UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

(Rule 14a-101)

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GERBER SCIENTIFIC, INC.

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Dear fellow shareholder:

 

The Board of Directors of Gerber Scientific, Inc. (“Gerber” or the “Company”) has unanimously adopted an Agreement and Plan of Merger dated as of June 10, 2011 (the “Merger Agreement”) among Gerber, Vector Knife Holdings (Cayman), Ltd. (“Parent”) and Knife Merger Sub, Inc. (“Merger Sub”) providing for the merger of Merger Sub with and into Gerber (the “Merger”), with Gerber surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are controlled affiliates of Vector Capital Corporation (“Vector”). If the Merger is completed, each share of our common stock that you own will be converted in to the right to receive $11.00 in cash, without interest, and a non-transferable contractual right to receive additional contingent cash consideration payments if net recoveries are obtained in connection with certain claims for infringement of a Gerber patent covering “print to cut” technology.

 

You will be asked, at a special meeting of Gerber’s shareholders, to consider and vote on a proposal to approve the Merger Agreement. After careful consideration, our Board of Directors unanimously adopted the Merger Agreement and the transactions contemplated by the Merger Agreement and unanimously declared that the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of Gerber and our shareholders. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE MERGER AGREEMENT.

 

You will also be asked to vote on a proposal to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to Gerber’s named executive officers in connection with the Merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable. All of these agreements were in place before the Company began discussions of a possible change of control transaction. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THIS PROPOSAL.

 

The proxy statement attached to this letter provides you with information about the Merger and the special meeting. A copy of the Merger Agreement is attached as Annex A to this proxy statement. We encourage you to read the entire proxy statement carefully. You may also obtain additional information regarding Gerber from documents we have filed with the Securities and Exchange Commission.

 

Your vote is very important, regardless of the number of shares of our common stock you own. The Merger cannot be completed unless holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting of shareholders vote “FOR” the approval of the Merger Agreement. If you do not vote, or if you abstain from voting, it will have the same effect as a vote against the Merger Agreement because it is one fewer vote for approval.

 

You may vote in person at the meeting or by proxy. Instructions for voting by mail, internet or telephone are on your proxy card. We recommend that you vote by proxy even if you plan to attend the meeting. If you hold shares through a broker or other nominee, you should follow the instructions provided by your broker or nominee.

 

Thank you in advance for your cooperation and continued support.

 

 

Tolland, Connecticut

July 22, 2011

 

This proxy statement is dated July 22, 2011 and is being mailed to shareholders beginning July 25, 2011.

GERBER SCIENTIFIC, INC.
24 INDUSTRIAL PARK ROAD WEST
TOLLAND, CONNECTICUT 06084

 

 

Notice of Special Meeting of Shareholders
to be held on August 18, 2011 at 10:00 AM

 

Dear Shareholder:

 

You are invited to attend a special meeting of shareholders of Gerber Scientific, Inc. The meeting will be held at the Hilton Hartford Hotel, 315 Trumbull Street, Hartford, Connecticut 06103 on Thursday August 18, 2011 at 10:00 a.m. local time. The purpose of the meeting is:

 

(1) To consider and vote on a proposal to approve the Agreement and Plan of Merger, dated as of June 10, 2011, among Gerber Scientific, Inc., Vector Knife Holdings (Cayman), Ltd. and Knife Merger Sub, Inc.

 

(2) To vote on a proposal to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to Gerber’s named executive officers in connection with the Merger, and the agreements and understandings pursuant to which such compensation may be paid or become payable, as described in the section entitled “The Merger — Advisory Vote on Golden Parachutes”.

 

(3) To vote on a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Agreement.

 

(4) To conduct other business if properly raised at the meeting.

 

Only shareholders of record at the close of business on July 22, 2011, the record date for the special meeting, are entitled to vote on these matters. All shareholders who are entitled to vote are urged to do so at the meeting or by proxy.

 

The Company has concluded that the shareholders are entitled to assert appraisal rights under Sections 33-855 to 33-872, inclusive of the Connecticut Business Corporation Act. Information concerning appraisal rights is provided in the section entitled “Appraisal Rights”.

 

In order to attend the meeting, you must present an admission ticket or provide separate verification of share ownership. Even if you expect to attend the meeting in person, it is recommended that you vote by proxy by signing and returning the accompanying proxy card in the enclosed postage-prepaid envelope. You may also vote your shares by telephone or through the internet by following the instructions set forth on the proxy card. If you later decide that you would like to vote in person at the meeting, or for any other reason you desire to revoke your proxy, you can revoke your proxy at any time before the voting occurs at the meeting.

 

By Order of the Board of Directors

 

 

 

William V. Grickis, Jr.
Secretary

 

Tolland, Connecticut

July 22, 2011

 

TABLE OF CONTENTS

 

 

GERBER SCIENTIFIC, INC.
24 INDUSTRIAL PARK ROAD WEST
TOLLAND, CONNECTICUT 06084

 

Special Meeting of Shareholders
to be held on August 18, 2011 at 10:00 AM

 

 

PROXY STATEMENT

 

 

 

This proxy statement is furnished in connection with the solicitation of proxies by Gerber Scientific, Inc. (“Gerber” or the “Company”, “we”, “us” or “our”), on behalf of our Board of Directors (the “Board”), to be used at a special meeting of shareholders, which will be held on Thursday, August 18, 2011 at 10:00 a.m. local time at the Hilton Hartford Hotel, 315 Trumbull Street, Hartford, Connecticut 06103. The purpose of the special meeting is for our shareholders to consider and vote upon the approval of the Agreement and Plan of Merger, dated as of June 10, 2011 (the “Merger Agreement”), among the Company, Vector Knife Holdings (Cayman), Ltd. (“Parent”) and Knife Merger Sub, Inc. (“Merger Sub”) providing for the merger (the “Merger”) of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. A copy of the Merger Agreement is attached to this proxy statement as Annex A. This proxy statement and the accompanying proxy card are being mailed to shareholders beginning July 25, 2011.

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the Merger fully, and for a more complete description of the legal terms of the Merger, you should carefully read this entire proxy statement, the annexes attached to this proxy statement and the documents referred to or incorporated by reference into this proxy statement. We have included page references in parentheses to direct you to the appropriate place in this proxy statement for a more complete description of the topics presented in this summary.

 

Gerber Scientific, Inc.

 

Gerber Scientific, Inc., through its subsidiaries, develops, manufactures, distributes and services automated equipment and software in two industries worldwide. Of its total revenue of $462.5 million for fiscal 2011, Gerber generated $266.0 million in sales of printing equipment, software and related supplies to customers in the sign making and specialty graphics industry and $196.5 million in sales of sophisticated design and cutting equipment and software to customers in the apparel and industrial markets. Gerber operates manufacturing facilities in the United States, Canada, the United Kingdom, Denmark and China and maintains global sales, distribution and service operations in over 25 countries. To maximize its geographic sales coverage, Gerber markets its products through both a direct sales force and independent sales agents located throughout all of Gerber’s domestic and international markets. Revenue from international sales, including United States export sales, represented approximately 74 percent of total revenue for fiscal 2011. As of April 30, 2011, Gerber had approximately 1,778 employees, of whom approximately two-thirds were based outside of the United States.

 

Gerber is incorporated in the State of Connecticut with its principal executive offices at 24 Industrial Park Road West, Tolland, Connecticut 06084. Its telephone number is (860) 870-2890.

 

Sometimes in this proxy statement, we use the term “Surviving Corporation” to refer to Gerber after the consummation of the Merger, when it will be a wholly owned subsidiary of Parent.

 

Vector Capital Corporation

 

Vector Capital Corporation (“Vector”) is a global private equity firm with $2 billion under management. Vector specializes in spinouts, buyouts and recapitalizations of established technology businesses. Vector identifies and pursues these complex investments in both the private and public markets. Vector actively partners with management teams to devise and execute new financial and business strategies that materially improve the competitive standing of these businesses and enhance their value for employees, customers and shareholders. Among Vector’s notable investments are Aladdin Knowledge Systems, Certara, Corel, LANDesk, Precise Software, Printronix, RAE Systems, Register.com, SafeNet, Savi Technology, Trafficmaster, WatchGuard Technologies and WinZip. In the aggregate, Vector portfolio companies have approximately $1.2 billion in revenue and employ approximately 4,945 people around the world.

 

The principal executive offices of Vector are located at One Market Street, Steuart Tower, 23rd Floor, San Francisco, California 94105. Its telephone number is (415) 293-5000.

 

Vector Knife Holdings (Cayman), Ltd.

 

Vector Knife Holdings (Cayman), Ltd. (“Parent”) is a Cayman company and is a controlled affiliate of Vector. Parent was formed at the direction of Vector solely for the purpose of acquiring Gerber and consummating the transactions contemplated by the Merger Agreement, including the related financings. Parent has de minimis assets and no operations.

 

The principal executive offices of Parent are located at One Market Street, Steuart Tower, 23rd Floor, San Francisco, California 94105. Its telephone number is (415) 293-5000.

Knife Merger Sub (“Merger Sub”)

 

Knife Merger Sub (“Merger Sub”) is a Connecticut corporation and a wholly owned subsidiary of Parent. Merger Sub was formed at the direction of Parent in anticipation of the Merger. Subject to the terms of the Merger Agreement and in accordance with Connecticut law, at the effective time of the Merger, Merger Sub will merge with and into Gerber and cease to exist, with Gerber continuing as the Surviving Corporation and as a subsidiary of Parent. Merger Sub has de minimis assets and no operations.

 

The principal executive offices of Merger Sub are located at One Market Street, Steuart Tower, 23rd Floor, San Francisco, California 94105. Its telephone number is (415) 293-5000.

 

Place, Date and Time (page 14)

 

The special meeting will be held at the Hilton Hartford Hotel, 315 Trumbull Street, Hartford, Connecticut 06103 on Thursday, August 18, 2011 at 10:00 a.m. local time.

 

Purpose (page 14)

 

The purpose of the meeting is (i) to consider and vote on a proposal to approve the Merger Agreement, (ii) to consider and vote on an advisory (non-binding) proposal to approve the compensation that may be paid or become payable to Gerber’s named executive officers in connection with the Merger, (iii) to consider and vote on a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Agreement and (iv) to conduct other business, if properly raised at the meeting.

 

Record Date (page 14)

 

Only holders of record of common stock at the close of business on July 22, 2011, the record date for the special meeting, will be entitled to vote on these matters. Each record holder of common stock will be entitled to one vote for each share of common stock held of record.

 

Required Vote, Abstentions and Broker Non-Votes (page 15)

 

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting. Because the required vote is based on the number of shares of Gerber’s common stock outstanding, rather than the number of votes cast, failure to vote your shares (including as a result of broker non-votes) and abstentions will have the same effect as voting against the Merger Agreement.

 

The advisory (non-binding) resolution on executive compensation payable in connection with the Merger must be approved by the affirmative vote of the majority of the votes cast at the special meeting at which a quorum is present. The vote on executive compensation payable in connection with the Merger is a vote separate and apart from the vote to approve the Merger. Because the vote on executive compensation is advisory in nature only, it will not be binding on the Company.

 

Abstentions and broker non-votes will be counted towards a quorum. However, if you are a shareholder of record, and you fail to vote by proxy or by ballot at the special meeting, your shares will not be counted for purposes of determining a quorum.

 

Voting and Proxies (page 14)

 

You may vote in person at the meeting or by proxy. Instructions for voting by mail, internet or telephone are on your proxy card. We recommend that you vote by proxy even if you plan to attend the meeting. If your shares are held in “street name”, you should follow the instructions that your broker provides. If you do not instruct your broker how to vote, your shares will not be voted, which will have the same effect as voting against the Merger Agreement.

Changing Your Vote (page 14)

 

If you are a registered shareholder, you can revoke your proxy by giving notice of revocation in writing to the Corporate Secretary of Gerber at 24 Industrial Park Road West, Tolland, Connecticut 06084 or by submitting by mail a new proxy dated after the date of the proxy being revoked. You can also revoke your proxy by accessing the internet site stated on the enclosed proxy card or by using the toll-free telephone number stated on the enclosed proxy card. In addition, your proxy may be revoked by attending the special meeting and revoking your proxy in open meeting, although your attendance at the special meeting alone will not revoke any proxy.

 

If your shares are held in “street name” the above directions do not apply to you and you must follow the instructions received from your broker to change your vote.

 

Consideration To Be Received by Gerber’s Shareholders (page 53)

 

At the completion of the Merger, each share of our common stock outstanding immediately prior to the effective time of the Merger (other than shares held by Gerber, Parent, Merger Sub, any other subsidiary of Parent or any subsidiary of Gerber or held by shareholders who have properly exercised appraisal rights under the Connecticut Business Corporation Act (the “CBCA”)), will be converted into the right to receive $11.00 in cash, without interest (the “Cash Consideration”) and a non-transferable contractual right to receive additional contingent cash consideration payments if net recoveries are obtained in connection with certain claims for infringement of a Gerber patent covering “print to cut” technology (such right, a “CCCP”, and together with the Cash Consideration, the “Merger Consideration”).

 

Contingent Cash Consideration Agreement (page 69)

 

Immediately prior to the completion of the Merger, Gerber will enter into a Contingent Cash Consideration Agreement (the “CCC Agreement”) governing the terms of the CCCPs and establishing a CCCP Committee (the “Committee”). The CCCPs will not be transferable except in very limited circumstances when a transfer is legally compelled. Gerber will fund the pursuit of certain claims (the “Claims”) for infringement of a Company patent covering computerized “print to cut” technology with up to $2 million deposited into an escrow account. If any net recoveries are received by Gerber prior to the closing of the Merger, such pre-closing recoveries will be deposited into the escrow account at the closing of the Merger for the benefit of the holders of CCCPs and Gerber’s funding obligation will be reduced up to such amount. Any post-closing recoveries from the pursuit of Claims against certain agreed parties, net of applicable legal contingency fees and an amount for taxes payable to Gerber, will be distributed first to Gerber as a reimbursement for the amount it funded for expenses through the escrow account and then to the holders of CCCPs. Pursuit of any Claims against other parties will require the consent of both Gerber and the Committee. Any post-closing recoveries from the pursuit of Claims against other parties, net of applicable legal contingency fees and an amount for taxes payable to Gerber, will be distributed first to Gerber as a reimbursement for any out-of-pocket expenses paid by Gerber in connection with the pursuit of such claims and then equally between Gerber, on the one hand, and the holders of CCCPs, on the other hand. The Committee will, at its discretion, determine payment dates on which payouts will be paid pro rata to holders of CCCPs, subject to adjustments for CCCPs issued to holders of out-of-the-money options at the time of the Merger to take into account the amount by which the exercise price of such options exceed $11.00 at the closing of the Merger.

 

Whether or not the holders of CCCPs receive any cash payments in respect of their CCCPs is highly uncertain and contingent on whether there are any net recoveries in respect of the Claims.

 

When the Merger Will Be Completed (page 53)

 

We are working to complete the Merger as soon as possible. We anticipate completing the Merger in the second half of calendar year 2011, subject to approval of the Merger Agreement by our shareholders and the satisfaction of the other closing conditions.

Treatment of Equity Awards (page 53)

 

Upon the consummation of the Merger, each outstanding, unexercised in-the-money stock option will be converted into the right to receive (i) the option’s spread value (i.e., a cash payment equal to the excess of $11.00 over such option’s exercise price) and (ii) a CCCP. Each outstanding, unexercised out-of-the-money stock option will be converted into the right to receive a CCCP that takes into account the amount by which such option’s exercise price exceeds $11.00. The restrictions on each outstanding “restricted” share of Gerber common stock will lapse upon consummation of the Merger, and each such share will be converted into the right to receive the Merger Consideration. Each outstanding restricted stock unit and deferred share will be converted into the right to receive the Merger Consideration.

 

Recommendation of Our Board of Directors (page 23)

 

After evaluating a variety of business, financial and market factors and consulting with our legal and financial advisors, and after due discussion and due consideration, our Board unanimously adopted the Merger Agreement and the transactions contemplated by the Merger Agreement and unanimously declared that the Merger Agreement and the transactions contemplated by the Merger Agreement are advisable and in the best interests of Gerber and our shareholders. OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE MERGER AGREEMENT AND “FOR” THE APPROVAL OF THE PROPOSAL ON GOLDEN PARACHUTES.

 

Opinion of RA Capital Advisors LLC (page 24)

 

Our financial advisor, RA Capital Advisors LLC, which we refer to as RA Cap, delivered its opinion to the Board that, as of June 10, 2011 and based upon and subject to the factors and assumptions set forth therein, the $11.00 per share in cash to be paid to holders of Gerber common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders. Solely for purposes of rendering its opinion, RA Cap neither considered the value of the patent litigation covered by the CCCPs nor assigned any value to it.

 

The full text of the written opinion of RA Cap, dated June 10, 2011, which sets forth assumptions made, procedures followed, matters considered and limitations on the opinion and the review undertaken in connection with the opinion, is attached as Annex B. RA Cap provided its opinion for the information and assistance of the Board in connection with its consideration of the transaction. The RA Cap opinion is not a recommendation as to how any holder of Gerber’s common stock should vote with respect to the transaction or any other matter.

 

Opinion of Peter J. Solomon Company, L.P. (page 29)

 

The Board also requested that Peter J. Solomon Company, L.P., which we refer to as PJSC, evaluate the fairness, from a financial point of view, of the consideration to be received in the Merger by holders of Gerber common stock. On June 10, 2011, PJSC delivered its opinion to the Board that, as of June 10, 2011 and based upon and subject to the factors and assumptions set forth therein, the $11.00 per share in cash to be paid to holders of Gerber common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders. For purposes of PJSC’s analyses, PJSC did not attempt to value or consider the merits of any of the claims that could potentially result in a CCCP and assigned no value to any CCCP.

 

The full text of the written opinion of PJSC, dated June 10, 2011, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C. PJSC provided its opinion for the information and assistance of the Board in connection with its consideration of the transaction. The PJSC opinion is not a recommendation as to how any holder of Gerber’s common stock should vote with respect to the transaction or any other matter.

Financing of the Merger (page 37)

 

Parent estimates the total amount of funds required to complete the Merger and related transactions, including payment of fees and expenses in connection with the Merger, to be approximately $315 million. This amount is expected to be provided through a combination of (i) equity contributions from an affiliate of Vector and a minority co-investor, totaling approximately $260 million, (ii) debt financing of up to $60 million and (iii) cash of Gerber.

 

Limited Guaranty (page 39)

 

The Vector affiliated investor and the minority co-investor have agreed to guarantee their respective percentages (determined based upon the relative size of their equity commitments to Parent) of the obligations of Parent under the Merger Agreement to pay, under certain circumstances, a reverse termination fee and reimburse certain expenses.

