (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
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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.
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,
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(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
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Company Material Adverse Effect from occurring prior to 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
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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
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
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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 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
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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
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
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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 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
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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
case, shall use reasonable effects to consult with all the parties hereto prior
to such release or statement
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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.
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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 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
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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
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
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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 $30,275,720.
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:
(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:
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(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) 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;
(g) The Company shall have amended its Articles of
Incorporation in connection with the Preference Amendment;
(h) The Shareholders shall have converted an aggregate of
295,000 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 19.75% of the issued and outstanding Preference Stock of
the Company, as adjusted pursuant to Section 2.01(f);
(i) 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
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after the Equity Contribution and the Preference Exchange, the
Investors will own 80.25% of the issued and outstanding Preference
Stock of the Company, as adjusted pursuant to Section 2.01(f);
(j) 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;
(k) 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;
(l) 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.
(m) 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
(n) 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
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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 295,000 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 aggregate of 19.75%
of the issued and outstanding Preference Stock of the Company, as
adjusted pursuant to Section 2.01(f).
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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), (k) and (n) of Section 8.02, except that the
references to Merger Sub in paragraphs (a), (c), (d), (k), and (n)
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), (g) and (n) 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 August 31, 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
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neither party may terminate this Agreement pursuant to this Section
8.01(b)(ii) prior to August 31, 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 August 31, 1999;
PROVIDED, that the right to terminate this Agreement under this Section
9.01(b) shall not be available to any party 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).
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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 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
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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 $2,500,000 (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.
(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
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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
New York, New York 10022
Telecopy: (212) 826-6798
Attention: Mark Rossi, Michael Najjar and Stephen Larson
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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. For purposes of this
Agreement, the term:
(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 any of its affiliates
or associates has
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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;
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(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.
(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
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(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 of the date hereof, by and among Merger Sub and the
Shareholders.
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 undertakings, both written
and oral, among the parties, or any of them, with respect to the subject matter
hereof. 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).
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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.
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.
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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.
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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/ Steven L. Larson
--------------------------------
Name: Steven L. Larson
Title: Secretary
EQUITRAC CORPORATION
By: /s/ Scott Modist
--------------------------------
Name: Scott Modist
Title: Senior Vice President and
Chief Financial Officer
FOR PURPOSES OF ARTICLES I, V, VII AND
VIII ONLY
SHAREHOLDERS
By: /s/ John T. Kane
--------------------------------
Name: John T. Kane
By: /s/ George P. Wilson
--------------------------------
Name: George P. Wilson
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/ Steven L. Larson
--------------------------------
Name: Steven L. Larson
Title: Managing Director
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APPENDIX B
PRUDENTIAL SECURITIES INCORPORATED
One New York Plaza, New York, NY 10292
(212) 778-1000
PRIVATE AND CONFIDENTIAL
February 16, 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 a
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 $25.25 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 February 15, 1999, of the Agreement, including
the exhibits thereto;
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Prudential Securities Incorporated
February 16, 1999
Page 2
(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 and 1998, and (b)
the Quarterly Reports on Form 10-Q for the fiscal quarters
ended May 30, 1998, August 31, 1998 and November 30, 1998;
(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.
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Prudential Securities Incorporated
February 16, 1999
Page 3
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.
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
B-3
<PAGE> 133
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;
C-1
<PAGE> 134
(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 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.
C-2
<PAGE> 135
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."
<PAGE> 136
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
----------- ---- --------- -------- ----------
<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>
D-1
<PAGE> 137
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
TRANSACTION DATE SHARES PRICE SALE PRICE
----------- ---- --------- -------- ----------
<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.
D-2
<PAGE> 138
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 Scott J. Modist,
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 May __,
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 MARCH __, 1999 AND THE ACCOMPANYING PROXY STATEMENT.
PLEASE SIGN AND DATE THIS PROXY BELOW
Date: , 1999
- --------------------------------------
- -------------------------------------
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS
ON LEFT. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, GUARDIAN OR
CORPORATE OFFICIAL, PLEASE GIVE FULL
TITLE.