 

Security Ownership of Directors and Executive Officers (page 78)

 

As of July 21, 2011, the directors and executive officers of Gerber beneficially owned, in the aggregate, 2,195,104 shares of our common stock, or approximately 8.6% of the outstanding shares of our common stock. The directors and executive officers have informed us that they intend to vote all of their shares of Gerber common stock “FOR” the approval of the Merger Agreement.

 

Interests of Our Directors and Executive Officers in the Merger (page 39)

 

Our directors and executive officers may have interests in the Merger that are different from, or in addition to, yours, including the following:

 

 

Our Board was aware of these interests and considered them, among other matters, in making its determinations.

 

Material United States Federal Income Tax Consequences (page 48)

 

The receipt of the Merger Consideration in exchange for shares of our common stock pursuant to the Merger will be a taxable transaction for U.S. Federal income tax purposes. The treatment of the CCCPs is not

clear. In general, a U.S. holder of our common stock will recognize gain at the time of the Merger equal to the excess, if any, of (a) the amount of cash received, and possibly the fair market value of the CCCP received, in exchange for such common stock over (b) the U.S. holder’s adjusted tax basis in such common stock. Such gain will be capital gain if such common stock is held as a capital asset, and will be long-term capital gain if such common stock is held for more than one year at the time of the Merger. The U.S. holder may not be entitled to recognize any tax loss pursuant to the Merger until the termination of the CCCP. The tax consequences of the Merger to you will depend on the facts of your own situation. We urge you to consult your own tax advisor to fully understand the tax consequences of the Merger to you.

 

Market Price of Our Stock (page 76)

 

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the trading symbol “GRB”. The closing sale price of our common stock on the NYSE on June 10, 2011, which was the last trading day before we announced the Merger, was $8.12. The $11.00 per share to be paid for each share of our common stock in the Merger represents a premium of 35% to the closing price of our common stock on June 10, 2011, and a premium of 24% to the average closing price for the 30 days ended June 10, 2011.

 

On July 21, 2011, the last trading day before the date of this proxy statement, the closing price of our common stock on the NYSE was $11.13. Shareholders are encouraged to obtain current market quotations for our common stock.

 

Procedure for Receiving Merger Consideration (page 54)

 

As soon as reasonably practicable after the consummation of the Merger, an exchange agent engaged by Parent, or an affiliate of Parent, will mail a letter of transmittal and instructions to you and our other shareholders. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the Merger Consideration. The CCCPs will not be evidenced by a certificate or other physical instrument.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the exchange agent without a letter of transmittal.

 

Appraisal Rights (page 73)

 

If you do not wish to accept the Merger Consideration for your shares of Company common stock as provided in the Merger Agreement, you are entitled to assert appraisal rights and to be paid the “fair value of your shares”, provided that you comply with the provisions of Sections 33-855 to 33-872, inclusive, of the Connecticut Business Corporation Act.

 

Solicitation of Acquisition Proposals (page 61)

 

Until 11:59 p.m., New York City time, on July 25, 2011, the Company is permitted to:

 

 

From and after 12:00 a.m., New York City time, on July 26, 2011 until the effective time of the Merger or, if earlier, the termination of the Merger Agreement, the Company, its subsidiaries and their representatives may not:

 

 

Except as permitted by the terms of the Merger Agreement described under “The Merger Agreement — Solicitation of Acquisition Proposals”, the Company has agreed in the Merger Agreement that the Board will not (i) fail to make, withdraw or modify in a manner adverse to Parent the Board’s recommendation (or recommend an acquisition proposal) (any of the foregoing in this clause (i), an “adverse recommendation change”), or (ii) exempt any transaction from the requirements of Section 33-841 or 33-844 of the CBCA.

 

Termination of the Merger Agreement (page 66)

 

The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the effective time of the Merger (notwithstanding any approval of the Merger Agreement by the shareholders of the Company) by mutual written agreement of the Company and Parent.

 

The Merger Agreement may also be terminated and the Merger may be abandoned at any time prior to the effective time of the Merger (notwithstanding any approval of the Merger Agreement by the shareholders of the Company) as follows:

 

by either the Company or Parent, if:

 

 

by Parent, if:

 

 

 

by the Company:

 

 

Termination Fees and Reimbursement of Expenses (page 67)

 

If the Merger Agreement is terminated in certain circumstances described under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 67:

 

 

Remedies (page 69)

 

The Company’s right to receive payment of the termination fee of $16.91 million from Parent or the guarantors pursuant to the limited guaranty in respect thereof will be the sole and exclusive remedy of the Company and its subsidiaries and shareholders against Parent, Merger Sub, the guarantors and any of their respective former, current and future direct or indirect equity holders, controlling persons, stockholders, directors, officers, employees, agents, affiliates, members, managers, general or limited partners or assignees, except for certain rights to equitable relief, including specific performance, described below.

Subject to certain limitations described under “The Merger Agreement — Remedies” beginning on page 69, the parties to the Merger Agreement will be entitled to an injunction or injunctions, specific performance or other equitable relief to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions thereof.

 

Conditions to the Merger (page 65)

 

Before we can complete the Merger, a number of conditions must be satisfied. These include:

 

 

Regulatory Approvals (page 51)

 

Completion of the Merger is subject to certain governmental or regulatory clearance procedures, including the termination or expiration of the waiting period under the HSR Act and the taking or making of all actions or filings pursuant to the foreign antitrust laws of Germany required to permit the consummation of the Merger.

 

The HSR Act provides that transactions such as the Merger may not be completed until certain information has been submitted to the Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and certain waiting period requirements have been satisfied. The Company and Parent filed notification and report forms with the Antitrust Division and the FTC under the HSR Act on June 23, 2011 and requested early termination of the waiting period. The request for early termination was granted on and became effective July 1, 2011.

 

The Merger is also subject to approval from the German Federal Cartel Office. Parent made the required filings with the German Federal Cartel Office on June 28, 2011 and approval was granted on July 18, 2011.

 

The following section is intended to address some commonly asked questions about the special meeting and the Merger. These questions and answers may not address all questions that may be important to you as a shareholder. We urge you to read carefully this proxy statement in its entirety, including the annexes to this proxy statement and the documents referred to or incorporated by reference into this proxy statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gerber may from time to time provide information, whether verbally or in writing, including certain statements included in or incorporated by reference into this proxy statement, which constitutes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding the following: the satisfaction of the closing conditions to the Merger Agreement, the expected completion and timing of the Merger and other information relating to the Merger. Although we believe the expectations contained in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove correct.

 

The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “potential”, “predict”, “will”, “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our management’s current views of Gerber with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or planned. We will not update these forward-looking statements, even though our situation may change in the future. Whether actual results will conform to our expectations and predictions is subject to a number of risks and uncertainties, including, but not limited to, risks and uncertainties relating to:

 

 

 

All subsequent written and oral forward-looking statements concerning the Merger or other matters addressed in this proxy statement and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Forward-looking statements speak only as of the date of this proxy statement or the date of any document incorporated by reference into this proxy statement. Except as required by applicable law or regulation, we do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

A special meeting of Gerber’s shareholders will be convened at the Hilton Hartford Hotel, 315 Trumbull Street, Hartford, Connecticut 06103 on Thursday, August 18, 2011 at 10:00 a.m. local time. The purpose of the meeting is (i) to consider and vote on a proposal to approve the Merger Agreement, (ii) to consider and vote on an advisory (non-binding) proposal to approve the compensation that may be paid or become payable to Gerber’s named executive officers in connection with the Merger, (iii) to consider and vote on a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Agreement and (iv) to conduct other business, if properly raised at the meeting. This section outlines the procedures and details of the special meeting.

 

Only holders of record of common stock at the close of business on July 22, 2011, the record date for the special meeting, will be entitled to vote at the meeting. As of July 21, 2011, there were 25,095,293 shares of common stock outstanding. Each record holder of common stock will be entitled to one vote for each share of common stock held of record.

 

You may vote in person at the meeting or by proxy. Instructions for voting by mail, internet, and telephone are on your proxy card. We recommend that you vote by proxy even if you plan to attend the meeting. If your shares are held in a stock brokerage account or by another nominee, such as a bank or trust (other than shares in the Gerber Scientific, Inc. and Participating Subsidiaries 401(k) Maximum Advantage Program, which is discussed below), then the broker or other nominee is considered to be the shareholder of record with respect to those shares. However, you still are considered to be the beneficial owner of those shares, with your shares being held in “street name”. Under the rules of the NYSE, brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to the approval of non-routine matters such as the Merger proposal and thus, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote such shares with respect to the approval of the Merger Agreement (i.e., “broker non-votes”). To be sure your shares are voted, you should instruct your broker or other nominee to vote your shares.

 

You may change your vote by delivering another proxy to Gerber in accordance with the instructions on the proxy card before voting occurs at the meeting or by revoking your proxy and voting in person at the meeting. If you are a registered shareholder, you can revoke your proxy by giving notice of revocation in writing to the Corporate Secretary of Gerber at 24 Industrial Park Road West, Tolland, Connecticut 06084 or by submitting by mail a new proxy dated after the date of the proxy being revoked. You can also revoke your proxy by accessing the internet site stated on the enclosed proxy card or by using the toll-free telephone number stated on the enclosed proxy card. In addition, your proxy may be revoked by attending the special

meeting and revoking your proxy in open meeting, although your attendance at the special meeting alone will not revoke any proxy.

 

If you hold your shares in “street name”, you must contact your broker or other nominee regarding how to revoke your proxy and change your vote.

 

The shares represented by valid proxies will be voted in the manner specified on the proxy card. Where specific choices are not indicated on the proxy card, the shares represented by valid proxies will be voted as recommended by our Board on all matters. Should any business matter not described in this proxy statement be properly presented at the meeting, the persons named in the proxy card will vote in accordance with their judgment. The Board knows of no matter, other than the approval of the Merger Agreement, the approval of golden parachute arrangements and the approval of an adjournment of the special meeting, if necessary or appropriate, that may be presented at the meeting.

 

You are urged to sign and return promptly your proxy card, or vote by phone or the internet, to make certain your shares will be voted at the meeting. For your convenience, a return envelope is enclosed, requiring no additional postage if you mail your signed proxy card in the United States. If you receive more than one proxy card because you have multiple accounts, you should sign and return all proxy cards received, or submit your vote by phone or through the internet with respect to each proxy card, to be sure all of your shares are voted.

 

The 401(k) Maximum Advantage Program trustee will vote plan shares as participants direct on their proxy card. The proxy card will serve as voting instructions for participants in the 401(k) Maximum Advantage Program. If participants do not sign and return a proxy card, or vote by phone or the internet or if participants sign and return a proxy card but fail to indicate how they wish to vote, the trustee will vote their plan shares in accordance with the direction of the plan’s named fiduciary, unless it is contrary to applicable law to do so.

 

Participants in the 401(k) Maximum Advantage Program must complete, date, sign, and return their proxy card, or vote by phone or through the internet, no later than 11:59 p.m., New York City time, August 15, 2011 for the shares represented by the proxy to be voted in the manner directed therein by the participant. Participants may attend the special meeting; however, participants’ shares can only be voted as described above in this paragraph.

 

For an explanation of the effect of the Merger on shares held in the 401(k) Maximum Advantage Program, see “The Merger Agreement — Treatment of Common Stock and Equity Awards — Shares in the Gerber Scientific, Inc. and Participating Subsidiaries 401(k) Maximum Advantage Program” beginning on page 53.

 

A quorum is necessary to conduct the business of the meeting. This means that holders of a majority of the outstanding shares of common stock must be represented at the meeting, either by proxy or in person. Abstentions are counted as shares present at the meeting for purposes of determining whether a quorum exists. Shares represented by broker non-votes are also counted in determining the quorum at the meeting, but are not counted for voting purposes. An executed proxy that fails to specify a choice on any matter will be voted in accordance with the recommendation of the Board. Votes will be tabulated by the inspector of election appointed for the meeting.

 

If a quorum is present at the meeting, the Merger Agreement must be approved by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting. If you do not vote, or if you abstain from voting, it will have the same effect as a vote against the Merger Agreement because it is one fewer vote for approval.

If a quorum is present at the meeting, the advisory (non-binding) resolution on executive compensation payable in connection with the Merger must be approved by the affirmative vote of the majority of the votes cast at the special meeting. The advisory (non-binding) vote on executive compensation payable in connection with the Merger is a vote separate and apart from the vote to approve the Merger Agreement. Accordingly, you may vote to approve the executive compensation and vote not to approve the Merger Agreement and vice versa. Because the vote on executive compensation is advisory in nature only, it will not be binding on the Company. Accordingly, because the Company is contractually obligated to pay the compensation, such compensation will be payable, subject only to the conditions applicable thereto, if the Merger Agreement is approved and regardless of the outcome of the advisory vote.

 

Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of, among other things, soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Agreement. Any adjournment to a date not more than 120 days after the date originally fixed for the special meeting may be made without notice, other than by an announcement made at the special meeting of the time and place of the adjourned meeting. If a quorum is present at the meeting, any such adjournment must be approved by the affirmative vote of the majority of the votes cast at the special meeting. If no instructions are indicated on your proxy card, your shares of common stock will be voted “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our shareholders who have already sent in their proxies to revoke them at any time before voting occurs at the special meeting as adjourned. Under the Merger Agreement, Gerber is permitted to adjourn or postpone the special meeting in the following cases:

 

 

You may attend the meeting in person if you were a shareholder of record of Gerber on July 22, 2011 or you hold a valid proxy from a shareholder of record as of that date. If you are not a shareholder of record but hold shares through a broker, bank, trust or other nominee, you should provide proof of beneficial ownership as of July 22, 2011, such as your most recent account statement prior to that date or a copy of the voting instruction card provided by your broker, bank, trust or other nominee, to Gerber at the address below in order to obtain an admission ticket to the meeting:

 

Gerber Scientific, Inc.
24 Industrial Park Road West
Tolland, Connecticut 06084
Attn: Secretary

 

The following is a discussion of the Merger, including the process undertaken by the Company and our Board in identifying and determining whether to engage in the proposed transaction. This discussion of the Merger is qualified by reference to the Merger Agreement, which is attached to this proxy statement as Annex A. You should read the entire Merger Agreement carefully as it is the legal document that governs the Merger.

 

The Company, through its subsidiaries, develops, manufactures, distributes and services automated equipment and software in the sign making, specialty graphics, packaging, apparel and industrial industries worldwide. The Company and the Board continually review and evaluate the risks and opportunities within the Company’s existing business segments and regularly consider strategic alternatives in order to enhance shareholder value, including, from time to time, acquisitions, divestitures and the possible sale of the Company.

 

Beginning in 2008, the Company and the Board considered and began executing various strategic restructuring alternatives, including the divestiture of certain of its business units. In connection with these processes, the Company retained RA Cap as financial advisor.

 

In September 2010, a current member of the Board became aware that Vector might have interest in a possible transaction to acquire all or part of the Company. This member of the Board suggested to Mr. Marc T. Giles, the Company’s president and chief executive officer, and Mr. Donald P. Aiken, the Chairman of the Board, that Mr. Giles should contact the representative of Vector to listen to what the representative of Vector had to say.

 

On October 7, 2010, after consultation with Mr. Aiken, Mr. Giles called a representative of Vector, who provided an overview of Vector and explained that Vector could have an interest in acquiring the Company.

 

On October 20, 2010, Mr. Giles reported his conversation with a representative of Vector to the entire Board and the Board directed Company management to explore Vector’s interest further, as a potential alternative to the Company’s strategic initiatives, as well as to provide the Board with a reference point for the Company’s potential value in a sale transaction. The Company also was authorized to enter into a confidentiality agreement with Vector and allow Vector to conduct preliminary due diligence.

 

On November 8, 2010, at the direction of the Board, Company management met with representatives of Vector while at an investor conference to discuss the Company entering into a confidentiality agreement and allowing Vector to conduct preliminary due diligence.

 

On January 14, 2011, the Company and Vector entered into a confidentiality agreement, which among other things, included customary standstill restrictions on Vector. The confidentiality agreement also prevented Vector from discussing the transaction with the Company’s management or employees unless given permission to do so by certain individuals specifically identified as contacts. During the following days, Vector conducted due diligence on the Company.

 

On January 20, a preliminary meeting was held between the Company’s management and representatives of Vector to discuss, on a highly preliminary basis, a potential acquisition of the Company. During the following weeks, Vector continued to conduct due diligence on the Company, including due diligence sessions with the Company’s management team and RA Cap.

 

On March 8, the Board retained Cravath, Swaine & Moore LLP (“Cravath”) as its special counsel in connection with a possible transaction.

 

On March 11, the Company amended its agreement with RA Cap to include retention as financial advisor in connection with a possible sale of all or a substantial portion of the capital stock or assets of the Company and to provide for fees to be paid to RA Cap in connection with this engagement.

On March 15, Mr. Giles and a representative of RA Cap met with representatives of Vector to discuss Vector’s interest in beginning in-depth due diligence on the Company. At this meeting, Vector indicated, on a highly preliminary basis, a valuation of $10.00 per share in cash for all of the capital stock of the Company, with the possibility of reaching a valuation of up to $11.00 per share following detailed due diligence.

 

During these preliminary meetings Vector indicated that it expected to offer and negotiate possible post-acquisition roles, compensation and investment opportunities with certain senior executives of the Company, including Mr. Giles, but only if and when the Board permitted Company executives to enter into such discussions. The Board gave such permission on July 9 as described under “The Merger — Interests of Our Directors and Executive Officers in the Merger”.

 

On March 18, during a special meeting of the Board, the Board discussed Vector’s interest in pursuing in-depth due diligence. The Board concluded it was not interested in a transaction with Vector at $10.00 per share but could be interested in a transaction at a price in the range of $11.00 per share. Without making any conclusion as to whether it would undertake a change of control transaction, the Board decided to allow Vector additional access to employees and information. During the following weeks, Vector continued to conduct due diligence on the Company and representatives of RA Cap, on behalf of the Company, engaged in discussions with respect to a potential transaction with Vector.

 

On April 15, during a special meeting of the Board, the Board discussed the inclusion by Vector of certain potential partners or sources of funding, including an affiliate of CITIC Capital Partners Limited (“CITIC”), as well as Vector’s assurance to Mr. Giles that, in any case, it would present a single bid to acquire the entire Company rather than a joint bid or a package of bids for portions of the Company. Representatives of RA Cap communicated to the Board Vector’s intent to submit a detailed non-binding proposal on April 22 and Vector’s request for an exclusivity period. RA Cap also summarized its discussions with Vector concerning purchase price and its guidance to Vector that the Board was not likely to entertain a price of less than $11.00 per share. In anticipation of receiving Vector’s proposal, the Board discussed the utility of obtaining another confirmatory preliminary value presentation from a firm familiar with the Company and the Board asked Mr. Giles to determine whether he could arrange such a presentation.

 

On April 22, Vector delivered to the Company a letter addressed to the Board, dated April 22, 2011 (the “Letter of Indication”), which contained a firm but non-binding indication that Vector was prepared to offer $11.00 per share in cash to acquire all of the capital stock of the Company. The Letter of Indication also contained an indication that Vector was willing to create a carveout mechanism for the Claims that could deliver additional value to the Company’s shareholders who would receive the merger consideration. Along with the Letter of Indication, Vector also provided a draft of a proposed Merger Agreement and a draft of a proposed exclusivity agreement. Vector stated its continued interest in a transaction was conditioned upon the Company entering into an exclusive negotiation period until May 31.

 

On April 26, at a regular meeting of the Board, the Board discussed the Vector proposal and alternative or parallel paths the Board might choose to take in addition to negotiations with Vector, including continuing to pursue its ongoing strategic initiatives. During this meeting, representatives of RA Cap presented RA Cap’s preliminary views on the potential value of the Company in a change of control transaction. Another investment firm familiar with the Company next presented its preliminary views on the potential value of the Company in a change of control transaction. This firm was not retained by the Company to provide financial advice or to render any opinion of the financial terms of a transaction. The preliminary presentation of this firm was generally in line with the preliminary valuation advice given to the Board by RA Cap. The Board concluded at this meeting that certain aspects of Vector’s proposal, primarily relating to deal certainty and the absence of flexibility to perform a post-signing market check, were not within a range the Board would accept. The Board determined it should not act on Vector’s request for an exclusivity agreement until there had been further discussions with Vector about the terms of its proposal, including the purchase price. The Board instructed RA Cap and Cravath to engage Vector in such discussions.

 

Between April 26 and May 1, discussions were held between representatives of RA Cap and Cravath, on behalf of the Company, and representatives of Vector and its counsel, Davis Polk & Wardwell LLP

(“Davis Polk”), in connection with a proposed transaction and exclusivity period, including a request by RA Cap for an increase in the purchase price which was not agreed to by Vector.

 

On May 1, during a special meeting of the Board, representatives of RA Cap and Cravath summarized the status of negotiations with Vector and Davis Polk in connection with a proposed transaction and the changes Vector had made to its indication of interest in response to the Board’s concerns such as inclusion of a more flexible “go-shop” process with lower termination fees and additional deal certainty. Representatives of Cravath reviewed with the Board the terms of the exclusivity agreement that Vector was requiring as a condition to its continued interest in a negotiated transaction. After extensive discussion, the Board concluded that Vector’s proposed terms had improved sufficiently to increase the Board’s confidence that a transaction in the best interests of the Company’s shareholders and other constituents could be negotiated. The Board also determined, subject to negotiation of the terms of the Merger Agreement, that a “go shop” process would provide an adequate market check for a transaction with Vector. The Board then unanimously authorized the Company to enter into an exclusivity agreement with Vector, commencing May 1, 2011 and ending May 31, 2011. During the May 1 meeting the Board also discussed the possibility of retaining a second financial advisor to provide an opinion on the fairness of the financial terms. The Board concluded that although RA Cap did not have any conflict of interest that affected the reliability of its advice, in light of the importance of the possible transaction to the Company it would be desirable for the Board also to receive advice from a firm whose compensation was not contingent upon consummation of a transaction. The Board authorized the Chairman of the Board, assisted by additional directors he selected, to solicit proposals from investment banks interested in such an assignment and to recommend a firm to the entire Board.

 

Later on May 1, the Company and Vector entered into the exclusivity agreement. During the following weeks, representatives of Vector continued to meet with representatives of the Company and conduct due diligence.

 

During May, representatives of RA Cap and Cravath, on behalf of the Company, and representatives of Vector and Davis Polk continued to negotiate the proposed terms of the Merger Agreement and the CCC Agreement. The parties exchanged drafts of the agreements they would enter into through this period and on May 31, Davis Polk distributed to Cravath forms of equity commitment letters and a form of limited guarantee to be delivered by the equity investors in Parent and a form of debt commitment letter to be delivered by Fortress Capital Corp. (“Fortress”).

 

On May 17, the Board engaged PJSC as financial advisor in connection with a possible transaction.

 

On May 31, the Company entered into a confidentiality agreement with a potential partner of Vector on terms substantially consistent with the confidentiality agreement executed between the Company and Vector on January 14. Mr. Giles and certain employees of the Company then met with Vector’s potential partner to conduct due diligence and discuss such partner’s general transaction history and practices. Representatives of Cravath, RA Cap and Vector also participated in this meeting.

 

On June 1, during a special meeting of the Board, representatives of RA Cap gave a financial presentation to the Board regarding the Company and the cash consideration that would be paid to the Company’s shareholders in a potential merger. The Board extensively discussed the latest negotiations of the terms of the Merger Agreement and the CCC Agreement with representatives of RA Cap and Cravath and concluded that, although there were still significant unresolved issues, it was likely a transaction in the best interests of the Company’s shareholders and other constituents could still be negotiated. At Vector’s request, the Board agreed to extend the exclusive negotiation period with Vector until June 7.

 

Between June 1 and June 7, negotiations continued between representatives of RA Cap and Cravath, on behalf of the Company, and representatives of Vector and Davis Polk regarding the proposed terms of the Merger Agreement and the CCC Agreement and the acceptability of Vector’s proposed financing. On June 7, immediately prior to a special meeting of the Board, Mr. Giles received a call from a representative of Vector, informing Mr. Giles of the most recent terms that were being offered by Vector.

 

On June 7, during a special meeting of the Board, the Company’s executives and representatives of RA Cap and Cravath summarized the status of the negotiations with Vector, including the key open items. The

Board engaged in a lengthy discussion about the desirability of the proposed transaction with Vector and the associated risks. The Board also discussed a range of alternative strategies other than the transaction proposed by Vector, including possible strategic divestitures. A representative of Abelman, Frayne & Schwab, counsel to the Company with respect to the Claims, reviewed with the Board the current status of litigation with respect to the Claims. After extensive discussion, the Board concluded that despite an improvement in Vector’s terms, Vector’s proposal still was unacceptable principally due to lack of agreement on the CCC Agreement terms as well as certain terms of the Merger Agreement. The Board decided it would not extend further Vector’s exclusive negotiation period, but would continue discussions to see if any acceptable transaction could be negotiated.

 

Between June 7 and June 10, negotiations continued resulting in the final Vector proposal.

 

On June 10, the Board met with its advisors to consider the revised final terms proposed by Vector for the Merger Agreement and the CCC Agreement. Representatives of PJSC gave a financial presentation to the Board regarding the Company and the cash consideration that would be paid to the Company’s shareholders in the potential merger. Thereafter, PJSC provided its oral opinion, subsequently confirmed in writing, to the Board to the effect that, as of June 10, 2011, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $11.00 per share cash consideration to be received by the holders of shares of Company common stock pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. Representatives of RA Cap updated their financial presentation to the Board from June 1 regarding the Company and the cash consideration that would be paid to the Company’s shareholders in the potential merger and provided its oral opinion, subsequently confirmed in writing, to the Board to the effect that, as of June 10, 2011, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $11.00 per share cash consideration to be received by the holders of shares of Company common stock pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. In providing their respective opinions, PJSC and RA Cap did not attempt to value or consider the merits of any of the Claims that could potentially result in a CCCP and assigned no value to the Claims or any CCCP. After considering the proposed terms of the Merger Agreement, the CCC Agreement and the other transaction agreements and the various presentations of Cravath, PJSC and RA Cap, including PJSC’s and RA Cap’s respective fairness opinions provided to the Board, and taking into account the other factors described below under the heading titled “The Merger — Reasons for the Merger”, the Board unanimously determined that the Merger Agreement and the transactions contemplated by the Merger Agreement are fair to and in the best interests of the Company and its shareholders, unanimously adopted and declared advisable the Merger Agreement and the transactions contemplated by the Merger Agreement and unanimously resolved to recommend approval of the Merger Agreement by the shareholders of the Company.

 

Later on June 10, Parent, Merger Sub and the Company executed the Merger Agreement and the other transaction agreements.

 

On June 13, the Company issued a press release announcing its entry into the Merger Agreement. A copy of the press release was furnished as an exhibit to the Form 8-K filed by the Company with the Securities and Exchange Commission on June 13, 2011.

 

Following the announcement of the Merger on the morning of June 13, representatives of RA Cap began contacting 12 potential strategic acquirors. As of the date of this proxy statement, none of the potential strategic acquirors contacted by RA Cap has opted to execute a confidentiality agreement with the Company.

 

In addition to contacting potential strategic acquirors, representatives of RA Cap contacted 19 private equity firms between June 13 and June 30 that had been identified as potentially having an interest in acquiring the Company. Five additional private equity firms contacted RA Cap regarding a potential interest in acquiring the Company. Of these 24 private equity firms, three parties executed a confidentiality agreement and were granted access to certain non-public information regarding the Company. Ultimately, all three of these private equity firms affirmatively indicated to RA Cap that they were not interested in pursuing a transaction with the Company.

 

In the course of reaching its decision to adopt and declare advisable the Merger Agreement and the transactions contemplated by the Merger Agreement and, subject to the terms and conditions of the Merger Agreement, to recommend approval of the Merger Agreement by the shareholders of the Company, the Board consulted with Company management and its financial and legal advisors and considered a significant number of factors, including the following:

 

 

 

In addition to taking into account the foregoing factors, the Board also considered a variety of risks and other countervailing factors related to entering into the Merger Agreement and the transactions contemplated by the Merger Agreement, including:

 

 

 

The foregoing discussion of the information and factors considered by the Board, while not exhaustive, includes the material factors considered by the Board. In view of the variety of factors considered in connection with its evaluation of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, the Board did not find it practicable to, and did not, quantify, rank or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have given different weights to different factors. The Board considered all of the factors as a whole and considered the factors in their totality to be favorable and to support the decision to unanimously adopt and declare advisable the Merger Agreement and the transactions contemplated by the Merger Agreement and to recommend approval of the Merger Agreement by the shareholders of the Company.

 

The Board recommends that the shareholders of the Company vote “FOR” approval of the Merger Agreement.

 

The Board retained RA Cap, based on RA Cap’s experience and reputation, to act as the Company’s financial advisor in connection with its analysis and consideration of the proposed Merger and deliver a fairness opinion in connection with the proposed Merger. As part of its investment banking business, RA Cap routinely performs financial analyses with respect to businesses and their securities in connection with mergers and acquisitions.

 

In connection with RA Cap’s engagement, the Board requested that RA Cap evaluate the fairness, from a financial point of view, of the Merger Consideration that the holders of the outstanding shares of Company common stock will be entitled to receive in the Merger. At a meeting of the Board held on June 10, 2011, RA Cap delivered an oral opinion to the Board, confirmed by delivery of a written opinion, dated June 10, 2011, to the effect that, as of that date and based on and subject to various assumptions, matters considered and limitations described in the opinion, the Merger Consideration set forth in the Merger Agreement was fair, from a financial point of view, to the holders of Company common stock. RA Cap considered the Merger Consideration to be received by the shareholders pursuant to the Merger Agreement to be $11.00 per share in cash, without interest, plus a CCCP. Solely for purposes of rendering its opinion, RA Cap neither considered the value of the patent litigation covered by the CCCPs nor assigned any value to it and RA Cap assumed that the Merger Consideration to be received in exchange for each share would be $11.00 cash per share, without interest.

 

The full text of RA Cap’s opinion describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by RA Cap. RA Cap’s opinion is attached as Annex B and is incorporated by reference into this proxy statement. RA Cap’s opinion addresses only the fairness, from a financial point of view, of the Merger Consideration pursuant to the Merger, and does not address any other aspect of the Merger or any related transaction. The opinion was provided solely for the information and assistance of the Board in connection with its consideration of the transactions contemplated by the Merger Agreement. RA Cap’s opinion does not address the merits of the underlying decision by the Company to engage in the transaction and does not constitute a recommendation to any shareholder as to how to vote or act with respect to any matters relating to the Merger. Shareholders are urged to read the opinion and consider it carefully in its entirety. The summary of RA Cap’s opinion below is qualified in its entirety by reference to, and should be reviewed together with, the full text of the opinion. It should be noted that, although subsequent developments after June 10, 2011 may affect the opinion, RA Cap does not have any obligation to update, revise or reaffirm its opinion, and will not undertake to do so.

 

In arriving at its opinion, RA Cap reviewed, among other information it deemed relevant:

 

 

In addition, RA Cap:

 

 

 

In rendering its opinion, RA Cap relied upon and assumed the accuracy and completeness of all of the financial, accounting and other information that was publicly available or that was furnished by the Company or its management, or otherwise reviewed by RA Cap, and RA Cap did not assume any responsibility for independently verifying the accuracy or completeness of such information. In that regard, RA Cap made certain assumptions, with the Board’s consent, including the following:

 

 

RA Cap’s opinion was necessarily based upon information available to it, and financial, economic, market and other conditions as they existed, and could be evaluated, as of the date of the opinion. It should be understood that subsequent developments may affect RA Cap’s opinion and RA Cap does not have any obligation to update, revise or reaffirm such opinion. RA Cap’s opinion is limited to the fairness, from a financial point of view, of the consideration to be received by holders of Company common stock in the Merger, and RA Cap has expressed no opinion as to the fairness of the Merger to, or any other consideration of, the holders of any other class of securities, creditors or other constituencies of the Company. The Company imposed no other instructions or limitations on RA Cap with respect to the investigation made or the procedures followed by it in rendering its opinion.

 

RA Cap’s opinion did not address the underlying business decision of the Company to engage in the Merger or the relative merits of the transactions contemplated by the Merger Agreement compared to any strategic alternatives that may have been available to the Company; nor did it address any legal, regulatory tax or accounting matters. RA Cap’s opinion addresses only the fairness, from the financial point of view, as of the date of its opinion, of the consideration to be received by the holders of Company common stock in the Merger. RA Cap’s opinion did not express any view on, and did not address, any other term or aspect of the Merger Agreement or Merger or any other term or aspect of any other agreement or instrument contemplated by the Merger Agreement or entered into or amended in connection with the Merger, including, without limitation, the fairness of the Merger to, or any consideration received in connection therewith by, any creditor or other constituency of the Company, nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or class of such persons, in connection with the Merger, relative to the $11.00 per share in cash to be paid to the public shareholders, or otherwise. RA Cap did not express any opinion as to the Merger on the solvency or viability of the Company or Parent or the ability of the Company or Parent to pay its obligations when they become due.

In preparing its opinion for the Board, RA Cap performed a variety of financial and comparative analyses, including those described below. The order in which the analyses are described does not represent the relative importance or weight given to the analyses performed by RA Cap. The summary of RA Cap’s analyses described below is not a complete description of the analyses underlying its opinion. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not susceptible to partial analysis or summary description. RA Cap believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In its analyses, RA Cap made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company and the industry generally, industry growth and the absence of any material change in the financial condition and prospects of the Company or the industry or in the financial markets in general. No company, transaction or business used in RA Cap’s analyses as a comparison is identical to the Company or the proposed Merger, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or transactions analyzed. The estimates contained in RA Cap’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, RA Cap’s analyses and estimates are inherently subject to substantial uncertainty. RA Cap’s opinion was approved by a Fairness Opinion Committee of RA Cap.

 

The following is a summary of the financial analyses underlying RA Cap’s opinion delivered to the Board on June 10, 2011 in connection with the Merger. In order to fully understand RA Cap’s financial analyses, the summarized range of values presented below must be read together with the text of each summary. The summarized range of values alone does not constitute a complete description of the financial analyses. Considering the summarized range of values below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of RA Cap’s financial analyses.

 

Historical Stock Price Analysis.  The high and low trading prices of the Company common stock for the twelve-month period ended June 9, 2011 was $4.64 and $9.90, respectively, compared to the consideration in the Merger of $11.00 per share. RA Cap reviewed the performance of the Company’s common stock to the performance of the following three indexes for the three-year period ended June 9, 2011: 1) an index of companies deemed comparable to the Company’s Gerber Technology business (“Gerber Technology”); 2) an index of companies deemed comparable to the Company’s Spandex business (“Spandex”); and 3) the Standard & Poor’s 500 index. RA Cap reviewed separate groups of companies comparable to each of Gerber Technology and Spandex due to the fact that Gerber Technology and Spandex are disparate businesses and no single company is directly comparable. The Company’s common stock outperformed the index of companies deemed comparable to Spandex, and underperformed both the index of companies deemed comparable to Gerber Technology and the Standard & Poor’s 500 index.

 

Selected Comparable Trading Market Analysis.  Using publicly available information, RA Cap reviewed the financial, operating and stock market data of the following selected publicly traded companies that were deemed comparable to Gerber Technology or Spandex. The following companies were deemed comparable to Gerber Technology based on Company operations and markets served:

 

 

 

The following companies were deemed comparable to Spandex:

 

 

For each selected company, Enterprise Value/Sales, Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), and Price/Earnings multiples were computed for the most recently published last twelve months prior to June 10, 2011, for preliminary results of the fiscal year ending April 30, 2011, and projected for the forward fiscal year ending April 30, 2012. RA Cap used the multiples, weighted based on the estimated respective revenues of Gerber Technology and Spandex, for both sets of comparable companies to calculate the last twelve months and forward multiples for the Company, which resulted in the range of implied enterprise values and share prices summarized below. All multiples were based on closing stock prices as of June 9, 2011.

 

 

 

Selected Comparable Transactions Analysis.  Using publicly available information, RA Cap reviewed selected transactions with disclosed transaction values that RA Cap deemed to be comparable to either Gerber Technology or Spandex based on Company operations and markets served. The following transactions were deemed comparable to Gerber Technology:

 

The following transactions were deemed comparable to Spandex:

 

 

For each selected transaction, and based on available data, Enterprise Value/Sales, Enterprise Value/EBITDA, and Price/Earnings multiples were computed for the last twelve months prior to the transaction. RA Cap used the multiples for both sets of comparable transactions to calculate the multiples for the last twelve months for the Company, which resulted in the range of implied enterprise values and share prices summarized below.

 

 

Illustrative Discounted Cash Flow Analysis.  RA Cap performed a discounted cash flow analysis of Company management’s projected financial results to calculate the estimated present value of the stand-alone, after-tax free cash flows that the Company would be expected to generate over the forecasted period ending April 30, 2016 and the enterprise value of the Company at the end of that period. RA Cap applied a range of terminal value multiples of 7.5x to 8.5x to the Company’s fiscal year 2016 estimated ending EBITDA. The present value of the cash flows to equity holders and terminal values for each case were calculated using discount rates of 13.1% to 15.1%, which were based upon an analysis of the Company’s weighted average cost of capital.

 

 

Premiums Paid Analysis.  Using publicly available information, RA Cap reviewed the acquisition price per share for selected acquisitions of U.S. publicly traded companies announced since June 15, 2009 with implied enterprise values between $200 million and $600 million, excluding banks and other financial firms. RA Cap compared the acquisition price per share to the target’s stock price one-day, one-month, average over one-month, average over two-months, and average over three-months prior to the announcement of the transaction to arrive at an implied range of stock price premiums. These premiums were applied to the corresponding stock prices of the Company, using June 9, 2011 as the Company’s reference point. All premiums for the selected transactions were based on publicly available stock prices.

 

 

Illustrative Leveraged Buyout Analysis.  RA Cap performed a leveraged buyout analysis to estimate the theoretical purchase price that a financial buyer could pay in an acquisition of the Company. For purposes of this analysis, RA Cap utilized Company management projected financial results and assumed that a buyer would obtain approximately $100 million in debt. RA Cap also assumed a range of EnterpriseValue/EBITDA terminal value multiples from 7.0x to 9.0x on the Company’s EBITDA for the fiscal year ending April 30, 2016. With an assumed equity internal rate of return ranging from 18% to 21%, the theoretical purchase price that a financial buyer could pay ranged from $10.60 to $11.40.

 

 

Sum of the Parts Analysis.  RA Cap performed a sum of the parts analysis to assess a range of prices that could potentially be realized if the Company’s business units were sold individually. RA Cap undertook several analyses to estimate the standalone values of Gerber Technology, Spandex and the Company’s Gerber Scientific Products business. After accounting for various other assets and liabilities in connection with a sum of the parts value, the net resulting value range per share ranged from $10.20 to $13.30.

 

 

Present Value of the Future Stock Price Analysis.  RA Cap performed an analysis to calculate the present value of the Company’s estimated future stock price. Using management’s projected EBITDA for the years ending April 30, 2012 and April 30, 2013 and an estimated trading EnterpriseValue/EBITDA multiple of 8.0x, RA Cap calculated a projected future stock price range of $11.30 to $14.00. The range of projected future stock prices was discounted using an equity discount rate of 15.1%, which was based upon an analysis of the Company’s cost of equity capital. The resulting present value range of the Company’s estimated future stock price is from $9.80 to $10.60.

 

 

Relationship Between RA Cap and the Company.  We have acted as financial advisor to the Company in connection with, and have participated in certain of the negotiations leading to the Merger Agreement. In performing its services to the Company as described above, RA Cap has not entered into or assumed any agency or other fiduciary relationship with the Company, the Board, the Company’s shareholders or any other person.

 

The Company has agreed to pay RA Cap fees of $2,400,000 for its services in connection with the Merger, of which $200,000 became payable upon the delivery of RA Cap’s opinion and the remainder of which is contingent upon consummation of the Merger.

 

In addition, the Company has agreed to reimburse RA Cap for its reasonable out-of-pocket expenses and provide indemnity against certain liabilities and other items arising out of its engagement.

 

Since June 1, 2008, RA Cap has worked on a retainer basis with the Company on several transactions and special projects. RA Cap advised the Company in its acquisition of Virtek Vision International, Inc. and in its sale of Virtek European Holdings Inc. and the assets of the Company’s Gerber Coburn segment, among other potential transactions. During that time, RA Cap earned a total of $2,107,000, consisting of $392,000 in retainer fees and $1,715,000 in success fees. Following the Merger, RA Cap does not expect its relationship with the Company to continue. RA Cap has not provided any services for Vector or its affiliates.

 

Pursuant to an engagement letter dated May 17, 2011, the Board engaged PJSC to act as financial and strategic advisor to the Board in connection with a possible merger or similar transaction involving the Company and, if requested, to render to the Board an opinion as to the fairness, from a financial point of view, to the holders of Company common stock (other than shares of Company common stock (i) held in the treasury of the Company or owned by Parent or Merger Sub, or by their respective subsidiaries, or (ii) held by holders who are entitled to and properly demand an appraisal of their shares of Company common stock in accordance with Connecticut law, the shares referred to in clauses (i) and (ii) being referred to as “Excluded Shares”) of the Merger Consideration to be paid pursuant and subject to the terms and conditions of the Merger Agreement.

 

On June 10, 2011, PJSC reviewed its analyses with the Board (at their special meeting) and delivered its oral opinion to the Board, which was subsequently confirmed by delivery of a written opinion dated June 10,

2011 (the “PJSC Opinion”), that, as of such date and subject to the assumptions, qualifications and limitations set forth in the PJSC Opinion, the Merger Consideration proposed to be paid to the holders of Company common stock (other than holders of Excluded Shares) in connection with the Merger was fair, from a financial point of view, to such holders.

 

The full text of the PJSC Opinion, which sets forth assumptions made, procedures followed, matters considered, and limitations on and scope of the review undertaken by PJSC in rendering the PJSC Opinion, is attached as Annex C to this proxy statement. The PJSC Opinion addresses only the fairness, from a financial point of view, to the holders of shares of Company common stock (other than holders of Excluded Shares) of the Merger Consideration proposed to be paid to such holders in connection with the Merger, was provided to the Board in connection with their evaluation of the Merger, did not address any other aspect of the Merger and did not, and does not, constitute a recommendation to any holder of Company common stock or any other person as to how any such holder or person should vote with respect to the Merger or act on any matter relating to the Merger. The summary of the PJSC Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion, which is incorporated by reference into this proxy statement. Holders of Company common stock are encouraged to read the PJSC Opinion carefully and in its entirety.

 

In connection with the PJSC Opinion, PJSC:

 

 

PJSC assumed and relied upon the accuracy and completeness of the information provided to PJSC for the purposes of the PJSC Opinion, and PJSC did not assume any responsibility for independent verification of such information. With respect to the financial projections, PJSC assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. PJSC did not conduct a physical inspection of the facilities or property of the Company. PJSC did not assume any responsibility for any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJSC furnished with any such valuation or appraisal. Furthermore, PJSC did not consider any tax, accounting or legal effects of the transaction or the transaction structure on any person or entity.

PJSC assumed that the final forms of the Merger Agreement and the CCC Agreement would be substantially the same as the last drafts of the Merger Agreement and the CCC Agreement reviewed by PJSC and would not vary in any respect material to PJSC’s analysis. PJSC further assumed that the Merger will be consummated in accordance with the terms of the Merger Agreement, without waiver, modification or amendment of any term, condition or agreement material to PJSC’s analysis (including, without limitation, the consideration proposed to be paid to the holders of Company common stock in connection with the Merger), and that, in the course of obtaining the necessary regulatory approvals for the Merger, no delay, limitation, restriction or condition will be imposed that would have a material adverse effect on the Company and that Parent will obtain the necessary financing to effect the Merger in accordance with the terms of financing commitments in the forms provided by Parent. PJSC further assumed that all representations and warranties set forth in the Merger Agreement and all related agreements are and will be true and correct in all respects material to PJSC’s analysis as of all of the dates made or deemed made and that all parties will comply in all respects material to PJSC’s analysis with all covenants of such parties thereunder. With the Board’s consent, for purposes of PJSC’s analyses, PJSC did not attempt to value or consider the merits of any of the claims that could potentially result in a CCCP and assigned no value to any CCCP.

 

The PJSC Opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to PJSC as of, June 9, 2011. In particular, PJSC did not express any opinion as to the prices at which shares of Company common stock may trade at any future time. Furthermore, the PJSC Opinion is limited to the fairness, from a financial point of view, to holders of shares of Company common stock (other than holders of Excluded Shares) of the Merger Consideration proposed to be paid to such holders pursuant to the Merger Agreement and does not address the Company’s underlying business decision to undertake the Merger or the relative merits of the Merger as compared to any alternative transactions or business strategies that might be available to the Company. The PJSC Opinion does not address any other aspect or implication of the Merger or any other agreement, arrangement or understanding entered into in connection with the Merger or otherwise except as expressly identified in the PJSC Opinion. In arriving at its opinion, PJSC was not authorized to solicit, and did not solicit, interest from any party with respect to a merger or other business combination transaction involving the Company or any of its assets, nor was PJSC involved in the negotiation of the terms of the Merger.

 

The following summarizes the material financial analyses performed by PJSC and reviewed with the Board on June 10, 2011 in connection with the delivery of the PJSC Opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJSC’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJSC’s financial analyses.

 

Analysis of Selected Publicly Traded Comparable Companies

 

Using publicly available information, PJSC performed a comparable companies analysis to determine (1) what the Company’s valuation would be if the Company common stock traded in the valuation range of certain comparable companies and (2) what the Company’s valuation would be if the Company common stock traded in such range and was to receive a premium to this valuation consistent with the median control premium paid in all announced public cash mergers and acquisition transactions (excluding financial services and real estate companies) with enterprise values between $200 million and $500 million since January 1, 2007 for U.S. targets. PJSC reviewed and compared selected financial data of companies of similar size and breadth having operations that, for purposes of PJSC’s analysis and based on PJSC’s experience, PJSC deemed similar to operations of the Company. The PJSC selected comparable companies were:

 

 

 

For each of these selected companies, PJSC calculated and compared various financial multiples and ratios, including, among others:

 

(1) enterprise value (which represents total equity value plus book values of total debt, preferred stock and minority interests less cash) as a multiple of each of:

 

 

for the selected companies, for the last twelve months and, other than as a multiple of net sales, for projected calendar years 2011 and 2012; and

 

(2) recent stock price per share as a multiple of earnings per share (referred to as “EPS”), for the last twelve months and for projected calendar years 2011 and 2012 based upon the closing stock prices as of June 9, 2011.

 

For purposes of this analysis, PJSC obtained the projected EPS, EBITDA and EBIT estimates for the public comparable companies by using the median of Wall Street analysts’ estimates as reported by Thomson Reuters as of June 9, 2011 for the PJSC selected companies.

Based on this data, as of June 9, 2011, PJSC developed a summary valuation analysis based on a range of trading valuation multiples and ratios for the PJSC selected companies. This analysis resulted in the following ranges of implied multiples and ratios:

 

 

 

PJSC then calculated a range of implied equity values per share of Company common stock using the range of multiples and ratios from the selected companies and applying them to the Company’s financial statistics, both excluding and including a “control premium”. For this calculation, the Company’s historical financial statistics were obtained from the Company’s historical financial statements, and the Company’s projected financial statistics were provided to PJSC by the Company’s management. See “Certain Financial Projections” beginning on page 36. The per share values were based on the number of fully diluted shares of Company common stock outstanding as of June 8, 2011. PJSC used a control premium of 28%, which was the median control premium paid in all announced public cash mergers and acquisition transactions (excluding financial services and real estate companies) with enterprise values between $200 million and $500 million since January 1, 2007, as reported by Mergerstat and Bloomberg.

 

Based on this analysis, PJSC derived reference ranges of implied equity values per share of Company common stock of $5.00 to $11.00 excluding a control premium and $6.40 to $14.08 including a control premium. PJSC noted that the Merger Consideration proposed to be paid to the holders of Company common stock in connection with the Merger was within the range of implied equity values of the PJSC selected companies.

 

Analysis of Selected Precedent Transactions

 

To analyze the Merger Consideration proposed to be paid to the holders of Company common stock in connection with the Merger relative to the consideration paid to the stockholders in selected other similar precedent transactions, PJSC prepared an analysis of selected precedent transactions that, for purposes of PJSC’s analysis, and based on PJSC’s experience, PJSC deemed similar to the Merger based on transaction size, Company operations and markets served. The PJSC selected precedent transactions were:

 

 

 

PJSC calculated the enterprise value in each of the selected transactions as a multiple of last twelve months revenue, EBITDA and EBIT. PJSC used publicly available data for the precedent transactions collected from SEC filings, news articles and other publicly available sources. Based on this analysis, PJSC derived the following ranges of multiples and ratios:

 

 

PJSC then calculated a range of implied equity values per share of Company common stock using the multiples and ratios from the selected transactions and applied them to the financial statistics of the Company. For this calculation, Company historical financial statistics were obtained from the Company’s historical financial statements, and the Company’s projected financial statistics were provided to PJSC by the Company’s management. See “Certain Financial Projections” beginning on page 35. The per share values were based on the number of fully diluted shares of Company common stock outstanding as of June 8, 2011.

 

Based on this analysis, PJSC derived a reference range of implied equity values per share of Company common stock of $5.00 — $9.00. PJSC noted that the Merger Consideration proposed to be paid to the holders of Company common stock in connection with the transaction was above the range of implied equity values per share of the selected transactions.

 

Discounted Cash Flow Analysis

 

PJSC performed a discounted cash flow analysis to calculate the theoretical value per share of Company common stock based on the value of the Company’s future unlevered free cash flows, as estimated and provided by the Company’s management for fiscal years 2012 to 2016. In performing its discounted cash flow analysis, PJSC considered various assumptions that it deemed appropriate based on a review with the Company’s management of the Company prospects and risks. PJSC believed it appropriate to utilize discount rates ranging from 11.0% to 15.0%, and EBITDA terminal value multiples ranging from 6.0x to 10.0x. PJSC determined to use these discount rates because they equaled the range of weighted average cost of capital of the Company and other companies deemed comparable to the Company by PJSC in its professional judgment.

 

Based on this analysis, PJSC derived a reference range of implied equity values per share of Company common stock of $7.50 — $12.00. PJSC noted that the Merger Consideration proposed to be paid to the holders of Company common stock in connection with the transaction was within the range of implied equity values.

 

Miscellaneous

 

In arriving at its opinion, PJSC performed a variety of financial analyses, the material portions of which are summarized above. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, PJSC did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to significance and relevance of each analysis and factor. Accordingly, PJSC believes that its analyses must be considered as a

whole and that selecting portions of its analyses or of the summary set forth above, without considering all such analyses, could create an incomplete view of the process underlying the PJSC Opinion.

 

In performing its analyses, PJSC relied on numerous assumptions made by the management of the Company and made numerous judgments of its own with regard to current and future industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. Actual values will depend upon several factors, including changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The analyses performed by PJSC are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of PJSC’s analysis of the fairness, from a financial point of view, to the holders (other than Parent and its affiliates) of Company common stock (other than holders of Excluded Shares) of the Merger Consideration proposed to be paid to such holders in connection with the transaction and were provided to the Board in connection with the delivery of the PJSC Opinion. The analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold, which may be higher or lower than the Merger Consideration proposed to be paid to the holders of Company common stock in the Merger and which are inherently subject to uncertainty. Because such analyses are inherently subject to uncertainty, none of the Company, PJSC or any other person assumes responsibility for their accuracy.

 

With regard to the comparable public company analysis and the precedent transactions analysis summarized above, PJSC selected such public companies on the basis of various factors for reference purposes only; however, no public company or transaction utilized as a comparison is identical to the Company or the Merger. Accordingly, an analysis of the foregoing was not mathematical; rather, it involved complex considerations and judgments concerning differences in financial and operating characteristics of the selected companies and other factors that could affect the acquisition or public trading values of the selected companies and transactions to which the Company and the Merger were being compared. The consideration proposed to be paid to the holders of Company common stock in the Merger was determined through negotiations between Parent and the Board and was approved by the Board. PJSC did not recommend any specific consideration to the Board or that any given consideration constituted the only appropriate consideration for the transaction. In addition, as described elsewhere in this proxy statement, the PJSC Opinion was one of many factors taken into consideration by the Board in evaluating the Merger. Consequently, the PJSC analyses described above should not be viewed as determinative of the respective opinions of the Board with respect to the Merger.

 

As part of its investment banking activities, PJSC is regularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, restructurings and valuations for corporate or other purposes. The Board selected PJSC to deliver an opinion with respect to the fairness, from a financial point of view, to the holders of Company common stock (other than holders of Excluded Shares) of the Merger Consideration proposed to be paid to such holders in connection with the Merger on the basis of such experience and PJSC’s qualifications and reputation.

 

Pursuant to the engagement letter dated May 17, 2011, the Company is obligated to pay PJSC a fee in connection with the services rendered to the Board. PJSC received a fee of $450,000 for its services, including a retainer fee of $100,000 and $350,000 of which was payable upon the date upon which PJSC advised the Company that it was prepared to render its opinion, and no portion of which is dependent on the closing of the Merger. In addition, the Company has also agreed to reimburse PJSC for its reasonable out-of-pocket expenses, including fees and disbursements of its counsel, incurred in connection with its engagement and to indemnify PJSC and certain related persons against liabilities and expenses, including liabilities under the federal securities laws, relating to or arising out of its engagement.

 

PJSC has not received compensation during the last two years for providing investment banking services to the Company, Parent or any of their affiliates. In addition, PJSC and its affiliates may provide in the future financial services to Parent and its affiliates, for which PJSC or its affiliates would expect to receive compensation. The issuance of the PJSC Opinion was authorized by its fairness opinion committee.

 

While the Company does publicly disclose certain financial forecasts as to future performance, earnings and other results, the Company does not as a matter of general practice publicly disclose financial forecasts beyond the upcoming full fiscal year and is especially cautious of making financial forecasts due to unpredictability of the underlying assumptions and estimates. However, in connection with the evaluation of a possible transaction involving the Company, the Company provided the Board and its advisors with certain non-public financial forecasts that were prepared by management of the Company and not for public disclosure.

 

A summary of these financial forecasts is not being included in this document to influence your decision whether to vote for or against the proposal to approve the Merger Agreement, but is being included because these financial forecasts were made available to the Board and its advisors. The inclusion of this information should not be regarded as an indication that the Board or its advisors or any other person considered, or now considers, such financial forecasts to be a reliable prediction of actual future results, and these forecasts should not be relied upon as such. The Company’s management’s internal financial forecasts, upon which the financial forecasts were based, are subjective in many respects. There can be no assurance that these financial forecasts will be realized or that actual results will not be significantly higher or lower than forecasted. The financial forecasts cover multiple years and such information by its nature becomes subject to greater uncertainty with each successive year. As a result, the inclusion of the financial forecasts in this proxy statement should not be relied on as necessarily predictive of actual future events.

 

In addition, the financial forecasts were not prepared with a view toward public disclosure or toward complying with generally accepted accounting principles in the United States (“GAAP”), the published guidelines of the SEC regarding projections and the use of non-GAAP measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the financial forecasts contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

 

These financial forecasts were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of the Company. The Company believes the assumptions that its management used as a basis for this projected financial information were reasonable at the time Company management prepared these financial forecasts, given the information Company management had at the time. Important factors that may affect actual results and cause these financial forecasts not to be achieved include risks and uncertainties relating to the Company’s business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions and other factors described or referenced under “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 13. In addition, the forecasts also reflect assumptions that are subject to change and do not reflect revised prospects for the Company’s business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the financial forecasts were prepared. Accordingly, there can be no assurance that these financial forecasts will be realized or that the Company’s future financial results will not materially vary from these financial forecasts.

 

No one has made or makes any representation to any shareholder or anyone else regarding the information included in the financial forecasts set forth below. Readers of this proxy statement are cautioned not to rely on the forecasted financial information. Some or all of the assumptions which have been made regarding, among other things, the timing of certain occurrences or impacts, may have changed since the date such forecasts were made. The Company has not updated and does not intend to update, or otherwise revise the financial forecasts 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 on which such forecasts were based are shown to be in error.

The following is a summary of the financial forecasts prepared by management of the Company and given to the Board and its advisors:

 

Summary Financial Forecasts

 

 

 

 

The Company and Parent estimate that the total amount of funds required to complete the Merger and related transactions and pay related fees and expenses will be approximately $315 million. Parent expects this amount to be provided through a combination of the proceeds of:

 

 

Equity Financing

 

On June 10, 2011, Vector IV entered into an equity commitment letter with Parent pursuant to which Vector IV committed to purchase, at or prior to the consummation of the Merger, $220 million of certain equity securities of Parent. In addition, on June 10, 2011, Able entered into an equity commitment letter with Parent pursuant to which Able committed to purchase, at or prior to the consummation of the Merger, $40 million of certain equity securities of Parent. The equity commitment of each of Vector IV and Able is conditioned upon the substantially simultaneous funding of Parent pursuant to the other equity commitment letter and the funding of the debt financing described below (or alternative debt financing obtained in accordance with the Merger Agreement). Each of the equity commitments described above is further conditioned upon the satisfaction of the conditions to the obligations of Parent to complete the Merger contained in the Merger Agreement. The equity commitments will terminate, in each case, upon the earliest to occur of (i) the full and indefeasible funding of the equity commitment at the consummation of the Merger, (ii) termination of the Merger Agreement (unless the Company has commenced litigation against Vector IV or Able, as the case may be, in respect of such party’s equity commitment letter prior to such termination) and (iii) the Company or any of its affiliates (with the Company’s authorization) asserting any claim against Vector IV, Able or certain of their affiliates in connection with the Merger Agreement or any of the transactions contemplated by the Merger Agreement or the equity commitment letters other than claims expressly permitted under the equity commitment letters. The Company is an express third-party beneficiary of each of the equity

commitment letters and has the right to seek specific performance of each of the equity commitments under the circumstances in which the Company would be permitted by the Merger Agreement to obtain specific performance requiring Parent to enforce the equity commitments.

 

Debt Financing

 

In connection with Parent’s entry into the Merger Agreement, Merger Sub received a debt commitment letter (the “Debt Commitment Letter”), dated June 10, 2011, from Fortress Capital Corp. The Debt Commitment Letter provides for a senior secured financing facility in aggregate of $60 million (the “Financing Facility”), consisting of (i) a $50 million term loan facility and (ii) a $10 million revolving credit facility of which no amounts may be drawn at the closing of the Merger.

 

Interest under the Financing Facility will be payable at a LIBOR-based rate, with a floor of 1.5%, plus 6.00% and will be payable in cash monthly in arrears.

 

Upon consummation of the Merger, the borrowers under the senior secured facilities will be the Company and certain domestic subsidiaries. The Financing Facility will be guaranteed, upon consummation of the Merger, by each domestic subsidiary of the Company that is designated by Fortress in consultation with Parent. The Financing Facility will be secured, upon consummation of the Merger, subject to permitted liens and other agreed upon exceptions, by a first priority lien on substantially all the assets of the Company and certain domestic subsidiaries of the Company that are designated by Fortress in consultation with Parent, but excluding amounts received by the Company relating to the litigation which is the subject of the CCC Agreement and any and all rights under the CCC Agreement.

 

Conditions:

 

The Financing Facility contemplated by the Debt Commitment Letter is subject to certain closing conditions, including, without limitation:

 

 

 

The commitment by Fortress to provide the Financing Facility will expire upon the earliest of (i) the termination of the Merger Agreement in accordance with its terms, (ii) the closing of the Merger without the use of the Financing Facility and (iii) 5:00 p.m. (New York City time) on November 10, 2011.

 

Subject to the terms and conditions of the Merger Agreement, each of Parent and Merger Sub will use its reasonable best efforts to obtain the financing on the terms and conditions described in the equity commitment letters and the Debt Commitment Letter, and will not enter into any contract that contains additional financing terms, and will not permit any amendment or modification to be made to, or any waiver of any provision under, the equity commitment letters or the Debt Commitment Letter if such amendment, modification or waiver (i) reduces (or could have the effect of reducing) the aggregate amount of the financing or (ii) imposes new or additional conditions or otherwise expands, amends or modifies any of the conditions to the financing, or otherwise expands, amends or modifies any other provision of the equity commitment letters or the Debt Commitment Letter in a manner that would reasonably be expected to (a) delay or prevent or make less likely the funding of the financing (or satisfaction of the conditions to the financing) on the closing date or (b) adversely impact the ability of Parent or Merger Sub to enforce its rights against other parties to the equity commitment letters or the Debt Commitment Letter.

 

Although the debt financing described in this proxy statement is not subject to due diligence or a “market out” provision, which would have allowed lenders not to fund their commitments if certain conditions in the financial markets prevail, there is still a risk that such debt financing may not be funded when required. As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described in this proxy statement is not available as anticipated.

 

Vector IV and Able have agreed to guarantee their respective percentages (determined based upon the relative size of their equity commitments to Parent) of the obligations of Parent under the Merger Agreement to pay, under certain circumstances, a reverse termination fee and reimburse certain expenses. The limited guaranty will terminate on the earliest of (i) the effective time of the Merger and (ii) the termination of the Merger Agreement in circumstances in which the reverse termination fee does not become payable by Parent (unless the Company has commenced litigation under the limited guaranty prior to such termination). However, if the Company or any of its affiliates (with the Company’s authorization) asserts any claim against Vector IV, Able or certain of their affiliates in connection with the Merger Agreement or any of the transactions contemplated by the Merger Agreement other than claims expressly permitted under the limited guaranty, the limited guaranty will immediately terminate and become null and void by its terms, all payments previously made pursuant to the limited guaranty must be returned and neither Vector IV and Able nor certain of their related parties will have any liability to the Company under the limited guaranty.

 

Details of the beneficial ownership of our directors and executive officers of Company common stock is set out in “Security Ownership of Certain Beneficial Owners and Management” beginning on page 77. In addition to their interests in the Merger as shareholders, certain of our directors and executive officers have

interests in the Merger that differ from, or are in addition to, your interests as a shareholder. In considering the recommendation of our Board to vote “FOR” the approval of the Merger Agreement, you should be aware of these interests. Our Board was aware of, and considered the interests of, our directors and executive officers in adopting the Merger Agreement and the transactions contemplated by the Merger Agreement. Except as described below, such persons have, to our knowledge, no material interest in the Merger that differs from your interests generally. We have also included in this section information with respect to Messrs. John Hancock, Stephen Lovass and Alex Incera even though they are no longer employed by the Company, because they were executive officers prior to their respective separations from the Company in April 2011, May 2011 and December 2010, respectively. For purposes of all of the agreements and plans described below, the completion of the transactions contemplated by the Merger Agreement will constitute a change in control.

 

Treatment of Equity Awards

 

As of the date of this proxy statement, certain of our directors and executive officers held stock options, restricted stock and deferred shares. As of the date of this proxy statement, we also have restricted stock units outstanding, although none of our executive officers or directors holds any such restricted stock units.

 

For information regarding beneficial ownership of Company common stock by each of our current directors and certain executive officers and all of such directors and executive officers as a group, see “Security Ownership of Certain Beneficial Owners and Management” beginning on page 77. The Company’s directors and executive officers will receive $11.00 per share and a CCCP for each vested share they own, in the same manner as other shareholders.

 

Stock Options

 

At the effective time of the Merger, each outstanding stock option that has an exercise price of less than $11.00, whether or not then vested, will be converted into the right to receive:

 

 

At the effective time of the Merger, each outstanding stock option that has an exercise price of greater than $11.00, whether or not then vested, will be converted into the right to receive a CCCP for each share of common stock subject to such stock option that takes into account the amount by which such option’s exercise price exceeds $11.00.

 

The cash consideration with respect to the stock options will be paid at or reasonably promptly following the effective time of the Merger, less any applicable withholding taxes. The CCCPs with respect to the stock options will be subject to the same terms and conditions as apply to CCCPs with respect to shares of Company common stock generally.

 

None of our directors holds any unvested stock options.

 

Restricted Stock

 

At the effective time of the Merger, each share of restricted stock will fully vest and be converted into the right to receive:

 

 

The cash consideration with respect to shares of restricted stock will be paid subject to the same terms and conditions as apply to shares of Company common stock generally. The CCCPs with respect to shares of restricted stock will be subject to the same terms and conditions as apply to CCCPs with respect to shares of Company common stock generally.

None of our directors holds any shares of restricted stock.

 

Restricted Stock Units

 

At the effective time of the Merger, each restricted stock unit will fully vest and be converted into the right to receive:

 

 

The cash consideration with respect to the restricted stock units will be paid at or reasonably promptly following the effective time of the Merger (but in no event later than 10 business days after the effective time of the Merger), less any applicable withholding taxes. The CCCPs with respect to the restricted stock units will be subject to the same terms and conditions as apply to CCCPs with respect to shares of Company common stock generally.

 

None of our executive officers or directors holds any restricted stock units.

 

Deferred Shares

 

Our non-employee directors hold deferred shares of Company common stock pursuant to the Non-Employee Director’s Stock Grant Plan and the Agreement for Deferment of Director Fees. All such shares are fully vested and will be distributed in full immediately prior to, and contingent upon, the consummation of the Merger.

 

None of our executive officers holds any deferred shares.

 

At the effective time of the Merger, each outstanding deferred share will cease to represent the right to receive a share of Company common stock and instead will be converted into:

 

 

The cash consideration with respect to the deferred shares will be paid within 10 business days following the earliest date which would not result in adverse tax consequences under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) to the holder of the deferred shares, less any applicable withholding taxes. The CCCPs with respect to the deferred shares will be subject to the same terms and conditions as apply to CCCPs with respect to shares of Company common stock generally.

 

Change-in-Control Agreements

 

We are party to change-in-control agreements with each of our current executive officers (excluding Messrs. Hancock, Lovass and Incera, who are no longer employed by the Company). We were never party to a change-in-control agreement with Mr. Incera. These change-in-control agreements provide for the following payments and benefits in the event an executive’s employment is terminated by the Company (other than for “cause”) or by the executive for “good reason” within two years following a “change-in-control”, which will occur upon consummation of the Merger (each term as defined in the change-in-control agreements):

 

 

 

In the event an executive’s employment is terminated by the Company for cause or by the executive other than for good reason, the executive is not entitled to any payments or benefits under the change-in-control agreement.

 

In exchange for the above payments and benefits, pursuant to the change-in-control agreements, each executive officer has agreed that in the event of a “potential change in control” (as defined in the change-in-control agreements and which includes entry into the Merger Agreement), the executive will not voluntarily terminate his employment with the Company until the earlier to occur of (1) six months after the occurrence of the potential change in control or (2) the occurrence of a change in control of the Company.

 

In addition, as a condition of receipt of the above payments and benefits, each executive must sign a general release in favor of the Company which releases the Company from all future claims and certifies the executive’s agreement to be bound following termination by the confidentiality and the one-year non-compete provisions in the agreement. Severance payments and other benefits under the change-in-control agreements will not be deferred or withheld on the basis of an asserted violation of the confidentiality provision.

 

In the event the above payments and benefits constitute “excess parachute payments”, within the meaning of Section 280G of the Code, the total amount of such payments and benefits will be reduced to the extent any such reduction would result in an increase in the aggregate after-tax value of the payments and benefits to be provided to the executive (taking into account the excise tax imposed on “excess parachute payments” pursuant to Section 4999 of the Code).

 

The Company has agreed to require any successor to its business expressly to assume its obligations under the agreements. If any such successor to the Company does not agree to assume its obligations under the agreements, the executive is entitled to compensation in the same amount and on the same terms as he would be entitled under the agreements in the event of termination without cause or termination for good reason following a change in control.

 

For purposes of the change-in-control agreements, “good reason” is generally defined to mean any of the following events: (i) a material diminution in the nature and scope of the executive’s authority, duties or responsibilities from those applicable immediately prior to the change in control; (ii) a reduction in the executive’s base salary from that provided immediately prior to the change in control; (iii) a diminution in the executive’s eligibility to participate in compensation plans and employee benefits and perquisites which provided opportunities to receive overall compensation and benefits and perquisites from the greater of (x) the opportunities provided by the Company for executives with comparable duties or (y) the opportunities under any such plans and perquisites under which the executive was participating immediately prior to the change in control; (iv) a change in the location of the executive’s principal place of employment by more than 50 miles from the location applicable immediately prior to the change in control; (v) a significant increase in the executive’s frequency or duration of business travel; or (vi) a reasonable determination by the Board that, as a result of the change in control and change in circumstances thereafter significantly affecting the executive’s position, the executive is unable to exercise the authority, powers, functions or duties applicable to his position immediately prior to the change in control.

 

CCCP Committee

 

From the effective time of the Merger, Messrs Donald P. Aiken, Stephen P. Lovass and William V. Grickis, Jr. are expected to serve on the Committee as initial Committee members and will be entitled to compensation and indemnification for such service under the CCC Agreement. See “The Contingent Cash Consideration Agreement-CCCP Committee Establishment and Authority” beginning on page 71.

New Management Arrangements

 

On July 9, the Board gave permission to certain of the Company’s employees (including the Company’s executive officers) to enter into discussions with Vector and a potential partner of Vector about possible post-acquisition roles and compensation or investment opportunities. Discussions about these matters are ongoing.

 

As of the date of this proxy statement, none of the Company, its subsidiaries, Vector or Vector’s potential partner has entered into any employment agreements with the Company’s executive officers in connection with the Merger, and neither the Company nor its subsidiaries has amended or modified any existing change-in-control agreements or other arrangements with management.

 

Directors’ and Officers’ Indemnification and Insurance

 

The Merger Agreement provides that Parent will cause the Surviving Corporation, and the Surviving Corporation will do the following:

 

 

Prior to the effective time of the Merger, the Company will, or if the Company is unable to, Parent will cause the Surviving Corporation as of the effective time of the Merger to, obtain and fully pay the premium for the non-cancelable extension of the directors’ and officers’ liability coverage of the Company’s existing directors’ and officers’ insurance policies and the Company’s existing fiduciary liability insurance policies, in each case for a claims reporting or discovery period of at least six years from and after the effective time of the Merger with respect to any claim related to any period or time at or prior to the effective time of the Merger (including claims with respect to the adoption of this Agreement and the consummation of the transactions contemplated hereby) with terms, conditions, retentions and limits of liability that are no less favorable than the coverage provided under the Company’s existing policies. The Company will give Parent a reasonable opportunity to participate in the selection of such “tail” insurance policy and the Company will give good faith consideration to any comments made by Parent with respect thereto. Moreover, the total amount payable for such “tail” insurance policy will not exceed 250% of the amount per annum payable by the Company for its current fiscal year and if the total amount payable for such “tail” insurance policy exceeds this cap, then the Company will obtain a policy with the greatest coverage available for a total amount payable not to exceed the amount of the cap.

 

The present and former directors and officers of the Company will have the right to enforce the provisions of the Merger Agreement relating to their indemnification

Benefit Arrangements with the Surviving Corporation

 

The Merger Agreement requires that, until April 30, 2012, Vector will provide, or cause the Surviving Corporation to provide, compensation and employee benefits to each employee that, taken as a whole, have a value that is substantially comparable in the aggregate (excluding any value attributable to the Company’s equity-based compensation or defined benefit plans) to those provided to the employees of the Company immediately prior to the effective time of the Merger.

 

In addition, the Surviving Corporation is required to honor and continue certain change-in-control, employment, severance, retention and termination policies and arrangements until the later of April 30, 2012 and the expiration of such policy or arrangement pursuant to its terms.

 

Quantification of Payments and Benefits

 

The following tables show the amounts of payments and benefits that each current director and executive officer of the Company (and certain former executive officers) would receive in connection with the Merger, assuming the consummation of the Merger occurred on July 15, 2011, the latest practicable date prior to the filing of this proxy statement, and, in the case of the executive officers, the employment of the executive officer was terminated by the Surviving Corporation without cause or by the executive officer for good reason on such date.

 

The first table below, entitled “Potential Change in Control Payments to Named Executive Officers”, along with its footnotes, shows the compensation payable to the Company’s chief executive officer, chief financial officer and the three other most highly compensated executive officers, as determined for purposes of its most recent annual proxy statement, and is subject to an advisory vote of the Company’s shareholders, as described under “Advisory Vote on Golden Parachutes” below.

 

The second table below, entitled “Potential Change in Control Payments to Other Executive Officers”, along with its footnotes, shows the compensation payable to the other executive officers and is not subject to an advisory vote. Although the rules of the SEC do not require the second table, it has been included so that quantification of the potential change in control payments and benefits that could be received by all our executive officers is presented in a uniform manner.

 

The third table below, entitled “Payments to Executive Officers and Directors in Respect of Vested Options”, along with its footnotes, shows the outstanding vested options held by the Company’s directors and executive officers, respectively, and the payments each of them can expect to receive for their vested options. Compensation payable in respect of outstanding unvested options held by the Company’s executive officers is included in the first and second tables below, entitled “Potential Change in Control Payments to Named Executive Officers” and “Potential Change in Control Payments to Other Executive Officers”, respectively. The Company’s directors do not hold any unvested options.

 

The fourth table below, entitled “Payments to Directors in Respect of Deferred Shares”, shows the outstanding deferred shares held by our non-employee directors and the payments each of them can expect to receive for their deferred shares, all of which are vested. Since all amounts payable to the Company’s directors are in respect of vested deferred shares, amounts payable to the Company’s directors are not separately quantified in the same manner as is provided for our executive officers.

 

Potential Change in Control Payments to Named Executive Officers

 

 

 

The three amounts are broken down as follows:

 

 

The salary and bonus components of the cash severance, respectively, for each named executive officer are as follows: (i) Mr. Giles — $600,000 and $450,000; (ii) Mr. Elia — $350,000 and $210,000; (iii) Mr. Finn — $340,000 and $170,000; (iv) Mr. Larson — $300,000 and $150,000; and (v) Mr. Hancock — $0 and $0.

 

 

 

Since the value of the CCCP is not fixed, the value of restricted stock and unvested stock options is based on the average closing price of Company shares over the first five business days following public announcement of the Merger, or $11.00. Accordingly, actual payments may be greater or less than those provided for above. Depending on when consummation of the Merger occurs, certain shares of restricted stock and certain stock options shown as unvested in the table may become vested in accordance with their terms without regard to the Merger.

 

Potential Change in Control Payments to Other Current and Certain Former Executive Officers

 

 

 

 

The three amounts are broken down as follows:

 

 

The salary and bonus components of the cash severance, respectively, for each executive officer are as follows: (i) Mr. Grickis — $274,383 and $137,191.50; (ii) Ms. Burmahl — $210,000 and $105,000; (iii) Mr. Arthurs — $259,050 and $129,525; and (iv) Mr. Lovass $0 and $0.

 

 

 

Since the value of the CCCP is not fixed, the value of restricted stock and unvested stock options is based on the average closing price of Company shares over the first five business days following public announcement of the Merger, or $11.00. Accordingly, actual payments may be greater or less than those provided for above. Depending on when consummation of the Merger occurs, certain shares of restricted

stock and certain stock options shown as unvested in the table may become vested in accordance with their terms without regard to the Merger.

 

 

Payments to Current and Certain Former Executive Officers and Directors in Respect of Vested Options

 

 

 

 

Payments to Directors in Respect of Deferred Shares

 

 

 

In accordance with Section 14A of the Exchange Act, the Company is providing its shareholders with the opportunity to cast an advisory vote on the compensation that may be payable to its named executive officers in connection with the Merger. As required by those rules, the Company is asking its shareholders to vote on the adoption of the following resolution:

 

“RESOLVED, that the compensation that may be paid or become payable to the Company’s named executive officers in connection with the Merger, as disclosed in the table entitled “Potential Change in Control Payments to Named Executive Officers” on page 44, including the associated narrative discussion, and the agreements or understandings pursuant to which such compensation may be paid or become payable, are hereby APPROVED.”

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THIS PROPOSAL.

 

The vote on executive compensation payable in connection with the Merger is a vote separate and apart from the vote to approve the Merger. Accordingly, you may vote to approve the executive compensation and vote not to approve the Merger and vice versa. Because the vote is advisory in nature only, it will not be binding on the Company. Accordingly, because the Company is contractually obligated to pay the compensation, such compensation will be payable, subject only to the conditions applicable thereto, if the Merger is approved and regardless of the outcome of the advisory vote.

 

The affirmative vote of the majority of the votes cast at the Company’s special meeting at which a quorum is present will be required to approve the advisory resolution on executive compensation payable in connection with the Merger. Abstentions and broker non-votes will be counted towards a quorum. However, if you are a shareholder of record, and you fail to vote by proxy or by ballot at the special meeting, your shares will not be counted for purposes of determining a quorum.

 

An abstention, failure to submit a proxy card or vote in person or a broker non-vote will not affect whether this matter has been approved, although they will have the practical effect of reducing the number of affirmative votes required to achieve the required majority by reducing the total number of shares from which the majority is calculated.

 

The following is a summary of the material United States Federal income tax consequences of the Merger to U.S. holders (as defined below) whose shares of our common stock are converted into the right to receive Merger Consideration in the Merger. The discussion is based upon the Code, Treasury regulations, Internal Revenue Service (“IRS”) rulings and judicial and administrative decisions in effect as of the date of this proxy statement, all of which are subject to change (possibly with retroactive effect) or to different interpretations. The following discussion does not purport to consider all aspects of U.S. Federal income taxation that might be relevant to our shareholders. This discussion applies only to shareholders who, on the date on which the Merger is completed, hold shares of our common stock as a capital asset. The following discussion does not address taxpayers subject to special treatment under U.S. Federal income tax laws, such as insurance companies, financial institutions, dealers in securities, tax-exempt organizations, mutual funds, real estate

investment trusts, investors in pass-through entities, S corporations and taxpayers subject to the alternative minimum tax. In addition, the following discussion may not apply to shareholders who acquired their shares of our common stock upon the exercise of employee stock options or otherwise as compensation for services or through a tax-qualified retirement plan or who hold their shares as part of a hedge, straddle, conversion transaction or other integrated transaction or who receive cash pursuant to the exercise of appraisal rights. If our common stock is held through a partnership, the U.S. Federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships that are holders of our common stock and partners in such partnerships are urged to consult their own tax advisors regarding the tax consequences to them of the Merger. The following discussion does not address potential foreign, state, local and other tax consequences of the Merger.

 

WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES, AS WELL AS THE FOREIGN, STATE AND LOCAL TAX CONSEQUENCES, OF THE DISPOSITION OF YOUR SHARES IN THE MERGER.

 

For purposes of this summary, a “U.S. holder” is a beneficial owner of shares of our common stock, who or that is, for U.S. Federal income tax purposes:

 

 

Except with respect to the backup withholding discussion below, this discussion does not discuss the tax consequences to any shareholder who or that, for U.S. Federal income tax purposes, is not a U.S. holder.

 

General

 

The exchange of shares for the Merger Consideration by a U.S. holder will be a taxable transaction for U.S. Federal income tax purposes. The amount and timing of the gain or loss a U.S. holder recognizes, and the character of a portion of such gain or loss, depends on the U.S. Federal income tax treatment of the CCCPs and any future payments made pursuant to them.

 

Under applicable Treasury Regulations, U.S. holders are not eligible to report payments pursuant to the CCCPs on the installment method because our stock is publicly traded. However, it is not clear whether the receipt of the CCCPs must be treated as a “closed transaction” or “open transaction” at the time of the Merger. Under Treasury Regulations, closed transaction treatment would apply if the CCCPs are considered to have a fair market value at the time of the Merger. Moreover, under those regulations, only in “rare and extraordinary cases” is the value of property so uncertain that open transaction treatment is available. There is no authority relating to rights similar to the CCCPs.

 

We believe that closed transaction treatment is more likely the correct result, and if the closed transaction treatment applies, the value of the CCCPs would most likely be considered to be the excess of the trading price of our common stock at the time of the Merger over the amount of cash to be paid on the Merger. It is possible however, that other factors should be taken into account in valuing the CCCP. In addition, because the treatment of the CCCPs is not entirely clear, we discuss below the consequences of both closed transaction and open transaction treatment. It is also uncertain whether the CCCPs represent debt instruments for U.S. Federal income tax purposes. However, because it is possible that no payments will be received on the CCCPs, we believe it is likely, and the following discussion assumes, that the CCCPs are not debt for Federal income tax purposes.

Under both closed and open transaction treatment, a portion of any payments pursuant to the CCCPs would be treated as imputed interest taxable as ordinary interest income. The imputed interest portion of any payment generally should equal the excess of (1) the amount of the payment over (2) the present value of such amount as of the effective time of the Merger, discounted at the relevant applicable Federal rate. The relevant applicable Federal rate will be the lower of (a) the lowest applicable Federal rate in effect during the three-month period ending with the month that includes the date on which the Merger Agreement was signed and (b) the lowest applicable Federal rate in effect during the three-month period ending with the month that includes the effective time of the Merger. The imputed interest is accounted for in accordance with your regular method of accounting. In the discussion of closed transaction and open transaction treatment below, references to payments under the CCCPs are to the non-interest portion of such payments.

 

Closed Transaction Treatment

 

The Merger.  Under the closed transaction approach, you would recognize a capital gain or loss upon the Merger equal to the difference, if any, between (1) the amount of cash and the fair market value at the time of the Merger of the CCCP that you receive and (2) your adjusted tax basis in our common stock. Gain or loss will be determined separately for each identifiable block of shares (i.e., shares acquired at the same cost in a single transaction) you surrender in exchange for Merger Consideration. Capital gain or loss, if any, will be long-term with respect to your shares that have a holding period longer than one year at the time of the Merger. Long-term capital gains of individuals are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses. Your initial tax basis in the CCCP will equal the fair market value of the CCCP at the time of the Merger. Your holding period will begin on the following day.

 

Receipt of Future Payments.  The tax treatment of future payments is not clear. We believe it is most likely that any such payments would be treated as a non-taxable return of capital and reduce your tax basis in your CCCPs until such basis has been reduced to zero, and any future payments would be taxable in full. Alternatively, it is possible that a portion of each payment might be considered taxable income, with the remaining portion reducing your tax basis in your CCCP until such basis has been reduced to zero, and any future payments would be taxable in full. You will be entitled to a loss if, at the time it is determined that no more payments will be made on the CCCP, you have any remaining tax basis in the CCCP. It is not clear whether the taxable payments described in this paragraph would be taxed as capital gain or ordinary income, but it is likely that any loss would be a capital loss.

 

Open Transaction Treatment

 

The Merger.  Under the open transaction approach, the CCCP would not be taken into account in determining your taxable gain upon receipt of the Merger Consideration. You would recognize a capital gain upon the Merger equal to the excess, if any, of the amount of cash you receive and your adjusted tax basis in our common stock. No loss would be recognized at the time of the Merger, and you would take no tax basis in the CCCP.

 

Receipt of future payments.  Under this approach, if the cash received in the Merger is equal to or greater than your tax basis in our common stock, then all payments received or accrued on the CCCP would be taxable in accordance with your regular method of accounting. If the cash received in the Merger is less than your tax basis in our common stock, then payments received or accrued on the CCCP would not be taxable until the total payments you receive or accrue (including those in the Merger) are equal to your tax basis in our common stock, and all subsequent payments on the CCCP would be taxable. It is likely that all payments that are taxable under this paragraph would be taxable as capital gain, and such gain would be long term if your holding period for our stock at the time of the Merger is more than one year. At the time that it is determined that no additional payments will be made under the CCCP, you would be entitled to a capital loss equal to any excess of your tax basis in our common stock over the aggregate cash you received at the time of the Merger and payments you received on your CCCP.

Due to the legal and factual uncertainty regarding the valuation and tax treatment of the CCCPs, we urge you to consult your tax advisors concerning the tax consequences to you of receiving the CCCP in the Merger.

 

Information Reporting and Backup Withholding

 

Information reporting to the IRS generally will be required with respect to payments of the Merger Consideration, as well as to payments pursuant to the CCCPs, to holders other than corporations and other exempt recipients. In addition, under the “backup withholding” provisions of the U.S. Federal income tax laws, the exchange agent may be required to withhold a portion of the amount of payments made to certain holders pursuant to the Merger, as applicable, and a portion of the amount of any payments made pursuant to the CCCPs. In order to prevent backup withholding with respect to payments, a U.S. holder must provide the exchange agent with such holder’s correct taxpayer identification number (“TIN”) and certify that such holder is not subject to backup withholding by completing the IRS Form W-9 in the letter of transmittal. Certain holders (including, among others, all corporations and certain foreign individuals and entities) may not be subject to backup withholding. If a holder does not provide its correct TIN or fails to provide the certifications described above, the IRS may impose a penalty on the holder, and payments to the holder pursuant to the Merger, as well as payments pursuant to the CCCPs, may be subject to backup withholding. All U.S. holders should complete and sign the IRS Form W-9 included in the letter of transmittal to provide the information necessary to avoid backup withholding. Foreign shareholders should complete and sign the appropriate Form W-8 (a copy of which may be obtained from the exchange agent) in order to avoid backup withholding. Such shareholders should consult a tax advisor to determine which Form W-8 is appropriate. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a holder’s U.S. Federal income tax liability provided the required information is timely furnished to the IRS.

 

The foregoing discussion of material United States Federal income tax consequences is included for general informational purposes only. We urge you to consult your own tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of Merger Consideration for shares of our common stock pursuant to the Merger.

 

Completion of the Merger is subject to certain governmental or regulatory clearance procedures, including the termination or expiration of the waiting period under the HSR Act and the taking or making of all actions or filings pursuant to the foreign antitrust laws of Germany required to permit the consummation of the Merger.

 

United States Antitrust Laws.  The HSR Act provides that transactions such as the Merger may not be completed until certain information has been submitted to the FTC and the Antitrust Division and certain waiting period requirements have been satisfied. The Company and Parent filed notification and report forms with the Antitrust Division and the FTC under the HSR Act on June 23, 2011 and requested early termination of the waiting period. The request for early termination was granted on and became effective July 1, 2011.

 

The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as the Merger. At any time before or after the consummation of the Merger, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger or seeking divestiture of certain assets or businesses of the parties. At any time before or after the consummation of the Merger, and notwithstanding that early termination of the HSR Act waiting period has been granted, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of certain assets or businesses. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

German Antitrust Laws.  Under German law, the Merger may not be completed until approval has been obtained from the German Federal Cartel Office. Parent made the required filings with the German Federal Cartel Office on June 28, 2011 and approval was granted on July 18, 2011.

 

On or about July 18, 2011, Sally A. Behn, a shareholder of the Company, served the Company and Merger Sub with a purported class action complaint on behalf of herself and all other similarly situated shareholders of the Company captioned in Superior Court in the Judicial District of Tolland at Rockville in the State of Connecticut as Sally A Behn v. Marc T. Giles, et al. The lawsuit names as defendants the Company, the Company’s directors (together with the Company, the “Company Defendants”), Vector and Merger Sub (together with Vector, the “Vector Defendants”).

 

The complaint alleges, among other things, that the Company’s directors breached their fiduciary duties in connection with the negotiation, consideration and adoption of the Merger Agreement by, among other things, agreeing to sell the Company for inadequate consideration and via an unfair process. The complaint alleges that the Company and the Vector Defendants aided and abetted the alleged breaches of fiduciary duty by the Company’s directors. The complaint also alleges that the preliminary proxy statement omits material information and provides materially misleading information. Based on these allegations, the complaint, among other relief, seeks certain injunctive relief, including enjoining of the Merger, and damages. It also purports to seek recovery of the costs of the action, including reasonable attorneys’ fees. Based on the facts known to date, the Company Defendants believe that the claims asserted in the complaint are without merit, and they intend to defend themselves vigorously.

 

The following is a summary of the material terms and conditions of the Merger Agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is attached as Annex A, and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read the Merger Agreement carefully and in its entirety because it is the legal document that governs the Merger.

 

The Merger Agreement and this summary of its terms have been included to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the Merger Agreement and described in this summary. The representations, warranties and covenants were qualified and subject to important limitations agreed to by the parties to the Merger Agreement in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to shareholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by the Company to Parent and Merger Sub, which disclosures are not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Merger Agreement and subsequent developments or new information affecting a representation or warranty may have been included in this proxy statement.

 

The Merger Agreement provides that at the effective time of the Merger, Merger Sub will be merged with and into the Company. As a result of the Merger, the separate corporate existence of Merger Sub will cease and the Company will continue as the Surviving Corporation following the Merger.

 

From and after the effective time of the Merger, until successors are duly elected or appointed and qualified, the directors of Merger Sub at the effective time of the Merger will be the directors of the Surviving Corporation and the officers of the Company at the effective time of the Merger will be the officers of the Surviving Corporation.

 

At the effective time of the Merger, the certificate of incorporation of the Company will be amended to read in its entirety as set forth in Exhibit B to the Merger Agreement and, as so amended, will be the certificate of incorporation of the Surviving Corporation until amended in accordance with applicable law. At the effective time of the Merger, the bylaws of the Company will be amended to read in their entirety as the bylaws of Merger Sub in effect immediately prior to the effective time of the Merger and as so amended will be the bylaws of the Surviving Corporation until amended in accordance with applicable law.

 

The closing of the Merger will take place no later than two business days after the date on which the conditions to closing of the Merger (described under “The Merger Agreement — Conditions to the Merger”) have been satisfied or, to the extent permissible, waived (other than the conditions that by their nature are to be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of those conditions).

 

The effective time of the Merger will occur on the date of the closing of the Merger at such time as the certificate of merger is duly filed with the Connecticut Secretary of the State (or at such later time as may be specified in the certificate of merger).

 

Common Stock

 

At the effective time of the Merger, each share of the Company’s common stock outstanding immediately prior to the effective time of the Merger (other than shares held by Parent, Merger Sub, any other subsidiary of Parent or any subsidiary of the Company or persons who properly exercise appraisal rights under Connecticut law) will be converted into the right to receive $11.00 in cash, without interest, and a CCCP. Shares of the Company’s common stock held by the Company as treasury stock or by Parent or Merger Sub immediately prior to the effective time of the Merger will be canceled and no payment will be made with respect to those shares. Shares of the Company’s common stock held by any subsidiary of the Company or Parent (other than Merger Sub) immediately prior to the effective time of the Merger will be converted into shares of common stock of the Surviving Corporation. Shares of the Company’s common stock held by shareholders who have properly exercised their appraisal rights for such shares in accordance with the CBCA will be entitled to payment of the appraised value of such shares in accordance with the CBCA. If any such shareholder fails to perfect, withdraws or otherwise loses such shareholders’ rights to appraisal pursuant to the CBCA, that shareholder’s shares of the Company’s common stock will be treated as if they had been converted as of the effective time of the Merger into the right to receive the Merger Consideration, without interest. See “Appraisal Rights” beginning on page 73.

 

Company Equity Awards

 

Upon the consummation of the Merger, each unexercised in-the-money stock option that is outstanding immediately prior to the effective time of the Merger will be converted into the right to receive (i) the option’s spread value in cash (i.e., a cash payment equal to the excess of $11 over such option’s exercise price) and (ii) a CCCP. Each unexercised out-of-the-money stock option that is outstanding immediately prior to the effective time of the Merger will be converted into the right to receive a CCCP that takes into account the amount by which such option’s exercise price exceeds $11. The restrictions on each “restricted” share of the

Company’s common stock that is outstanding immediately prior to the effective time of the Merger shall vest in full and become free of such restrictions upon consummation of the Merger, and each such share will be converted into the right to receive the Merger Consideration. Each restricted stock unit and each deferred share that is outstanding immediately prior to the effective time of the Merger will be converted into the right to receive the Merger Consideration. See “The Merger — Interests of Our Directors and Executive Officers in the Merger” beginning on page 39.

 

Shares in the Gerber Scientific, Inc. and Participating Subsidiaries 401(k) Maximum Advantage Program

 

If the Merger is completed, each participant in the 401(k) Maximum Advantage Program will be entitled to receive the Merger Consideration for each share of the Company’s common stock that the participant holds in his or her 401(k) Maximum Advantage Program account. However, participants will not receive the proceeds from their plan shares directly. Instead, on the day(s) that the proceeds are received by shareholders of Company common stock generally, each participant’s proceeds will be deposited into his or her account under the 401(k) Maximum Advantage Program and then automatically invested in the Wells Fargo Stable Return Fund, which is an investment alternative under the plan. Participants will be able to direct all aspects of their accounts, including transferring the proceeds out of the Wells Fargo Stable Return Fund and into any other investment option available under the 401(k) Maximum Advantage Program. Following the Merger, participants will not hold any shares of the Surviving Corporation nor will an investment fund be created under the 401(k) Maximum Advantage Program for that purpose.

 

Prior to the effective time of the Merger, Parent will appoint Computer Share Trust Company, N.A., or if Computer Share Trust Company, N.A. is not willing to so act, another agent that it is reasonably acceptable to the Company (the “exchange agent”), to act as exchange agent for the payment of the Merger Consideration. Parent will make available to the exchange agent, as needed, the Cash Consideration to be paid in respect of shares of the Company’s common stock.

 

Promptly after the effective time of the Merger (but in no event later than three business days after the effective time of the Merger) each holder of shares of the Company’s common stock will be sent a letter of transmittal and instructions on exchanging its shares of Company common stock for the per share Merger Consideration.

 

YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD, AND YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL.

 

Each holder of shares of Company common stock that have been converted into the right to receive the Merger Consideration will be entitled to receive, upon (i) surrender to the exchange agent of a certificate representing shares of Company common stock, together with a properly completed letter of transmittal, or (ii) receipt of an “agent’s message” by the exchange agent (or such other evidence, if any, of transfer as the exchange agent may reasonably request) in the case of a book-entry transfer of uncertificated shares, the Merger Consideration in respect of Company common stock represented by a certificate or uncertificated share. Until so surrendered or transferred, as the case may be, each such certificate or uncertificated share will represent after the effective time of the Merger for all purposes only the right to receive the Merger Consideration.

 

If any portion of the Merger Consideration is to be paid to a person other than the person in whose name the surrendered certificate or the transferred uncertificated share is registered, it will be a condition to such payment that either such certificate will be properly endorsed or will otherwise be in proper form for transfer or such uncertificated share will be properly transferred and the person requesting such payment will pay to the exchange agent any transfer or other taxes required as a result of such payment to a person other than the registered holder of such certificate or uncertificated share or establish to the satisfaction of the exchange agent that such tax has been paid or is not payable.

No interest will be paid or will accrue on the cash payable upon surrender of certificates or uncertificated shares. Parent, the Surviving Corporation or the exchange agent will be entitled to deduct and withhold any applicable taxes from the Merger Consideration. Any sum which is so withheld by Parent, the Surviving Corporation or the exchange agent will be deemed to have been paid to the person with regard to whom it is withheld.

 

After the effective time of the Merger, there will be no further registration of transfers of shares of Company common stock. If, after the effective time of the Merger, certificates or uncertificated shares are presented to the Surviving Corporation or the exchange agent, they will be canceled and exchanged for the Merger Consideration.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the Merger Consideration, you will have to make an affidavit of the loss, theft or destruction, and if required by the Surviving Corporation, post a bond in a reasonable amount as indemnity against any claim that may be made against it with respect to such certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.

 

Any portion of the Cash Consideration made available to the exchange agent that remains unclaimed by the holders of shares of Company common stock one year after the effective time of the Merger will be returned to Parent, upon demand, and any such holder who has not exchanged shares of Company common stock for the Merger Consideration prior to that time may thereafter look only to Parent for payment of the Merger Consideration, in respect of such shares without any interest.

 

Parent will not be liable to any holder of shares of Company common stock for any amounts paid to a public official pursuant to applicable abandoned property, escheat or similar laws. Any amounts remaining unclaimed by holders of shares of Company common stock immediately prior to such time when such amounts would otherwise escheat to or become property of any governmental authority will become, to the extent permitted by applicable law, the property of Parent free and clear of any claims or interest of any person previously entitled thereto.

 

Each of Parent and Merger Sub will use its reasonable best efforts to obtain the equity and debt financing for the Merger on the terms and conditions described in the equity commitment letters and the Debt Commitment Letter, and will not enter into any contract that contains additional financing terms, and will not permit any amendment or modification to be made to, or any waiver of any provision under, the equity commitment letters and the Debt Commitment Letter if such amendment, modification or waiver (i) reduces (or could have the effect of reducing) the aggregate amount of the financing or (ii) imposes new or additional conditions or otherwise expands, amends or modifies any of the conditions to the financing, or otherwise expands, amends or modifies any other provision of the equity commitment letters or the Debt Commitment Letter in a manner that would reasonably be expected to (a) delay or prevent or make less likely the funding of the financing (or satisfaction of the conditions to the financing) on the closing date or (b) adversely impact the ability of Parent or Merger Sub to enforce its rights against other parties to the equity commitment letters or the Debt Commitment Letter (provided that, subject to compliance with certain provisions, Parent and Merger Sub may amend the Debt Commitment Letter to add additional lenders, arrangers, bookrunners and agents).

 

Each of Parent and Merger Sub will use its reasonable best efforts to:

 

 

 

Parent has agreed to keep the Company informed on a current basis and in reasonable detail of the status of its efforts to arrange the debt financing and to provide the Company copies of the material definitive agreements for the debt financing.

 

Parent and Merger Sub have agreed to give the Company prompt notice (i) of any breach or default by any party to the equity commitment letters or the Debt Commitment Letter or definitive agreements related to the financing, (ii) of the receipt of any written notice or other written communication from any financing source with respect to any actual or potential breach or material dispute or disagreement between or among any parties thereto and (iii) if at any time for any reason Parent or Merger Sub believes in good faith that it will not be able to obtain all or any portion of the financing on the terms and conditions, in the manner or from the sources contemplated by the equity commitment letters or the Debt Commitment Letter or definitive agreements related to the financing. Subject to limited exceptions, if any of the events described above occur or if any portion of the debt financing otherwise becomes unavailable, Parent and Merger Sub will use their reasonable best efforts to arrange and obtain alternative financing in an amount sufficient to consummate the transactions contemplated by the Merger Agreement and to the extent possible with other terms and conditions not materially less favorable to Parent and Merger Sub (or their affiliates) as promptly as practicable following such occurrence.

 

The obtaining of the financing, or any alternative financing, is not a condition to the consummation of the Merger.

 

The Company will use its reasonable best efforts to, and will cause each of its subsidiaries and representatives to use their reasonable best efforts to, provide all cooperation that is customary in connection with the arrangement of the debt financing as may be reasonably requested in writing by Parent (provided that such requested cooperation does not unreasonably interfere with the conduct of the business and ongoing operations of the Company and its subsidiaries), including (i) participation in a reasonable number of meetings, due diligence sessions, lender presentations and sessions with rating agencies, (ii) assisting with the preparation of materials for rating agency presentations, bank information memoranda and similar documents required in connection with the debt financing (provided that any such rating agency presentations, bank information memoranda and similar documents shall contain disclosure reflecting the surviving corporation or its subsidiaries as the obligor), (iii) furnishing Parent and its debt financing sources with such pertinent and customary information (other than financial information), to the extent reasonably available to the Company, regarding the Company and its subsidiaries as may be reasonably requested in writing by Parent to consummate the debt financing and historical audited and unaudited financial statements as filed with the SEC, financial data as may be reasonably requested in writing by Parent and audit reports, (iv) using commercially reasonable efforts to obtain accountants’ comfort letters, legal opinions, surveys and title insurance as reasonably requested in writing by Parent and (v) executing and delivering any customary pledge and security documents, other definitive financing documents or other certificates or documents requested in writing, including, to the extent the statements are true therein, a customary solvency certificate by the chief financial officer of the Company; provided that the effectiveness of such actions shall be conditioned upon, or become operative after, the closing of the Merger and that none of the Company or any of its subsidiaries or its representatives shall be required to pay any commitment or other fee or incur any liability in connection with the financing prior to the effective time of the Merger and no personal liability shall be imposed on the officers, directors, employees or agents involved.

 

The Merger Agreement contains representations and warranties made by the Company, Parent and Merger Sub to each other as of specific dates. The statements embodied in those representations and warranties were made for purposes of the Merger Agreement and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of the Merger Agreement. In addition, some of those representations and warranties were made as of a specific date may be subject to a contractual standard of materiality different from that generally applicable to shareholders or may have been used for the purpose of allocating risk between the parties to the Merger Agreement rather than establishing matters as facts. For the foregoing reasons, you should not rely on the representations and warranties as statements of factual information.

 

The representations and warranties made by the Company to Parent include representations and warranties relating to, among other things:

 

 

 

Many of the Company’s representations and warranties are qualified as to, among other things, “materiality” or “Material Adverse Effect”. For the purposes of the Merger Agreement, a “Material Adverse Effect” means, with respect to any person, a material adverse effect on (i) the financial condition, business, assets or results of operations of such person and its subsidiaries, taken as a whole, excluding any effect resulting from (a) changes in the financial, securities, credit or other capital markets or general economic or regulatory, legislative or political conditions, (b) changes or conditions generally affecting the industry in which such person and its subsidiaries operate, (c) geopolitical conditions, acts of war, sabotage or terrorism or natural or man-made disasters, (d) changes in applicable law or GAAP or interpretations thereof, (e) the failure, in and of itself, of such person to meet any internal or published projections, forecasts, estimates or predictions or changes in the market price or trading volume of the securities of such person or the credit rating of such person (it being understood that the underlying facts giving rise or contributing to such failure or change may be taken into account in determining whether there has been a Material Adverse Effect if such facts are not otherwise excluded under this definition), (f) the announcement, pendency or consummation of the transactions contemplated by the Merger Agreement, including any suit, action or proceeding in respect of the Merger Agreement or the transactions contemplated by the Merger Agreement, any loss or change in relationship with any customer, supplier, vendor or other business partner of such person or any other disruption to the business of such person, (g) if such person is the Company, any action taken by the Company or any of its subsidiaries at the written request, or with the written consent, of Parent or (h) if such person is the Company, the failure by the Company or any of its subsidiaries to take any action if that action is prohibited by the Merger Agreement to the extent that Parent fails to give its consent after receipt of a written request therefor, except, in the case of clause (a), (b), (c) or (d), to the extent having a materially disproportionate effect on such person and its subsidiaries, taken as a whole, relative to other participants in the industry in which such person and its subsidiaries operate (in which case the incremental materially disproportionate impact or impacts may be taken into account in determining whether there has been a Material Adverse Effect) or (ii) such person’s ability to consummate the transactions contemplated by the Merger Agreement.

 

The representations and warranties made by Parent to the Company include representations and warranties with respect to Parent and Merger Sub relating to, among other things:

 

 

 

Under the Merger Agreement, the Company has agreed that, subject to certain exceptions, from the date of the Merger Agreement until the effective time of the Merger, the Company will, and will cause each of its subsidiaries to:

 

 

 

The Company has also agreed that during the same time period and subject to certain exceptions, it will not and it will not permit any of its subsidiaries to:

 

 

 

 

Until 11:59 p.m., New York City time, on July 25, 2011, the Company is permitted to:

 

 

From and after 12:00 a.m., New York City time, on July 26, 2011 until the effective time of the Merger or, if earlier, the termination of the Merger Agreement, the Company, its subsidiaries and their representatives may not:

 

 

From and after 12:00 a.m., New York City time, on July 26, 2011 and except with respect to any excluded party, the Company is required to cease immediately and cause to be terminated any and all existing activities, discussions or negotiations, if any, with any third party and its representatives conducted prior to the date of the Merger Agreement with respect to any acquisition proposal, and promptly request that each such third party, if any, that has executed a confidentiality agreement within the 12-month period prior to the date of the Merger Agreement in connection with its consideration of any acquisition proposal return or destroy all confidential information furnished to such third party by or on behalf of the Company or any of its subsidiaries.

 

No later than one business day after July 26, 2011, the Company must notify Parent in writing of the identity of each excluded party, the material terms and conditions of such excluded party’s acquisition proposal and whether the Board has determined in good faith, after consultation with its financial advisor and outside legal counsel, that an acquisition proposal received by the Company or any of its representatives from such excluded party constitutes a superior proposal.

 

Except as permitted by the terms of the Merger Agreement described below, the Company has agreed in the Merger Agreement that the Board will not (i) fail to make, withdraw or modify in a manner adverse to Parent the Board’s recommendation (or recommend an acquisition proposal) (any of the foregoing in this

clause (i), an “adverse recommendation change”), or (ii) exempt any transaction from the requirements of Section 33-841 or 33-844 of the CBCA.

 

At any time from and after 12:00 a.m., New York City time, on July 26, 2011 and prior to obtaining shareholder approval, if the Company or any of its representatives has received a written acquisition proposal from any third party that the Board reasonably believes could lead to a superior proposal, then the Company may:

 

 

In addition, at any time prior to obtaining shareholder approval, if the Board determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with its fiduciary duties, the Board may make an adverse recommendation change. However, if the Board is making an adverse recommendation change in response to any fact, event, change, development or set of circumstances other than an acquisition proposal, then the Board may not make such adverse recommendation change unless the Company has complied with the following procedures:

 

 

From and after 12:00 a.m., New York City time, on July 26, 2011,

 

 

In addition, the Board may not make an adverse recommendation change in response to an acquisition proposal, unless:

 

 

Nothing in the provisions of the Merger Agreement will prevent the Board from (i) complying with Rule 14e-2(a), Rule 14d-9 or Item 1012(a) of Regulation M-A promulgated under the Exchange Act with regard to an acquisition proposal (provided that any such action taken or statement made that relates to an acquisition proposal will not be deemed to be an adverse recommendation change if the Board’s recommendation is reaffirmed in connection with such action or in such statement) or (ii) making any disclosure to the shareholders of the Company if the Board determines in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with any applicable law (including its fiduciary duties).

 

An “excluded party” means any person or group of persons from whom the Company or any of its representatives has received prior to 12:00 a.m., New York City time, on July 26, 2011, an acquisition proposal that the Board reasonably believes could lead to a superior proposal. Following 12:00 a.m., New York City time, on July 26, 2011, such person or group will only continue to be an “excluded party” if the Board has determined in good faith, after consultation with its financial advisor and outside legal counsel, that an acquisition proposal received by the Company or any of its representatives from such person or group prior to 12:00 a.m., New York City time, on July 26, 2011 constitutes a superior proposal.

 

Notwithstanding the foregoing, such person or group will cease to be an excluded party after 11:59 p.m., New York City time, on August 9, 2011 (provided that if the Board has given Parent notification of its intention to make an adverse recommendation change or terminate the Merger Agreement, then such person or group will continue to be an excluded party unless (i) the Board determines that the most recent acquisition proposal received by the Company or any of its representatives from such person or group no longer constitutes a superior proposal when compared to the most recent proposal made by Parent to amend the terms of the Merger Agreement and (ii) such person or group fails to make on or prior to the third business day after such determination a new acquisition proposal that the Board determines constitutes a superior proposal to such most recent proposal made by Parent).

 

An “acquisition proposal” means any offer, proposal or bona fide inquiry of any third party relating to, or any third party bona fide indication of interest in:

 

 

A “superior proposal” means any bona fide, written acquisition proposal for at least a majority of the outstanding shares of common stock or all or substantially all of the consolidated assets of the Company on terms that the Board determines in good faith by a majority vote, after consultation with its financial advisor and outside legal counsel, and taking into account all relevant terms and conditions of such acquisition proposal, including any conditions to consummation, the timing of the transaction compared to the Merger and, if a cash transaction (whether in whole or in part), whether financing is then fully committed or determined in good faith by the Board to be available, is more favorable and makes available greater aggregate value to the Company’s shareholders than the Merger (taking into account any proposal by Parent to amend the terms of the Merger Agreement).

 

The Company will cause a meeting of its shareholders to be duly called and held as soon as reasonably practicable following clearance of this proxy statement by the SEC for the purpose of voting on the approval of the Merger Agreement, the Merger and the other transactions contemplated thereby; provided that the Company will have no obligation to hold the shareholder meeting on or before (and may adjourn or postpone the shareholder meeting if previously called until) (a) July 26, 2011 or (b) if an excluded party exists as of 12:00 a.m., New York City time, on July 26, 2011, the first date that such person or group does not continue to be an excluded party.

 

In addition, the Company may adjourn or postpone the shareholder meeting (i) after consultation with Parent, to the extent necessary to ensure that any required supplement or amendment to this proxy statement is provided to the Company’s shareholders within a reasonable amount of time in advance of the shareholder meeting, (ii) as otherwise required by any applicable law or (iii) if as of the time for which the shareholder meeting is scheduled as set forth in this proxy statement, there are insufficient shares of the Company’s common stock represented (in person or by proxy) to constitute a quorum necessary to conduct the business of the shareholder meeting.

 

Subject to the provisions discussed above under “The Merger Agreement — Solicitation of Acquisition Proposals”, the Board will (a) recommend approval of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, (b) use its reasonable best efforts to obtain Company shareholder approval and (c) otherwise comply with all legal requirements applicable to such meeting.

 

Parent has agreed to vote or cause to be voted any shares of Company common stock beneficially owned by it or its subsidiaries in favor of the proposal to approve the Merger Agreement.

 

Subject to certain exceptions, the Company will (i) upon reasonable advance written notice from Parent, give to Parent and its representatives access during normal business hours to the offices, properties, books and records of such party, (ii) furnish to Parent and its representatives such existing financial and operating data and other existing information as such persons may reasonably request and (iii) instruct its representatives to reasonably cooperate with Parent in its investigation.

 

Subject to certain exceptions, the Company will, and will cause each of its subsidiaries to, use reasonable efforts to provide information reasonably requested by Parent in connection with planning and preparation for a proposed restructuring of the Company that Parent intends to implement following the closing of the Merger (the “proposed restructuring”). Neither the Company nor its subsidiaries is obligated to take any actions to implement any part of the restructuring on or prior to the effective time of the Merger.

 

Neither the Company nor its employees, counsel, financial advisors, auditors and other authorized representatives shall be required to provide access, information or cooperation to the extent (i) such access, information or cooperation includes any valuation of the Company or (ii) the Company determines in good faith that not providing such access, information or cooperation is necessary to comply with contractual arrangements or other confidentiality obligations or any applicable law or to address reasonable attorney-client or other privilege concerns.

 

The Merger Agreement requires that, until April 30, 2012, Parent will provide, or cause the Surviving Corporation to provide, compensation and employee benefits to each employee that, taken as a whole, have a value that is substantially comparable in the aggregate (excluding any value attributable to the Company’s equity-based compensation or frozen defined benefit plans) to those provided to the employees of the Company immediately prior to the effective time of the Merger.

 

In addition, the Surviving Corporation is required to honor and continue certain change in control, employment, severance, retention and termination policies and arrangements until the later of April 30, 2012 and the expiration of such policy or arrangement pursuant to its terms.

 

See “The Merger — Interests of Our Directors and Officers in the Merger” beginning on page 39.

 

For at least six years following consummation of the Merger, the Surviving Corporation is required to indemnify the current or former directors or officers of the Company and its subsidiaries for acts or omissions by such directors and officers occurring prior to the effective time of the Merger. In addition, the Merger Agreement contemplates that a prepaid directors’ and officers’ liability insurance policy, providing coverage to directors and officers of the Company for six years following consummation of the Merger, will be obtained by the Company prior to consummation of the Merger. See “The Merger — Interests of Our Directors and Officers in the Merger — Directors’ and Officers’ Indemnification and Insurance” beginning on page 43.

 

The obligations of the Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction of the following conditions:

 

 

The obligations of Parent and Merger Sub to consummate the Merger are subject to the satisfaction of the following further conditions:

 

 

 

The obligations of the Company to consummate the Merger are subject to the satisfaction of the following further conditions:

 

 

The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the effective time of the Merger (notwithstanding any approval of the Merger Agreement by the shareholders of the Company) by mutual written agreement of the Company and Parent.

 

The Merger Agreement may also be terminated and the Merger may be abandoned at any time prior to the effective time of the Merger (notwithstanding any approval of the Merger Agreement by the shareholders of the Company) as follows:

 

by either the Company or Parent, if:

 

 

by Parent, if:

 

 

by the Company:

 

 

Except as provided for below, the Company is required to pay Parent a termination fee of $7.89 million if:

 

 

 

The Company is required to pay Parent a termination fee of $5.35 million instead of $7.89 million if the Company terminates the Merger Agreement in order to enter into a definitive agreement concerning a superior proposal with an excluded party on terms no less favorable in the aggregate to the Company than the terms proposed by such excluded party as of 12:00 a.m., New York City time, on July 26, 2011.

 

Parent is required to pay the Company a termination fee of $16.91 million if:

 

 

If the Company is required to pay the termination fee of $7.89 million to Parent, then the Company will also be required to reimburse Parent and its affiliates for 100% of their out-of-pocket fees and expenses up to $1.69 million actually incurred by them in connection with the Merger Agreement and the transactions contemplated by the Merger Agreement.

 

Parent has agreed to reimburse the Company for any expenses incurred by the Company or its subsidiaries in connection with the cooperation of the Company and its subsidiaries with respect to the arrangement of the financing of the Merger and the proposed restructuring.

 

Vector IV and Able have agreed, pursuant to the limited guaranty, to guarantee the obligation of Parent to pay the Parent termination fee and any expenses incurred by the Company or its subsidiaries in connection with the cooperation of the Company and its subsidiaries with respect to the arrangement of the financing of the Merger and the proposed restructuring, as described under “The Merger — Limited Guaranty”.

 

All costs and expenses incurred in connection with the Merger Agreement will be paid by the party incurring such cost or expense, except as described under “The Merger Agreement — Termination Fees and Reimbursement of Expenses”.

 

Any provision of the Merger Agreement may be amended or waived prior to the effective time of the Merger if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to the Merger Agreement or, in the case of a waiver, by each party against whom the waiver is to be effective; provided that after Company shareholder approval has been obtained, there will be no amendment or waiver that would require the further approval of the shareholders of the Company under the CBCA without such approval having first been obtained.

 

The Company’s right to receive payment of the reverse termination fee of $16.91 million from Parent or the guarantors pursuant to the limited guaranty in respect thereof will be the sole and exclusive remedy of the Company and its subsidiaries and shareholders against Parent, Merger Sub, the guarantors and any of their respective former, current and future direct or indirect equity holders, controlling persons, shareholders, directors, officers, employees, agents, affiliates, members, managers, general or limited partners or assignees, except for certain rights to equitable relief, including specific performance, described below.

 

The parties to the Merger Agreement will be entitled to an injunction or injunctions, specific performance or other equitable relief to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions thereof. However, the right of the Company to seek an injunction, specific performance or other equitable remedies in connection with enforcing Parent’s obligation to cause the equity financing to be funded to fund the Merger (but not the right of the Company to such injunctions, specific performance or other equitable remedies for obligations other than with respect to the equity financing) will be subject to the requirements that (i) the conditions to closing of the Merger (other than conditions that by their nature are to be satisfied at the closing of the Merger) have been satisfied on the date the Merger should have been consummated pursuant to the terms of the Merger Agreement but for the failure of the equity financing to be funded, (ii) the debt financing has been funded in accordance with the terms thereof or will be funded in accordance with the terms thereof at the closing of the Merger if the equity financing is funded at the closing of the Merger and (iii) the Company has irrevocably confirmed that if the equity financing and debt financing are funded, then it would take such actions that are within its control to cause the closing of the Merger to occur.

 

The following is a summary of the material terms and conditions of the CCC Agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the form of CCC Agreement, a copy of which is attached as Annex D, and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the CCC Agreement that is important to you. We encourage you to read the CCC Agreement carefully and in its entirety because it is the legal document that governs the CCCPs.

 

The CCC Agreement and this summary of its terms have been included to provide you with information regarding the terms of the CCC Agreement. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the CCC Agreement and described in this summary.

 

The Company’s U.S. Patent No. 5,537,135 (the “135 Patent”) was issued on July 16, 1996. Prior to the issuance of the 135 Patent, vinyl graphic designs and signage that included enhanced graphic features such as multicolor and halftone three dimensional effects could only be achieved by skilled artisans using labor intensive techniques.

 

The 135 Patent covers the method and apparatus developed by the Company’s employee inventors for the computerized preparation of graphic products utilizing a printer to print on sheet material and a cutter to cut the sheet material with the printed material within the periphery of the cut edges. Nearly every “print to cut” apparatus falls within the claims of the 135 Patent, including the Company’s line of Edge^® vinyl printers.

 

On June 12, 2003 and again on November 30, 2004, an anonymous third party (believed by the Company to be Roland DG Corporation (“Roland DG”)) filed requests to re-examine the 135 Patent with the U.S. Patent and Trademark Office (the “USPTO”). These two proceedings were consolidated by the USPTO, which issued its decision on May 2, 2006 reconfirming the patentability of the 135 Patent.

 

On December 18, 2006, the Company filed suit in the U.S. District Court for the District of Connecticut (the “Court”) against Roland DGA Corporation (“Roland DGA”), the distribution and sales arm of Roland DG for North and South America, alleging infringement of the 135 Patent (the “Roland Suit”). On March 11, 2010, the Court granted the Company’s motion to amend its complaint to add Roland DG as a defendant in the litigation. Based on scheduling orders approved by the Court, the Company anticipates that the case will go to trial in June 2012.

 

On August 2, 2007, the Company issued a press release informing the public that it had commenced the above described lawsuit against Roland DGA and confirming “its commitment to its shareholders to enforce intellectual property rights aggressively and to assure a satisfactory return on its investments in intellectual property and research and development activities” and further stating that it “is seeking damages in excess of thirty million dollars ($30,000,000), and an injunction against Roland’s sale of infringing products”. Roland DGA and Roland DG have denied that their products infringe the 135 Patent and have filed counterclaims for a declaration by the Court that the 135 Patent is invalid, based in part on the existence of prior art not adequately considered by the USPTO. The parties are still actively conducting final discovery in anticipation of a trial in June 2012. Although the Company believes that it will prevail in Court with regard to its lawsuit against Roland DGA and Roland DG, there can be no assurance, and the Company does not make any representation, as to the outcome of the lawsuit or as to the timing or amount of potential recoveries from the lawsuit, if any.

 

Whether or not the holders of CCCPs receive any cash payments in respect of their CCCPs is highly uncertain and contingent on whether there are any net recoveries in respect of the Patent Claims (as defined below).

 

In order to continue the pursuit of claims (the “Patent Claims”) with respect to the 135 Patent, the Committee will be established under the CCC Agreement among the Company, the initial Committee members and a paying agent. The initial Committee members are expected to be Mr. Donald P. Aiken (the current Chairman of the Board), Mr. Stephen P. Lovass (a former officer of the Company), Mr. William V. Grickis, Jr. (the current General Counsel of the Company) and a Committee member to be appointed by the Company.

 

At the effective time of the Merger, the pursuit of the Patent Claims will be initially funded by the Company with up to $500,000 deposited into an escrow account. Subject to certain conditions, the Committee may request that the Company, and the Company will be obligated to, deliver additional funds into the escrow account up to $2 million in the aggregate (including the initial funding amount of up to $500,000). The Company will have no obligation to deliver additional funds after the date of the deposit into the escrow account of aggregate recoveries either (i) in excess of $1 million or (ii) in respect of payment in full of (a) any damages awarded to the Company under a final non-appealable judgment rendered by a court of competent jurisdiction or (b) any settlement payments

payable to the Company pursuant to a settlement, in the cases of clauses (a) and (b), in respect of the Roland Suit, whichever shall occur first). If any net recoveries are received by the Company prior to the closing of the Merger, the Company’s funding obligation will be reduced up to such amount. All fees, costs and expenses incurred by the Committee or any Committee member in connection with the administration of the escrow account or in carrying out the Committee’s powers and duties under the CCC Agreement will be paid from the escrow account.

 

The CCCPs will not be evidenced by a certificate or other instrument and only holders, as determined at the effective time of the Merger, who are registered on the CCCP register to be maintained by the paying agent will be deemed and treated as the absolute owners of CCCPs.

 

The CCCPs and any interest therein (including beneficial ownership through a broker, dealer, custodian bank or other nominee) may not be sold, assigned, transferred, pledged, encumbered or in any other manner transferred or disposed of, in whole or in part, directly or indirectly, other than through (i) a transfer on death by will or intestacy, (ii) a transfer by instrument to an inter vivos or testamentary trust in which the CCCP is to be passed to beneficiaries upon the death of the trustee; (iii) transfers made pursuant to a court order, (iv) if the holder is a partnership or limited liability company, a distribution to its partners or members, as applicable or (v) a transfer made by operation of law.

 

The Committee will consist of four members with Mr. Aiken, Mr. Lovass and Mr. Grickis expected to be the initial Committee members appointed by the holders of CCCPs (the initial “Specified Committee Members”) and an initial Committee member appointed by the Company (the initial “Company Committee Member”).

 

Under the CCC Agreement, the Committee has the power and authority to:

 

 

It is not intended that the Committee members will have any fiduciary or similar duties to the holders of CCCPs. Each Committee member will be indemnified against any loss incurred by reason of having been a Committee member or resulting from administration of any Patent Claims or the escrow account or any decision or action, with certain limited exceptions. Any indemnified amounts will be paid out of the escrow until the assets of the escrow are exhausted and then from the income from the investment of such assets until such income is exhausted, and thereafter will be paid by the Company. Upon request, the Company must also advance payments in connection with such indemnification; provided that the indemnified party must undertake to repay any amounts so advanced in the event it is subsequently determined in a final non-appealable judgment rendered by a court of competent jurisdiction that the loss that would otherwise be indemnified was primarily caused by the bad faith or willful misconduct of such indemnified party.

 

Each Specified Committee Member will be entitled to compensation for service as a Committee member and the Company Committee Member will receive no compensation. Mr. Aiken and Mr. Lovass are expected to be entitled to compensation in the form of an annual retainer (paid quarterly). Mr. Grickis is expected to be entitled to compensation in the form of (i) a one-time retainer (paid quarterly) for all work during the first year the Committee is convened and all work relating to the Permitted Claims (as defined below) and (ii) an hourly rate for all other work. Mr. Grickis is also expected to be entitled to additional compensation of 1% of net proceeds to holders of CCCPs if and when any Patent Claim is settled.

 

The Committee will have the power and authority to pursue any Patent Claims against Roland DG Corporation, Seiko Corporation, Mimaki Engineering Co., Ltd. and any of their respective subsidiaries (any such Patent Claims, “Permitted Claims”). Pursuit of any Patent Claims against other parties (any such Patent Claims, “Other Claims”) will require the unanimous approval of the Committee members, including the Company Committee Member. At any time after the Committee elects to pursue any Other Claim, the Company may elect to control the pursuit of such Other Claim, in which case the Company will have the power and authority to pursue such Other Claim as if it were the Committee under the CCC Agreement (subject to certain excluded powers and authorities). If the pursuit of any Other Claim is controlled by the Company, the Company will not be allowed to use the assets in the escrow account or the income from the investment of such assets to pursue such Other Claim.

 

Any post-closing recoveries from the pursuit of Permitted Claims, net of applicable legal contingency fees and an amount for taxes payable to the Company, will be distributed first to the Company in reimbursement for any losses for which it indemnified the Committee members or the paying agent and for the amount it funded for expenses through the escrow account and then to the holders of CCCPs.

 

Any post-closing recoveries from the pursuit of Other Claims, net of applicable legal contingency fees and an amount for taxes payable to the Company, will be distributed first to the Company in reimbursement for any losses for which it indemnified the Committee members or the paying agent and for any out-of-pocket expenses paid by the Company in connection with the pursuit of such Other Claims and then equally between the Company, on the one hand, and the holders of CCCPs, on the other hand.

 

The Committee will, at its discretion, determine payment dates on which payouts will be paid. No later than five business days after the date that the Committee finally determines that all escrow expenses have been paid and no Patent Claims should continue to be pursued, the Committee will direct the paying agent to make the final escrow payout. Payouts will be paid pro rata to holders of CCCPs (provided that at such time there are no accrued and unpaid escrow expenses), subject to adjustments for CCCPs issued to holders of out-of-the-money options at the time of the Merger to take into account the amount by which the exercise price of such options exceed $11.00 at the closing of the Merger.

 

Any escrow assets that remain undistributed to the holders of CCCPs one year after the date of the final escrow payout will be delivered to the Company, upon demand, and any holders of CCCPs who have not theretofore received cash in exchange for such CCCPs shall thereafter look only to the Company for payment of their claim therefore.

 

The paying agent will deduct and withhold from any amount payable pursuant to the CCC Agreement such amounts as it is required to deduct and withhold with respect to the making of such payment under applicable tax laws. To the extent that amounts are so withheld or paid over to or deposited with the relevant governmental entity, such withheld amounts will be treated for all purposes as having been paid to the Company or the holder of a CCCP in respect of which such deduction and withholding was made.

 

The escrow established under the CCC Agreement will be maintained by the paying agent in an escrow account held by the paying agent. The paying agent’s duties under the CCC Agreement include:

 

 

 

The paying agent will be indemnified for its actions under the CCC Agreement, with certain limited exceptions. Any indemnified amounts will be paid out of the escrow until the assets of the escrow are exhausted and then from the income from the investment of such assets until such income is exhausted, and thereafter will be paid by the Company.

 

Holders of CCCPs will have no rights to or in the escrow or the Patent Claims or against the Company, its affiliates or the Committee members, other than as expressed in the CCC Agreement.

 

The Company does not make any representation as to the outcome of any Patent Claims or as to the timing or amount of potential recoveries from the Patent Claims, if any.

 

Whether or not the holders of CCCPs receive any cash payments in respect of their CCCPs is highly uncertain and contingent on whether there are any net recoveries in respect of the Patent Claims.

 

Under the Connecticut Business Corporation Act, if you do not wish to accept the Merger Consideration for your shares of Company common stock as provided in the Merger Agreement, you have the right to seek an appraisal of, and to be paid the “fair value” for, the shares of Company common stock you hold, provided that you comply with the provisions of Sections 33-855 to 33-872, inclusive, of the CBCA. Under the CBCA, “fair value” means the value of your shares immediately before the Merger becomes effective, using customary and current valuation techniques generally used in similar contexts, without discounting for lack of marketability or minority status. You should be aware that the fair value of your shares as determined under the applicable provisions of the CBCA could be greater than, the same as or less than the Merger Consideration.

 

The following discussion is not a complete statement of the law pertaining to appraisal rights under the CBCA and is qualified in its entirety by the full text of Sections 33-855 to 33-872, a copy of which is included in this proxy statement as Annex E. As provided in CBCA Section 33-860(d), a copy of the Company’s audited financial statements for the fiscal year ended April 30, 2011 will be included in the mailing of this proxy statement.

 

If you have a beneficial interest in shares of Company common stock held of record in the name of another person, such as a broker or nominee, you must act to perfect your appraisal rights promptly and in a timely manner to cause the record holder to follow the steps summarized below, or assert appraisal rights directly in accordance with Section 33-857(b) of the CBCA.

 

As provided in CBCA Section 33-861(a), any Company shareholder wishing to assert dissenters’ rights must:

 

 

CBCA SECTION 33-856(d) PROVIDES THAT WHERE THE RIGHT OF A COMPANY SHAREHOLDER TO BE PAID THE FAIR VALUE OF ITS SHARES OF COMPANY COMMON STOCK IS MADE AVAILABLE BY SECTION 33-856, SUCH REMEDY IS THE SHAREHOLDER’S EXCLUSIVE REMEDY AS A COMPANY SHAREHOLDER WITH RESPECT TO THE MERGER, WHETHER OR NOT SUCH SHAREHOLDER PROCEEDS AS PROVIDED IN SECTIONS 33-855 TO 33-872 INCLUSIVE.

 

As provided in CBCA Section 33-862, if the proposal to approve the Merger Agreement and the transactions contemplated by the Merger Agreement is approved and the Merger becomes effective, no later than ten days after the completion of the Merger, the Company will deliver a written appraisal notice to each

Company shareholder who has satisfied the requirements of CBCA Section 33-861(a) described above (hereinafter referred to as a “dissenter”). The appraisal notice must:

 

 

As provided in CBCA Section 33-863(a), a Company shareholder who has received the required notice to dissenters and who wishes to exercise appraisal rights must sign and return the appraisal form sent by the Company and:

 

 

ANY DISSENTER WHO DOES NOT EXECUTE AND RETURN THE APPRAISAL FORM OR DEPOSIT ITS SHARE CERTIFICATES BY THE DATE SET FORTH IN THE NOTICE IS NOT ENTITLED TO PAYMENT FOR ITS SHARES OF COMPANY COMMON STOCK UNDER CBCA SECTIONS 33-855 TO 33-872, INCLUSIVE. INSTEAD, ITS SHARES OF COMPANY COMMON STOCK SHALL BE TREATED AS IF THEY HAD BEEN CONVERTED AS OF THE EFFECTIVE TIME OF THE MERGER INTO THE RIGHT TO RECEIVE THE MERGER CONSIDERATION, WITHOUT INTEREST THEREON.

 

Except as provided below, the Company will pay in cash each dissenter who has complied with CBCA Section 33-863(a) the amount the Company estimates to be the fair value of that dissenter’s shares of Company common stock, plus accrued interest from the date of the completion of the Merger, within 30 days after the date set by the Company by which it must receive the appraisal form, as provided in CBCA Section 33-865(a).

 

The payment must be accompanied by: