<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1995
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CALIFORNIA MICROWAVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3663 94-1668412
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
985 ALMANOR AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 732-4000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GEORGE L. SPILLANE
CALIFORNIA MICROWAVE, INC.
985 ALMANOR AVENUE
SUNNYVALE, CA 94086
TELEPHONE: (408) 720-6228
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
RICHARD W. CANADY, ESQ. P. DEXTER PEACOCK, ESQ.
HORACE L. NASH, ESQ. JOHN F. WOMBWELL, ESQ.
STEPHEN J. DECOSSE, ESQ. CHARLES R. GREGG, JR., ESQ.
Howard, Rice, Nemerovski, Canady, Robertson, Andrews & Kurth L.L.P.
Falk & Rabkin, A Professional Corporation 4200 Texas Commerce Tower
Three Embarcadero Center 600 Travis Street
San Francisco, California 94111-4065 Houston, TX 77002
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS MAXIMUM AGGREGATE
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
BE REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
Common Stock, par value
$.10 per share............... 3,350,000 shares $4.95(1) $16,588,000(1) $5,720(1)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with Rule 457(f)(2) on the basis of the book value
of the outstanding capital stock of Microwave Networks Incorporated ("MNI")
as of December 31, 1994, of $16,588,000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CALIFORNIA MICROWAVE, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION
STATEMENT ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
- --------------------------------- ----------------------
<S> <C> <C>
(Information About the Transaction)
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page; Cross Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Available Information; Table of Contents
3. Risk Factors and Ratio of Earnings to
Fixed Charges and Other Information....... Summary; Risk Factors; Selected Historical
and Pro Forma Financial Information; The
Merger and Related Transactions; Terms of
the Merger; CMI and MNI Pro Forma Combined
Condensed Financial Information
4. Terms of the Transaction.................. Summary; Introduction; The Merger and
Related Transactions; Terms of the Merger;
Description of CMI Common Stock;
Comparison of Rights of Holders of CMI
Common Stock and Holders of MNI Capital
Stock
5. Pro Forma Financial Information........... CMI and MNI Pro Forma Combined Condensed
Financial Statements
6. Material Contacts with the Company Being
Acquired.................................. The Merger and Related Transactions
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters........................ *
8. Interests of Named Experts and Counsel.... Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
(Information About the Registrant)
10. Information with Respect to S-3
Registrants............................... *
11. Incorporation of Certain Information by
Reference................................. *
12. Information with Respect to S-2 or S-3
Registrants............................... *
13. Incorporation of Certain Information by
Reference................................. *
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants......... Information Concerning CMI; Selected
Historical and Pro Forma Financial
Information; CMI Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Index to Financial
Statements
</TABLE>
- ---------------
* Not Applicable.
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION
STATEMENT ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
- --------------------------------- ----------------------
<S> <C> <C>
(Information About the Company Being Acquired)
15. Information with Respect to S-3
Companies................................. *
16. Information with Respect to S-2 or S-3
Companies................................. *
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........... Summary; Selected Historical and Pro Forma
Financial Information; Information
Concerning MNI; MNI Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Index
to Financial Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited........ Summary; Voting and Proxies; The Merger
and Related Transactions; Information
Concerning CMI; Information Concerning MNI
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer...................... *
</TABLE>
- ---------------
* Not Applicable.
<PAGE> 4
CALIFORNIA MICROWAVE, INC.
985 ALMANOR AVENUE
SUNNYVALE, CA 94086
February , 1995
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of California
Microwave, Inc. ("CMI") will be held at CMI's principal executive offices,
located at 985 Almanor Avenue, Sunnyvale, California on March 16, 1995, at 9:00
a.m.
At the Special Meeting, you will be asked to consider and vote upon the
approval of an Agreement and Plan of Reorganization and Merger and related
Agreement of Merger (collectively the "Merger Agreement") providing for the
merger of CMI Acquisition Corporation, a Texas corporation and a wholly owned
subsidiary of CMI, with and into Microwave Networks Incorporated, a Texas
corporation ("MNI"). MNI will be the surviving corporation, and on the
consummation of the merger, MNI will be a wholly owned subsidiary of CMI and
each outstanding share of MNI Common Stock and MNI Preferred Stock (other than
shares, if any, as to which dissenters' rights have been exercised pursuant to
Texas law) will be converted into that number of shares of CMI Common Stock
determined by dividing 3,350,000 by the total number of shares of MNI Capital
Stock outstanding immediately prior to the closing (including for this purpose
any MNI Capital Stock issuable under then outstanding options, warrants or other
convertible securities) and rounding the quotient off to the nearest
ten-thousandth (.0001), subject to possible adjustment as described in the
Prospectus/Proxy Statement. CMI will assume all outstanding options of MNI. If
approved by the stockholders of CMI and MNI, the merger is expected to be
consummated as soon as practicable after such approval.
After careful consideration, the Board of Directors of CMI has unanimously
approved the Merger Agreement described in the attached material and the
transactions contemplated thereby and has concluded that they are fair to and in
the best interests of CMI and its stockholders. Accordingly, the Board of
Directors unanimously recommends a vote in favor of the merger.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Prospectus/Proxy Statement relating to the actions to
be taken by CMI stockholders at the Special Meeting and a proxy card. The
Prospectus/Proxy Statement more fully describes the proposed merger and includes
information about CMI and MNI and the reasons for the Merger.
All stockholders are cordially invited to attend the Special Meeting in
person. However, whether or not you plan to attend the Special Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Special Meeting, you may vote in person if you wish, even though you
have previously returned your proxy. It is important that your shares be
represented and voted at the Special Meeting.
Sincerely,
Philip F. Otto
Chairman and Chief Executive Officer
<PAGE> 5
CALIFORNIA MICROWAVE, INC.
985 ALMANOR AVENUE
SUNNYVALE, CA 94086
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the Stockholders of California Microwave, Inc.:
A Special Meeting of the Stockholders of California Microwave, Inc., a
Delaware corporation ("CMI"), will be held at 9:00 a.m. on March 16, 1995 at
CMI's principal executive offices, located at 985 Almanor Avenue, Sunnyvale,
California, for the following purposes:
1. To approve an Agreement and Plan of Reorganization and Merger, dated as
of January 31, 1995, and the related Agreement of Merger, between CMI, CMI
Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of
CMI ("Acquisition Corp."), and Microwave Networks Incorporated, a Texas
corporation ("MNI"), pursuant to which (i) Acquisition Corp. will be merged with
and into MNI, (ii) MNI will be the surviving corporation and a wholly owned
subsidiary of CMI, (iii) each outstanding share of MNI Common Stock and MNI
Preferred Stock ("MNI Capital Stock") (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to Texas law) will be converted
into that number of shares of CMI Common Stock determined by dividing 3,350,000
by the total number of shares of MNI Capital Stock outstanding immediately prior
to the closing (including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities) and rounding
the quotient off to the nearest ten-thousandth (.0001), subject to possible
adjustment as described in the Prospectus/Proxy Statement; and (iv) CMI will
assume all outstanding options of MNI.
2. To transact such other business as may properly come before the Special
Meeting.
The foregoing items of business are more fully described in the
Prospectus/Proxy Statement accompanying this Notice.
Only stockholders of record of CMI Common Stock at the close of business on
February 13, 1995 are entitled to notice of and to vote at the meeting or any
adjournment thereof. Approval of the merger will require the affirmative vote of
a majority of the shares of CMI Common Stock present in person or by proxy at
the Special Meeting and entitled to vote.
Sunnyvale, California
February , 1995
BY ORDER OF THE BOARD OF DIRECTORS
George L. Spillane
Secretary
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, YOU ARE URGED TO FILL
IN, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOUR
PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
<PAGE> 6
CALIFORNIA MICROWAVE, INC. MICROWAVE NETWORKS INCORPORATED
PROSPECTUS/PROXY STATEMENT
CALIFORNIA MICROWAVE, INC. ("CMI") has filed a Registration Statement on
Form S-4 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933 (the
"Securities Act") for the registration of up to 3,350,000 shares of its
authorized but unissued Common Stock, $.10 par value per share ("CMI Common
Stock"), to be issued in connection with the merger (the "Merger") of CMI
Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of
CMI ("Acquisition Corp.") with and into Microwave Networks Incorporated ("MNI")
pursuant to the terms of an Agreement and Plan of Reorganization and Merger (the
"Agreement of Reorganization") and the related Agreement of Merger
(collectively, the "Merger Agreement") among CMI, MNI and Acquisition Corp.
As a result of the Merger, MNI will become a wholly owned subsidiary of CMI
and each outstanding share of Common Stock of MNI, $.01 par value per share
("MNI Common Stock"), and each outstanding share of Preferred Stock of MNI, $.01
par value per share (the "MNI Preferred Stock" and, together with the MNI Common
Stock, the "MNI Capital Stock") (other than shares, if any, as to which
dissenters' rights have been exercised pursuant to Texas law) will be converted
into that number of shares of CMI Common Stock determined by dividing 3,350,000
by the total number of shares of MNI Capital Stock outstanding immediately prior
to the closing (including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities) and rounding
the quotient off to the nearest ten-thousandth (.0001), subject to possible
adjustment as described under "Terms of the Merger--Manner and Basis of
Converting Shares." If approved by CMI and MNI stockholders, the Merger is
expected to be consummated as soon as practicable after such approval.
Upon the Merger becoming effective, each then outstanding option to
purchase shares of Common Stock of MNI will be assumed by CMI (the "Assumed
Options"). Each Assumed Option will be converted into an option to purchase that
number of shares of CMI Common Stock as is equal (subject to rounding) to the
number of shares of MNI Common Stock that were subject to such option
immediately prior to the Merger multiplied by the Exchange Ratio (as defined
below). See "Terms of the Merger--Manner and Basis of Converting Shares." The
exercise price for Assumed Options will be adjusted to an exercise price per
share equal (subject to rounding) to the exercise price per share of the
specific option immediately prior to the Merger divided by the Exchange Ratio.
See "The Merger and Related Transaction--MNI Stock Options."
Holders of MNI Capital Stock may, under certain circumstances and by
following prescribed statutory procedures, exercise dissenters' rights to
receive cash for their shares. See "Terms of the Merger--Dissenters' Rights."
This Prospectus/Proxy Statement constitutes: (a) the Proxy Statement of CMI
relating to the solicitation of proxies by the Board of Directors of CMI for use
at the Special Meeting of Stockholders of CMI scheduled to be held on March 16,
1995; (b) the Proxy Statement of MNI relating to the solicitation of proxies by
the Board of Directors of MNI for use at the Special Meeting of Stockholders of
MNI to be held on the same date; and (c) the Prospectus of CMI for the related
issuance of CMI Common Stock filed as part of the Registration Statement. All
information herein with respect to CMI has been furnished by CMI, and all
information herein with respect to MNI has been furnished by MNI.
This Prospectus/Proxy Statement and the accompanying form of proxy are
first being mailed to stockholders of CMI and MNI on or about February , 1995.
------------------------
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED CAREFULLY BY CMI STOCKHOLDERS AND MNI STOCKHOLDERS IN EVALUATING THE
PROPOSALS TO BE VOTED ON AT THE CMI SPECIAL MEETING OF STOCKHOLDERS AND MNI
SPECIAL MEETING OF STOCKHOLDERS AND THE ACQUISITION OF THE SECURITIES OFFERED
HEREBY.
------------------------
NEITHER THIS TRANSACTION NOR THE SECURITIES OF CALIFORNIA MICROWAVE, INC. TO BE
ISSUED IN THE MERGER HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS FEBRUARY , 1995
<PAGE> 7
AVAILABLE INFORMATION
CMI is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained by mail from the Public
Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. CMI Common Stock is quoted on the Nasdaq National Market
and reports, proxy statements and other information concerning CMI can be
inspected at the offices of Nasdaq Operations, 1735 K Street, Washington, D.C.
20006.
CMI has filed with the SEC a registration statement on Form S-4 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information,
reference is hereby made to the Registration Statement.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offering
made hereby. If given or made, such information or representation must not be
relied upon as having been authorized by CMI or MNI. Neither the delivery of
this Prospectus/Proxy Statement nor any distribution of securities made
hereunder shall, under any circumstances, create an implication that there has
been no change in the facts herein set forth since the date hereof. This
Prospectus/Proxy Statement does not constitute an offer to sell or a
solicitation of an offer to buy the securities offered by this prospectus/proxy
statement or a solicitation of a proxy in any jurisdiction where, or to any
person to whom, it is unlawful to make such an offer or solicitation.
i
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................................................................. i
SUMMARY............................................................................... 1
The Companies....................................................................... 1
Special Meetings of Stockholders of CMI and MNI..................................... 1
The Merger.......................................................................... 2
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION............................... 6
Selected Historical Financial Data.................................................. 6
Selected Unaudited Pro Forma Combined Financial Data................................ 8
Comparative Per Share Data.......................................................... 9
Price Range of Common Stock......................................................... 10
RISK FACTORS.......................................................................... 11
INTRODUCTION.......................................................................... 14
VOTING AND PROXIES.................................................................... 15
Date, Time and Place of Special Meetings............................................ 15
Record Date and Outstanding Shares.................................................. 15
Voting of Proxies................................................................... 16
Vote Required....................................................................... 16
Dissenters' Rights.................................................................. 17
Solicitation of Proxies and Expenses................................................ 17
THE MERGER AND RELATED TRANSACTIONS................................................... 18
Joint Reasons for the Merger........................................................ 18
Additional Reasons for the Merger--CMI.............................................. 18
Additional Reasons for the Merger--MNI.............................................. 19
Background.......................................................................... 19
Financial Advisor................................................................... 22
Management After the Merger......................................................... 25
MNI Stock Options................................................................... 25
Form S-8 Registration Statement..................................................... 25
Voting Agreements................................................................... 25
TERMS OF THE MERGER................................................................... 26
Effective Time of the Merger........................................................ 26
Manner and Basis of Converting Shares............................................... 26
Escrow and Indemnification.......................................................... 27
Exchange of Certificates............................................................ 27
Conduct of Business Prior to the Merger............................................. 28
Conditions to the Merger............................................................ 28
Employment Agreements and Covenants Not To Compete.................................. 29
Termination or Amendment of Agreement of Reorganization............................. 29
Certain United States Federal Income Tax Considerations............................. 29
Accounting Treatment................................................................ 32
Affiliates' Restrictions on Sale of CMI Common Stock and MNI Capital Stock.......... 32
Governmental and Regulatory Approvals............................................... 32
Merger Expenses..................................................................... 33
Dissenters' Rights.................................................................. 33
CMI AND MNI PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS......................... 36
CMI SELECTED FINANCIAL DATA........................................................... 40
MNI SELECTED FINANCIAL DATA........................................................... 42
CMI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 44
</TABLE>
ii
<PAGE> 9
TABLE OF CONTENTS--CONTINUED
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MNI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 51
INFORMATION CONCERNING CMI............................................................ 57
Business............................................................................ 57
Telecommunications Industry Overview................................................ 57
Strategy............................................................................ 58
Products and Markets................................................................ 59
Satellite Communications............................................................ 59
Wireless............................................................................ 61
Intelligence Systems................................................................ 63
Sales, Marketing and Customer Support............................................... 63
Manufacturing....................................................................... 64
Competition......................................................................... 64
Research and Development............................................................ 64
Patents and Licenses................................................................ 64
Employees........................................................................... 65
Regulation.......................................................................... 65
Backlog............................................................................. 65
Properties.......................................................................... 66
Security Ownership of Directors, Executive Officers and Principal Stockholders...... 66
Executive Officers and Directors.................................................... 67
Information about the Board of Directors and Committees of the Board................ 69
Board Compensation.................................................................. 69
Executive Compensation.............................................................. 70
Employment Agreement................................................................ 72
INFORMATION CONCERNING MNI............................................................ 73
Introduction........................................................................ 73
Strategy............................................................................ 73
Key Markets......................................................................... 74
Customers and Applications.......................................................... 75
Technology and Products............................................................. 75
Sales and Marketing................................................................. 77
Customer Service and Support........................................................ 78
Research and Development............................................................ 79
Manufacturing and Supplies.......................................................... 79
Backlog............................................................................. 79
Competition......................................................................... 80
Regulation.......................................................................... 80
Patents and Licenses................................................................ 80
Employees........................................................................... 81
Facilities.......................................................................... 81
Legal Matters....................................................................... 81
Executive Officers.................................................................. 81
Board Committees.................................................................... 82
Board Compensation.................................................................. 82
Employment and Consulting Agreements................................................ 82
Executive Compensation.............................................................. 83
Certain Relationships and Related Transactions...................................... 84
Security Ownership of Directors, Executive Officers and Principal Stockholders...... 85
</TABLE>
iii
<PAGE> 10
TABLE OF CONTENTS--CONTINUED
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF CMI COMMON STOCK....................................................... 87
COMPARISON OF RIGHTS OF HOLDERS OF CMI COMMON STOCK AND HOLDERS OF MNI CAPITAL
STOCK............................................................................... 88
Anti-Takeover Measures.............................................................. 88
Amendments to the Articles or Certificate of Incorporation.......................... 89
Mergers, Exchanges, Consolidations and Dissolutions................................. 89
Disposition of Assets............................................................... 90
Cumulative Voting................................................................... 90
Change in Number of Directors....................................................... 90
Newly Created Directorships and Vacancies........................................... 91
Removal of Directors................................................................ 91
Dividends........................................................................... 91
Power to Call Special Meetings of Stockholders...................................... 92
Stockholder Action Without a Meeting................................................ 92
Conflict of Interest Transactions with Directors.................................... 92
Dissenters' Rights.................................................................. 92
Indemnification..................................................................... 93
LEGAL MATTERS......................................................................... 93
EXPERTS............................................................................... 93
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
APPENDIX A
Agreement and Plan of Reorganization and Merger Among CMI,
CMI Acquisition Corp. and MNI.................................................... A-1
APPENDIX B
Articles of Merger and Agreement of Merger Among CMI, Acquisition Corp. and MNI..... B-1
APPENDIX C
Texas Business Corporation Act Articles 5.11 through 5.13........................... C-1
APPENDIX D
Opinion of Bear, Stearns & Co. Inc.................................................. D-1
</TABLE>
iv
<PAGE> 11
SUMMARY
The following contains a brief summary of certain information contained
elsewhere in this Prospectus/ Proxy Statement. This summary does not contain a
complete statement of all material features of the proposal to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Prospectus/Proxy Statement, including the Appendices hereto,
which are incorporated by reference herein.
THE COMPANIES
California Microwave, Inc. California Microwave, Inc. ("CMI") designs,
manufactures and markets sophisticated systems and products used worldwide in
satellite and wireless communications for the transmission of voice, data,
facsimile and video. CMI applies its expertise in microwave radio technologies
to: satellite earth stations and equipment; microwave radios for wireless
applications; and electronic intelligence systems. CMI is a leading provider of
both satellite earth stations used for satellite communications and digital and
analog microwave radios for the cellular, personal communications network and
private network markets.
CMI sells its products through a variety of channels for use by many of the
world's principal providers of telecommunications services. These include AT&T,
MCI, Sprint, GTE, COMSAT Corporation, British Telecom, and telephone companies
around the world. Other users of CMI's products include private networks, such
as broadcast and cable television operators, utilities and other major
corporations, and municipal, state and national governments. CMI believes that
it is among the limited number of key suppliers to these entities because of its
proven record of technical performance and reliability, customer support and
cost effectiveness.
CMI was incorporated in California in 1968 and was reincorporated in
Delaware in 1987. CMI's principal executive offices are located at 985 Almanor
Avenue, Sunnyvale, California 94086, and its telephone number at that address is
(408) 732-4000.
CMI Acquisition Corporation. CMI Acquisition Corporation, a Texas
corporation ("Acquisition Corp."), is a corporation recently organized by CMI
for the purpose of effecting the acquisition described in this Prospectus/Proxy
Statement. It has no material assets and has not engaged in any activities
except in connection with such proposed acquisition. Acquisition Corp.'s
executive offices are located at 985 Almanor Avenue, Sunnyvale, California
94086, and its telephone number at that address is (408) 732-4000.
Microwave Networks Incorporated. Microwave Networks Incorporated ("MNI")
designs, manufactures and markets digital microwave radios and related products
for a wide range of telecommunications applications used worldwide in wireless
networks. MNI's current products address the requirements for wireless voice and
data transmission typically for cellular and fixed base telephony applications.
MNI is a worldwide leader in the supply of quality digital and video microwave
transmission products and systems providing wireless radio interfaces in
frequency bands from 2 GHz to 38 GHz. Typical end users of MNI's products
include cellular operators, private businesses and domestic and international
common carriers. Approximately 93% of MNI's revenues were generated from
international sales in its fiscal year ended June 30, 1994.
MNI was incorporated in Texas under the name Telsat Corporation in 1981 and
changed its name to Microwave Networks Incorporated in April 1985. Its executive
offices are located at 10795 Rockley Road, Houston, Texas 77099-3571, and its
telephone number is (713) 495-7123.
SPECIAL MEETINGS OF STOCKHOLDERS OF CMI AND MNI
Time, Date, Place and Purpose. A Special Meeting of Stockholders of CMI
("CMI Special Meeting") will be held at CMI's principal executive offices,
located at 985 Almanor Avenue, Sunnyvale, California on March 16, 1995 at 9:00
a.m. A Special Meeting of Stockholders of MNI ("MNI Special Meeting") will be
held at MNI's corporate offices located at 10795 Rockley Road, Houston, Texas on
March 16, 1995 at 9:00 a.m. The purpose of both Special Meetings is to consider
and vote on a proposal to approve and adopt an Agreement and Plan of
Reorganization and Merger, attached hereto as Appendix A (the "Agreement of
Reorganization") and the related Agreement of Merger attached hereto as Appendix
B (the "Agreement of
1
<PAGE> 12
Merger" and, together with the Agreement of Reorganization, the "Merger
Agreement") among CMI, MNI and Acquisition Corp. See "The Merger and Related
Transactions," and "Terms of the Merger."
Record Date and Vote Required. The record date for stockholders of both
CMI and MNI entitled to vote upon the Merger at their respective Special
Meetings is February 13, 1995 (the "Record Date"). Approval of the Merger
Agreement requires the affirmative vote of a majority of shares of CMI Common
Stock present and entitled to vote at the CMI Special Meeting (shares as to
which brokers holding shares in street name for customers have not received
direction or discretionary authority from their customers are considered shares
not entitled to vote with respect to this matter, but are considered shares that
are present for purposes of determining a quorum), and the affirmative vote of
two-thirds of the shares of MNI Common Stock, and two-thirds of each of the
Series A, Series B and Series C Preferred Stock of MNI, voting as separate
series. The presence, either in person or by properly executed proxy, at the CMI
Special Meeting and at the MNI Special Meeting (the "Special Meetings") of the
holders of a majority of the outstanding shares entitled to vote at such Special
Meeting is necessary to constitute a quorum at such Special Meeting.
As of the Record Date, there were approximately holders of record of
CMI Common Stock. The directors and executive officers of CMI, and their
affiliates, beneficially owned 459,765 shares of CMI Common Stock (representing
approximately 3.7% of the outstanding CMI Common Stock), and the directors and
executive officers of MNI, and their affiliates, beneficially owned 5,440,157
shares of MNI Capital Stock, representing approximately 60% of the outstanding
MNI Capital Stock (76.5% of the MNI Common Stock; 68% of the Series A MNI
Preferred Stock; 52.8% of the Series B MNI Preferred Stock; and 47% of the
Series C MNI Preferred Stock.
The directors of CMI, who beneficially own 328,330 shares of the
outstanding CMI Common Stock (2.6%), intend to vote in favor of the Merger. The
directors and executive officers of MNI have agreed, subject to certain
limitations, to vote their shares in favor of the Merger Agreement and the
Merger. See "The Merger and Related Transactions--Voting Agreements."
Consummation of the Merger is subject to a number of conditions. See "Terms of
the Merger--Conditions to the Merger."
THE MERGER
Effect of Merger. Upon consummation of the Merger, pursuant to the Merger
Agreement, Acquisition Corp. will be merged into MNI, which will be the
surviving corporation, and MNI will become a wholly owned subsidiary of CMI.
Effective Time of the Merger. The Merger will be effective when the
Certificate of Merger is issued by the Texas Secretary of State (the "Effective
Time of the Merger") after Articles of Merger have been filed with the Secretary
of State. The Effective Time of the Merger is currently expected to be on or
about March 16, 1995, subject to approval of the Merger at the Special Meetings,
and further subject to the satisfaction or waiver of the conditions precedent to
the Merger set forth in the Agreement of Reorganization. See "Terms of the
Merger--Effective Time of the Merger" and "Terms of the Merger--Conditions to
the Merger."
Terms of the Merger. As a result of the Merger, each outstanding share of
MNI Capital Stock (other than shares, if any, as to which dissenters' rights
have been exercised pursuant to Texas law) will be converted into that number of
shares of CMI Common Stock determined by dividing 3,350,000 (the "Numerator") by
the total number of shares of MNI Capital Stock outstanding immediately prior to
the closing (including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities) and rounding
the quotient thereof off to the nearest ten-thousandth (.0001). Notwithstanding
the foregoing, (i) MNI has the right to terminate the Merger Agreement if the
average closing price of CMI Common Stock on the Nasdaq National Market for the
15 consecutive trading days immediately preceding the date of the CMI Special
Meeting ("Final Closing Price") is less than $30.00 (as reported by Nasdaq),
provided that if MNI exercises this right, the termination shall not be
effective if CMI agrees to increase the Numerator to the number which when
multiplied by the Final Closing Price equals $100,500,000, and (ii) CMI has the
right to terminate the Merger Agreement if the Final Closing Price is more than
$41.375, provided that if CMI exercises this right, the termination shall not be
effective if MNI agrees to decrease the
2
<PAGE> 13
Numerator to the number which when multiplied by the Final Closing Price is
equal to $138,606,250. Such decisions to terminate, or to change the Numerator,
would be within the discretion of the Boards of Directors of MNI or CMI,
respectively. The number of shares of CMI Common Stock into which each share of
MNI Capital Stock is converted is referred to herein as the "Exchange Ratio."
All options to acquire shares of MNI Common Stock that are outstanding at the
Effective Time of the Merger will be converted into options to acquire CMI
Common Stock based upon the Exchange Ratio. See "Terms of the Merger--Manner and
Basis of Converting Shares."
Number of Shares of CMI Common Stock to be Held by MNI Stockholders. Based
upon the number of shares of MNI Capital Stock outstanding as of the record date
established for the Special Meetings, and assuming that: (i) the average closing
price of CMI Common Stock quoted on the Nasdaq National Market for the 15
trading days prior to the date of the CMI Special Meeting is $30.00 or more and
$41.375 or less (ii) no MNI stockholders exercise dissenters' rights, and (iii)
all of the shares of CMI Common Stock held in escrow (as described below) will
be delivered to MNI stockholders, approximately 3,150,000 shares of CMI Common
Stock (approximately 20% of the total shares of CMI Common Stock outstanding
immediately after the Merger), will be held by the former holders of MNI Capital
Stock after the Merger. See "Terms of the Merger--Manner and Basis of Converting
Shares" and "--Escrow."
Assumption of MNI Options. Upon consummation of the Merger, the
obligations of MNI with respect to all options to purchase shares of MNI Common
Stock then outstanding will be assumed by CMI (the "Assumed Options"). Each
Assumed Option will continue to have, and be subject to, the same terms and
conditions set forth in the applicable MNI stock option agreement immediately
prior to the Effective Time of the Merger, provided that shares issuable upon
exercise of the Assumed Options will no longer be subject to a right of
repurchase by MNI. Following the Effective Time of the Merger, each Assumed
Option will be exercisable for the number of whole shares of CMI Common Stock
determined by multiplying the number of shares of MNI Common Stock purchasable
under such option immediately prior to the Effective Time of the Merger by the
Exchange Ratio, rounded up to the nearest whole number. The per share exercise
price of the Assumed Options will be equal to the original exercise price of the
specific Assumed Options divided by the Exchange Ratio, rounded down to the
nearest whole cent. See "The Merger and Related Transactions--MNI Stock Option"
and "Terms of the Merger -- Manner and Basis of Converting Shares."
Registration Rights. Holders of MNI's Capital Stock who are identified by
MNI as affiliates of MNI subject to Rule 145 under the Securities Act pursuant
to the Merger Agreement will receive certain rights to include their shares in
certain registration statements filed by CMI under the Securities Act. See
"Terms of the Merger--Affilates' Restrictions on Sale of CMI Common Stock and
MNI Capital Stock."
Form S-8 Registration Statement. As promptly as practicable after the
Effective Time of the Merger, CMI will file a registration statement on Form S-8
under the Securities Act, covering the shares of CMI Common Stock issuable upon
exercise of the Assumed Options. See "The Merger and Related Transactions --MNI
Stock Options."
Escrow. Ten percent of the shares of CMI Common Stock to be issued in the
Merger will be delivered to an escrow established with First National Bank of
Boston, CMI's Transfer Agent ("Bank of Boston"). Such shares will be held in
escrow following the Merger until the date on which CMI first publicly announces
the combined results of operations of CMI and MNI covering a period after the
Merger of at least 30 days, at which time, pursuant to an escrow agreement, such
shares will be distributed to MNI stockholders or retained by CMI to the extent
necessary to satisfy certain indemnification obligations of MNI for breaches of
representations, warranties and covenants under the Merger Agreement. Pursuant
to the terms of the Merger Agreement, the stockholders of MNI agree to advance
funds to the MNI stockholder representatives under the escrow agreement on a pro
rata basis in the event the stockholder representatives incur expenses or
request advancement of expenses in connection with disputes related to release
of the escrowed shares. To the extent a stockholder does not advance such funds,
and there are shares available for distribution out of escrow to such
stockholder, such stockholder's escrowed shares may be utilized to meet such
obligation. See "Terms of the Merger--Escrow."
3
<PAGE> 14
Recommendations of the Boards of CMI and MNI. The Board of Directors of
each company has unanimously approved the Merger Agreement and the transactions
contemplated thereby. THE BOARD OF EACH COMPANY UNANIMOUSLY RECOMMENDS APPROVAL
OF THE MERGER AGREEMENT BY THE STOCKHOLDERS OF SUCH COMPANY. For a discussion of
the reasons favoring a merger of the two companies considered by each company's
Board of Directors in approving the Merger Agreement, see "The Merger and
Related Transactions--Reasons for the Merger."
Opinion of Financial Advisor. On January 31, 1995 and February , 1995,
Bear, Stearns & Co. Inc. ("Bear Stearns") delivered to CMI's Board of Directors
its written opinions to the effect that, as of each such date and based upon the
matters described therein, the Merger was fair, from a financial point of view,
to the stockholders of CMI. Reference is made to the full text of the opinion
dated February , 1995, a copy of which is set forth in Appendix D, which sets
forth assumptions made, matters considered and attendant limitations. CMI
stockholders are urged to, and should, read this opinion carefully in its
entirety. See "The Merger and Related Transactions--Financial Advisors."
Conduct of the Combined Companies Following the Merger. Following the
Effective Time of the Merger, MNI will be operated as a subsidiary of CMI and
employees of MNI will continue as employees of the surviving corporation. The
Board of Directors of MNI after the Merger will consist of three officers of CMI
(Philip F. Otto, Douglas H. Morais and Garrett E. Pierce), together with the
following officers of MNI, who will serve at the pleasure of CMI: Arthur W.
Epley, III and Carl B. Frampton. See "The Merger and Related
Transactions--Management After the Merger."
Exchange of MNI Stock Certificates. At the Effective Time of the Merger,
each issued and outstanding share of MNI Capital Stock (other than shares, if
any, as to which dissenters' rights have been exercised pursuant to Texas law)
automatically will be converted into the right to receive CMI Common Stock based
on the Exchange Ratio. The exchange of certificates evidencing shares of MNI
Capital Stock for certificates evidencing shares of CMI Common Stock will be
made upon surrender of the former to Bank of Boston, as Exchange Agent.
CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE PRIOR TO CONSUMMATION OF THE
MERGER. Promptly after the Effective Time of the Merger, MNI stockholders will
be provided with a letter of transmittal and related materials needed to
exchange their certificates. See "Terms of the Merger--Manner and Basis of
Converting Shares" and "Terms of the Merger--Exchange of Certificates."
Conditions to the Merger; Termination. Notwithstanding approval of the
Merger Agreement by the stockholders of CMI and MNI, the consummation of the
Merger is subject to a number of conditions which, if not fulfilled or waived,
permit termination of the Agreement of Reorganization. The Agreement of
Reorganization may also be terminated by mutual consent. See "Terms of the
Merger--Conditions to the Merger" and "Terms of the Merger--Termination or
Amendment of Agreement of Reorganization."
Government and Regulatory Approvals. CMI and MNI are aware of no
governmental or regulatory approvals required for consummation of the Merger,
other than compliance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder ("HSR Act"),
compliance with federal and applicable state securities laws and the filing of
Articles of Merger as required under Texas law. CMI submitted a filing under the
HSR Act, on February , 1995 and the requisite waiting period under the HSR Act
with respect to the Merger is expected to terminate on March , 1995.
Voting Agreements; Affiliate Agreements. The directors and executive
officers of MNI will vote their shares in favor of the Merger Agreement. See
"The Merger and Related Transactions--Voting Agreements." The persons identified
by MNI as "affiliates" (as that term is defined for purposes of Rule 145
promulgated under the Securities Act) of MNI will, prior to the Effective Time
of the Merger enter into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of MNI
Capital Stock held by them prior to the Merger and the shares of CMI Common
Stock received by them in the Merger so as to comply with the requirements of
applicable federal securities and tax laws and to help ensure that the Merger
will be treated as a pooling of interests for accounting and financial reporting
purposes. See "Terms of the Merger--Conditions to the Merger" and "Terms of the
Merger--Affiliates' Restrictions on Sale of CMI Common Stock and MNI Capital
Stock." Directors and executive officers of
4
<PAGE> 15
CMI will also, prior to the Effective Time of the Merger, enter into agreements
restricting their sales of CMI Common Stock to help preserve pooling of
interests accounting treatment.
Certain Federal Income Tax Consequences. The Merger is intended to be a
tax-free reorganization for federal income tax purposes, and consummation of the
Merger is conditioned upon receipt by MNI of an opinion of counsel to MNI to the
effect that the Merger should constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code of 1986 (the "Code"). If the Merger is
a reorganization within the meaning of Section 368 of the Code, stockholders of
MNI will recognize no gain or loss for federal income tax purposes as a result
of their exchange of MNI Capital Stock for CMI Common Stock in the Merger,
except to the extent that they exercise dissenters' rights or receive cash in
lieu of fractional shares. See "Terms of the Merger--Certain United States
Federal Income Tax Considerations."
Accounting Treatment. The Merger is to be treated as a pooling of
interests for accounting purposes. As a condition to the consummation of the
Merger, CMI is to receive a letter from its independent auditors, Ernst & Young
LLP, confirming the appropriateness of pooling of interests accounting for the
Merger under Accounting Principles Board Opinion No. 16 if the Merger is
consummated in accordance with the Merger Agreement. See "Terms of the Merger."
Dissenters' Rights. Holders of shares of MNI Capital Stock who comply with
the requirements of Articles 5.11 et seq. of the Texas Business Corporation Act
(the "TBCA") will be entitled to assert dissenters' rights and to require MNI to
purchase the shares as to which they dissent at their "fair value" as of the day
immediately preceding the MNI Special Meeting, excluding any appreciation or
depreciation in anticipation of the Merger. Holders of shares of MNI Capital
Stock who desire to preserve their dissenters' rights must not vote in favor of
the Merger Agreement. In addition, any such stockholder electing to assert
dissenters' rights must file with MNI, prior to the MNI Special Meeting, a
written objection to the Merger, setting out that the shareholder's right to
dissent will be exercised if the action is effective. Within 10 days after
delivery or mailing of written notice to the stockholder by MNI that the Merger
has been effected, the stockholder may make written demand on MNI for payment of
the fair value of the shareholder's shares. A proxy or vote by such shareholder
against approval of the Merger Agreement is not sufficient to constitute such a
demand. Any stockholder failing to make demand within the 10 day period shall be
bound by the Merger Agreement.
Articles 5.11 through 5.13 of the TBCA are reproduced in full as Appendix C
to this Prospectus/Proxy Statement. Holders of MNI Capital Stock who seek to
assert their dissenters' rights must follow the statutory procedures precisely.
FAILURE TO FOLLOW ANY OF THE STATUTORY PROCEDURES MAY RESULT IN A TERMINATION OR
WAIVER OF DISSENTERS' RIGHTS. See "Terms of the Merger--Dissenters' Rights."
Certain Effects of the Merger on the Rights of MNI Stockholders. The
internal affairs of MNI are currently governed by MNI's Articles of
Incorporation and Bylaws, which are governed by Texas law. Upon consummation of
the Merger, the stockholders of MNI will become stockholders of CMI and their
rights will be governed by CMI's Certificate of Incorporation and Bylaws, which
are governed by Delaware law. See "Description of CMI Common Stock" and
"Comparison of Rights of Holders of CMI Common Stock and MNI Capital Stock."
5
<PAGE> 16
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following tables present selected historical and pro forma combined
financial information and comparative per share data for CMI and MNI. The
unaudited pro forma combined information is calculated after giving effect to
the Merger at an assumed Exchange Ratio of .3511 of a share of CMI Common Stock
for each outstanding share and option to purchase a share of MNI Capital Stock
using the pooling of interests method of accounting. The selected historical
consolidated financial data (except other data) set forth below for CMI and MNI
for, and as of the end of, each of the five years in the period ended June 30,
1994 are derived from the Consolidated Financial Statements of CMI and MNI, both
of which have been audited by Ernst & Young LLP, independent auditors. The
selected historical consolidated financial information presented below for, and
as of the end of, the six months ended December 31, 1993 and 1994 are derived
from unaudited condensed consolidated financial statements of CMI and MNI which
in the opinions of their managements reflect all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The historical and pro
forma financial information are not necessarily indicative of future operations
or the actual results that would have occurred had the Merger been consummated
at the beginning of the periods presented and should not be construed as
representative of future operations. This information should be read in
conjunction with the audited consolidated financial statements of CMI and MNI at
June 30, 1993 and 1994 and for each of the three years in the period ended June
30, 1994 and the notes thereto, with the unaudited condensed consolidated
financial statements of CMI and MNI at December 31, 1994 and for the six months
ended December 31, 1993 and 1994 and the notes thereto, and with the unaudited
pro forma combined condensed financial statements and notes thereto included
elsewhere in this Prospectus/Proxy Statement. See "CMI and MNI Pro Forma
Combined Condensed Financial Statements" and "Index to Financial Statements."
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CALIFORNIA MICROWAVE, INC.
HISTORICAL STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- --------------------
1990 1991 1992(1) 1993 1994(2) 1993(2) 1994
--------- --------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales........................... $ 145,851 $ 177,364 $ 199,003 $ 267,181 $369,017 $ 145,112 $ 205,855
Operating income................ 12,105 13,677 8,619 17,993 26,189 11,833 15,508
Net income...................... 6,642 8,001 5,088 10,004 15,056 6,845 8,496
========= ========= ========= ========= ========= ========= =========
Net income per share--primary... $ 0.80 $ 0.93 $ 0.56 $ 0.98 $ 1.20 $ 0.55 $ 0.67
Net income per share--fully
diluted....................... 0.80 0.93 0.56 0.98 1.18(3) 0.55 0.64
========= ========= ========= ========= ========= ========= =========
Average shares and equivalents--
primary....................... 8,416 8,636 9,111 10,168 12,572 12,523 12,725
Average shares and equivalents--
fully diluted................. 8,416 8,636 9,111 10,168 13,922 12,836 15,093
Cash dividends per share........ -- -- -- -- -- -- --
OTHER DATA:
Bookings........................ $ 131,923 $ 183,462 $ 202,487 $ 293,123 $400,435 $ 223,371 $ 239,629
Backlog......................... 111,504 118,381 130,232 156,174 220,388 267,229 254,162
</TABLE>
6
<PAGE> 17
HISTORICAL BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT
AT JUNE 30, DECEMBER 31,
---------------------------------------------------------- ------------
1990 1991 1992 1993 1994 1994
------- ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Working capital..................... $38,413 $45,911 $ 56,641 $ 63,190 $111,974 $124,805
Total assets........................ 89,987 98,481 147,240 169,625 293,983 296,988
Total debt, including current
maturities........................ 14,307 5,230 40,433 5,579 70,490 79,981
Total stockholders' equity.......... 55,735 67,496 75,285 119,188 140,745 153,393
</TABLE>
MICROWAVE NETWORKS INCORPORATED
HISTORICAL STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- -----------------
1990 1991 1992 1993 1994 1993 1994
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales................................... $ 9,507 $16,050 $22,503 $39,383 $36,976 $16,601 $28,813
Operating income (loss)................. 492 633 (551) 4,766 2,380 678 4,154
Net income(4)(5)........................ 413 596 206 3,701 1,612 434 2,717
======== ======== ======== ======== ======== ======== ========
Net income per share--
Primary and Fully Diluted(4)(5)(6).... $ 0.06 $ 0.08 $ 0.02 $ 0.42 $ 0.18 $ 0.05 $ 0.29
======== ======== ======== ======== ======== ======== ========
Average shares and equivalents--
Primary and Fully Diluted(6).......... 6,470 7,487 8,277 8,782 9,074 9,016 9,242
Cash dividends per share................ -- -- -- -- -- -- --
OTHER DATA:
Bookings.............................. $11,095 $22,784 $27,259 $33,902 $40,707 $17,470 $33,426
Backlog............................... 2,569 9,303 14,059 8,578 12,309 9,447 16,922
</TABLE>
HISTORICAL BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT
AT JUNE 30, DECEMBER 31,
------------------------------------------------------ ------------
1990 1991 1992 1993 1994 1994
------ ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Working capital............................. $1,547 $ 5,340 $ 4,883 $ 9,381 $11,085 $ 14,320
Total assets................................ 4,818 10,328 14,776 19,269 23,071 33,840
Total debt, including current maturities.... 932 550 3,982 2,389 4,550 8,150
Total stockholders' equity.................. 2,348 6,777 6,996 12,222 13,836 16,588
</TABLE>
- ---------------
(1) In April 1992, CMI acquired all the shares of Microwave Radio Corporation
("MRC") for $33 million in cash. An additional $11 million in contingent
payments based on the income of MRC was paid. The acquisition was accounted
for as a purchase transaction. The operating results of MRC have been
included in operations from the acquisition date.
(2) In October 1993, CMI acquired substantially all the assets and certain of
the liabilities of TeleSciences Transmission Systems ("TTS") for $28.7
million in cash and notes. The acquisition was accounted for as a purchase
transaction. The operating results of TTS have been included in operations
from the acquisition date.
(3) Fully diluted net income per share for the fiscal year ended June 30, 1994
has not been previously reported in the audited financial statements because
the difference between primary and fully diluted earnings per share was not
material.
(4) MNI's net income for 1992 includes $345,000 or $0.04 per share for a
cumulative effect on prior years of a change in the method of accounting for
overhead costs in inventory as well as $604,000 or $0.07 per share for a
change in the method of accounting for income taxes.
(5) MNI's net income includes $219,000, or $0.03 per share in 1991, and
$148,000, or $0.02 per share in 1990, for an extraordinary item related to
the reduction of income taxes arising from the carryforward of prior years'
operating loss.
(6) MNI's net income per share assumes the conversion of all outstanding shares
of MNI Preferred Stock into shares of MNI Common Stock.
7
<PAGE> 18
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA(1)(4)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA CMI AND MNI COMBINED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------- ----------------------
1992(2) 1993 1994(3) 1993(3) 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales............................. $221,506 $306,564 $405,832 $161,713 $234,202
Operating income.................. 8,068 22,776 28,459 12,511 19,609
Income before cumulative effects
of changes in accounting
principles..................... 4,345 13,705 16,598 7,279 11,120
======= ======= ======= ======= =======
Per share data:
Income before cumulative
effects of changes in
accounting principles--
primary...................... $ 0.36 $ 1.03 $ 1.05 $ 0.46 $ 0.70
Income before cumulative
effects of changes in
accounting principles--fully
diluted...................... 0.36 1.03 1.05 0.46 0.67
======== ======== ======== ======== ========
Average shares and equivalents--
primary........................ 12,017 13,251 15,758 15,689 15,970
Average shares and
equivalents--fully diluted..... 12,017 13,251 17,108 16,002 18,338
PRO FORMA CMI AND MNI COMBINED OTHER DATA:
Bookings.......................... $229,746 $327,025 $440,964 $240,841 $272,103
Backlog........................... 144,291 164,752 232,680 276,676 270,581
</TABLE>
PRO FORMA CMI AND MNI COMBINED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
--------------------
<S> <C>
Working capital....................................................... $138,960
Total assets.......................................................... 330,586
Total debt, including current maturities.............................. 88,131
Total stockholders' equity............................................ 169,816
</TABLE>
- ---------------
(1) The pro forma combined balance sheet data assumes the Merger took place on
December 31, 1994 and combines CMI's December 31, 1994 balance sheet data
with MNI's December 31, 1994 balance sheet data. The pro forma combined
statement of operations data assumes that the Merger took place as of the
beginning of each of the periods presented and combines CMI's historical
consolidated statement of operations data for the three years ended June 30,
1994 and for the six months ended December 31, 1993 and 1994 with MNI's
historical consolidated statement of operations data for the three years
ended June 30, 1994 and for the six months ended December 31, 1993 and 1994,
respectively.
(2) In April 1992, CMI acquired all the shares of MRC for $33 million in cash.
An additional $11 million in contingent payments based on the income of MRC
was paid. The acquisition was accounted for as a purchase transaction. The
operating results of MRC have been included in operations from the
acquisition date.
(3) In October 1993, CMI acquired substantially all the assets and certain of
the liabilities of TTS for $28.7 million in cash and notes. The acquisition
was accounted for as a purchase transaction. The operating results of TTS
have been included in operations from the acquisition date.
(4) CMI and MNI will incur charges which are not expected to exceed $4 million
in the period in which the Merger occurs to reflect the consolidation of
certain product lines and other costs as well as transaction fees and costs
incident to the Merger. These charges will be included in operations in the
period in which the Merger is consummated and are not included in the pro
forma balance sheet or statement of operations data. The aforementioned
amount is a preliminary estimate only and therefore is subject to change.
8
<PAGE> 19
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of CMI and
MNI and combined per share data on an unaudited pro forma basis after giving
effect to the Merger and pooling of interests basis assuming that .3511 CMI
shares were issued in exchange for each share of MNI Capital Stock in the
Merger. The information presented in this tabulation should be read in
conjunction with the pro forma combined condensed financial statements and the
separate financial statements of the respective companies and the notes thereto
appearing elsewhere herein. The unaudited pro forma combined condensed financial
data are not necessarily indicative of the operating results that would have
been achieved had the transaction been in effect as of the beginning of the
periods presented and should not be construed as representative of future
operations.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
FOR THE YEAR ENDED, AND AT, ENDED, AND AT,
JUNE 30, DECEMBER 31,
--------------------------- -----------------
1992 1993 1994 1993 1994
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
HISTORICAL--CMI
Net income--primary............................ $0.56 $0.98 $ 1.20 $0.55 $ 0.67
Net income--fully diluted...................... $0.56 $0.98 $ 1.18 $0.55 $ 0.64
Book value..................................... -- -- $11.70 -- $12.51
HISTORICAL--MNI(1)
Net income..................................... $0.02 $0.42 $ 0.18 $0.05 $ 0.29
Book value..................................... -- -- $ 1.56 -- $ 1.86
PRO FORMA COMBINED--PER CMI SHARE:(2)
Income before cumulative effects of changes in
accounting principles -- primary............ $0.36 $1.03 $ 1.05 $0.46 $ 0.70
Income before cumulative effects of changes in
accounting principles -- fully diluted...... $0.36 $1.03 $ 1.05 $0.46 $ 0.67
Book value..................................... -- -- $10.21 -- $11.03
EQUIVALENT PRO FORMA COMBINED--PER MNI SHARE:(2)
Income before cumulative effects of changes in
accounting principles -- primary............ $0.13 $0.36 $ 0.37 $0.16 $ 0.24
Income before cumulative effects of changes in
accounting principles -- fully diluted...... $0.13 $0.36 $ 0.37 $0.16 $ 0.23
Book value..................................... -- -- $ 3.58 -- $ 3.87
</TABLE>
- ---------------
(1) MNI net income per share and book value per share assumes the conversion of
the MNI Preferred Stock into MNI Common Stock for all periods presented.
(2) The pro forma combined book value per share assumes the Merger took place on
June 30, 1994 and December 31, 1994 and combines CMI's June 30, 1994 and
December 31, 1994 balance sheet data with MNI's June 30, 1994 and December
31, 1994 balance sheet data. The pro forma combined net income per share
assumes that the Merger took place as of the beginning of each of the
periods presented and combines CMI's historical consolidated statement of
operations data for the year ended June 30, 1994 and for the six months
ended December 31, 1994 with MNI's historical consolidated statement of
operations data for the year ended June 30, 1994 and for the six months
ended December 31, 1994, respectively.
9
<PAGE> 20
PRICE RANGE OF COMMON STOCK
CMI. The Common Stock of California Microwave, Inc. is quoted on the
Nasdaq National Market under the symbol "CMIC." As of January 31, 1995, there
were approximately 2,000 record holders of CMI Common Stock. The following table
sets forth the range of high and low prices for CMI Common Stock on the Nasdaq
National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal 1993
First quarter........................................................... $14.25 $ 9.00
Second quarter.......................................................... $17.75 $10.25
Third quarter........................................................... $18.125 $12.75
Fourth quarter.......................................................... $20.75 $13.25
Fiscal 1994
First quarter........................................................... $29.00 $17.25
Second quarter.......................................................... $31.25 $21.00
Third quarter........................................................... $27.50 $19.25
Fourth quarter.......................................................... $24.00 $16.50
Fiscal 1995
First quarter........................................................... $26.00 $20.75
Second quarter.......................................................... $38.25 $24.25
Third quarter (through February 2, 1995)................................ $39.75 $28.50
</TABLE>
On January 31, 1995, the last trading day prior to the first public
announcement by CMI and MNI of the proposed merger, the closing price of CMI
Common Stock as reported on the Nasdaq National Market was $29.00 per share.
MNI. No established public trading market exists for MNI Capital Stock. In
May, October and December 1994, MNI granted options to acquire MNI Common Stock
to employees of MNI, including executive officers, at a price of $0.95, $1.45
and $6.00, per share, respectively, which the Board of Directors of MNI believed
was a reasonable estimate of the fair market value of MNI Common Stock on such
dates. At its January 31, 1995 meeting, the MNI Board of Directors determined
that the fair market value of each share of MNI Common Stock was approximately
$6.00, after taking into consideration the Exchange Ratio and applying an
approximate 40% discount based upon the present illiquidity of such stock.
CMI follows the policy of reinvesting all earnings to finance expansion of
its business and has paid no cash dividends. MNI has paid no cash dividends.
10
<PAGE> 21
RISK FACTORS
The following factors should be considered carefully with the information
provided elsewhere in this Prospectus/Proxy Statement in evaluating the
proposals to be voted on at the Special Meetings and the acquisition of the
securities offered hereby.
Integration of Certain Operations; Potential Effect on CMI Common
Stock. CMI and MNI have entered into the Merger Agreement with the expectation
that the Merger will result in certain benefits for the combined companies. See
"The Merger and Related Transactions." Achieving the anticipated benefits of the
Merger will depend in part upon whether the integration of the two companies'
businesses is achieved in an efficient and effective manner, and there can be no
assurance that this will occur. The combination of the two companies will
require, among other things, partial integration of the companies' respective
product offerings and coordination of their sales and marketing and research and
development efforts. There can be no assurance that integration will be
accomplished smoothly or successfully. The difficulties of such integration may
be increased by the necessity of coordinating geographically separated
organizations. The integration of certain operations following the Merger will
require the dedication of management resources which may temporarily distract
attention from the day-to-day business of the combined companies. Failure to
effectively accomplish the integration of the two companies' operations could
have an adverse effect on CMI's results of operations and financial conditions.
Fluctuations in Quarterly Results. CMI and MNI have experienced and will
in the future experience significant fluctuations in sales and operating results
from quarter to quarter. Factors that could cause CMI's and MNI's sales and
operating results to vary significantly from period to period include: mix of
systems and products sold; timing of significant orders and deliveries of new
and existing products and systems, particularly in the case of MNI, whose sales
historically have primarily resulted from orders received in the quarter;
acquisitions; receipt of documents to support export shipments, such as export
licenses and letters of credit; fluctuating market demand; price competition;
new product introductions by competitors; fluctuations in foreign currency
exchange rates; disruptions in delivery of components or subsystems; political
instability; regulatory developments; general economic conditions; and other
factors described in this section. In certain of CMI's and in MNI's operations,
inventory levels are established, and expenditures are made, based upon
forecasted demand as well as on customer orders, and CMI and MNI may be limited
in their ability to reduce inventory and expenses if such forecasted demand is
not realized. In addition, a limited number of customers have accounted for and
are likely to continue to account for a substantial portion of MNI's sales, and
the loss of any such key customer could have a material adverse effect on MNI's
results of operations in any quarter. See "CMI Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Historical Quarterly Results" and "MNI Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations."
Dependence on Component Availability, Subcontractor Performance and Key
Suppliers. On-time delivery of CMI's and MNI's products is dependent upon the
availability of quality components and subsystems used by CMI and MNI in its
products. CMI and MNI depend in part upon subcontractors to manufacture and
deliver certain items in a timely and satisfactory manner. CMI and MNI obtain
certain components and subsystems from single, or a limited number of, sources.
MNI in particular is dependent upon single source suppliers for a key component
of its radios. CMI and MNI operate without a substantial inventory of components
and subsystems but believe that most components and subsystems are available
from existing or alternative suppliers and subcontractors. A significant
interruption in the delivery of such items could have a material adverse effect
on CMI's and MNI's results of operations. See "Information Concerning
CMI--Manufacturing" and "Information Concerning MNI--Manufacturing and
Suppliers."
Competition and Changing Technology. Competition is intense and increasing
among providers of telecommunications equipment and systems. CMI's and MNI's
products compete with other microwave-based telecommunications products and
alternative telecommunications transmission media, including copper cable and
fiber optic cable. See "Information Concerning CMI--Telecommunications Industry
Overview." CMI and MNI believe that competition in their markets is based
primarily on price, performance, reputation, on-time delivery, reliability and
customer support. Many of CMI's and MNI's competitors have significantly
11
<PAGE> 22
greater financial, marketing and operating resources than CMI and MNI. In
addition, certain of CMI's and MNI's customers have technological capabilities
in CMI's and MNI's product areas and could choose to replace CMI's and MNI's
products with their own. See "Information Concerning CMI--Competition" and
"Information Concerning MNI--Research and Development," "--Competition,"
"--Regulation" and "--Patents and Licenses."
The technology underlying CMI's and MNI's products is subject to change.
CMI's and MNI's continued success will depend in part upon their ability to
develop and introduce competitive products and to bring those products to market
in a timely manner.
Regulation. Radio communications, including satellite communications, are
subject to regulation by United States and foreign laws and international
treaty. CMI's and MNI's equipment must conform to domestic and international
requirements established to avoid interference among users of microwave
frequencies and to permit interconnection of equipment. In addition, CMI and MNI
are affected to the extent that domestic and international authorities regulate
the allocation of the radio frequency spectrum. Equipment to support new
services can be marketed only if permitted by suitable frequency allocations and
regulations, and the process of establishing new regulations is complex and
lengthy. See "Information Concerning CMI--Regulation" and "Information
Concerning MNI--Regulation."
U.S. Government Business. CMI's U.S. government business, which accounted
for 28% and 31% of total sales for the years ended June 30, 1994 and 1993,
respectively, is subject to various risks, including unpredictable reductions in
funds available for CMI's projects and contract termination at the convenience
of the government. A significant portion of CMI's U.S. government business is
also subject to reduction or termination due to government policy changes.
International Sales. CMI's international sales represented 42% and 41% of
total sales for the years ended June 30, 1994 and 1993, respectively. MNI's
international sales represented 93% of total sales for such years. CMI and MNI
expect that international sales will continue to grow. These sales expose CMI
and MNI to certain risks, including the difficulty and expense of staffing and
maintaining foreign sales distribution channels, barriers to trade, fluctuations
in foreign currency exchange rates, political instability, availability of
suitable export financing, export license requirements and other U.S. and
foreign regulations that may apply to the export of CMI's and MNI's products.
CMI and MNI attempt to reduce the risk of doing business in foreign countries by
seeking contracts denominated in dollars, advance payments and irrevocable
letters of credit in their favor. CMI also seeks to reduce that risk by currency
hedging. MNI's business is currently concentrated in emerging markets in
developing countries. A significant portion of MNI's sales are in Mexico. Sales
to customers in Mexico accounted for 44% of total sales in fiscal year 1994 and
17% for the six months ended December 31, 1994. The recent devaluation of the
Mexican peso will increase the cost in U.S. dollars of MNI's products in that
country and the uncertainty of the peso may cause some customers to delay new
orders or payment for existing orders. The long-term impact of such devaluation,
including any possible effect on the business outlook in other developing
countries, cannot be predicted.
Reliance Upon In-Country Partners. In order to address the unique
political, technical and regulatory issues in MNI's target markets, MNI strives
to develop relationships with in-country partners who can provide the required
local resources and business contacts to establish a competitive position in
those markets. MNI's ability to compete successfully in foreign countries is
dependent in part on MNI's obtaining and retaining reliable and experienced
in-country partners to provide sales and support services in such countries. MNI
does not have long-term contractual relationships with any of its in-country
partners and, therefore, has no assurances of a continuing relationship within a
given market.
Customer Concentration. MNI has historically relied upon major orders from
a small number of customers for a large portion of its revenues. Approximately
47% and 54% of MNI's revenues in fiscal year 1994 and for the six months ended
December 31, 1994, respectively, were derived from sales of products to three of
MNI's largest customers. MNI's sales in each of the last three years have been
concentrated among a relatively small number of customers, and the specific
customers have changed from year to year. It is the nature of MNI's business
that the projects in which it is involved (telephone networks for a national
telephone company, for example) are large in relation to its own revenues.
Therefore, MNI must replace completed
12
<PAGE> 23
projects with new projects regularly. There is no assurance that it can continue
to do so, and if it were to fail to obtain a sufficient number of new orders in
the future, it could have a material adverse effect on its business and results
of operations.
Organization; Dependence on Key Personnel. CMI is decentralized, which CMI
believes has the advantage of fostering responsiveness to particular markets and
customers. This structure leaves CMI with less central control over the
operations of its divisions and subsidiaries. CMI's and MNI's success is
dependent upon the continued contributions of their respective key management
personnel. Many of CMI's key personnel would be difficult to replace and most
are not subject to employment or noncompetition agreements. CMI's growth and
future success will depend in large part upon its ability to attract and retain
highly qualified management, engineering, sales and marketing personnel.
Competition for such personnel from other companies, academic institutions,
government entities and other organizations is intense. There can be no
assurance that CMI will be successful in hiring or retaining such personnel.
Certain executive officers of MNI will enter into employment agreements in
connection with the Merger.
13
<PAGE> 24
INTRODUCTION
This Prospectus/Proxy Statement is furnished in connection with the
solicitation by California Microwave, Inc. and Microwave Networks Incorporated
of proxies to be voted at the special meetings of their respective stockholders
(the "Special Meetings"), which will be held on March 16, 1995 at 9:00 a.m., at
CMI's principal executive offices located at 985 Almanor Avenue, Sunnyvale,
California, and at 9:00 a.m. at MNI's principal executive offices, located at
10795 Rockley Road, Houston, Texas, respectively. This Prospectus/Proxy
Statement is also furnished to MNI stockholders in connection with the issuance
by CMI of the CMI Common Stock in connection with the Merger described herein.
This Prospectus/Proxy Statement and related Notice of Special Meeting of
Stockholders and Proxy are first being sent to stockholders of CMI and MNI on or
about February , 1995.
The principal executive offices of CMI are located at 985 Almanor Avenue,
Sunnyvale, California 94086, and its telephone number at that address is (408)
732-4000. The principal executive offices of MNI are located at 10795 Rockley
Road, Houston, Texas 77099-3571 and its telephone number at that address is
(713) 495-7123.
The information set forth in this Prospectus/Proxy Statement concerning CMI
has been furnished by CMI. The information set forth in this Prospectus/Proxy
Statement concerning MNI has been furnished by MNI.
This Prospectus/Proxy Statement contains certain information set forth more
fully in the Agreement and Plan of Reorganization and Merger attached hereto as
Appendix A and the Agreement of Merger attached hereto as Appendix B, and is
qualified in its entirety by reference to such documents, each of which is
hereby incorporated herein by reference. In deciding whether to vote for or
against the proposal to approve the Merger, each stockholder of CMI and MNI
should carefully read all of these documents.
14
<PAGE> 25
VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL MEETINGS
At the CMI Special Meeting, the stockholders of CMI will consider and vote
upon a proposal to approve and adopt the Merger Agreement and approve the
issuance of shares of CMI Common Stock in connection with the Merger Agreement.
At the MNI Special Meeting, the stockholders of MNI will consider and vote upon
a proposal to approve and adopt the Merger Agreement. Pursuant to the Merger
Agreement, (i) Acquisition Corp. will merge with and into MNI (the "Merger"),
with MNI remaining as the surviving corporation (the "Surviving Corporation")
and becoming a wholly owned subsidiary of CMI, and (ii) the holders of the
common stock, $.01 par value per share (the "MNI Common Stock") and of the
preferred stock, $.01 par value per share (the "MNI Preferred Stock" and,
together with the MNI Common Stock, the "MNI Capital Stock"), of MNI will
receive, for each share of MNI Capital Stock (other than shares, if any, as to
which dissenters' rights have been exercised pursuant to Texas law), that number
of shares of CMI Common Stock determined by dividing 3,350,000 (the "Numerator")
by the total number of shares of MNI Capital Stock outstanding immediately prior
to the closing (including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities) and rounding
the quotient thereof off to the nearest ten-thousandth (.0001). Notwithstanding
the foregoing, (i) MNI has the right to terminate the Merger Agreement if the
average closing price of CMI Common Stock on the Nasdaq National Market for the
15 consecutive trading days immediately preceding the date of the CMI Special
Meeting ("Final Closing Price") is less than $30.00 (as reported by Nasdaq),
provided that if MNI exercises this right, the termination shall not be
effective if CMI agrees to increase the Numerator to the number which when
multiplied by the Final Closing Price equals $100,500,000, and (ii) CMI has the
right to terminate the Merger Agreement if the Final Closing Price is more than
$41.375, provided that if CMI exercises this right, the termination shall not be
effective if MNI agrees to decrease the Numerator to the number which when
multiplied by the Final Closing Price is equal to $138,606,250. Such decisions
to terminate, or to change the Numerator, would be within the discretion of the
Boards of Directors of MNI or CMI, respectively. The number of shares of CMI
Common Stock into which each share of MNI Capital Stock is converted is referred
to herein as the "Exchange Ratio." In addition, for each whole share of CMI
Common Stock received by a MNI stockholder, such stockholder will receive one
Common Share Purchase Right which permits the purchase of certain shares of CMI
Common Stock upon the occurrence of certain events generally associated with an
unsolicited attempt to take over CMI. See "Description of CMI Common Stock." The
CMI Special Meeting will be held at CMI's corporate headquarters, 985 Almanor
Avenue, Sunnyvale, California at 9:00 a.m. on March 16, 1995. The MNI Special
Meeting will be held at MNI's corporate offices, located at 10795 Rockley Road,
Houston, Texas on March 16, 1995 at 9:00 a.m.
Upon the Merger becoming effective, each then outstanding option to
purchase shares of Common Stock of MNI will be assumed by CMI (the "Assumed
Options"). Each Assumed Option will be converted into an option to purchase that
number of shares of CMI Common Stock as is equal (subject to rounding) to the
number of shares of MNI Common Stock that were subject to such option
immediately prior to the Merger, multiplied by the Exchange Ratio. The exercise
price for Assumed Options will be adjusted to an exercise price per share equal
(subject to rounding) to the exercise price per share of the specific option
immediately prior to the Merger divided by the Exchange Ratio.
RECORD DATE AND OUTSTANDING SHARES
CMI Common Stock
Stockholders of record of CMI Common Stock at the close of business on
February 13, 1995 (the "Record Date") are entitled to notice of and to vote at
the CMI Special Meeting. At the Record Date, approximately CMI stockholders
were holders of record and shares of CMI Common Stock were issued and
outstanding. Except for the stockholders identified under "Information
Concerning CMI--Security Ownership of Directors, Executive Officers and
Principal Stockholders" there were no persons known to the management of CMI to
be the beneficial owners of more than 5% of the outstanding CMI Common Stock.
15
<PAGE> 26
MNI Capital Stock
Stockholders of record of MNI Capital Stock at the close of business on the
Record Date are entitled to notice of and to vote at the MNI Special Meeting. At
the Record Date, there were approximately MNI stockholders of record, and
shares of MNI Capital Stock issued and outstanding. Except for the
stockholders identified under "Information Concerning MNI--Principal
Stockholders," there were no persons known to the management of MNI to be the
beneficial owners of more than 5% of the outstanding MNI Capital Stock (assuming
conversion of all shares of MNI Preferred Stock).
VOTING OF PROXIES
All properly executed proxies that are not revoked will be voted at the
respective Special Meetings in accordance with the instructions contained
therein. Proxies containing no instructions regarding the proposals specified in
the form of proxy will be voted for approval of the Merger Agreement and related
transactions in accordance with the recommendation of the Boards of Directors of
CMI and MNI. Any stockholder signing a proxy has the power to revoke it prior to
the Special Meeting or at the Special Meeting prior to the vote pursuant to the
proxy. A proxy may be revoked by delivering a written notice of revocation or a
duly executed proxy bearing a later date or by attending the Special Meeting and
voting in person.
VOTE REQUIRED
Under the rules of the National Association of Securities Dealers, Inc.
applicable to issuers of securities quoted on the Nasdaq National Market, CMI is
required to obtain stockholder approval of any plan or arrangement, such as the
Merger Agreement, if the number of shares of the issuer's common stock to be
issued pursuant to such plan or arrangement will equal or exceed 20% of the
number of shares of the issuer's common stock outstanding before such issuance.
No approval of the Merger Agreement by CMI stockholders is required under
Delaware or Texas law. Approval of the Merger Agreement by MNI stockholders is
required under Texas law.
Approval of the Merger Agreement requires (i) the affirmative vote of a
majority of the shares of the CMI Common Stock present in person or represented
by proxy and entitled to vote at the CMI Special Meeting (shares as to which
brokers holding shares in street name for customers have not received direction
or discretionary authority from their customers are considered shares not
entitled to vote with respect to this matter, but are considered shares that are
present for purposes of determining a quorum) and (ii) the affirmative vote of
two-thirds of the outstanding shares of MNI Common Stock and two-thirds of each
of the Series A, Series B and Series C MNI Preferred Stock, voting as separate
series. As a consequence, abstentions at the CMI and MNI Special Meetings will
have the effect of a negative vote. Stockholders beneficially owning
approximately 60% of the outstanding shares of MNI Capital Stock (76.5% of the
MNI Common Stock; 68% of the Series A MNI Preferred Stock; 52.8% of the Series B
MNI Preferred Stock; and 47.6% of the Series C MNI Preferred Stock) have agreed
to vote in favor of the Merger subject to certain limitations. See "The Merger
and Related Transactions--Voting Agreements." Consummation of the Merger is
subject to approval of the CMI and MNI stockholders and of a number of other
conditions. The directors of CMI, who beneficially own 328,330 shares of the
outstanding CMI Common Stock (2.60% of such stock), intend to vote in favor of
the Merger. See "Terms of the Merger--Conditions to the Merger."
If any other matters are properly presented for consideration at either the
CMI Special Meeting or the MNI Special Meeting (or any adjournments or
postponements thereof) including, among other things, consideration of a motion
to adjourn or postpone either meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the enclosed forms of proxy and voting thereunder will have the
discretion to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to any such solicitation by either company may be
revoked by the person giving it at any time before it is voted. Proxies may be
revoked by (i) filing with the Secretary of the relevant company at or before
the taking of the vote at the Special Meeting of such company, a written notice
of revocation bearing a later date than the proxy, (ii) duly executing a later
dated proxy relating to the same
16
<PAGE> 27
shares and delivering it to the Secretary of such company, before the taking of
the vote at the Special Meeting of such company, or (iii) attending that Special
Meeting and voting in person (although attendance at that Special Meeting will
not in and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered as
appropriate to (i) CMI at 985 Almanor Avenue, Sunnyvale, California 94086,
Attention: Secretary, or hand-delivered to the Secretary of CMI, in each case at
or before the taking of the vote at the CMI Special Meeting, or (ii) MNI at
10795 Rockley Road, Houston, Texas 77099, Attention: Secretary, or
hand-delivered to the Secretary of MNI, in each case at or before the taking of
the vote at the MNI Special Meeting.
DISSENTERS' RIGHTS
Stockholders of MNI who do not vote in favor of the Merger may, under
certain circumstances and by following procedures prescribed by the Texas
Business Corporation Act, exercise dissenters' rights and receive cash for their
shares. The failure of a dissenting stockholder of MNI to follow the appropriate
procedures may result in the termination or waiver of such rights. See "Terms of
the Merger--Dissenters' Rights."
SOLICITATION OF PROXIES AND EXPENSES
Each of CMI and MNI will bear the cost of the solicitation of proxies from
their respective stockholders. In addition to solicitation by mail, the
directors, officers and employees of CMI and MNI may solicit proxies from
stockholders by telephone, telegram, letter or in person. Arrangements will also
be made with brokerage houses and other custodians, nominees and fiduciaries for
the forwarding of solicitation material to the beneficial owners of stock held
of record by CMI's stockholders, and CMI will reimburse such custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith. CMI has retained Corporate Investor Communications to
aid in the solicitation of proxies and to distribute materials to brokerage
houses, banks, custodians and other nominee holders. CMI will bear the entire
cost of the fee payable to Corporate Investor Communications for its services,
estimated not to exceed $5,000, and will reimburse such firm for certain
out-of-pocket expenses.
THE BOARDS OF DIRECTORS OF CMI AND MNI HAVE UNANIMOUSLY CONCLUDED THAT THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO AND IN
THE BEST INTERESTS OF SUCH COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS
OF EACH COMPANY UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF SUCH COMPANY VOTE IN
FAVOR OF THE MERGER AGREEMENT.
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<PAGE> 28
THE MERGER AND RELATED TRANSACTIONS
The detailed terms of, and conditions to, the Merger are contained in the
Agreement and Plan of Reorganization and Merger and the Agreement of Merger,
copies of which are attached to this Prospectus/ Proxy Statement as Appendix A
and Appendix B, respectively, and incorporated herein by reference. The
statements made in this Prospectus/Proxy Statement with respect to the terms of
the Merger and related transactions are qualified in their entirety by the text
of those agreements, collectively referred to herein as the "Merger Agreement."
JOINT REASONS FOR THE MERGER
The Boards of Directors of CMI and MNI, in voting to recommend the proposed
Merger, identified a number of potential benefits that they believe will
contribute to the success of the combined companies. These potential benefits
are outlined below. There can be no assurance that any of these potential
benefits will be realized.
- Increased International Market Share.
CMI and MNI believe that the Merger will enhance their ability to compete
in the international marketplace.
- Complementary International Presence.
The international sales of CMI and MNI are geographically complementary.
Nearly all of MNI's sales have been international, with the majority of such
sales in Latin America, Eastern Europe and Asia/Pacific, while CMI's wireless
sales have been concentrated in the U.S. and in Western Europe.
- Increased Customer Base and Channels of Distribution.
Together CMI and MNI will benefit from a larger installed customer base,
which should present opportunities for repeat business and greater opportunities
for marketing other wireless products.
- Cost Efficiencies and Operating Synergies.
CMI and MNI believe that through combining their operations they should
achieve efficiencies in sales, marketing, product development and support,
enabling them to compete more effectively. Together CMI and MNI should benefit
from increased economies of scale in their manufacturing operations and
purchasing activities, and with their combined resources should be able to
reduce product development time.
- Increased Manufacturing Capacity.
CMI and MNI will benefit from increased manufacturing capacity, more
manufacturing flexibility and more efficient capacity utilization.
ADDITIONAL REASONS FOR THE MERGER--CMI
The Board of Directors of CMI believes that the following are additional
benefits of the Merger and the related acquisition of MNI's capabilities:
- Expanded Global Presence for CMI.
The Merger should enable CMI to expand its international wireless sales
because of MNI's established presence in certain markets, particularly Latin
America, Eastern Europe and Asia/Pacific. The Merger will more quickly establish
CMI's presence in these high growth potential, developing country markets. In
addition, CMI will benefit from MNI's established sales and service offices in
China, Mexico, Singapore and the U.K., and MNI's product development activity in
Australia.
- Increased Presence in Wireless Markets.
The Merger will result in an increased share of the global wireless market
and, in particular, the international cellular market, for CMI by adding MNI's
product lines to those of CMI.
18
<PAGE> 29
- Increased International Distribution.
The Merger will substantially expand CMI's network of international sales
representatives and distributors, offering increased opportunities to sell CMI's
products.
- Improved Business Mix.
The Merger will increase the wireless portion of CMI's business mix.
Wireless has been targeted by CMI as a business sector with numerous
opportunities because of its rapid growth and relatively fragmented nature.
ADDITIONAL REASONS FOR THE MERGER--MNI
The Board of Directors of MNI believes that the following are additional
benefits of the Merger and the related acquisition of MNI's capabilities by CMI:
- Access to CMI's Established Customer Base.
The Merger will provide MNI access to CMI's established customer
relationships, which should allow MNI to sell more of its products.
- Access to CMI's Technology.
The Merger will provide MNI access to CMI's technology, which will create
opportunities to improve product performance and cost.
- Availability of Greater Resources to Support MNI's Growth.
MNI's management believes that MNI will be better positioned to compete as
part of a larger, more integrated company than as a smaller independent company.
- Provide Liquidity to MNI Stockholders.
The Merger will be a means by which MNI stockholders and option holders
will be able to obtain greater liquidity for their equity interests by reason of
their receipt of registered shares of CMI Common Stock. The Merger was
considered in view of available alternatives, and the Board of Directors of MNI
concluded that the Merger will provide MNI stockholders value for their shares
that is at least equivalent to that which they might obtain as a result of an
initial public offering that had been under consideration. In addition, the
Merger is expected to constitute a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
BACKGROUND
CMI and MNI are both in the wireless communications equipment business.
Accordingly, each had been aware of the market presence, product reputation and
management of the other. During the spring of 1993, Philip F. Otto, CMI's
President and Chief Executive Officer, and other members of CMI management
reviewed CMI's position in the international microwave radio market, and decided
that it would be appropriate to approach MNI to explore whether it had an
interest in a business combination or other arrangement with CMI.
Following up on this decision, in the spring of 1993, a representative of
Bear Stearns contacted Arthur W. Epley, III, MNI's Chief Executive Officer, on
behalf of CMI for the purpose of ascertaining whether MNI had an interest in a
business combination. As a result of that contact, Mr. Otto was informed by the
Bear Stearns representative that MNI's Board of Directors was in the early
stages of exploring alternatives for MNI's future, including the possibility of
future public or private financing, and business combinations.
In May 1993, Mr. Otto contacted Mr. Frank LaHaye, a member of MNI's Board
of Directors and a general partner of Peregrine Ventures, a venture capital firm
with holdings in MNI, to arrange a meeting between representatives of CMI and
MNI. Mr. Otto and Mr. LaHaye met on May 14, 1993 at CMI's corporate offices in
Sunnyvale, California to discuss MNI. Following that meeting, Mr. Otto contacted
Mr. Epley and was invited to visit MNI to meet with Mr. Epley, to tour MNI's
facilities and to discuss areas of mutual interest between MNI and CMI.
On June 11, 1993, MNI executed an engagement letter with the investment
banking firm of Hambrecht & Quist Incorporated ("H&Q"), whereby H&Q was retained
to advise MNI in connection with financial
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strategies of the Company, including the potential sale of MNI. Immediately
thereafter, H&Q contacted Mr. Otto and arranged a meeting which took place on
June 14 or 15, 1993, at which Mr. Otto and H&Q discussed the potential of a
business combination.
On June 16, 1993, CMI and MNI entered into a Confidential Non-disclosure
Agreement and Mr. Otto visited MNI's corporate facilities in Houston, Texas,
where he met with Mr. Epley. During that visit, Mr. Epley discussed the status
of MNI's business, its strategy and its immediate and long-term prospects.
Similarly, Mr. Otto reviewed CMI's recent corporate history and future plans. It
was agreed that the businesses of the two companies were complementary, with
little overlap in geographic area of markets served. At the conclusion of this
visit, Mr. Otto and Mr. Epley agreed to consider, over time, the advisability of
establishing a more formal relationship. In late July H&Q furnished CMI with an
executive summary of operations of MNI.
In July 1993, CMI executed a letter of intent to acquire TeleSciences
Transmission Systems, Inc. ("TTS"), a wholly owned subsidiary of TeleSciences,
Inc. On August 18, Bear Stearns notified H&Q of the letter of intent, and on
August 23 Mr. Otto notified H&Q that CMI expected to be preoccupied with the TTS
transaction. The TTS acquisition was completed in October 1993. From August 1993
through May 1994, CMI's attention was focused on completing and subsequently
integrating the TTS operations. However, on October 8, 1993 Mr. Otto met with
H&Q, reviewed the status of the TTS transaction, and expressed CMI's continuing
interest in H&Q's activities with MNI.
In December 1993, MNI approached representatives of MRC, a subsidiary of
CMI, to discuss the sale to MNI of certain subsystems for MNI's 38GHz digital
microwave radio under an "original equipment manufacturer" ("OEM") agreement. As
a result of these discussions, MRC and MNI entered into an OEM agreement on
March 8, 1994. MNI pursued the OEM agreement with MRC because it was
experiencing growing demand for a 38 GHz radio in its markets and it would be
advantageous to incorporate MRC's subsystem into its product rather than to
develop it independently. MNI felt that an OEM agreement with MRC was
appropriate because MRC is a recognized world leader in high quality 38GHz
radios and MRC's subsystem was compatible with MNI's line of radios with only
minor modifications.
In April 1994, H&Q called Mr. Otto to review the status of their activities
with MNI. Mr. Otto expressed interest in learning about the current operating
performance of MNI, and on May 2, 1994, H&Q made several calls to Mr. Otto and
other CMI representatives to discuss MNI's performance and the potential
business fit between the companies.
On May 23, 1994, Mr. Epley sent a letter to Mr. Otto outlining the benefits
of a possible merger of the two companies. Arrangements were made for Mr. Epley
and representatives of H&Q to visit CMI's corporate headquarters in Sunnyvale,
California on June 14, 1994 to meet with Mr. Otto, as well as several other CMI
executives including Dr. Douglas H. Morais, President of CMI's Wireless Products
Group. During that visit the potential operating synergies that might result
from a merger of the companies were discussed. However, in late June 1994, CMI
informed MNI that it did not wish to proceed further with discussions at that
time. The decision not to proceed at that time was based in part on concerns
regarding MNI's recent operating results and the inability at that time (based
in part on constraints arising out of the time being spent on the integration of
TTS) to define adequately a plan for integrating MNI with the various components
of CMI's Wireless Group, including the newly acquired TTS.
In September 1994, Dr. Morais contacted Mr. Epley to suggest that it might
be mutually beneficial to explore once again the idea of a merger, if warranted
by both MNI's and CMI's current operating results and outlook. Representatives
of H&Q met with Mr. Otto, Dr. Morais and other representatives of CMI on
November 9, 1994 to update CMI regarding MNI's operational status and to explore
further the possibility of a business combination. It was learned at that
meeting that MNI's operating results and business outlook had substantially
improved.
Between November 9, 1994 and November 28, 1994 discussions between
representatives of CMI, MNI and H&Q continued. On November 28, 1994 at a special
meeting of the Board of Directors of CMI in Sunnyvale, California, Mr. Otto
discussed with the Board the possible combination of CMI and MNI and the
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<PAGE> 31
Board authorized Mr. Otto to continue discussions with MNI. On November 30,
1994, Mr. Otto sent a letter to Mr. Epley outlining terms under which CMI would
consider exchanging CMI Common Stock for all of the shares of MNI Capital Stock.
On December 1, 1994, the MNI Board of Directors held a regular meeting at
MNI's Houston facility. At the meeting, the Board considered an initial public
offering. The Board also considered the November 30, 1994 CMI letter, but
concluded that more value could be achieved for the MNI shareholders through an
initial public offering. The Board selected investment bankers for an initial
public offering and authorized beginning the process of filing a registration
statement with the SEC covering the initial public offering of its common stock.
On or about December 5, 1994, management of CMI and MNI agreed to meet once
again to assess the idea of a merger and to review the business prospects of MNI
in more detail. This meeting was held at MNI's offices in Houston on December 8,
1994, between Mr. Otto, Dr. Morais, Mr. Epley and Carl B. Frampton, MNI's Chief
Operating Officer and Chief Financial Officer. On December 14, 1994, Mr. Otto
discussed with Bear Stearns the possibility of engaging Bear Stearns as its
financial advisor for a potential transaction with MNI, and Bear Stearns was so
engaged on December 15, 1994. On December 19 and 20, 1994, Dr. Morais and other
representatives of CMI visited MNI's facility in Houston for a further review of
operations. As a result of these meetings with MNI management and consultations
with Bear Stearns, CMI concluded that the value of MNI was substantially higher
than had previously been assessed.
From December 15, 1994, representatives of Bear Stearns and H&Q continued
to contact each other to assess the viability and terms of a potential merger.
There were also several telephone discussions on this subject between
representatives of CMI and MNI.
On December 21, 1994, officers of MNI met with representatives of H&Q and
two other investment banks, and their respective attorneys in the initial "all
hands" meeting in connection with MNI's proposed initial public offering. On
January 5, 1995, another such meeting was held.
On January 4, 1995, the CMI Board of Directors held a special meeting. At
the meeting the Board ratified the engagement of Bear Stearns and the management
of CMI and representatives of Bear Stearns reviewed the business prospects and
valuation of MNI. The Board authorized CMI management to continue to explore the
possibility of acquiring MNI. Following the meeting, Bear Stearns and H&Q and
members of the management of CMI and MNI continued discussions on a daily basis.
Between January 5 and January 11, 1995, proposals were exchanged through Bear
Stearns and H&Q. The MNI Board of Directors held a Special Meeting on January 6,
1995 to receive an update from H&Q as to the status of the negotiations and to
consider the various proposals. The MNI Board had a special meeting on January
9, 1995 to further consider the various proposals.
On January 11, 1995, the parties concluded that they had reached a point in
their discussions of the terms of a potential merger where they felt comfortable
with proceeding directly to the negotiation of a definitive agreement of merger.
At this time, MNI notified its investment bankers that it was suspending
activity concerning the initial public offering. The drafting of a definitive
agreement commenced immediately and representatives of management of CMI and MNI
and their counsel met at the Houston offices of MNI for the purpose of
negotiating the agreement. At the regular meeting of the CMI Board of Directors,
held on January 19, 1995, management advised the Board as to the status of
negotiations with MNI, and the CMI Board of Directors authorized its officers to
continue negotiations with MNI's management with a view to presenting a
definitive agreement to the Board for its approval. Meetings of CMI and MNI
management representatives and their respective accountants and attorneys were
held between January 23 and 30, 1995 to investigate MNI and CMI and prepare
various documents in connection with the proposed merger.
On January 31, 1995, the Boards of Directors of both CMI and MNI met
separately to consider the Merger. Both Boards of Directors unanimously approved
the Merger Agreement.
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FINANCIAL ADVISOR
The Board of Directors of CMI selected Bear Stearns as its financial
advisor in connection with the transactions contemplated by the Merger
Agreement. Bear Stearns was selected by the Board of Directors of CMI because of
its qualifications and expertise in providing advice to companies in the
communications and technology industries, as well as its reputation as an
internationally recognized investment banking firm. In addition, Bear Stearns
served as the managing underwriter in CMI's two most recent underwritten public
offerings of securities, both of which occurred in 1993, for which Bear Stearns
received customary compensation.
At the request of CMI, Bear Stearns has delivered written opinions to the
Board of Directors of CMI, dated January 31, 1995 and February , 1995 (the
"Bear Stearns Opinions"), to the effect that, as of each such date, the Merger
was fair, from a financial point of view, to the stockholders of CMI.
THE FULL TEXT OF THE OPINION OF BEAR STEARNS DATED FEBRUARY , 1995 IS
ATTACHED AS APPENDIX D TO THIS PROSPECTUS/PROXY STATEMENT. CMI STOCKHOLDERS ARE
URGED TO, AND SHOULD, READ SUCH OPINION CAREFULLY IN ITS ENTIRETY IN CONJUNCTION
WITH THIS PROSPECTUS/PROXY STATEMENT FOR ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS OF THE REVIEW BY BEAR STEARNS.
The Bear Stearns Opinions address only the fairness of the Merger from a
financial point of view to the stockholders of CMI as of the dates set forth
therein and do not constitute a recommendation to any stockholder of CMI as to
how such stockholder should vote with respect to the approval of the Merger
Agreement. The summary of the opinion of Bear Stearns dated February , 1995
set forth in this Prospectus/Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
Although Bear Stearns evaluated the financial terms of the Merger and
participated in discussions concerning the consideration to be paid, in
rendering its opinions, Bear Stearns did not recommend the specific
consideration to be paid in the Merger. The consideration to be received by
MNI's stockholders as a result of the Merger was determined by negotiation
between MNI and CMI after consultation by each of such parties with their
respective financial advisors.
In connection with rendering its opinion dated February , 1995, Bear
Stearns, among other things: (i) reviewed this Prospectus/Proxy Statement in
substantially the final form to be sent to the stockholders of CMI; (ii)
reviewed the Merger Agreement; (iii) reviewed MNI's audited consolidated
financial statements for the fiscal years ended June 30, 1991 through 1994, and
its unaudited consolidated financial statements for the six month periods ended
December 31, 1993 and 1994; (iv) reviewed CMI's Annual Reports to Shareholders
and Annual Reports on Form 10-K for the fiscal years ended June 30, 1992 through
1994, and its Quarterly Reports on Form 10-Q for the periods ended September 30,
1994 and December 3, 1994; (v) reviewed certain operating and financial
information, including projections, provided by the managements of CMI and MNI
relating to their respective business prospects, which projections are based
upon certain assumptions, many of which are beyond the control of such companies
(the "CMI Management Projections" and the "MNI Management Projections,"
respectively, and collectively, the "Projections"); (vi) met with certain
members of MNI's senior management to discuss MNI's operations, historical
financial statements and future prospects, and their views of the business,
operational and strategic benefits, potential synergies (including revenue
enhancements and cost savings) and other implications of the Merger; (vii) met
with certain members of CMI's senior management to discuss CMI's operations,
historical financial statements and future prospects, their views with respect
to the operations, historical financial statements and future prospects of MNI,
and their views of the business, operational and strategic benefits, potential
synergies (including revenue enhancements and cost savings) and other
implications of the Merger; (viii) reviewed the pro forma financial impact of
the Merger on CMI; (ix) reviewed the historical prices and trading volumes of
CMI Common Stock; (x) reviewed publicly available financial data and stock
market performance data of other companies that it deemed generally comparable
to CMI and MNI; (xi) reviewed the financial terms of certain other recent
acquisitions that it deemed generally comparable to the Merger; and (xii)
conducted such other studies, analyses, inquiries and investigations that it
deemed appropriate.
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Subject to the next two paragraphs, Bear Stearns relied upon and assumed
without independent verification (i) the accuracy and completeness of all of the
financial and other information provided to it for purposes of its opinions and
(ii) the reasonableness of Projections and the assumptions made by the
managements of CMI and MNI with respect thereto and with respect to potential
synergies that could be achieved upon consummation of the Merger. Bear Stearns
did not make or seek to obtain appraisals of CMI's or MNI's assets or
liabilities. Bear Stearns further relied upon the assurances of the managements
of CMI and MNI that such managements were unaware of any facts that would make
the information or projections provided to Bear Stearns incomplete or
misleading. The Bear Stearns Opinions are also necessarily based upon the
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of each such opinion. Finally, Bear Stearns also
assumed that the Merger would be accounted for in accordance with the pooling of
interests method of accounting under the requirements of Accounting Principles
Board Opinion No. 16.
The following is a brief summary of certain of the financial analyses used
by Bear Stearns in connection with providing its opinion dated January 31, 1995
to the Board of Directors of CMI. With respect to the projections of future
business prospects of CMI and MNI used in certain of the analyses set forth
below, Bear Stearns considered a variety of factors that could affect the
achievability of the Projections and, in conjunction with CMI's management,
developed alternative scenarios that were presented to the Board of Directors of
CMI. In arriving at its Opinions, Bear Stearns did not ascribe a specific range
of fair value to the CMI Common Stock, but made its determination on the basis
of financial and comparative analyses, including (without limitation) those set
forth below.
In addition to its review of the results of the financial analyses
described below, as noted above, Bear Stearns had conversations with management
of CMI and MNI concerning the strategic implications of the Merger. Accordingly,
Bear Stearns also assumed, based upon such conversations, that the combined
entity resulting from the Merger might enjoy several strategic advantages over a
stand-alone CMI, including (i) an increased presence in the wireless
communication segment, (ii) the creation of an entity with a global market
presence and broader product line, providing quicker access to the international
cellular market, (iii) the addition of higher margin products and (iv) potential
synergies and cost savings. However, Bear Stearns was not requested to opine as
to, and the Bear Stearns Opinions did not address, the underlying business
decision to proceed with the Merger.
In connection with the delivery of its opinion dated February , 1995,
Bear Stearns performed certain procedures to update certain of the analyses made
in connection with the delivery of its earlier opinion and reviewed with CMI's
and MNI's management the assumptions on which such analyses were based. The
results of the valuation methods based upon such procedures and review were
essentially the same as described below.
Relative Contribution Analysis. Bear Stearns analyzed the pro forma
contribution of each of CMI and MNI to the combined entity, if the Merger were
to be consummated, and reviewed certain historical and estimated future
operating and financial information including, among other things, sales,
operating cash flow, operating income and net income of CMI and MNI, and the pro
forma revenue, operating cash flow, operating income and net income of the
combined entity resulting from the Merger based on the Projections. Such
analyses did not take into account any potential synergies or cost savings that
might be realized after the Merger or of any one-time transaction costs incurred
in connection therewith. Bear Stearns noted that, based on the Projections and
on sensitivity analyses performed by Bear Stearns thereon, for fiscal 1995, 1996
and 1997, CMI's contribution ranges from 85.4% to 90.0% of pro forma sales, from
77.2% to 89.2% of pro forma operating cash flow, from 75.6% to 89.2% of pro
forma operating income, and from 75.2% to 89.3% of pro forma net income of the
combined entity. In comparison, the CMI Stockholders immediately prior to the
Merger will own approximately 81.9% of the pro forma fully diluted number of
shares of the combined entity. Readers of this Proxy Statement/Prospectus should
understand that although the foregoing analyses of certain projected financial
information may have been helpful in reviewing a possible Merger, there can be
no assurance that any such analyses will accurately reflect future performance.
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Pro Forma Merger Analysis. Bear Stearns analyzed per share estimates for
1995, 1996 and 1997 for both CMI and, on a pro forma basis, the combined entity
after the consummation of the Merger, based on the Projections and on
sensitivity analyses performed by Bear Stearns thereon. This analysis was
performed without taking into account any potential synergies or cost savings
that might be realized after the consummation of the Merger or any one-time
transaction costs incurred in connection therewith. Such analysis showed
accretion in the fully diluted earnings per share resulting from the Merger of
1.4% in 1995, and a range from 10.1% accretion to 7.6% dilution in the
subsequent years analyzed. Readers of this Proxy Statement/Prospectus should
understand that although the foregoing analyses of certain projected financial
information may have been helpful in reviewing a possible Merger, there can be
no assurance that any such analyses will accurately reflect future performance.
Imputed Equity Acquisition Valuation Analysis. Bear Stearns derived a
range of equity acquisition values for MNI. This reference range of values was
based on (i) a comparable company analysis, (ii) a comparable acquisition
analysis and (iii) a discounted cash flow analysis. The comparable company
analysis involved an analysis of selected actual and estimated financial,
operating and stock market information for CMI and MNI and selected wireless
communications equipment companies (i.e., The Allen Group, Digital Microwave
Corp., Glenayre Technologies, Motorola, Inc., Nokia Telecom, QUALCOMM, Inc.
Spectrian Corporation and Tellabs). Bear Stearns observed that no company used
in the above analysis as a comparison is identical to MNI. In particular, such
companies have different product lines, product mixes and different proportions
of domestic and international sales. The reference range of values was also
based, among other factors, on certain other analyses performed by Bear Stearns,
including, as noted above, an analysis of selected transactions Bear Stearns
believed to be comparable to the Merger (i.e. Western Multiplex/Glenayre
Technologies; Kalpana, Inc./Cisco Systems, Inc.; Megaherts Holding/U.S.
Robotics, Inc.; Network Systems Corp./Storage Technology; Keptel, Inc./Antec
Corporation; Radiation Systems, Inc./Comsat Corporation; VMX Inc./Octel
Communications; Artel Communications/Chipcom Corp.; Telematics International/ECI
Telecom Ltd.; Bytex Corp./Network Systems Corp.; TeleSciences/CMI; Octocom
Systems/Telebit Corp.). Bear Stearns observed that (except for CMI) no company
used in the above analysis as a comparison is identical to MNI or CMI. In
particular, such companies have different product offerings and market positions
than either CMI or MNI.
Based upon a range of values for MNI determined using the foregoing
analyses, Bear Stearns derived an imputed reference range of equity acquisition
values per share for the MNI Capital Stock. After taking into account the
Exchange Ratio and the average closing sale price for the CMI Common Stock over
the fifteen trading day period ended January 27, 1995, Bear Stearns determined
that the imputed purchase price on such date for the MNI Capital Stock in the
Merger would be within the range of per share equity values described above.
Other Analyses. Bear Stearns conducted such other analyses as it deemed
necessary, including an analysis regarding the potential effects of changes in
the P/E multiple for the combined entity following the Merger on such entity's
stock price and other related matters, the review of selected investment
research reports on, and earnings estimates for, CMI, the analysis of available
information regarding the stock ownership of CMI and MNI, and trailing price
information for CMI.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying Bear Stearns' opinion. In arriving at its opinions, Bear Stearns
considered the results of all such analyses. The analyses were prepared solely
for purposes of providing its opinion to the Board of Directors of CMI as to the
fairness of the Merger, from a financial point of view, to the stockholders of
CMI and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. As described above, Bear Stearns' opinion and presentation to the
Board of Directors of CMI was one of many factors taken into consideration by
the Board of Directors of CMI in making its determination to approve the Merger
Agreement. The foregoing summary does not purport to be a complete description
of the analysis performed by Bear Stearns.
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In the ordinary course of its business, Bear Stearns may actively trade the
securities of CMI for its own account and for the accounts of customers and,
accordingly, may, at any time, hold a long or short position in such securities.
Pursuant to a letter agreement dated December 16, 1994, CMI agreed to pay
Bear Stearns (i) a retainer of $100,000, (ii) a fee of $300,000 for rendering
its initial opinion and updates to such opinion in connection with the Merger
and (iii) a fee of $900,000 payable upon consummation of the Merger, which will
be reduced by the $100,000 retainer and the $300,000 fee. Bear Stearns is also
entitled to receive 15% of any break-up fee received by CMI in connection with
the Merger. CMI has also agreed to reimburse Bear Stearns for its reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel, and to indemnify Bear Stearns and certain related persons against
certain liabilities in connection with the engagement of Bear Stearns, including
certain liabilities under the federal securities laws.
MANAGEMENT AFTER THE MERGER
Conduct of the Combined Companies Following the Merger. Following the
Effective Time of the Merger, MNI will be operated as a subsidiary of CMI and
employees of MNI will continue as employees of the surviving corporation. The
Board of Directors of MNI after the Merger will consist of three officers of CMI
(Philip F. Otto, Douglas H. Morais and Garrett E. Pierce), together with the
following officers of MNI, who will serve at the pleasure of CMI: Arthur W.
Epley, III and Carl B. Frampton. See "The Merger and Related
Transactions--Management After the Merger."
MNI STOCK OPTIONS
As of January 31, 1995, 1,600,000 shares of MNI Common Stock were reserved
for issuance pursuant to MNI's NonQualified Stock Option Plan for Nonemployee
Directors and Consultants and MNI's Non-Qualified Stock Option Plan for
Employees (the "MNI Option Plans") of which options to purchase a total of
592,750 shares of MNI Common Stock were outstanding. The terms of the MNI Option
Plans allow outstanding options to be assumed by a successor company in a
transaction such as the Merger.
All outstanding and unexercised options to acquire MNI Common Stock (the
"Assumed Options") under the MNI Option Plans will be assumed by CMI upon
consummation of the Merger. Each such Assumed Option will become exercisable for
a number of shares of CMI Common Stock equal to the number of shares of MNI
Common Stock issuable upon exercise of such option immediately prior to the
Merger multiplied by the Exchange Ratio at an exercise price per share of CMI
Common Stock equal to the original exercise price per share divided by the
Exchange Ratio and will otherwise have the same exercise period and other terms
and conditions, provided that the shares issuable upon exercise of the Assumed
Options will no longer be subject to a right of repurchase by MNI.
FORM S-8 REGISTRATION STATEMENT
As promptly as practicable after the Effective Time of the Merger, CMI will
file a registration statement on Form S-8 under the Securities Act, covering the
shares of CMI Common Stock issuable upon exercise of the Assumed Options. See
"Terms of the Merger--MNI Options."
VOTING AGREEMENTS
In connection with the execution of the Merger Agreement, each of the
directors and executive officers of MNI has executed or will execute a Voting
Agreement pursuant to which such person has agreed to vote all shares of MNI
Capital Stock with respect to which such person has or shares voting or
investment control in favor of the Merger Agreement and the Merger subject to
certain limitations. Such agreements are not intended to prohibit any MNI
stockholder who is also a director of MNI from acting in accordance with such
stockholder's fiduciary duty as a director of MNI. Such directors and executive
officers represent, in the aggregate, approximately 60% of the outstanding MNI
Capital Stock (76.5% of the MNI Common Stock; 68% of the Series A MNI Preferred
Stock; 52.8% of the Series B MNI Preferred Stock; and 47.6% of the Series C MNI
Preferred Stock).
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TERMS OF THE MERGER
The detailed terms of, and conditions to, the Merger are contained in the
Agreement and Plan of Reorganization and Merger and the Agreement of Merger,
copies of which are attached to this Prospectus/ Proxy Statement as Appendix A
and Appendix B, respectively, and incorporated herein by reference. The
statements made in this Prospectus/Proxy Statement with respect to the terms of
the Merger and related transactions are qualified in their entirety by the text
of those Agreements, collectively referred to herein as the "Merger Agreement."
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides for the merger of Acquisition Corp., a wholly
owned subsidiary of CMI, with and into MNI, which will be the surviving
corporation. On consummation of the Merger MNI will be a wholly owned subsidiary
of CMI.
The Merger will be effective when the Secretary of State of the State of
Texas issues the Certificate of Merger after Articles of Merger are filed with
the Secretary of State of the State of Texas in accordance with Texas law. See
"Terms of the Merger--Conditions to the Merger." It is anticipated that, if the
Merger is approved at the MNI Special Meeting and at the CMI Special Meeting and
all other conditions to the Merger have been fulfilled or waived, Articles of
Merger will be filed and the Certificate of Merger issued on or about March 16,
1995.
MANNER AND BASIS OF CONVERTING SHARES
As of the Effective Time of the Merger, each issued and outstanding share
of MNI Capital Stock (other than shares, if any, as to which dissenters' rights
have been exercised pursuant to Texas law) will be converted into that number of
shares of CMI Common Stock determined by dividing 3,350,000 (the "Numerator") by
the total number of shares of MNI Capital Stock outstanding immediately prior to
the closing (including for this purpose any MNI Capital Stock issuable under
then outstanding options, warrants or other convertible securities) and rounding
the quotient thereof off to the nearest ten-thousandth (.0001). Notwithstanding
the foregoing, (i) MNI has the right to terminate the Merger Agreement if the
average closing price of CMI Common Stock on the Nasdaq National Market for the
15 consecutive trading days immediately preceding the date of the CMI Special
Meeting ("Final Closing Price") is less than $30.00 (as reported by Nasdaq),
provided that if MNI exercises this right, the termination shall not be
effective if CMI agrees to increase the Numerator to the number which when
multiplied by the Final Closing Price equals $100,500,000, and (ii) CMI has the
right to terminate the Merger Agreement if the Final Closing Price is more than
$41.375, provided that if CMI exercises this right, the termination shall not be
effective if MNI agrees to decrease the Numerator to the number which when
multiplied by the Final Closing Price is equal to $138,606,250. Such decisions
to terminate, or to change the Numerator, would be within the discretion of the
Boards of Directors of MNI or CMI, respectively. The number of shares of CMI
Common Stock into which each share of MNI Capital Stock is converted is referred
to herein as the "Exchange Ratio." In addition, for each whole share of CMI
Common Stock received by a MNI stockholder, such stockholder will receive one
Common Share Purchase Right which permits the purchase of certain shares of CMI
Common Stock upon the occurrence of certain events generally associated with an
unsolicited attempt to acquire CMI. In addition, each MNI Option will be assumed
by CMI upon consummation of the Merger. Each Assumed Option will become
exercisable for the number of shares of CMI Common Stock that equals the product
of (i) number of shares of MNI Common Stock issuable on exercise of the option
immediately prior to the Merger, and (ii) the Exchange Ratio, and will be
exercisable after the Merger at an exercise price per share of CMI Common Stock
equal to the original exercise price divided by the Exchange Ratio. All other
terms of the Assumed Options will remain the same, provided that the shares
issuable upon exercise of the Assumed Options will no longer be subject to a
right of repurchase by MNI.
No fractional shares of CMI Common Stock will be issued in connection with
the Merger. In lieu of fractional shares, each MNI stockholder who would
otherwise be entitled to a fractional share will receive cash equal to the per
share market value of CMI Common Stock, based on the closing price of CMI Common
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Stock on the Nasdaq National Market on the trading day immediately prior to the
Effective Time of the Merger, multiplied by the fraction of a share of CMI
Common Stock to which the stockholder would otherwise be entitled. Based upon
the number of shares of MNI Capital Stock outstanding as of the Record Date, and
assuming that: (i) the Final Closing Price is at least $30.00 and at most
$41.375, (ii) no MNI stockholders exercise dissenters' rights, and (iii) all of
the shares of CMI Common Stock held in escrow will be delivered to MNI
stockholders, approximately 15,400,000 shares of CMI Common Stock will be
outstanding as of the Effective Time of the Merger, of which approximately
3,150,000 shares (approximately 20% of the total), will be held by the former
holders of MNI Capital Stock. Accordingly, the former holders of MNI stock as a
group will be in a position to use cumulative voting rights to elect a member of
the CMI Board of Directors and to have a significant influence on other
corporate matters which require the vote of CMI stockholders.
Based upon the assumptions contained in the immediately preceding
paragraph, each share of MNI Capital Stock exchanged in the Merger will be
exchanged for .3511 of a share of CMI Common Stock, and based on the closing
sale price of CMI Common Stock on , 1995, will have a market value
of approximately $ .
ESCROW AND INDEMNIFICATION
Under the terms of the Merger Agreement, ten percent of the shares of CMI
Common Stock otherwise issuable to the MNI stockholders (based upon the
assumptions contained under "--Manner and Basis of Converting Shares" above,
approximately 315,000 shares) will be held in escrow following the Merger until
the date on which CMI first publicly announces financial results including the
combined operations of CMI and MNI covering a period of at least 30 days (the
"Expiration Date"). The shares in escrow will be available to indemnify CMI
against losses arising from breaches of the representations, warranties and
covenants of MNI contained in the Agreement of Reorganization. The return of the
shares in escrow will be the exclusive remedy available to CMI for any such
breaches.
CMI has also agreed to indemnify the MNI stockholders against losses
arising from breaches of the representations, warranties and covenants of CMI
contained in the Agreement of Reorganization. The liability of CMI for any such
breaches cannot exceed $10,050,000.
Each such indemnification will cover losses only if they exceed $85,000 in
the aggregate (in which event all such losses will be covered without regard to
such $85,000 threshold).
On the Expiration Date, all the shares then remaining in escrow not subject
to a claim for indemnification by CMI and not subject to reimbursement as
described below shall be released to the former MNI stockholders pro rata
according to the shares of MNI Capital Stock held by them at the Effective Time
of the Merger. Pursuant to the terms of the Merger Agreement, the stockholders
of MNI agree to advance funds to the MNI stockholder representatives under the
escrow agreement on a pro rata basis in connection with expenses incurred by the
stockholder representatives in connection with disputes related to release of
the escrowed shares. To the extent a stockholder does not advance such funds,
and there are shares available for distribution out of escrow to such
stockholder, such stockholder's escrowed shares may be utilized to meet such
obligation.
EXCHANGE OF CERTIFICATES
Bank of Boston, CMI's transfer agent, has been designated as Exchange Agent
for purposes of exchanging MNI's stock certificates for certificates
representing CMI Common Stock. Promptly after the Effective Time of the Merger,
the Exchange Agent will mail or otherwise deliver to each MNI stockholder of
record a letter of transmittal with instructions to be used by such stockholder
in surrendering certificates that, prior to the Merger, represented shares of
MNI Capital Stock.
Upon surrender of an MNI stock certificate, together with a duly executed
letter of transmittal, the Exchange Agent will arrange for the holder of such
certificate to receive in exchange therefor certificates evidencing the number
of shares of CMI Common Stock to which such holder of MNI Capital Stock is
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entitled based on the Exchange Ratio and cash for any fractional share, less the
number of shares which have been delivered to escrow on behalf of such holder.
See "--Escrow."
Until an MNI stock certificate has been surrendered to CMI, each such
certificate shall be deemed at any time after the Effective Time of the Merger
to represent the right to receive, upon such surrender, certificates for such
number of shares of CMI Common Stock and payments in lieu of fractional shares
as the stockholder is entitled to under the Merger Agreement.
MNI STOCKHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES FOR EXCHANGE PRIOR
TO APPROVAL OF THE MERGER BY THE CMI AND MNI STOCKHOLDERS AND RECEIPT OF THE
TRANSMITTAL LETTER FROM THE EXCHANGE AGENT.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
Under the Agreement of Reorganization, MNI has agreed that, until the
Effective Time of the Merger, it will carry on its business in the ordinary and
usual course, use its best efforts to carry on and preserve its business and its
relationships with customers, suppliers, employees and others in substantially
the same manner as it has prior to the Agreement of Reorganization, and will
not, without the prior written consent of CMI, enter into certain specified
transactions outside the ordinary course of business.
Until termination of the Agreement of Reorganization, MNI will not directly
or indirectly encourage, solicit, initiate, or, subject to the fiduciary duties
of the directors, conduct discussions or negotiations with, provide information
to, or enter into any agreement with, any corporation, partnership, person or
other entity concerning the possible merger, consolidation or sale of assets or
similar transactions or a public offering of its stock. If the Board of
Directors of MNI terminates the Merger Agreement by reason of receipt of a
proposal which in the exercise of its fiduciary duties it concludes is superior
(a "Superior Proposal"), MNI is required under the Agreement of Reorganization
to pay to CMI the amount of the documented out-of pocket expenses incurred in
connection with the transactions contemplated hereby, plus an amount equal to 3%
of the total consideration payable to MNI and/or its stockholders under the
Superior Proposal.
Each company has agreed to provide the other company (including accounting,
legal and investment banking representatives) with access to its offices and
senior employees for the purpose of due diligence.
CONDITIONS TO THE MERGER
In addition to the approval by the stockholders of CMI and MNI of the
Merger Agreement, the obligations of CMI and MNI to consummate the Merger are
subject to the satisfaction of a number of conditions, including: (a) the
effectiveness of the Registration Statement on Form S-4 filed by CMI with
respect to the shares of CMI Common Stock to be issued to the MNI stockholders
under the Merger Agreement and the absence of any stop orders or proceedings
with respect to the Form S-4 or the Prospectus/ Proxy Statement contained
therein; (b) the shares of CMI Common Stock to be issued as a result of the
Merger and upon exercise of Assumed Options shall have been approved for
quotation on the Nasdaq National Market; (c) the accuracy of the representations
and warranties made in the Merger Agreement; (d) the performance of the
covenants contained in the Merger Agreement; (e) receipt of a letter from Ernst
& Young LLP, CMI's independent auditors, confirming the appropriateness of
pooling of interests accounting for the Merger under Accounting Principles Board
Opinion No. 16, if the Merger is consummated in accordance with the Merger
Agreement, and receipt of an opinion of counsel for MNI that the Merger should
constitute a reorganization within the meaning of Section 368(a) of the Code;
(f) the absence of any threatened or pending litigation or proceeding to
restrain or prohibit the Merger; (g) the receipt by each party of a certificate
signed by the other party's Chief Executive Officer certifying to the
fulfillment of certain conditions to the Merger; (h) the number of shares held
by MNI stockholders eligible to exercise dissenters' rights shall not exceed 5%
of the shares of MNI Capital Stock; (i) the receipt by CMI and MNI of all
permits or authorizations as may be required by regulatory review authorities,
including expiration or termination of all waiting, review and investigative
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"); (j) the receipt of an updated Bear Stearns fairness
opinion, opinions of counsel and certain other documents; (k) the receipt of
employment agreements and covenants not to
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compete executed by certain executive officers of MNI; (l) approval of the
Merger Agreement by the stockholders of CMI and MNI; and (m) the satisfactory
completion of due diligence of CMI and MNI by March 3, 1995.
To ensure that the Merger will be accounted for as a pooling of interests
and to ensure that the issuance of CMI Common Stock in the Merger complies with
the Securities Act, MNI will provide CMI with a letter identifying all persons
who would be considered "affiliates." It is a condition to closing that the
affiliates of MNI will enter into Affiliate Agreements providing, among other
things, that they will not sell any shares held in MNI, and that they will not
make any disposition of CMI Common Stock until such time as CMI has published
financial results covering at least 30 days of post-merger combined operations
of CMI and MNI and that they will not offer to sell, sell or otherwise dispose
of any CMI Common Stock issued to such person in the Merger in violation of Rule
145 under the Securities Act. Directors and executive officers of CMI will also,
prior to the Effective Time of the Merger, enter into agreements restricting
their sales of CMI Common Stock to help ensure pooling of interest accounting
treatment. See "--Affiliates' Restrictions on Sale of MNI and CMI Stock."
At any time on or prior to the filing of Articles of Merger with the
Secretary of State of the State of Texas, to the extent legally allowed, either
CMI or MNI, by action taken by its Board of Directors, and without approval of
the stockholders of such company, may waive compliance with any of the
agreements or conditions contained in the Merger Agreement for the benefit of
such company.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
Pursuant to the Agreement of Reorganization, each of Arthur W. Epley, III,
MNI's President and Chief Executive Officer, Charles W. Bentley, MNI's Vice
President of Operations, W. F. Montgomery, MNI's Vice President of Sales,
Asia/Pacific, and Carl B. Frampton, MNI's Chief Operating Officer and Chief
Financial Officer, will enter into an employment agreement ("Employment
Agreement") with MNI, and each of Messrs. Epley, Bentley and Montgomery will
enter into a covenant not to compete ("Covenant") with MNI as of the Effective
Time of the Merger. Each Employment Agreement provides for the employment of
such person on a full-time basis through June 30, 1997, subject to earlier
termination under certain circumstances. Thereafter, employment would be on an
"at will" basis. The Employment Agreements specify that the salaries of such
persons will continue at their present rates through June 30, 1995 with the
salary rates for the balance of the term to be negotiated but not to be less
than the current salary rates. The Employment Agreements also provide that MNI's
existing bonus plan will continue through June 30, 1995 and be replaced by an
incentive bonus plan for the 1996 fiscal year.
The Covenants provide that such persons will not, for a period of four
years after the Merger, engage or have an interest in any business activity that
is competitive with any activity of MNI. The Covenants also provide that such
persons will not solicit customers and will not induce employees of MNI or its
subsidiaries to leave such employment during such four year period.
The Agreement of Reorganization also provides that MNI and its subsidiaries
will use their best efforts to enter employment arrangements satisfactory to CMI
with certain other key MNI employees to be identified by CMI.
TERMINATION OR AMENDMENT OF AGREEMENT OF REORGANIZATION
The Agreement of Reorganization may be terminated at any time prior to the
filing of Articles of Merger with the Secretary of State of the State of Texas,
without regard to whether stockholder approval of the Merger has been obtained;
(a) by mutual consent of CMI and MNI; (b) by either CMI or MNI if any of the
conditions precedent to the obligations of such party have not been fulfilled by
May 31, 1995, or on the happening of a material breach by the other party; or
(c) by the Board of Directors of MNI by reason of receipt of a Superior
Proposal. See "--Conditions to the Merger" and "--Conduct of Business Prior to
the Merger."
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The Merger Agreement may be amended by the parties thereto at any time
prior to stockholder approval. After stockholder approval, an amendment may be
made without further stockholder approval only if it would not alter or change
the Exchange Ratio or have a material adverse effect on the stockholders of CMI
or MNI. See "--Manner and Basis of Converting Shares" for a discussion of how
the Exchange Ratio is determined.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth below is a discussion of certain material federal income tax
consequences, under the Code, to CMI, MNI and MNI's stockholders who receive CMI
Common Stock in exchange for MNI Capital Stock as a result of the Merger or who
receive payment for their shares upon exercise of their dissenters' rights or
payment for fractional shares. This discussion does not deal with all aspects of
federal taxation that may be relevant to MNI stockholders in light of their
particular circumstances, such as the tax consequences to MNI stockholders who
do not hold their MNI Capital Stock as a capital asset or to persons who
acquired their shares in compensatory transactions, nor the effects of state,
local or foreign income taxation.
STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY OF
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
As a condition to consummation of the Merger, MNI will receive from Andrews
& Kurth L.L.P., counsel to MNI, an opinion to the effect that the Merger should
constitute a reorganization within the meaning of Section 368(a) of the Code.
The tax description set forth below has been reviewed by such counsel. An
opinion represents only the best judgment of tax counsel. Neither the
description of the tax consequences set forth below nor such opinion will be
binding on the Internal Revenue Service (the "Service"), and the Service may
adopt a position contrary to that described below.
MNI stockholders should be aware that this discussion and the opinion of
counsel to MNI are based upon counsel's interpretation of the Code, applicable
Treasury Regulations, judicial authority and administrative rulings and
practice, all as of the date hereof. There can be no assurance that future
legislative, judicial or administrative changes will not adversely affect the
accuracy of the statements and conclusions set forth therein. Any such changes
could be applied retroactively and could affect the tax consequences of the
Merger.
Assuming the Merger qualifies as a reorganization under Section 368(a) of
the Code, the following U.S. federal income tax consequences will occur:
Consequences to CMI and MNI
No gain or loss will be recognized by CMI, Acquisition Corp. or MNI on
account of the Merger.
Consequences to MNI Stockholders
No gain or loss will be recognized by the MNI stockholders upon the receipt
in the Merger of CMI Common Stock in exchange for their shares of MNI Capital
Stock.
The aggregate tax basis of the CMI Common Stock received by each MNI
stockholder (including any CMI Common Stock held in escrow), will be the same as
the aggregate tax basis of the MNI Capital Stock surrendered in exchange
therefor.
The holding period for each share of CMI Common Stock received by each
stockholder of MNI in exchange for MNI Capital Stock will include the period for
which such stockholder held the MNI Capital Stock exchanged therefor, provided
such stockholders' MNI Capital Stock is held as a capital asset at the Effective
Time of the Merger.
With respect to stockholders of MNI who exercise dissenters' rights with
respect to their shares of MNI Capital Stock and who receive payment for such
shares in cash (see "Terms of the Merger--Dissenters' Rights"), the Service
should treat such cash as having been received as a distribution from MNI in
redemption of such MNI Capital Stock. Such redemption would be treated as a
distribution in full payment in exchange for such MNI Capital Stock, and thus
the dissenting shareholder would recognize gain or loss measured by the
difference between the cash received and the basis of such MNI Capital Stock, if
the
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redemption does not have the effect of the distribution of a dividend under
Section 302 of the Code (after applying the constructive ownership rules of
Section 318 of the Code).
An MNI stockholder who receives a cash payment in lieu of a fractional
share of CMI Common Stock will be treated as if the fractional share were
distributed in the Merger and then redeemed by CMI, and will recognize capital
gain or capital loss measured by the difference between the amount of cash
received and the stockholder's basis in the fractional share (which will be a
pro rata portion of the stockholder's basis in the MNI Capital Stock surrendered
in the Merger) provided such stockholder's MNI Capital Stock is held as a
capital asset at the Effective Time of the Merger.
Limitations on Description
Even if the Merger qualifies as a tax-free reorganization, a recipient of
shares of CMI Common Stock could recognize gain to the extent that such shares
were considered by the Internal Revenue Service to be received in exchange for
consideration other than MNI Capital Stock. All or a portion of such gain may be
taxable as ordinary income. Gain would also be recognized to the extent a MNI
stockholder was treated by the Service as receiving (directly or indirectly)
consideration other than CMI Common Stock in exchange for his or her MNI Capital
Stock.
The opinion of counsel to MNI and description of the tax consequences set
forth above are subject to certain assumptions and qualifications and counsel to
MNI has relied on the truth and accuracy of the representations of the parties
in the Merger Agreement, in representation letters to be delivered by the
officers and directors of CMI and MNI and by certain stockholders of MNI and
representations of affiliates in the Affiliates Agreement. One of the
representations to be relied on is that no affiliate, except as discussed below,
and no other stockholder of MNI owning one percent or more of the MNI Capital
stock, has, as of the Effective Time of the Merger, any plan or intent to sell,
exchange or otherwise dispose of any of the CMI Common Stock received by such
person in the Merger. Stockholders owning approximately 16.02% of the MNI
Capital Stock outstanding immediately prior to the Effective Time of the Merger
are partnerships that have indicated that they intend to distribute the CMI
Common Stock received by them to their partners after the release of earnings
covering 30 days of combined operations of CMI and MNI. No representation as to
such partners' intentions with respect to disposition of such stock have been
obtained; however, the general partners of such partnerships have represented
that, to the best of their knowledge, the distributee partners have no plan or
intent to sell, exchange or otherwise dispose of any of the shares of CMI Common
Stock distributed to them. For the relevance of these representations, see the
discussion below of "continuity of interest."
In order for the continuity of interest requirement to be met, MNI
stockholders must not, pursuant to a plan or intent existing at or prior to the
Effective Time of the Merger, dispose of an amount of CMI Common Stock to be
received in the Merger (including dispositions through the exercise of
dissenters' rights and, under certain circumstances, pre-merger dispositions of
MNI Capital Stock) such that the MNI stockholders do not retain a meaningful
continuing equity ownership in CMI. Generally, so long as holders of MNI Capital
Stock do not plan to dispose of in excess of 50 percent of the CMI Common Stock
to be received as described above (the "50 Percent Test"), such requirement will
be satisfied. Although there is no direct legal precedent which addresses the
matter, counsel to MNI, based on analogous authority, does not believe the
distribution by the partnerships discussed above to their partners will erode
the continuity of interest requirement provided the distributee partners have no
plan or intention to dispose of the CMI Common Stock distributed to them. To the
extent they do have such plan or intent, the CMI Common Stock received by them
will adversely effect satisfaction of the continuity of interest requirement.
Management of MNI and CMI have no knowledge of a plan or intention that would
result in the 50 Percent Test not being satisfied.
A successful challenge by the Service to the reorganization status of the
Merger would result in an MNI stockholder recognizing gain or loss with respect
to each share of MNI Capital Stock surrendered equal to the difference between
such stockholder's basis in such share and the fair market value, as of the
Effective Time of the Merger, of the CMI Common Stock received in exchange
therefor. In such event, an MNI stockholder's aggregate basis in the shares of
CMI Common Stock received in the exchange would equal the
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fair market value of such shares of CMI Common Stock and the stockholder's
holding period for such shares would not include the period during which the
stockholder held MNI Capital Stock.
ACCOUNTING TREATMENT
The Merger will be treated as a pooling of interests for accounting
purposes. Under this accounting treatment, the recorded assets and liabilities
of both CMI and MNI are carried forward to the combined operations of the
surviving corporation at their recorded amounts.
To ensure that the Merger will be treated as a pooling of interests,
directors, executive officers and affiliates of MNI and CMI either have or will
enter into Affiliates Agreements imposing certain resale limitations on their
stock. See "--Affiliates' Restrictions on Sale of CMI Common Stock and MNI
Capital Stock."
AFFILIATES' RESTRICTIONS ON SALE OF CMI COMMON STOCK AND MNI CAPITAL STOCK
The shares of CMI Common Stock to be issued in the Merger have been
registered under the Securities Act by a Registration Statement on Form S-4,
thereby allowing such securities to be traded without restriction by all former
holders of MNI Capital Stock not deemed to be "affiliates" (as such term is
defined for purposes of Rule 145 under the Securities Act) of MNI at such time
as the transaction is submitted for a vote to the MNI stockholders. MNI
stockholders who may be deemed affiliates of MNI will be so advised by MNI.
Pursuant to the terms of the Agreement of Reorganization, each affiliate of
MNI has executed an affiliates agreement (the "MNI Affiliates Agreement").
Pursuant to the MNI Affiliates Agreement, each MNI affiliate has agreed not to
make any sale of CMI Common Stock received upon consummation of the Merger in
violation of the Securities Act or the rules and regulations promulgated
thereunder. Generally this will require that such sales be made in accordance
with Rule 145(d) under the Securities Act promulgated by the SEC, which in turn
requires that, for specified periods, such sales be made in compliance with the
volume limitations, manners of sale provisions and current information
requirements of Rule 144 under the Securities Act promulgated by the SEC. The
volume limitations should not impose any material limitations on any MNI
stockholder who owns less than one percent of the outstanding CMI Common Stock
after the Merger unless, pursuant to Rule 144, such stockholder's shares are
required to be aggregated with those of another stockholder.
The MNI Affiliates Agreements provide, among other things, that each
affiliate of MNI has agreed (i) not to sell, exchange, transfer, pledge, or
otherwise dispose of or encumber the MNI Capital Stock owned by such affiliate
at any time prior to the Merger; (ii) not to transfer, sell, exchange, pledge or
otherwise dispose of or encumber the CMI Common Stock to be received in the
Merger at any time prior to the date financial results covering at least 30 days
of combined operations of CMI and MNI after the Merger have been publicly
released by CMI (the "Affiliates Expiration Date"); (iii) that, except as
specifically disclosed, the affiliate has no present plan or intention to sell,
exchange, transfer, pledge or otherwise dispose of any of the CMI Common Stock
to be received by him or her in the Merger; and (iv) not to offer, sell,
exchange, transfer, pledge or otherwise dispose of any CMI Common Stock except
as permitted by Rule 145 promulgated under the Securities Act by the SEC or
pursuant to a registration statement under, or an exemption from, the Securities
Act.
Holders of MNI's Capital Stock who are identified by MNI as affiliates of
MNI subject to Rule 145 under the Securities Act will receive "piggyback"
registration rights to include their shares in up to two registration statements
filed by CMI under the Securities Act pursuant to the Merger Agreement.
GOVERNMENTAL AND REGULATORY APPROVALS
CMI and MNI are aware of no governmental or regulatory approvals required
for consummation of the Merger, other than compliance with applicable securities
and "blue sky" laws of various states and the filing of Articles of Merger
required under Texas law, and expiration or termination of all waiting, review
and investigative periods under the HSR Act.
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MERGER EXPENSES
Whether or not the Merger is consummated, CMI and MNI will be responsible
for their own costs and expenses incurred in connection with the Merger and the
transactions contemplated thereby, provided that if the Merger is consummated,
any such expenses which are then unpaid will be the responsibility of the
combined companies, and provided further that if MNI terminates the Merger
Agreement by reason of a Superior Proposal, MNI is required under the Agreement
of Reorganization to pay to CMI the amount of the documented out-of pocket
expenses incurred by CMI in connection with the transactions contemplated
hereby, plus an amount equal to 3% of the total consideration payable to MNI
and/or its stockholders under the Superior Proposal.
In consideration for financial advisory services in connection with a
possible sale or merger of MNI rendered by H&Q dating back to June 1993, H&Q
will receive a fee in the amount of $1.5 million if the Merger is consummated,
and not otherwise. See "The Merger and Related Transactions -- Financial
Advisor" for a description of the fees payable to Bear Stearns.
DISSENTERS' RIGHTS
CMI Stockholders. Dissenter's rights are not available under Delaware law
to CMI stockholders in connection with the Merger.
MNI Stockholders. The TBCA, Articles 5.11 through 5.13, entitles any
stockholder of record of MNI who objects to the Merger and who follows the
procedures prescribed by such Articles, in lieu of receiving the consideration
proposed under the Merger Agreement, to receive cash equal to the "fair value"
of his or her shares as determined by appraisal. Set forth below is a summary of
the procedures relating to the exercise of the right to dissent as provided in
the TBCA, which have been reproduced in full as Appendix C of this
Prospectus/Proxy Statement. The summary does not purport to be complete and is
qualified in its entirety by reference to Articles 5.11, 5.12 and 5.13 of the
TBCA as set forth in Appendix C. Failure to comply with any of the required
steps may result in termination of any such right to dissent the stockholder may
have under the TBCA.
MNI stockholders who follow the procedures set forth in Articles 5.12 and
5.13 of the TBCA may receive a cash payment equal to the fair value of their
shares of MNI Capital Stock determined as of the day immediately preceding the
MNI Special Meeting, excluding any appreciation or depreciation in anticipation
of the Merger. Unless all the procedures set forth in Articles 5.12 and 5.13 are
followed by a stockholder who wishes to exercise dissenters' rights, such
stockholder will be bound by the terms of the Merger. To be entitled to a cash
payment upon exercise of dissenters' rights, a stockholder must (i) file with
MNI, prior to the MNI Special Meeting, a written objection to the Merger,
setting out that the stockholder's right to dissent will be exercised if the
Merger is effected and giving the stockholder's address to which notice thereof
shall be delivered or mailed in the event the Merger is consummated; (ii) not
vote his shares in favor of the adoption and approval of the Merger Agreement,
and (iii) demand such cash payment in writing within ten days after the delivery
or mailing by MNI of a notice that the Merger has become effective, which notice
must be delivered or mailed to the stockholder within ten days after the Merger
is effected. The failure of a stockholder to vote such stockholder's shares
against the Merger Agreement will not constitute a forfeiture of such
stockholder's dissenters' rights, so long as the stockholder does not vote such
shares in favor of the Merger and the other statutory requirements are met. The
demand must state the number and class of shares owned by the stockholder and
the fair value of such shares as estimated by the stockholder. Any stockholder
failing to make demand within the ten-day period shall be bound by the Merger
Agreement. Within 20 days after demanding payment for his shares, each holder of
certificates formerly representing such shares so demanding payment shall submit
such certificates to MNI for notation thereof that such demand has been made.
The failure of holders of such certificates to do so shall, at the option of
MNI, terminate such stockholders' rights to dissent unless a court of competent
jurisdiction for good and sufficient cause shall otherwise direct.
Within 20 days after receipt by MNI of a demand for payment made by a
dissenting stockholder, MNI shall deliver or mail to the dissenting stockholder
a written notice that shall either set out that MNI accepts the amount claimed
in the demand and agrees to pay that amount within 90 days after the Effective
Time of
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the Merger, upon the surrender of the share certificates duly endorsed, or shall
contain an estimate by MNI of the fair value of such stockholder's shares of MNI
Capital Stock, together with an offer to pay the amount of that estimate within
90 days after the Effective Time of the Merger, upon the surrender of the
Certificates for shares of MNI Capital Stock duly endorsed, and upon receipt of
notice within 60 days after the Effective Time of the Merger from the
stockholder that the stockholder agrees to accept that amount.
If, within 60 days after the Effective Time of the Merger, MNI and the
stockholder agree upon the value of the shares, MNI shall pay for the shares
within 90 days after the Effective Time of the Merger and upon surrender of the
certificates for the shares duly endorsed. Upon such payment, the stockholder
shall cease to have any interest in the shares or in MNI.
If, within the period of 60 days after the Effective Time of the Merger,
the dissenting stockholder and MNI do not so agree, then the stockholder or MNI
may, within 60 days after the expiration of such 60 day period, file a petition
in any court of competent jurisdiction in Harris County, Texas, asking for a
finding and determination of the fair value of the stockholder's shares. The
clerk of the court shall give notice of the time and place fixed for the hearing
of the petition by registered mail to MNI and to the stockholders who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by MNI. MNI and all MNI stockholders so
notified shall be bound by the final judgment of the court.
After the hearing of the petition, the court shall determine the
stockholders who have complied with the provisions of Article 5.12 of the TBCA
and have become entitled to the valuation of and payment for their shares, and
shall appoint one or more qualified appraisers to determine that value. In
addition to having the power to examine the books and records of MNI, the
appraisers shall afford a reasonable opportunity to the parties interested to
submit to the appraisers pertinent evidence as to the value of their shares.
The appraisers shall determine the fair value of the shares of the
stockholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the stockholders entitled to
payment for their shares and shall direct the payment of that value by MNI
together with interest thereon, to the date of such judgment, to the
stockholders entitled to payment. The judgment shall be payable to the holders
of shares only upon, and simultaneously with, the surrender to MNI of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting stockholders shall cease to have any interest in those shares or in
MNI. The court shall allow the appraisers a reasonable fee as court costs, and
all costs shall be allotted between the parties in the manner that the court
determines to be fair and equitable.
Any stockholder who has demanded payment for his or her shares in
accordance with the TBCA shall not thereafter be entitled to vote or exercise
any other rights of a stockholder, except the right to receive payment for his
or her shares in accordance with the TBCA and the right to maintain an
appropriate action to obtain relief on the ground that the Merger would be or
was fraudulent. The shares for which payment has been demanded shall not
thereafter be considered outstanding for the purposes of any subsequent vote of
stockholders.
Any stockholder who has demanded payment for his or her shares in
accordance with Article 5.12 may withdraw such demand at any time before payment
for his shares or before any petition has been filed pursuant to the TBCA asking
for a finding and determination of the fair value of such shares, but no such
demand may be withdrawn after such payment has been made or, unless MNI shall
consent thereto, after any such petition has been filed. If, however, (i) such
demand shall be withdrawn as provided above, (ii) pursuant to Article 5.13, MNI
shall terminate the stockholder's rights under Article 5.12, (iii) no petition
asking for a finding and determination of fair value of such shares by a court
shall have been filed within the time provided in Article 5.12 or (iv) after the
hearing of a petition filed pursuant to Article 5.12, the court shall determine
that such stockholder is not entitled to the relief provided by Article 5.12,
then, in any such case, (A) such stockholder and all persons claiming under such
stockholder shall be conclusively presumed to have approved and ratified the
Merger Agreement and shall be bound thereby, (B) the right of such stockholder
to be paid
34
<PAGE> 45
the fair value of his or her shares shall cease, and his or her status as a
stockholder shall be restored without prejudice to any corporate proceedings
that may have been taken during the interim and (C) such stockholder shall be
entitled to receive any dividends or other distributions made to stockholders in
the interim.
A vote against approval and adoption of the Merger Agreement will not
satisfy the requirement for a written objection to approval and adoption of the
Merger Agreement by the dissenting stockholder or a written demand for payment
of the "fair value" of the shares owned by a dissenting stockholder. Failure to
vote against approval and adoption of the Merger Agreement (i.e., abstention
from voting) will not constitute a waiver of a stockholder's dissenters' rights.
If the holders of 5% or more of the outstanding shares shall have taken steps to
perfect their dissenters' rights respecting the Merger in accordance with the
TBCA, CMI has the right, under the Merger Agreement, to terminate the Merger
Agreement. If CMI exercises its termination right in such event, Acquisition
Corp. and MNI would not merge and MNI stockholders who have perfected their
dissenters' rights would not receive any cash payment, but would continue to
hold such shares in MNI.
Exercise of the right to dissent under the TBCA may result in a judicial
determination that the "fair value" of a dissenting stockholder's shares is
higher or lower than the value of the CMI Common Stock to be received pursuant
to the Merger Agreement.
The TBCA provides that, in the absence of fraud in the transaction, the
right to an appraisal as set forth above of a stockholder objecting to the
Merger is the exclusive remedy for the recovery of the value of such
stockholder's shares or for money damages to such stockholder with respect to
the Merger. If MNI complies with the requirements of the TBCA, any stockholder
who fails to comply with the requirements of the TBCA shall not be entitled to
bring suit for the recovery of the value of his shares or for money damages to
the stockholder with respect to the Merger.
HOLDERS OF MNI CAPITAL STOCK WHO SEEK TO ASSERT THEIR DISSENTERS' RIGHTS
MUST FOLLOW THE STATUTORY PROCEDURES PRECISELY. FAILURE TO FOLLOW ANY OF THE
STATUTORY PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS'
RIGHTS. IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF TEXAS LAW, ANY MNI
STOCKHOLDER WHO IS CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT A LEGAL
ADVISER.
THE FOREGOING IS MERELY A SUMMARY AND DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF THE RIGHTS OF DISSENTING STOCKHOLDERS. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE APPLICABLE STATUTORY PROVISIONS OF ARTICLES 5.11,
5.12 AND 5.13 OF THE TEXAS BUSINESS CORPORATION ACT WHICH ARE SET FORTH IN FULL
IN APPENDIX C TO THIS PROSPECTUS/PROXY STATEMENT.
35
<PAGE> 46
CMI AND MNI
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma combined condensed financial statements
give effect to the Merger of CMI and MNI on a pooling of interests basis. The
pro forma combined condensed balance sheet assumes the Merger took place on
December 31, 1994 and combines CMI's historical condensed consolidated balance
sheet with MNI's historical condensed consolidated balance sheet at that date.
The pro forma combined condensed statements of operations assume that the Merger
took place as of the beginning of each of the periods presented and combine
CMI's historical condensed consolidated statements of operations for the three
years ended June 30, 1994 and CMI's historical condensed consolidated statements
of operations for the six months ended December 31, 1993 and 1994 with the
historical condensed consolidated statements of operations of MNI for the three
years ended June 30, 1994 and the historical condensed consolidated statements
of operations for MNI for the six months ended December 31, 1993 and 1994,
respectively.
The pro forma combined condensed statements of operations are not
necessarily indicative of operating results which would have been achieved had
the Merger been consummated as of the beginning of such periods and should not
be construed as representative of future operations.
These pro forma combined condensed financial statements should be read in
conjunction with the historical consolidated financial statements and the notes
thereto of CMI and MNI included elsewhere in this Prospectus/Proxy Statement.
36
<PAGE> 47
CMI AND MNI
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CMI AT MNI AT
DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1994 1994 ADJUSTMENTS COMBINED
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents, and short-term
investments........................... $ 4,882 $ 501 $ $ 5,383
Accounts receivable...................... 121,960 12,505 (419) 134,046
Inventories.............................. 67,738 14,962 177 82,877
Deferred tax asset....................... -- 549 549
Prepaid expenses and other current
assets................................ 2,288 423 2,711
------------ ------------ ----------- ---------
Total current assets............. 196,868 28,940 (242) 225,566
Property, plant and equipment, net......... 33,610 4,559 38,169
Intangible assets of businesses acquired,
net and other assets..................... 66,510 341 66,851
------------ ------------ ----------- ---------
Total assets..................... $296,988 $ 33,840 $(242) $ 330,586
========== ========== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of
long-term debt........................ $ 10,000 $ 5,659 $ $ 15,659
Accounts payable......................... 30,492 6,835 (77) 37,250
Accrued liabilities...................... 29,382 2,061 31,443
Income taxes accrued and payable......... 2,189 65 2,254
------------ ------------ ----------- ---------
Total current liabilities........ 72,063 14,620 (77) 86,606
Other long-term liabilities................ 1,551 141 1,692
Long-term debt............................. 69,981 2,491 72,472
------------ ------------ ----------- ---------
Total liabilities................ 143,595 17,252 (77) 160,770
------------ ------------ ----------- ---------
Stockholders' equity:
Preferred stock.......................... -- 72 (72) --
Common stock............................. 1,226 18 295 1,539
Capital in excess of par value........... 70,052 11,322 (276) 81,098
Retained earnings........................ 82,626 5,273 (165) 87,734
Other.................................... (511) (97) 53 (555)
------------ ------------ ----------- ---------
Total stockholders' equity....... 153,393 16,588 (165) 169,816
------------ ------------ ----------- ---------
Total liabilities and
stockholders'equity............ $296,988 $ 33,840 $(242) $ 330,586
========== ========== ========= ========
</TABLE>
37
<PAGE> 48
CMI AND MNI
PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------- ---------------------
1992 1993 1994 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................ $221,506 $306,564 $405,832 $161,713 $234,202
Cost of goods sold.................. 168,057 220,896 294,803 113,419 166,461
-------- -------- -------- -------- --------
Gross profit...................... 55,449 85,668 111,029 48,294 67,741
-------- -------- -------- -------- --------
Operating expenses:
Research and development.......... 7,239 11,916 17,627 7,896 13,153
Marketing and administrative...... 37,345 49,422 62,875 26,985 33,711
Amortization of intangible
assets......................... 797 1,554 2,068 902 1,268
-------- -------- -------- -------- --------
Total operating
expenses................ 45,381 62,892 82,570 35,783 48,132
-------- -------- -------- -------- --------
Income from operations.............. 8,068 22,776 28,459 12,511 19,609
Other income (expense):
Interest expense, net............. (870) (2,360) (2,524) (722) (2,172)
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effects of changes in
accounting principles............. 7,198 20,416 25,935 11,789 17,437
Provision for income taxes.......... 2,853 6,711 9,337 4,510 6,317
-------- -------- -------- -------- --------
Income before cumulative effects of
changes in accounting principles.. $ 4,345 $ 13,705 $ 16,598 $ 7,279 $ 11,120
======== ======== ======== ======== ========
Per Share Data:
Income before cumulative
effects of changes in accounting
principles -- primary............. $ 0.36 $ 1.03 $ 1.05 $ 0.46 $ 0.70
======== ======== ======== ======== ========
Income before cumulative effects of
changes in accounting
principles -- fully diluted....... $ 0.36 $ 1.03 $ 1.05 $ 0.46 $ 0.67
======== ======== ======== ======== ========
Average shares and equivalents --
primary........................... 12,017 13,251 15,758 15,689 15,970
======== ======== ======== ======== ========
Average shares and equivalents --
fully diluted..................... 12,017 13,251 17,108 16,002 18,338
======== ======== ======== ======== ========
</TABLE>
See Notes to unaudited pro forma combined condensed financial statements.
38
<PAGE> 49
NOTES TO PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The pro forma combined condensed financial statements reflect the issuance of
approximately 3.1 million shares of CMI Common Stock for all of the
outstanding shares of MNI Capital Stock, as defined, outstanding as of
December 31, 1994 in conjunction with the Merger based on an assumed Exchange
Ratio of .3511 shares of CMI Common Stock for each share of MNI Capital
Stock.
2. CMI made sales to MNI of $161,000 in the year ended June 30, 1994 and
$466,000, in the six months ended December 31, 1994. The effect of these
transactions has been eliminated in the accompanying pro forma combined
condensed financial statements. There were no other material transactions
between CMI and MNI during any period presented.
3. CMI and MNI will incur charges which are not expected to exceed $4 million in
the period in which the Merger occurs to reflect the consolidation of certain
product lines and other costs as well as transaction fees and costs incident
to the Merger. These charges will be included in operations in the period in
which the Merger is consummated and are not included in the pro forma balance
sheet or statement of operations. The aforementioned amount is a preliminary
estimate only and therefore is subject to change.
4. The pro forma combined balance sheet assumes the conversion of the MNI
Preferred Stock into CMI Common Stock.
5. Shares used in computing primary per share amounts include weighted average
common shares outstanding and common equivalent shares. Common equivalent
shares consists of common stock issuable upon the conversion of MNI Preferred
Stock and common stock issuable upon exercise of stock options and warrants
using the treasury stock method. Shares used in computing fully-diluted per
share amounts also assumes conversion of all outstanding CMI convertible
notes and a reduction of related interest expense.
39
<PAGE> 50
CMI SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements for CMI and the notes
thereto and "CMI Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The selected consolidated
financial data (except other data) set forth below for each of the years in the
five-year period ended June 30, 1994 are derived from the audited consolidated
financial statements of CMI. The CMI consolidated financial statements as of
June 30, 1993 and 1994 and for each of the three years in the period ended June
30, 1994, have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus/Proxy Statement. The selected consolidated
financial data for the six months ended December 31, 1993 and 1994 and as of
December 31, 1993 and 1994 are derived from unaudited financial statements of
CMI which in the opinion of management reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
of the interim periods. Historical operating results are not necessarily
indicative of results that may be expected in any future period.
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------------------------------------------- --------------------
1990 1991 1992(1) 1993 1994(2) 1993(2) 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales........................ $145,851 $177,364 $199,003 $267,181 $369,017 $145,112 $205,855
Cost of products sold........ 111,608 136,457 153,246 198,368 273,415 103,694 150,613
-------- -------- -------- -------- -------- -------- --------
Gross margin................. 34,243 40,907 45,757 68,813 95,602 41,418 55,242
-------- -------- -------- -------- -------- -------- --------
Expenses:
Research and development... 2,600 2,817 5,021 8,242 13,203 5,788 10,207
Marketing and
administration........... 18,901 23,786 31,320 41,024 54,142 22,895 28,259
Amortization of intangible
assets................... 637 627 797 1,554 2,068 902 1,268
-------- -------- -------- -------- -------- -------- --------
Total expenses...... 22,138 27,230 37,138 50,820 69,413 29,585 39,734
-------- -------- -------- -------- -------- -------- --------
Operating income............. 12,105 13,677 8,619 17,993 26,189 11,833 15,508
Interest expense, net........ (1,573) (977) (639) (2,114) (2,289) (611) (2,023)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes... 10,532 12,700 7,980 15,879 23,900 11,222 13,485
Provision for income taxes... 3,890 4,699 2,892 5,875 8,844 4,377 4,989
-------- -------- -------- -------- -------- -------- --------
Net income................... $ 6,642 $ 8,001 $ 5,088 $ 10,004 $ 15,056 $ 6,845 $ 8,496
========= ========= ========= ========= ========= ========= =========
Net income per
share -- primary........... $ 0.80 $ 0.93 $ 0.56 $ 0.98 $ 1.20 $ 0.55 $ 0.67
========= ========= ========= ========= ========= ========= =========
Net income per share -- fully
diluted.................... $ 0.80 $ 0.93 $ 0.56 $ 0.98 $ 1.18 $ 0.55 $ 0.64
========= ========= ========= ========= ========= ========= =========
Average shares and
equivalents -- primary..... 8,416 8,636 9,111 10,168 12,572 12,523 12,725
Average shares and
equivalents -- fully
diluted.................... 8,416 8,636 9,111 10,168 13,922 12,836 15,093
</TABLE>
40
<PAGE> 51
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1993 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Bookings..................... $131,923 $183,462 $202,487 $293,123 $400,435 $223,371 $239,629
Backlog...................... 111,504 118,381 130,232 156,174 220,388 267,229 254,162
BALANCE SHEET DATA:
Working capital.............. $ 38,413 $ 45,911 $ 56,641 $ 63,190 $111,974 $115,414 $124,805
Total assets................. 89,987 98,481 147,240 169,625 293,983 259,262 296,988
Long-term obligations
including current
maturities................. 14,307 5,230 40,433 5,579 70,490 70,670 79,981
Total stockholders' equity... 55,735 67,496 75,285 119,188 140,745 130,437 153,393
</TABLE>
- ---------------
(1) In April 1992, CMI acquired all the shares of MRC for $33 million in cash.
An additional $11 million in contingent payments based on the income of MRC
was paid. The acquisition was accounted for as a purchase transaction. The
operating results of MRC have been included in operations from the
acquisition date.
(2) In October 1993, CMI acquired substantially all the assets and certain of
the liabilities of TTS for $28.7 million in cash and notes. The acquisition
was accounted for as a purchase transaction. The operating results of TTS
have been included in operations from the acquisition date.
41
<PAGE> 52
MNI SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements for MNI and the notes
thereto and "MNI Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein. The selected consolidated
financial data set forth below (except other data) for each of the years in the
five-year period ended June 30, 1994 are derived from the audited consolidated
financial statements of MNI. The MNI consolidated financial statements as of
June 30, 1993 and 1994 and for each of the three years in the period ended June
30, 1994, have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus/Proxy Statement. The selected consolidated
financial data for the six months ended December 31, 1993 and 1994 and as of
December 31, 1993 and 1994 are derived from unaudited financial statements of
MNI which in the opinion of management reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
of the interim periods. Historical operating results are not necessarily
indicative of results that may be expected in any future period.
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------------------- -------------------
1990 1991 1992 1993 1994 1993 1994
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales.................................... $9,507 $16,050 $22,503 $39,383 $36,976 $16,601 $28,813
Cost of products sold.................... 5,532 9,139 14,811 22,528 21,479 9,725 16,219
------ ------- ------- ------- ------- ------- -------
Gross margin............................. 3,975 6,911 7,692 16,855 15,497 6,876 12,594
------ ------- ------- ------- ------- ------- -------
Expenses:
Research and development............... 1,089 1,673 2,218 3,691 4,384 2,108 2,988
Marketing and administration........... 2,394 4,605 6,025 8,398 8,733 4,090 5,452
------ ------- ------- ------- ------- ------- -------
Total expenses.................. 3,483 6,278 8,243 12,089 13,117 6,198 8,440
------ ------- ------- ------- ------- ------- -------
Operating income (loss).................. 492 633 (551) 4,766 2,380 678 4,154
Interest expense and other, net.......... (77) (29) (231) (229) (275) (111) (109)
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes........ 415 604 (782) 4,537 2,105 567 4,045
Provision for income taxes(1)............ 2 8 (39) 836 493 133 1,328
------ ------- ------- ------- ------- ------- -------
Income (loss) before cumulative effects
of changes in accounting principles.... 413 596 (743) 3,701 1,612 434 2,717
Cumulative effects on prior years of
changes in accounting principles:
Method of accounting for income
taxes................................ -- -- 604 -- -- -- --
Method of accounting for overhead costs
in inventory......................... -- -- 345 -- -- -- --
====== ======== ======== ======== ======== ======== ========
Net income............................... $ 413 $ 596 $ 206 $ 3,701 $ 1,612 $ 434 $ 2,717
====== ======== ======== ======== ======== ======== ========
Net income per share..................... $ 0.06 $ 0.08 $ 0.02 $ 0.42 $ 0.18 $ 0.05 $ 0.29
====== ======== ======== ======== ======== ======== ========
Average shares and equivalents........... 6,470 7,487 8,277 8,782 9,074 9,016 9,242
</TABLE>
42
<PAGE> 53
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------------------------------------- -------------------
1990 1991 1992 1993 1994 1993 1994
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS)
OTHER DATA:
Bookings................................ $11,095 $22,784 $27,259 $33,902 $40,707 $17,470 $33,426
Backlog................................. 2,569 9,303 14,059 8,578 12,309 9,447 16,922
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital......................... $ 1,547 $ 5,340 $ 4,883 $ 9,381 $11,085 $ 9,969 $14,320
Total assets............................ 4,818 10,328 14,776 19,269 23,071 21,482 33,840
Long-term obligations, including current
maturities............................ 932 550 3,982 2,389 4,550 4,776 8,150
Total stockholders' equity.............. 2,348 6,777 6,996 12,222 13,836 12,651 16,588
</TABLE>
- ---------------
(1) Net of $219,000 or $0.03 per share in 1991 and $148,000 or $0.02 per share
in 1990 for an extraordinary item--the reduction of income taxes arising
from the carryforward of prior years' operating loss.
43
<PAGE> 54
CMI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
During the 1980s, CMI's sales were principally in the turnkey satellite
earth station and intelligence systems areas. Systems include a relatively high
percentage of large subcontracted items manufactured by others. Two key elements
of CMI's strategy are to increase product sales as a proportion of total sales,
where it believes the potential for growth in revenue and profits is greater,
and to increase the proprietary product content of its systems sales. Consistent
with this strategy, CMI has targeted the wireless product area and in April 1992
acquired MRC a manufacturer of digital and analog fixed-link and portable
microwave radios, and in October 1993 acquired substantially all of the assets
and certain of the liabilities of TTS, a manufacturer of digital and analog
microwave radios for the cellular, personal communications network and private
network markets. Wireless sales have grown from 8% of total sales in fiscal 1991
to 38% of total sales in fiscal 1994 and 41% of total sales in the six-month
period ended December 31, 1994, and CMI expects wireless sales to continue to
grow as a percentage of total sales.
CMI's international sales have expanded significantly, from 33% of total
sales in 1991 to 42% of total sales in fiscal 1994 and the six-month period
ended December 31, 1994. This growth has been in both satellite communications
and wireless, as investment in telecommunications infrastructure in foreign
countries has accelerated. CMI expects international sales to continue to grow
as a percentage of total sales.
CMI's overall gross margin reflects a blend of higher gross margin product
sales combined with lower gross margin systems sales. Gross margin as a
percentage of sales increased from 23% to 26% over the three fiscal years ended
June 30, 1994 and was approximately 27% in the six-month period ended December
31, 1994. This increase is due principally to a higher proportion of product
sales.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of CMI's total sales:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
------------------------- ---------------
1992 1993 1994 1993 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin....................................... 23.0 25.8 25.9 28.5 26.8
Research and development expenses.................. 2.5 3.1 3.6 4.0 5.0
Marketing and administration expenses.............. 15.8 15.4 14.7 15.8 13.7
Amortization of intangible assets.................. 0.4 0.6 0.6 0.6 0.6
Operating income................................... 4.3 6.7 7.1 8.1 7.5
Interest income (expense), net..................... (0.3) (0.8) (0.6) (0.4) (1.0)
Income before income taxes......................... 4.0 5.9 6.5 7.7 6.6
Net income......................................... 2.6 3.7 4.1 4.7 4.1
</TABLE>
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1993
Bookings and Backlog. Bookings were $239.6 million and $223.4 million for
the six months ended December 31, 1994 and 1993, respectively, representing an
increase of 7%. Bookings growth in commercial markets of approximately 14% more
than offset a 7% decline in U.S. government orders. International orders
represented 49% of total orders in the six month period ended December 31, 1994
compared to 46% of total orders in the six months ended December 31, 1993.
Orders for wireless and satellite communications products were up 36% and
accounted for all of the bookings growth. Orders for intelligence and satellite
communications systems each declined approximately 10% from the record levels of
the prior period.
44
<PAGE> 55
Backlog was $254.2 million and $267.2 million at December 31, 1994 and
1993, respectively, representing a decrease of 5%. The decrease was principally
due to an increase in product business relative to system business and
completion of deliveries against a multi-year U.S. government radio contract
booked in fiscal 1993. The proportion of backlog that was expected to be
delivered within twelve months was 75% and 85% as of December 31, 1994 and 1993,
respectively. This percentage decrease was due to a $40 million contract from
AT&T under which most deliveries will occur in fiscal 1996.
Sales. Sales were $205.9 million and $145.1 million for the six months
ended December 31, 1994 and 1993, respectively, representing an increase of 42%.
Sales increased in each of CMI's three primary product areas. Approximately 61%
of the increase was in wireless which includes the sales of TTS from the date of
acquisition in October 1993. Wireless sales represented 41% of total sales in
the first half of fiscal 1995 compared to 32% of total sales in the prior year
period. Satellite communications sales increased by 16% and represented 42% of
total sales. Most of the satellite communications increase was in product sales
rather than system sales. Intelligence systems sales increased 46% and
represented 16% of total sales. This increase was due to increased U.S.
government funding for the Airborne Reconnaissance Low program.
Sales also increased significantly in each major market sector.
International sales continued to lead CMI's growth, rising by 58%. About half of
the overall increase was in the international sector. This increase was due to
the growing demand for wireless and satellite networking products in expanding
the worldwide telecommunications infrastructure, both within and between
countries. International sales represented 42% of total sales in the period
compared to 37% in the prior year period.
Another trend was the continuing increase in wireless and satellite product
sales relative to lower margin intelligence and satellite system sales. Product
sales were up 63% in the first half of fiscal 1995 while system sales were up
17%. Thus, products represented 62% of total sales in the period, compared to
54% in the prior year period.
No single customer accounted for more than 10% of sales in either period.
However, CMI's total sales to all departments and agencies of the U.S.
government represented 26% of total sales in the period. Because CMI is
concentrating its investments in commercial areas, this percentage is expected
to continue to decline.
Gross Margin. Gross margin was $55.2 million and $41.4 million for the six
months ended December 31, 1994 and 1993, respectively, representing an increase
of 33%. Gross margin as a percentage of total sales was 26.8% and 28.5% for such
periods, respectively. Gross margins, which expanded sequentially from the 24.2%
recorded in the second half of fiscal 1994, declined relative to the six-month
period ended December 31, 1993 due to sales from the low margin backlog acquired
in the purchase of TTS and shipments of lower-margin satellite communications
systems.
Gross margins as a percentage of sales for products are generally in the
35% to 45% range, while turnkey satellite earth station and intelligence systems
typically yield gross margins in the 10% to 20% range. System sales include a
relatively high percentage of large subcontracted items to which CMI adds less
value and upon which customers allow minimal markup. In addition, engineering
costs in turnkey satellite earth stations and intelligence systems are customer
funded and are included in costs of products sold. CMI's strategy includes
increasing the proportion of product sales.
Research and Development. Research and development expenses were $10.2
million and $5.8 million for the six months ended December 31, 1994 and 1993,
respectively, representing an increase of 76%. Research and development expenses
as a percentage of sales were 5.0% and 4.0%, respectively, for such periods. CMI
anticipates that research and development expenses will continue to increase at
a faster rate than sales as wireless and satellite networking product sales
represent an increasingly higher percentage of total sales. In general,
engineering expenditures in turnkey satellite earth stations and intelligence
systems are customer funded and are included in cost of products sold.
Marketing and Administration. Marketing and administration expenses were
$28.3 million and $22.9 million for the six months ended December 31, 1994 and
1993, respectively, representing an increase of 23%. Marketing and
administration expenses as a percentage of sales were 13.7% and 15.8%,
respectively, for such
45
<PAGE> 56
periods. The percentage decrease is due to increased sales, particularly in the
satellite communications business area, without a corresponding increase in
marketing and administration expenses.
Amortization of Intangible Assets. Amortization expenses associated with
intangible assets were $1.3 million and $0.9 million for the six months ended
December 31, 1994 and 1993, respectively, representing an increase of 41%. The
increase was due to the amortization of purchased intangible assets recorded in
the acquisitions of TTS and MRC.
Operating Income. Operating income was $15.5 million and $11.8 million for
the six months ended December 31, 1994 and 1993, respectively, representing an
increase of 31%. Operating income as a percentage of total sales was 7.5% and
8.1% for periods, respectively. This percentage decline was due to lower gross
margins and higher research and development costs offset by lower marketing and
administration expenses, related to sales discussed above.
Interest Expense (Net). Net interest expense was $2.0 million and $0.6
million for the six months ended December 31, 1994 and 1993, respectively. In
the second quarter of fiscal 1994, CMI issued $65,200,000 of convertible
subordinated notes and used the proceeds principally to finance the acquisition
of TTS. Interest expense also increased due to the impact of the final $9.6
million cash payment to the former stockholders of MRC and extended payment
terms on certain international system contracts.
Provisions of Income Taxes. The provision for income taxes was $5.0
million and $4.4 million for the six months ended December 31, 1994 and 1993,
respectively. The effective tax rate was 37% and 39% for such periods,
respectively. CMI's effective tax rate for fiscal 1994 was 37%; however, the
estimated tax rate used for the six months ended December 31, 1993 was 39%. This
reduction in CMI's effective tax rate is due primarily to increased research and
development tax credits as a result of increased research and development
expenditures.
COMPARISON OF FISCAL YEARS 1994, 1993 AND 1992
Bookings and Backlog. Bookings were $400.4 million, $293.1 million and
$202.5 million in fiscal 1994, 1993 and 1991, respectively, representing
year-to-year increases of 37% in 1994 and 45% in 1993.
Bookings increased during the three-year period in each of CMI's principal
product areas and market sectors. The most significant increase was in the
wireless product area which includes the bookings of MRC and TTS after their
acquisitions in April 1992 and October 1993, respectively. Wireless bookings
accounted for 54% of the increase in bookings from 1992 to 1994. Wireless
bookings were 12% of total bookings in 1992 and increased to 33% in 1994.
Backlog was $220.4 million, $156.2 million and $130.2 million at the end of
1994, 1993 and 1992, respectively, representing year-to-year increases of 41% in
1994 and 20% in 1993. The proportion of such backlog that was expected to be
delivered within 12 months was 80%, 85% and 95% as of the end of 1994, 1993 and
1992, respectively. The percentage decrease in 1993 and 1994 was due to two
major multi-year U.S. government contract awards in the intelligence area.
Sales. Sales were $369.0 million, $267.2 million and $199.0 million in
1994, 1993 and 1992, respectively, representing year-to-year increases of 38% in
1994 and 34% in 1993. Sales increased in each of CMI's three primary product
areas. Approximately 68% of the increase over these two years was in wireless,
which includes the sales of MRC and TTS from the dates of acquisition in fiscal
1992 and fiscal 1994. Significant sales increases (28% of the increase over two
years) occurred in the satellite communication product area due to investments
in telecommunications infrastructure by foreign countries. Seven percent of the
increase over these two years was in intelligence systems.
Sales also increased significantly in each major market sector.
International sales continued to lead CMI's growth, rising by 40% in 1994 and by
58% in 1993. About half of the overall sales increase over these two years was
in the international sector. This increase was due to the growing demand for
wireless and satellite networking products in expanding the worldwide
telecommunication infrastructure, both within and
46
<PAGE> 57
between countries. This growth was broad-based, but strongest in Asia.
International sales represented 42%, 41% and 35% of total sales for 1994, 1993
and 1992, respectively.
Another trend was the continuing increase in wireless and satellite product
sales relative to lower margin intelligence and satellite system sales. Product
sales were up approximately 90% in 1994 while systems sales were essentially
unchanged. Thus, products represented 57% of total 1994 sales compared to 41% of
1993 sales.
No single customer accounted for more than 10% of sales in 1994, 1993 or
1992. However, CMI's total sales to all departments and agencies of the U.S.
Government represented 28%, 31% and 33% of total sales in 1994, 1993 and 1992,
respectively. Because CMI is concentrating its investments in commercial areas,
this downward trend is expected to continue.
Gross Margin. Gross margin was $95.6 million, $68.8 million and $45.8
million in 1994, 1993 and 1992, respectively, representing year-to-year
increases of 39% in 1994 and 50% in 1993. Gross margins as a percentage of sales
for products are generally in the 35% to 45% range, while turnkey satellite
earth station and intelligence systems typically yield gross margins in the 10%
to 20% range. System sales include a relatively high percentage of large
subcontracted items to which CMI adds less value and upon which customers allow
minimal markup. In addition, engineering costs in turnkey satellite earth
stations and intelligence systems are customer funded and are included in costs
of products sold. CMI's strategy includes increasing the proportion of product
sales.
Gross margin as a percentage of sales increased to 25.9% in 1994 from 25.8%
in 1993 and 23.0% in 1992. These increases were principally due to the
increasing proportion of wireless and satellite networking product sales
relative to system integration sales. The impact of this favorable trend was
offset in 1994 by sales of low margin backlog acquired in the purchase of TTS.
Research and Development. Research and development expenses were $13.2
million, $8.2 million and $5.0 million in 1994, 1993 and 1992, respectively,
representing year-to-year increases of 60% in 1994 and 64% in 1993. Research and
development expenses as a percentage of sales were 3.6%, 3.1% and 2.5% in 1994,
1993 and 1992, respectively. CMI anticipates that research and development
expenses will continue to increase at a faster rate than sales as wireless and
satellite networking product sales represent an increasingly higher percentage
of total sales. In general, engineering expenditures in turnkey satellite earth
stations and intelligence systems are customer funded and are included in cost
of products sold.
Marketing and Administration. Marketing and administration expenses were
$54.1 million, $41.0 million and $31.3 million in 1994, 1993 and 1992,
respectively, representing year-to-year increases of 32% in 1994 and 31% in
1993. Marketing and administration expenses as a percentage of total sales were
14.7%, 15.4% and 15.8% in 1994, 1993 and 1992, respectively. In general, the
1994 and 1993 increases relate to increased expenses associated with CMI's
strategy of expanding its wireless operations, as well as increased expenses in
satellite communications, where CMI continues to develop new international and
domestic markets. In addition, the 1994 increase includes eight months of
expenses at TTS. The 1992 expense included $1.9 million of non-recurring charges
(1.0% of sales). CMI anticipates that marketing and administration expense, as a
percent of sales, will remain in the 14 to 15% range, excluding the impact of
any future acquisitions.
Amortization of Intangible Assets. Amortization expenses associated with
intangible assets were $2.1 million, $1.6 million and $0.8 million in 1994, 1993
and 1992, respectively, representing increases of 33% in 1994 and 95% in 1993.
The increase in 1994 and 1993 were due to the amortization of purchased
intangible assets recorded in the acquisitions of TTS and MRC. Amortization will
increase in 1995 as a result of the additional $9.6 million paid to the former
stockholder of MRC in August 1994 and to the fact that 1995 will include a full
year's amortization of the purchased intangible assets related to the TTS
acquisition.
Operating Income. Operating income was $26.2 million, $18.0 million and
$8.6 million in 1994, 1993 and 1992, respectively, representing increases of 46%
in 1994 and 109% in 1993. Operating income as a percentage of total sales was
7.1%, 6.7% and 4.3% in 1994, 1993 and 1992, respectively. The increase in
operating income as a percentage of sales in 1994 and 1993 were due principally
to the increase in gross
47
<PAGE> 58
margins in 1993 and, in both years, the reduction, relative to sales, in
marketing and administration expense. These improvements more than offset the
increase in research and development expense as a percentage of sales.
Interest Expense (Net). Net interest expense was $2.3 million, $2.1
million and $0.6 million in 1994, 1993 and 1992, respectively. Interest expense
increased in 1993 and 1994 in order to finance the TTS and MRC acquisitions, and
is expected to increase further in 1995 due to the full year's interest on the
convertible subordinated notes issued in fiscal 1994.
Provisions for Income Taxes. The Financial Accounting Standards Board has
issued Statement No. 109, "Accounting for Income Taxes" (SFAS 109), which
establishes a new method of accounting for income taxes. CMI has adopted this
method effective July 1, 1992. This method supersedes the previous accounting
standard for income taxes, SFAS 96, which CMI had adopted in fiscal 1988. The
cumulative effect of this change is immaterial and prior years have not been
restated. Provision for income taxes was $8.8 million, $5.9 million and $2.9
million in 1994, 1993 and 1992, respectively. This represents an effective tax
rate of 37%, 37% and 36% in 1994, 1993 and 1992, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, CMI had working capital of $124.8 million, including
$4.4 million of cash and cash equivalents, compared with working capital of
$115.4 million, including cash and cash equivalents of $27.7 million, at
December 31, 1993. This increase was the result of profitable operations and the
impact of the $61.1 million net proceeds from CMI's sale of long-term
convertible subordinated notes in December 1993. Net cash used in operating
activities was $7.0 million and $14.3 million in the six months ended December
31, 1994 and 1993, respectively. The negative operating cash flow in the current
period was due to the impact of extended payment terms on certain international
system contracts booked in fiscal 1994, while the negative operating cash flow
in the prior period was due to the need to fund the post-acquisition working
capital requirements of TTS.
During the first half of fiscal 1995, funds were generated from operating
income (including depreciation and amortization) and were used to finance
increased receivable balances and payments of June 30, 1994 payables and
accruals, principally payments under incentive agreements and employee benefit
plans. The net result was an operational cash outflow of $7.0 million. CMI's
investing activities during the first half of fiscal 1995 were a payment, under
the April 1992 MRC acquisition agreement, to MRC's stockholders of $9.6 million
and for capital equipment additions of $5.1 million. Total cash outflow for
investing activities was $15.0 million. Sale of CMI Common Stock to CMI
employees under on-going CMI Option Plans resulted in a cash inflow of $3.7
million. During the six months ended December 31, 1994, CMI borrowed $9.7
million under its credit lines in order to finance the operating cash outflows
and the MRC additional acquisition payment. The above activity was responsible
for a net decrease in cash of $8.8 million for the first half of fiscal 1995.
Compared to the prior year period, inventory turnover improved and the
average receivable collection period lengthened. Due to operational efficiencies
in both wireless and satellite communications product areas, inventory turnover
increased from 3.6 turns to 4.4 turns. Due to the extended payment terms on
certain international system contracts, average receivables increased to 102
days from 79 days. CMI anticipates that average receivables will be reduced into
the 80-90 day range by the last quarter of fiscal 1995.
In February 1994, CMI renewed two unsecured committed credit facilities,
totaling $33.5 million, $25 million of which expires in October 1995 and $8.5
million of which expires in April 1995. At December 31, 1994, there were $9.7
million of borrowings and $11.0 million of standby letters of credit outstanding
under these credit lines, leaving $12.8 million of available credit lines.
CMI believes that its current cash position, funds generated from
operations and funds available from its credit facilities will be adequate to
meet CMI's requirements for working capital, capital expenditures, debt service
and external investments for the foreseeable future.
48
<PAGE> 59
At June 30, 1994, CMI had working capital of $112.0 million, including
$13.3 million of cash and cash equivalents, compared with working capital of
$63.2 million, including $5.3 million of cash and cash equivalents, at June 30,
1993. Net cash used in operating activities was $20.7 million in 1994 compared
to cash provided by operations of $10.4 million in 1993 and $9.0 million in
1992. Two principal factors accounted for the decline in performance in 1994.
First, TTS, at acquisition, required an infusion of cash of approximately $25
million. Second, in order to penetrate certain key international markets, CMI
provided extended payment terms covering a higher percentage of its 1994
second-half international systems sales than was generally the case in the past.
In addition, a contract assumed by the Company in connection with its
acquisition of TTS included extended payment terms and also resulted in unbilled
receivables. Correspondingly, unbilled receivables increased from $1.9 million
at June 30, 1993 to $21.4 million at June 30, 1994. CMI expects to collect these
receivables in fiscal 1995. Due to these factors, accounts receivable turnover
decreased in 1994. Due to the extended payment terms on certain international
projects, average receivables increased to 82 days of sales in 1994 from 71 days
in 1993.
Capital expenditures were $11.2 million in 1994 compared to $10.8 million
in 1993 and $8.0 million in 1992. Capital expenditures in 1995 are expected to
be approximately at the same level as in 1993-94.
During fiscal 1994, cash was generated from the sale of $57.5 million of
ten-year 5 1/4% convertible subordinated notes due 2003 and $5,700,000 of
five-year 5% convertible subordinated notes due 1998. The ten-year notes are
convertible at the option of the holder into CMI Common Stock at a conversion
price of $28.4375 per share and the five-year notes are convertible at $28.50
per share. The net proceeds of approximately $61.1 million were used to retire
the bank loan incurred to fund the acquisition and working capital needs of TTS.
CMI paid $28.7 million for the net assets of TTS, consisting of $23.7 million in
cash and a $5 million, five-year 5% convertible subordinated note, convertible
(after resolution of certain acquisition-related matters) at the option of the
holder into common stock of CMI at a conversion price of $28.50 per share. Of
the $5 million note, $3 million was offset against advances from TTS to its
parent prior to the closing of the acquisition and is no longer payable.
In fiscal 1993, CMI sold 2,530,000 shares of its common stock at $13.25 per
share. The net proceeds of approximately $31.2 million along with current cash
balances were used to retire the $35 million bridge loan incurred in connection
with the 1992 acquisition of MRC.
49
<PAGE> 60
HISTORICAL QUARTERLY RESULTS OF CMI
The following table presents consolidated financial results for each of the
last ten quarters in the period ended December 31, 1994. These consolidated
financial results are unaudited. In the opinion of management, however, they
have been prepared on the same basis as the audited consolidated financial
information and include all adjustments necessary for a fair presentation of the
information set forth therein. The operating results for any quarter are not
necessarily indicative of the results that may be expected for any future
period.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
QUARTER ENDED:
-----------------------------------------------------------------------------------------------------
FISCAL 1993 FISCAL 1994
------------------------------------- --------------------------------------- FISCAL 1995
SEPT. SEPT. -------------------
30 DEC. 31 MAR. 31 JUNE 30 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales..................... $60,114 $62,742 $72,052 $72,273 $62,516 $82,596 $104,702 $119,203 $102,218 $103,637
Cost of products sold..... 44,535 46,777 53,961 53,095 44,209 59,485 78,140 91,581 75,673 74,940
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Gross margin.............. 15,579 15,965 18,091 19,178 18,307 23,111 26,562 27,622 26,545 28,697
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Expenses:
Research and
development........... 1,805 1,989 2,183 2,265 2,246 3,542 4,157 3,258 4,859 5,348
Marketing and
administration........ 9,379 9,365 10,724 11,556 10,261 12,634 15,244 16,003 13,835 14,424
Amortization of
intangible assets..... 389 388 388 389 382 520 543 623 634 634
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total expenses........ 11,573 11,742 13,295 14,210 12,889 16,696 19,944 19,884 19,328 20,406
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Operating income.......... 4,006 4,223 4,796 4,968 5,418 6,415 6,618 7,738 7,217 8,291
Interest income (expense),
net..................... (680) (664) (728) (42) 18 (629) (840) (838) (864) (1,159)
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Income before income
taxes................... 3,326 3,559 4,068 4,926 5,436 5,786 5,778 6,900 6,353 7,132
Provision for income
taxes................... 1,230 1,315 1,508 1,822 2,120 2,257 1,913 2,554 2,350 2,639
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net income................ $ 2,096 $ 2,244 $ 2,560 $ 3,104 $ 3,316 $ 3,529 $ 3,865 $ 4,346 $ 4,003 $ 4,493
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Net income per
share -- primary........ $ 0.23 $ 0.24 $ 0.25 $ 0.26 $ 0.27 $ 0.28 $ 0.30 $ 0.35 $ 0.32 $ 0.35
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Average shares and
equivalents -- primary.. 9,116 9,363 $10,122 12,066 12,450 12,596 12,828 12,414 12,578 12,872
</TABLE>
The following table sets forth, for the periods indicated, certain income
and expense items expressed as a percentage of CMI's total sales:
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
QUARTER ENDED:
-----------------------------------------------------------------------------------------------------
FISCAL 1993 FISCAL 1994
------------------------------------- --------------------------------------- FISCAL 1995
SEPT. SEPT. -------------------
30 DEC. 31 MAR. 31 JUNE 30 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin.............. 25.9 25.4 25.1 26.5 29.3 28.0 25.4 23.2 26.0 27.7
Research and development
expenses................ 3.0 3.2 3.0 3.1 3.6 4.3 4.0 2.7 4.8 5.2
Marketing and
administration
expenses................ 15.7 14.9 14.9 16.0 16.4 15.3 14.6 13.4 13.5 13.9
Amortization of intangible
assets.................. 0.6 0.6 0.5 0.5 0.6 0.6 0.5 0.5 0.6 0.6
Operating income.......... 6.6 6.7 6.7 6.9 8.7 7.8 6.3 6.5 7.1 8.0
Interest income (expense),
net..................... (1.1) (1.0) (1.0) (0.1) 0.0 (0.8) (0.8) (0.7) (0.9) (1.1)
Income before income
taxes................... 5.5 5.7 5.7 6.8 8.7 7.0 5.5 5.8 6.2 6.9
Net income................ 3.5 3.6 3.6 4.3 5.3 4.3 3.7 3.6 3.9 4.3
</TABLE>
50
<PAGE> 61
MNI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, MNI's Financial Statements and Notes thereto
included elsewhere in this Prospectus. Historical results are not necessarily
indicative of trends in operating results for any future period.
OVERVIEW OF MNI OPERATIONS
MNI was incorporated as a Texas corporation in 1981. During MNI's first
three years of operations it concentrated on product development, seeking market
opportunities for telecommunications equipment. In 1986, MNI began producing and
shipping small quantities of digital and video microwave radio for the United
States marketplace. For the period 1986 to early 1989 MNI primarily manufactured
and sold microwave radio alternatives to copper or fiber lease lines to private
network users. With the advent of telephony competition and reduced cost lease
lines MNI focused on international opportunities. In early 1989 MNI successfully
collaborated with Northern Telecom in establishing significant sales into Mexico
and South America. MNI has since developed its own sales and distribution
network throughout the world, utilizing sales offices and in-country
representatives.
MNI's revenues have grown at a compound annual growth rate of approximately
30% since 1990, all of which has been generated from internal growth and product
diversification. During its fiscal year ended June 30, 1994, MNI derived
approximately 82% of its revenues from sales of its manufactured short and long
haul, low to medium capacity microwave radio products, approximately 12% of its
revenues from sales of equipment purchased and resold to compliment its
manufactured radios and approximately 6% of its revenues from installation,
repair and other similar services. Sales of manufactured radios typically
generate higher gross profit margins than the resale of equipment or the
provision of services.
MNI's annual and quarterly operating results are affected by a number of
factors, including MNI's manufactured product mix, the level and timing of
orders placed by its customers, price competition, overall revenue mix between
products and services, delivery of components and subsystems from vendors,
political instability, regulatory developments and general economic conditions
and market demand.
51
<PAGE> 62
RESULTS OF OPERATIONS
The following table sets forth certain data from MNI's Consolidated
Statements of Operations for the fiscal years ended June 30, 1992, 1993 and
1994, and the six months ended December 31, 1993 and 1994, expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31
------------------------- ---------------
1992 1993 1994 1993 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold.............................. 65.8 57.2 58.1 58.6 56.3
----- ----- ----- ----- -----
Gross margin..................................... 34.2 42.8 41.9 41.4 43.7
----- ----- ----- ----- -----
Expenses:
Marketing and administration....................... 26.8 21.3 23.6 24.6 18.9
Research and development........................... 9.9 9.4 11.9 12.7 10.4
----- ----- ----- ----- -----
36.7 30.7 35.5 37.3 29.3
----- ----- ----- ----- -----
Operating income (loss)............................ (2.5) 12.1 6.4 4.1 14.4
Interest expense, net.............................. (1.0) (.6) (.7) (.7) (.4)
----- ----- ----- ----- -----
Income (loss) before income taxes.................. (3.5) 11.5 5.7 3.4 14.0
Provision for income taxes......................... .2 2.1 1.3 .8 4.6
----- ----- ----- ----- -----
Income (loss) before cumulative effects of changes
in accounting principles......................... (3.3) 9.4 4.4 2.6 9.4
----- ----- ----- ----- -----
Cumulative effects of changes in accounting
principles....................................... 4.2 -- -- -- --
----- ----- ----- ----- -----
Net Income......................................... .9% 9.4% 4.4% 2.6% 9.4%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1993
Sales. Sales were $28.8 million and $16.6 million for the six months ended
December 31, 1994 and 1993, respectively, representing an increase of 73%. This
increase reflects a 75% increase in the number of units shipped and an average
increase of $1,000 per unit in the average sales price per unit. The sales
increase reflects new contracts obtained in Eastern Europe and an increase in
the number of radios sold in Australia to existing customers. This increase was
partially offset by reductions of shipments to Northern Telecom under the terms
of its supply agreement. MNI has become less reliant on its relationship with
Northern Telecom and expects sales under this supply agreement, which expires in
May 1995, will continue to decline as a percentage of total sales. Service sales
decreased by 48% primarily due to a decline in the amount of installations
performed for customers in Mexico.
International sales continued to account for MNI's growth, rising by 3% to
96% of total sales in the period compared to 93% with the prior year period.
MNI had sales to two customers which accounted for 27% and 19%,
respectively, of total sales for the six months ended December 31, 1994. MNI had
sales to one customer which accounted for 28% of total sales for the six months
ended December 31, 1993. MNI expects that a majority of its sales in the near
term will continue to be concentrated among a relatively small number of
customers.
Gross Margin. Gross margin was $12.6 million and $6.9 million for the six
months ended December 31, 1994 and 1993, respectively, representing an increase
of 83%. Gross margin as a percentage of total sales was 43.7% and 41.4% for such
periods, respectively. The increase in gross margin as a percentage of sales was
due to an average increase in unit sales price of $1,000 per unit resulting
primarily from the introduction in 1994 of the 16 QAM radio product line and a
higher shipment level of 15 GHz 4/8 E1 radios, both of which are relatively
higher priced products. In addition, gross margin increased due to the increased
proportion of
52
<PAGE> 63
higher margin radio sales to total sales, as radio sales typically generate
gross margins in the 30% to 55% range, while service and non-value added
equipment sales generate margins in the 25% to 35% range.
Research and Development. Research and development expenses were $3.0
million and $2.1 million for the six months ended December 31, 1994 and 1993,
respectively, representing an increase of 43%. Research and development expenses
as a percentage of sales were 10.4% and 12.7%, respectively, for such periods.
MNI anticipates that research and development expenses will continue to
increase.
Marketing and Administration. Marketing and administration expenses were
$5.5 million and $4.1 million for the six months ended December 31, 1994 and
1993, respectively, representing an increase of 34%. Marketing and
administration expenses as a percentage of sales were 18.9% and 24.6%,
respectively, for such periods. The percentage decrease is due to increased
sales, particularly to existing international customers, without a corresponding
increase in marketing and administration expenses.
Operating Income. Operating income was $4.2 million and $.7 million for
the first six months ended December 31, 1994 and 1993, respectively,
representing an increase of 600%. Operating income as a percentage of sales was
14.4% and 4.1%, respectively, for such periods. The percentage increase was due
to higher gross margins and lower operating expenses, related to the increased
sales as noted above.
Interest Expense, Net. Interest expense was $.1 million for the six months
ended December 31, 1994 and 1993. Interest expense increased due to an increase
in the prime rate and the increased borrowing level on MNI's credit facilities
at its bank. The increased borrowing level partially resulted from MNI granting
extended payment terms on certain international system contracts.
Provision for Income Taxes. The provision for income taxes was $1.3
million and $.1 million for the six months ended December 31, 1994 and 1993,
respectively. The effective tax rate was 33% and 24%, respectively. The
effective tax rates were lower than the statutory rates due to MNI's use of a
foreign sales corporation subsidiary and of net operating loss carryforwards.
COMPARISON OF FISCAL YEARS 1994, 1993 AND 1992
Sales. Sales were $37.0 million, $39.4 million and $22.5 million in 1994,
1993 and 1992, respectively, representing a 6% decrease in 1994 and a 75%
increase in 1993. The 1994 decrease resulted from lower product shipments to
Northern Telecom and to Venezuelan and Australian cellular customers, as well as
lower installation revenues from the Venezuelan market. Product demand from
Australia declined as the customer used 1994 to begin construction of its
cellular network with radios shipped in 1993. Product and service demand in
Venezuela also declined as the customer substantially completed its core
cellular networks in early 1994. The sales decline in 1994 was partially offset
by a 5% increase in the number of radios shipped, with the introduction of a 1E1
low capacity, relatively inexpensive radio. Introduction of this lower priced
radio increased volume but caused the average sales price to decline by $1,000
per unit.
The 1993 sales increase is attributable to MNI receiving significant orders
from new customers developing cellular networks in Australia and Mexico, and
continued sales growth to Northern Telecom. The number of radios shipped
increased 103%, as the average price per radio sold decreased by $1,000 compared
to 1992. The average sales price decline was due to increased competition in
cellular markets and MNI's desire to capture orders in selected developing
countries.
International sales were 93%, 93% and 85% of total sales in 1994, 1993 and
1992, respectively. The majority of these sales were to meet the growing demand
for wireless networking products in the expanding worldwide telecommunication
infrastructure, primarily in cellular network applications. This growth was
broad based, but strongest in Mexico, South America and the Asia/Pacific
regions.
MNI had sales to three customers in 1994 which accounted for 20%, 16% and
11%, respectively, of total sales. MNI had sales to three customers in 1993
which accounted for 30%, 17% and 12%, respectively, of total sales. In 1992, MNI
had sales to two customers which accounted for 36% and 17%, respectively, of
total sales. MNI expects that a small number of customers will continue to
account for a majority of its international sales in fiscal 1995.
53
<PAGE> 64
Gross Margin. Gross margin was $15.5 million, $16.9 million and $7.7
million in 1994, 1993 and 1992, respectively, representing an 8% decrease in
1994 and a 119% increase in 1993. The changes in year-to-year margins generally
resulted from the changes in year-to-year sales levels. Gross margins as a
percentage of sales for radios were generally in the 30% to 55% range, while
service and low markup subcontracted items typically generated gross margins in
the 25% to 35% range. MNI's strategy includes increasing the proportion of radio
sales to total sales.
Gross margin as a percentage of sales increased from 34.2% in 1992 to 42.8%
in 1993, but decreased to 41.9% in 1994. The increase in 1993 was due to an
improvement of five percentage points in both equipment sales margins and
service sales margins. MNI lowered its average radio cost in 1993 by
approximately $1,400 due to volume inventory purchases, lower overhead costs per
radio and subcontracting some printed circuit board assembly to a third party.
This cost reduction accounted for most of the increase in gross margins of
products, with an improved product sales mix of higher margin 15 GHz radios
accounting for the remainder. Service margins improved due to increased
installation revenues in Mexico and controlled cost of services through the
Company's Mexican subsidiary. The decrease in 1994 gross margins resulted from
the introduction of the 1E1 radio, which has a lower margin than MNI's higher
capacity radios, and to competitive reductions in sales prices to obtain large
orders.
Research and Development. Research and development expenses were $4.4
million, $3.7 million and $2.2 million in 1994, 1993 and 1992, respectively.
Research and development expenses as a percentage of total sales were 11.9%,
9.4% and 9.9% in 1994, 1993 and 1992, respectively. The increase in 1994 as a
percentage of sales was due to the lower sales level in 1994 as well as
increased costs related to development of the QAM and 1E1 radios, introduced in
fiscal 1994, and the creation of a research and development subsidiary in
Australia. MNI anticipates that research and development expenses will continue
to increase.
Marketing and Administration. Marketing and administration expenses were
$8.7 million, $8.4 million and $6.0 million in 1994, 1993 and 1992,
respectively, representing year-to-year increases of 4% in 1994 and 40% in 1993.
Marketing and administration expenses as a percentage of sales were 23.6%, 21.3%
and 26.8% in 1994, 1993 and 1992, respectively. In general, the 1994 increase in
dollar amount and percentage of revenue resulted from the increased marketing
and sales costs in serving the international market, the expansion of the
Mexican subsidiary and Singapore sales office, and increased technical service
personnel to support 1994 and anticipated 1995 international sales. The decrease
in expenses in 1993 as a percentage of sales was due to the growth in sales. MNI
anticipates that marketing and administration expense, as a percent of sales,
will decrease to the 18% to 20% range, excluding the impact of the merger with
CMI.
Operating Income (Loss). Operating income (loss) was $2.4 million, $4.8
million and ($.6) million in 1994, 1993 and 1992, respectively. Operating income
(loss) as a percentage of sales was 6.4%, 12.1% and (1.0%) in 1994, 1993 and
1992, respectively. The decrease in operating income as a percentage of sales in
1994 was due to the decrease in gross margins and the increase in operating
expenses. Due to the significant growth in 1993 sales, MNI expanded its
workforce to serve its growing international customer base and to continue
development of new products. MNI chose not to decrease its operating costs
significantly in 1994 despite the decrease in sales compared to 1993. The
increase in operating income in 1993 resulted from improved gross margin on a
higher sales level and the reduction, relative to sales, in marketing and
administration and research and development expenses.
Interest Expense, Net. Net interest expense was $.2 million in 1994, 1993
and 1992. Interest expense is expected to increase in 1995 due to the increase
in interest rates and MNI's increased borrowing for working capital purposes.
Provisions for Income Taxes. MNI adopted Statement No. 109, "Accounting
for Income Taxes," of the Financial Accounting Standards Board effective July 1,
1991. The cumulative effect on prior years of this change was a $.6 million
increase in 1992 income. Provision for income taxes was $.5 million, $.8 million
and ($.6) million in 1994, 1993 and 1992, respectively. This represents an
effective tax rate of 23% and 18% in 1994 and 1993, respectively. The
differences between the effective and statutory tax rates in both 1994 and 1993
were due to the foreign sales corporation subsidiary and research and
development tax credits. MNI
54
<PAGE> 65
expects its effective tax rate will continue to be lower than the statutory rate
due to the foreign sales corporation and related high percentage of foreign
sales.
QUARTERLY RESULTS
The following table sets forth certain unaudited statement of operations
data for the six quarters ended December 31, 1994. This data has been derived
from unaudited consolidated financial statements and should be read in
conjunction with MNI's audited financial statements and notes thereto included
elsewhere in this Prospectus. Such quarterly results are not necessarily
indicative of future results of operations.
STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
FISCAL 1994 FISCAL 1995
----------------------------------------- -------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Sales................................. $8,804 $ 7,797 $10,370 $10,005 $ 12,921 $15,892
Cost of products sold................. 5,069 4,656 5,758 5,996 7,198 9,021
-------- ------- ------- ------- -------- -------
Gross margin........................ 3,735 3,141 4,612 4,009 5,723 6,871
Expenses:
Research and development............ 1,110 998 1,080 1,196 1,320 1,668
Marketing and administration........ 2,035 2,055 2,123 2,520 2,587 2,865
-------- ------- ------- ------- -------- -------
Operating income...................... 590 88 1,409 293 1,816 2,338
Interest expense, net................. (45) (66) (86) (78) (80) (29)
-------- ------- ------- ------- -------- -------
Income before income taxes............ 545 22 1,323 215 1,736 2,309
Provision for income taxes............ 127 6 309 51 561 767
-------- ------- ------- ------- -------- -------
Net income............................ $ 418 $ 16 $ 1,014 $ 164 $ 1,175 $ 1,542
====== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth the percentage relationship of certain items
to total revenues with regard to MNI's results of operations for the six
quarters ended December 31, 1994.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
FISCAL 1994 FISCAL 1995
-------------------------------------------- --------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin......................... 42.4 40.3 44.5 40.1 44.3 43.2
Marketing and administration
expense............................ 23.1 26.4 20.5 25.2 20.0 18.0
Research and development expense..... 12.6 12.8 10.4 12.0 10.2 10.5
Operating income..................... 6.7 1.1 13.6 2.9 14.1 14.7
Interest expense and other........... .5 .8 .8 .8 .6 .2
Income before income taxes........... 6.2 .3 12.8 2.1 13.5 14.5
Net income........................... 4.7 .3 9.8 1.7 9.1 9.7
</TABLE>
55
<PAGE> 66
LIQUIDITY AND CAPITAL RESOURCES
MNI has financed its operations to date through the private placements of
its equity, equipment leases, bank borrowings and cash generated from
operations. Principal sources of liquidity at December 31, 1994 consisted of
$501,000 in cash and cash equivalents, and $8.0 million of credit facilities
under two loan agreements with a commercial bank, which expire in November 1997,
of which $.7 million was unused and available at December 31, 1994. Such
agreements contain financial covenants and restrictions relating to various
matters including net worth, current ratio, worth to debt ratio, and corporate
changes, including being a party to a merger or consolidation, and restrictions
on the payment of dividends and limitations on capital expenditures.
Net cash provided by (used in) operating activities was $1.9 million and
($0.6) million for fiscal 1993 and 1994, respectively, and ($1.8) million for
the six months ended December 31, 1994.
Cash used for investing activities was $1.1 million and $1.0 million for
fiscal 1993 and 1994, respectively, and $2.0 million for the six months ended
December 31, 1994. Cash used for investing activities has consisted of capital
expenditures. MNI expects to acquire approximately $2.5 million of capital
equipment by the end of fiscal 1995, consisting primarily of test equipment for
production and testing of its products.
Cash provided by financing activities in fiscal 1994 was $2.0 million.
During the six months ended December 31, 1994, $3.6 million was provided by
financing activities, primarily from bank borrowings and capital leases.
MNI has a $6.0 million line of credit with Texas Commerce Bank National
Association ("TCB") which expires in November 1997. The line, bearing interest
at prime, is secured by accounts receivable, inventory and general intangibles.
The Borrowing base is limited to 80% of eligible accounts receivable and 20% of
eligible inventory (as defined in the loan agreement). Under the terms of the
loan agreement, MNI is required to maintain certain ratios of current assets to
current liabilities, maintain a specified level of net worth, meet a maximum
debt to worth ratio, and achieve a minimum fixed charge coverage ratio. The line
of credit includes commitment fees, paid quarterly, of .25% of the unused
portion of the line of credit. $700,000 of this line of credit was unused and
available at December 31, 1994.
MNI also has a term note with TCB which bears interest at the prime rate
and matures in November 1997. The note is secured by accounts receivable,
inventory, general intangibles and computer equipment. The outstanding balance
as of December 31, 1994 was $2.0 million.
MNI believes that after consummation of the Merger, its cash requirements
will be met by MNI's cash generated from operations and capital furnished by
CMI.
56
<PAGE> 67
INFORMATION CONCERNING CMI
BUSINESS
California Microwave, Inc. designs, manufactures and markets sophisticated
systems and products used worldwide in satellite and wireless communications for
the transmission of voice, data, facsimile and video. CMI applies its expertise
in microwave radio technologies to: satellite earth stations and equipment;
microwave radios for wireless applications; and electronic intelligence systems.
California Microwave is a leading provider of both satellite earth stations used
for satellite communications and digital and analog microwave radios for the
cellular, personal communications network and private network markets.
CMI sells its products through a variety of channels for use by many of the
world's principal providers of telecommunications services. These include AT&T,
MCI, Sprint, GTE, COMSAT Corporation, British Telecom, and telephone companies
around the world. Other users of CMI's products include private networks, such
as broadcast and cable television operators, utilities and other major
corporations, and municipal, state and national governments. California
Microwave believes that it is among the limited number of key suppliers to these
entities because of its proven track record of technical performance and
reliability, customer support and cost effectiveness.
CMI acquired through its subsidiary, California Microwave--TeleCom
Transmission Systems, Inc., substantially all of the assets and certain of the
liabilities of TTS on October 26, 1993. TTS's product line consists of digital
and analog microwave radios for the cellular, personal communications network
and private network markets. CMI paid $28.7 million for the net assets of TTS at
the closing, consisting of $23.7 million in cash and a $5 million, five-year 5%
convertible subordinated note, convertible (after the resolution of certain
acquisition-related matters) at the option of the holder into Common Stock of
CMI at a conversion price of $28.50 per share. Of the $5 million note, $3
million was offset against advances from TTS to its parent prior to the closing
of the acquisition and is no longer payable. A contingent payment would have
been payable if specified TTS related sales for the 18-month period commencing
July 1, 1993 had exceeded $117 million. CMI does not expect that any payments
pursuant to this contingent payment provision will be required. As a part of the
transaction, Motorola, Inc. purchased a $5.7 million, five-year 5% convertible
subordinated note, convertible at the option of the holder into Common Stock of
CMI at a conversion price of $28.50 per share. Motorola, Inc. also extended its
equipment purchase agreement with TTS through October, 1998.
In December 1993, CMI completed a $57,500,000 offering of 5 1/4% percent
convertible subordinated notes due 2003 and having an initial conversion price
of $28.4375 per share. The net proceeds of approximately $55,400,000 were used
principally to repay outstanding indebtedness under CMI's bank credit
agreements, with the balance to be used for general corporate purposes.
In August 1994, CMI paid the former stockholders of MRC $9,600,000,
bringing to $11,000,000 the total amount paid to such stockholders under the
contingent payment agreement entered into at the time of the acquisition of MRC.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
Telecommunications Market. The demand for improved telecommunications is
increasing worldwide as emerging economies seek to modernize, and as
increasingly information intensive developed countries introduce new
telecommunications services. The telecommunications industry has expanded
rapidly during the last decade, principally due to technological advances and
regulatory changes in the United States and internationally. Advances in
technology have lowered per-unit communications costs, increased product
reliability, and encouraged a proliferation of new and enhanced communications
products and services. Regulatory initiatives (such as the breakup of the Bell
system and the assignment of radio frequency spectrum for cellular telephone
services) have enhanced competition, permitted the opening of new markets and
provided incentives for the development of new products.
57
<PAGE> 68
Alternative Transmission Media. Customers for telecommunications equipment
must weigh the relative costs and advantages of the four presently available
transmission media: copper cable, fiber optic cable, satellite systems and
terrestrial microwave radio systems.
- Copper cable, the traditional transmission medium most familiar to
consumers, is being replaced and supplemented by the other media,
particularly for high-volume and long-distance transmissions where
it has substantial capacity, cost and reliability limitations.
- Fiber optic cable is best suited to high-volume, point-to-point,
short- or long-distance links where its advantages--capacity,
quality and security--justify the long lead time and high cost to
equip and install a network.
- Satellite systems are often a preferred medium for transmitting to a
large geographical or multipoint area. These systems, which use
microwave technology, are well suited for rapid introduction of
service in remote areas or where terrestrial alternatives are
unavailable, such as mobile, shipboard or military applications.
Satellite systems require a sizeable initial capital investment by
service providers to build and launch. Once the satellites are in
orbit, however, there are substantial incentives to use this
capacity, which typically requires continued investment in satellite
earth stations.
- Terrestrial microwave radio systems can be quickly and easily
installed, require relatively low initial capital investment and can
be upgraded and expanded over time. There are a wide variety of
microwave radios offering different frequencies, modulation
techniques (analog or digital), and data transmission capacities.
However, microwave radio applications typically require government
licensing and frequency coordination in order to prevent signal
interference among various users, and require a line of sight
between the transmitting and receiving antennas. Unavailability of
sufficient frequency spectrum has historically inhibited sales in
developed countries, although this constraint is being alleviated by
the actions of various governments and the availability of radios
that do not require governmental licensing prior to use.
Rarely is a complete communications system based solely on one of these
media. Transmission is normally routed through a combination of media, each
employed where it fits most cost-effectively within the communications network.
For example, a microwave radio studio-to-transmitter link used by a television
broadcaster may connect to a satellite system used to distribute programs
domestically and overseas. In addition, the various media provide routing
alternatives for the other media, as in the case of satellite backup facilities
for undersea fiber optic cables.
STRATEGY
California Microwave's strategy is to apply its expertise in microwave
technologies to systems and products for the satellite communications, wireless
and intelligence systems markets. CMI works closely with key customers and
potential customers to specify and develop new products and product enhancements
that have long-term growth potential. CMI considers its ability to create and
maintain long-term customer relationships an important component of its overall
strategy in each of its markets.
CMI has concentrated its efforts on sales of systems and products used for
communications infrastructure rather than on consumer terminals and equipment.
CMI's strategy includes the following key elements:
Maintenance of Strong Position in Satellite Communications and Intelligence
Systems Markets. By introducing new products and expanding its marketing
efforts and distribution capabilities worldwide, CMI intends to continue to
strengthen its position in its markets for satellite communications and
intelligence systems.
Wireless Growth. CMI believes that the wireless telecommunications market
offers numerous opportunities because of its rapid growth and relatively
fragmented nature. Emerging opportunities for the sale of microwave radios
include cellular and other portable personal communication systems, mobile data
entry,
58
<PAGE> 69
remote data collection and device monitoring and wireless local area networks.
Many of these opportunities relate to the portability and mobility requirements
of customers.
International Expansion. CMI's systems and equipment are marketed on a
worldwide basis. CMI's international sales have expanded significantly in both
satellite communications and wireless, and represented 42% of total sales for
the fiscal year ended June 30, 1994. International sales are expected to
continue to increase due to international infrastructure requirements in
developing countries and the emergence of wireless opportunities worldwide.
Acquisitions. CMI intends to continue to enhance its market position
through acquisitions of companies or lines of business that complement its
existing businesses. Consistent with this strategy, CMI in April 1992
acquired MRC and in October 1993 acquired substantially all of the assets and
certain of the liabilities of TTS and is seeking to acquire MNI pursuant to the
Merger as described in this Prospectus/Proxy Statement. In addition, CMI
acquired Mobile Satellite Products Corp. (formerly ViaSat Technology
Corporation; "MobileSat"), Microwave Data Systems ("MDS") and EFData Corp.
("EFData") in recent years.
Core Technology Focus. Since its founding in 1968, CMI's systems and
products have been based on microwave radio technologies. CMI's products employ
both analog and digital applications of radio frequency technology. Digital
technology significantly enhances performance and capacity and facilitates new
product developments. CMI has invested significant resources in these
technologies and believes its microwave communications technologies provide a
solid base for the development of future wireless communications products and
services, including new forms of mobile and portable communications systems.
Decentralized Organizational Structure. California Microwave's
subsidiaries and divisions are decentralized. CMI believes this organizational
structure allows the key entrepreneurial personnel of each division to be
responsive to particular markets and customers. Each subsidiary and division
typically maintains its own sales, marketing, product development and
manufacturing functions.
PRODUCTS AND MARKETS.
CMI's sales are summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------- --------------------------
1992 % 1993 % 1994 % 1993 % 1994 %
---- --- ---- --- ---- --- ---- --- ---- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SALES BY PRODUCT CLASS:
Satellite communications........... $130 66% $157 59% $178 48% $ 74 51% $ 86 42%
Wireless........................... 24 12 61 23 139 38 47 32 84 41
Intelligence systems............... 39 19 46 17 50 14 23 16 34 17
Other.............................. 6 3 3 1 2 -- 1 1 2 --
---- --- ---- --- ---- --- ---- --- ---- ---
Total....................... $199 100% $267 100% $369 100% $145 100% $206 100%
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
SALES BY MARKET SECTOR:
International...................... $ 70 35% $110 41% $154 42% $ 54 37% $ 86 42%
U.S. commercial.................... 63 32 76 28 113 30 51 35 67 33
U.S. government.................... 66 33 81 31 102 28 40 28 53 25
---- --- ---- --- ---- --- ---- --- ---- ---
Total............................ $199 100% $267 100% $369 100% $145 100% $206 100%
===== ==== ===== ==== ===== ====
---- --- ---- ---
</TABLE>
SATELLITE COMMUNICATIONS
California Microwave is a leader in the design, assembly, integration and
installation of satellite earth stations, from the largest international gateway
earth stations, through an extensive series of mid-size earth stations, to very
small portable earth stations. Earth stations are integrated systems consisting
of antennas (1 to 32 meters in diameter), transmitting and receiving equipment,
and video, data and telephone system interface equipment. CMI also manufactures
certain electronic equipment, such as modems and frequency converters, which are
incorporated into earth stations. Large antennas and certain other equipment are
59
<PAGE> 70
obtained from third parties. CMI's line of digital and analog earth stations
provides point-to-point and point-to-multipoint transmission of voice, data,
facsimile and video, as well as tracking and command of the satellites
themselves. Many of the earth stations and related equipment are incorporated
into communications networks designed, installed and integrated by CMI. CMI's
systems are installed and operating in more than 75 countries.
Turnkey Satellite Earth Stations and Networks. CMI, through its subsidiary
Satellite Transmission Systems, Inc. ("STS"), is a leading supplier of turnkey
satellite transmit/receive earth stations and networks for domestic,
international and government applications. CMI is both an equipment supplier and
a large-scale network integrator. It has installed more than 1,000 major earth
stations on a turnkey basis, including more than 200 digital earth stations for
use by members of the INTELSAT network. Turnkey satellite earth stations
typically are completed in three to twelve months.
Transportable, Mobile, Portable and Other Satellite Earth Stations. CMI,
through its subsidiaries STS, EFData and MobileSatTM, manufactures a variety of
transportable, mobile, portable and other satellite earth stations. Most have
modular designs, which reduce equipment costs, installation costs and delivery
lead times, and accommodate a wide variety of capacity, frequency band or other
customer requirements.
Transportable and mobile earth stations are typically used for rapid
deployment to supply broadcast and voice communications where telephone service
may be non-existent or temporarily unavailable. CMI, through its MobileSat
subsidiary, has developed the world's first portable International Maritime
Satellite Organization ("INMARSAT") B terminal which is used for high-speed data
and voice transmission and is marketed under the trademark "LYNXX(R)". CMI
commenced shipments of LYNXX(R) following INMARSAT type approval.
Satellite Earth Station Products. Through various of its subsidiaries and
divisions, California Microwave manufactures a broad line of electronic products
used in earth stations. The products are used extensively in CMI's own earth
stations and are also sold in volume to other earth station suppliers and to
operators of communication networks to upgrade existing earth stations. EFData
is a leading producer of high speed (up to 155 million bits per second) digital
modems used to connect private or public telephone lines to satellite
communications networks. Since 1988, EFData has delivered approximately 13,500
satellite modems for use in INTELSAT systems, satellite backup facilities for
undersea fiber optic cable, and for many private network applications. STS
manufactures a range of frequency converters used in satellite earth stations,
and proprietary computer-based monitor and control systems. EFData also
manufactures a completely self-contained earth station electronics package for
low-cost rural and infrastructure networks.
CMI's principal satellite communications products are summarized in the
following table:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
SATELLITE COMMUNICATIONS
- ------------------------------------------------------------------------------------------------------------------
TYPICAL SELECTED CUSTOMERS
PRODUCTS APPLICATIONS PRICE RANGE OR END USERS
- ------------------------------------------------------------------------------------------------------------------
TURNKEY SATELLITE EARTH STATIONS AND NETWORKS
- ------------------------------------------------------------------------------------------------------------------
International Gateways Provides direct voice, data, $1,000,000 to AT&T, British Telecom, MCI,
video and facsimile services $5,000,000 Singapore Telecom, Telefonica
internationally (11-32 meter (Spain), Bulgaria
antenna) Telecommunications Company
- ------------------------------------------------------------------------------------------------------------------
Networks Provides voice, data, video $5,000,000 to AT&T, Tenneco Oil, U.S.
and facsimile services for $15,000,000 Government, Acumen (Thailand),
corporations, telephone Telespazio (Italy), Samsung
companies and governments (South Korea), Emetel
domestically (Ecuador), Shanghai Stock
Exchange
- ------------------------------------------------------------------------------------------------------------------
Video Uplinks Transmits television signals $500,000 to Hughes Communications, Hong
$2,000,000 Kong Telecom, Singapore
Telecom, British Telecom, KDD
(Japan)
- ------------------------------------------------------------------------------------------------------------------
Very Small Transmits data used by $500,000 to Hughes Network Systems, AT&T
Aperture Terminal retailers, car dealers and $2,000,000 Tridom
("VSAT") Hubs hotels in VSAT networks
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 71
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
TYPICAL SELECTED CUSTOMERS
PRODUCTS APPLICATIONS PRICE RANGE OR END USERS
- ------------------------------------------------------------------------------------------------------------------
Mobile Shore Stations Transmits voice and data to $1,000,000 to Hughes Network Systems, Satcom
land, mobile and shipboard $5,000,000 S.A. (Portugal), VSNL (India),
terminals in INMARSAT and American Mobile Satellite
other mobile satcom networks Corp.
- ------------------------------------------------------------------------------------------------------------------
Tracking, Telemetry and Tracks, monitors and controls $1,000,000 to AT&T, GTE, INTELSAT,
Command Earth Stations satellite during launch and in $5,000,000 COMSAT
orbit
- ------------------------------------------------------------------------------------------------------------------
TRANSPORTABLE, MOBILE, PORTABLE AND OTHER SATELLITE EARTH STATIONS
- ------------------------------------------------------------------------------------------------------------------
SCAMP 3.5-9 meter antenna earth $100,000 to CBS, Reuters, U.S. Government,
stations with electronics $400,000 Teleinformatica (Italy),
package on antenna for Telefonica (Spain)
international data and VSAT
network hubs
- ------------------------------------------------------------------------------------------------------------------
FAST 1.8-2.4 meter antenna $100,000 to U.S. Government, CBS, Midwest
"fly-away" earth stations for $600,000 Video (CNN)
transmitting voice and
high-speed data (up to 2
megabits/second)
- ------------------------------------------------------------------------------------------------------------------
PSAT 1.2-2.4 meter antenna earth $50,000 to Chevron, AMOCO, ABC,
stations for transmitting $150,000 Department of State
voice and low-speed data (256
kilobits/second), typically
for emergency communications
- ------------------------------------------------------------------------------------------------------------------
LYNXX(R) Suitcase-size complete earth $30,000 to U.S. Government, Exxon,
station providing voice and $50,000 COMSAT, British Telecom
data using INMARSAT-B service
- ------------------------------------------------------------------------------------------------------------------
CSAT/KSAT 1.8-6 meter antenna smaller $20,000 to Hughes Network Systems, MCI,
capacity earth stations using $100,000 IDB Communications, Satelnet
C-and Ku- bands for remote (Argentina), U.S. Government,
transmission of voice and data Reuters, IMPSAT (Argentina)
- ------------------------------------------------------------------------------------------------------------------
SATELLITE EARTH STATION PRODUCTS
- ------------------------------------------------------------------------------------------------------------------
High Speed Modems For connecting telephone lines $5,000 to AT&T, GTE, MCI, Sprint,
to international satellite $80,000 British Telecom, OPTUS
networks; optical fiber (Australia)
back-up; and private networks
- ------------------------------------------------------------------------------------------------------------------
Frequency Converters Key component in earth $8,000 to AT&T, MCI, Telefonica (Spain),
stations for converting $50,000 U.S. Government,
frequencies Communications Authority of
Thailand, Singapore
Telecommunications, Entel
(Chile)
- ------------------------------------------------------------------------------------------------------------------
Monitor and Control PC-based color graphics $5,000 to British Telecom, COMSAT, MCI,
Systems monitor and control system for $75,000 Reuters, U.S. Government
networks and earth stations
- ------------------------------------------------------------------------------------------------------------------
DIGITAL VIDEO TELEVISION PRODUCTS
- ------------------------------------------------------------------------------------------------------------------
Progeny(TM) Transmits and receives digital $5,000 to New product; to be marketed to
television signals by $20,000 U.S. and international
satellite and other radio broadcast television networks
carrier media
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
WIRELESS
California Microwave designs, manufactures and markets digital and analog
microwave radios and other equipment used in land-based point-to-point and
point-to-multipoint communications links. CMI is a leading manufacturer of
microwave radios for cellular and other personal communications networks, for
private voice and data communications networks and for portable electronic news
gathering and studio-to-transmitter links. CMI believes that wireless is one of
the fastest growing areas of the telecommunications industry due to
technological advances, regulatory initiatives and the expanding requirements
for connectivity between people and computers and other electronic devices.
Cellular and Personal Communications Networks and Systems. CMI, through
MRC and TTS, manufactures short-distance and long-distance digital microwave
radio systems for worldwide applications in cellular and portable personal
communications networks and systems. Since July 1992, CMI has received
significant orders from major users in the United Kingdom, Germany, Belgium and
Australia for digital
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<PAGE> 72
microwave radios to interconnect microcells in new cellular and personal
communications systems. The majority of these orders are for new 23 GHz and 38
GHz radios.
Land Mobile and Utility Communications. CMI, through TTS, manufacturers
and sells digital and analog microwave radio systems for the interconnection of
statewide public safety mobile networks. Most of these sales are made through
Motorola, with whom TTS has an equipment supply agreement. TTS also sells
products to large utilities to provide voice and data communications along major
rights of way.
Television Broadcast. MRC is a leading supplier of analog microwave radios
to U.S. and international broadcast and cable television markets for use
principally in portable electronic news gathering and studio-to-transmitter
applications.
Wireless Data Networking. CMI, through its MDS division, manufactures
point-to-point and point-to-multipoint microwave data radios. MDS point-to-point
radios are used to extend the reach of a communications system in areas where
low capacity, multi-channel voice or data communications links are required.
Point-to-multipoint radio systems are used principally to connect central
computers to remote computer terminals or to physical measurement and control
devices. Typical applications include remote monitoring and automated operation
of oil and gas production and distribution, water-wastewater treatment systems,
and control of electric utility power generation facilities. Approximately
100,000 MDS data radios have been sold since MDS commenced the sale of radios in
1986.
CMI's MRC subsidiary manufactures a short-distance microwave radio system
that provides point-to-point high speed data connection of local area networks.
Typical users include companies operating multiple local area networks within a
metropolitan area.
CMI's principal wireless products are summarized in the following table:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
WIRELESS
- ------------------------------------------------------------------------------------------------------------------
TYPICAL SELECTED CUSTOMERS
PRODUCTS APPLICATIONS PRICE RANGE OR END USERS
- ------------------------------------------------------------------------------------------------------------------
CELLULAR AND PERSONAL COMMUNICATIONS NETWORKS AND SERVICES AND SPECIALIZED MOBILE RADIOS
- ------------------------------------------------------------------------------------------------------------------
Digital microwave radios (2 to 38 Cell-to-cell interconnections $7,000 to Mercury One-2-One (U.K.),
GHz) $50,000 Vodafone (U.K.), British
Telecom (U.K.), Orange (U.K.),
E-Plus (Germany), CellTel (Sri
Lanka), Sprint Cellular, Bell
South Cellular
- ------------------------------------------------------------------------------------------------------------------
LAND MOBILE AND UTILITY COMMUNICATIONS
- ------------------------------------------------------------------------------------------------------------------
Analog radios Large statewide public safety $10,000 to $50,000 Motorola, NYPD, Massachusetts
(2-6 GHz) mobile networks State Police, Indiana State
Digital radios Police, Orange Co., Florida
(2-23 GHz) Police and Fire, City of
Cleveland Public Safety,
Michigan State Public Safety
System
Analog radios Large utility right-of-way $10,000 to $50,000 Motorola, Tenneco Gas,
(2-6 GHz) networks PT. Telkomunikasi,
Digital radios Indonesia, Daqing Oil (China),
(2-23 GHz) Pennsylvania Game Commission
- ------------------------------------------------------------------------------------------------------------------
TELEVISION BROADCAST
- ------------------------------------------------------------------------------------------------------------------
Analog broadband radios Electronic news gathering, $8,000 to ABC, CBS, NBC, CNN, FOX,
(2-40 GHz) electronic field production $20,000 C-SPAN
(2-23 GHz) Studio-to-transmitter links, $18,000 to PBS, BBC (U.K.), Prime
regional networks $100,000 Television and Southern Cross
Broadcasting (Australia)
- ------------------------------------------------------------------------------------------------------------------
WIRELESS DATA NETWORKING
- ------------------------------------------------------------------------------------------------------------------
Analog and digital data radios Point-to-point and point-to- $1,000 to Mobil, Phillips Petroleum,
(450 and 900 MHz) multipoint, remote monitoring, $10,000 Florida Power & Light, PG&E,
control and data collection Georgia Power, El Paso Gas,
Amoco, China National
Petroleum Corporation
LAN microwave radios Local area network $10,000 to $12,000 Pacific Communications,
(23 GHz) interconnection Watchtower Bible and Tract
Society of NY, HSC Corp.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE> 73
The Merger will add MNI's products to the above, strengthening the digital
microwave radio product line particularly in the 13 to 18 GHz frequency range.
The Merger will also add MNI's customer base, providing a strong market position
in Latin America, Eastern Europe and Asia/Pacific with major cellular customers
in Mexico, Venezuela, Argentina, Colombia, Peru, Hungary, Israel, Australia and
the Philippines.
INTELLIGENCE SYSTEMS
CMI participates in selected areas of the U.S. government market which are
closely related to CMI's commercial technological and product base. In recent
years, as U.S. defense spending has declined, CMI has competed effectively by
offering adaptations of its technologies and commercially available
"off-the-shelf" products to stable and growing segments of the Department of
Defense market at significantly less cost than would be the case under military
specification procurement procedures. CMI integrates electronic and electro-
optical systems for both airborne and ground-based applications. These systems
collect, process and disseminate intelligence and reconnaissance information
using advanced radio communications hardware and both special-purpose and
off-the-shelf computers and software. CMI maintains and upgrades these systems
throughout their useful lives, which can be a decade or more. CMI has developed
a series of products with secure, portable, ruggedized suitcase sized packaging
that incorporate key intelligence information collection, processing and
analysis capabilities contained in its larger systems.
CMI also designs and develops state-of-the-art multisensor imaging systems
and sophisticated electronic intelligence collection systems which it integrates
into inexpensive commercial aircraft. In fiscal 1991, CMI received contracts
totaling $19.6 million as a prime contractor for the U.S. Army's Air
Reconnaissance Low ("ARL") program. The ARL program employs both imagery and
signal intelligence sensors mounted on deHavilland-7 aircraft. These sensors
collect information which can be immediately transmitted to designated receiving
locations. The ARL aircraft can be rapidly deployed anywhere in the world. CMI
completed its first ARL contracts and made final delivery of the first aircraft
to the Army in 1993. CMI has received significant follow-on ARL contracts
involving additional aircraft.
In early 1993, CMI introduced its new airborne intercept and direction
finding and geo-location system. CMI believes that this system locates signals
from over a wide range of frequencies more rapidly and accurately than do other
systems.
CMI's intelligence projects typically involve multi-year, multi-million
dollar contracts. In addition, CMI sells subsystems and other equipment to U.S.
government agencies on a short-term delivery basis. The price of a project
depends on a number of factors, including the amount of development involved,
quantities ordered, maintenance requirements and whether an aircraft is to be
modified and supplied by CMI in connection with the contract.
SALES, MARKETING AND CUSTOMER SUPPORT
California Microwave directs its sales and marketing efforts toward major
users of its systems and products through a well established international
distribution network. The sales and marketing strategy of CMI varies with the
particular market served and involves direct sales by CMI's own sales force,
sales through representatives, value-added resellers, or a combination of the
foregoing. CMI also has entered into sales distribution agreements with respect
to certain of its satellite communications and wireless products.
CMI considers its ability to create and maintain long-term customer
relationships an important component of its overall strategy in each of its
markets. Relationships with customers are established and maintained by CMI's
product area managers and their technical and marketing staffs. CMI's strategy
also includes its commitment to provide ongoing customer support for its systems
and products. This support involves providing direct access to CMI's engineering
staff or trained technical representatives located throughout the world to
resolve technical or operational problems.
63
<PAGE> 74
CMI has expanded its international sales significantly and has sold
products in over 75 countries. CMI intends to continue to expand its marketing
efforts and distribution channels worldwide.
MANUFACTURING
Manufacturing operations consist principally of assembly and testing of
electronic systems built from fabricated parts, printed circuits and electronic
components. Both manual and various automated methods are employed, depending
primarily upon production volume. CMI employs formal Total Quality Management
programs and other training programs, and its STS and EFData subsidiaries have
qualified for International Standards Organization ("ISO") quality procedure
registration programs and is registered to ISO 9001, a standard sometimes
imposed by foreign buyers. Other subsidiaries and divisions of CMI are working
toward registration to ISO 9001, and CMI believes that lack of such registration
does not currently have any material adverse effect on its business.
Electronic components and raw materials used in CMI's products are
generally obtained from a large number of suppliers. Some components are
standard items and others are manufactured to CMI's specifications by
subcontractors. CMI obtains certain components and subsystems from single, or a
limited number of, sources. CMI operates without a substantial inventory of
components and subsystems but believes that most components and subsystems are
available from existing or alternative suppliers and subcontractors. A
significant interruption in the delivery of such items could have a material
adverse effect on CMI's results of operations.
COMPETITION
California Microwave is engaged in a highly competitive business and the
number of potential customers for CMI's products is limited. Many of CMI's
competitors have significantly greater financial, marketing and operating
resources than CMI. In addition, certain of CMI's customers have technological
capabilities in CMI's product areas and could choose to replace CMI's products
with their own. CMI's major competitors by product area include: NEC, Alcatel
Telespace and Scientific-Atlanta, Inc.--satellite communications; NEC, Digital
Microwave Corporation, Harris Corporation, Alcatel and Motorola--wireless; ESL,
Inc. (a subsidiary of TRW Inc.), Lockheed Corporation and E-Systems,
Inc.--intelligence.
CMI believes that competition in its markets is based primarily on price,
performance, reputation, on-time delivery, reliability and customer support. CMI
believes that it has the ability to develop, produce and install turnkey
satellite earth stations, and to deliver satellite and wireless equipment,
faster than many of its competitors. In the intelligence area, CMI believes that
it has the ability to solve customers' problems with proprietary solutions and
to offer cost-effective approaches using commercially available products.
RESEARCH AND DEVELOPMENT
Research and development expenses were $13.2 million, $8.2 million and $5.0
million and in fiscal 1994, 1993 and 1992, respectively, representing 3.6%, 3.1%
and 2.5% of total sales, respectively, for the same periods.
CMI obtains customer funding for research and development where possible to
adapt CMI's basic technology to specialized customer requirements. Most research
and development expenses in turnkey satellite earth stations and intelligence
systems are customer-funded and are included in cost of products sold. Since CMI
expects to emphasize equipment sales, particularly in the wireless area, it
expects research and development expenditures, as a percent of sales, to
continue to increase.
PATENTS AND LICENSES
Due to the rapidly changing nature of technology in CMI's business, patents
and licenses have been of substantially less significance in CMI's business than
have been the timely application of its technology and the design, development
and marketing capabilities of its personnel.
64
<PAGE> 75
EMPLOYEES
At December 31, 1994, CMI had 1,918 employees, 1,043 of whom were engaged
in production and production support, 547 in research and development and other
engineering support, 147 in marketing and 181 in general and administration
functions. None of the employees is represented by a labor union. CMI believes
that its employee relations are good.
REGULATION
Radio communications, including satellite communications, are subject to
regulation by United States and foreign laws and international treaty. CMI's
equipment must conform to domestic and international requirements established to
avoid interference among users of microwave frequencies and to permit
interconnection of equipment.
The use of microwave signals depends upon the availability of frequencies
that permit interference-free operation. In many developed countries, the
unavailability of frequency spectrum has historically inhibited the growth of
microwave systems. However, two factors are alleviating this problem. First, the
proliferation of fiber optics for high capacity systems has reduced the demand
for microwave frequencies for such systems, thus freeing up frequency spectrum
for new types of services, particularly for portable or mobile communications.
Second, many government regulatory agencies are reallocating frequencies from
one type of use to another, thus providing incentive for new communications
services. Current regulatory efforts by international and national regulatory
authorities are directed at providing microwave frequencies for new portable
wireless personal communications services. Equipment to support these new
services can be marketed only if permitted by suitable frequency allocations and
regulations, and the process of establishing new regulations is complex and
lengthy.
BACKLOG
At June 30, 1994, CMI's backlog of undelivered orders was $220.4 million
(approximately 80% of which is expected to be delivered during fiscal 1995)
compared with $156.2 million at June 30, 1993. At December 31, 1994, CMI's
backlog of undelivered orders was $254.2 million (approximately 75% of which is
expected to be delivered prior to December 31, 1995) compared with $267.2
million at December 31, 1993. In CMI's experience, its backlog at any given time
is not necessarily indicative of prospective period revenues. CMI generally
records an order in backlog when CMI receives a firm contract or purchase order
which identifies product quantities and delivery dates, and in the case of
government contracts, when such contracts have been funded by the government.
While from time to time a substantial portion of CMI's backlog has been
comprised of large orders, the cancellation of any of which could have a
material adverse effect on CMI's operating results, CMI historically has not
experienced significant changes in its backlog from cancellations or revisions
of orders.
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<PAGE> 76
PROPERTIES
The table below describes the location and general character of the
principal plants and materially important physical properties that are owned or
leased by the Company and its subsidiaries as of June 30, 1994:
<TABLE>
<CAPTION>
LEASE NO. OF SQUARE
OCCUPANT EXPIRES BUILDINGS FOOTAGE LOCATION
------------------------------ ---------- --------- ------- -----------------------
<S> <C> <C> <C> <C> <C>
1. Corporate Headquarters 1997 1 130,000 Sunnyvale, CA
and Sunnyvale Products Div.
2. Satellite Transmission (owned) 2 90,000 Hauppauge, NY
Systems, Inc. (owned) 1 37,000 Melbourne, FL
3. Viasat Technology Corp. 1997 1 33,000 Hauppauge, NY
4. Government Electronics 1995 2 51,900 Woodland Hills, CA
Division
5. Airborne Systems 1996 1 39,000 Belcamp, MD
Integration Div. monthly 1 19,619 Baltimore, MD
6. EFData Corp. 1995-2001 2 54,000 Tempe, AZ
7. Microwave Data (owned) 1 43,260 Rochester, NY
Systems Division 1995 1 2,042 San Mateo, CA
8. Microwave Radio Corporation 1997 1 71,500 Chelmsford, MA
monthly 1 5,247 Lowell, MA
9. TeleCom Transmission Systems 2004 1 110,063 Bloomingdale, IL
1997 1 36,348 Fremont, CA
10. Government Communications 1994 1 12,000 Annapolis Junction, MD
Systems Division
</TABLE>
CMI believes that its facilities are adequate for its present needs.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth information as of January 31, 1995,
regarding ownership of CMI Common Stock by (i) each person who is known by CMI
to own beneficially more than 5% of any class of the CMI Common Stock, (ii)
CMI's Chief Executive Officer and each of its next four most highly compensated
executive officers for the fiscal year ended June 30, 1994, (iii) the directors
individually, and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
CMI COMMON STOCK
BENEFICIALLY OWNED(1)
----------------------
NUMBER PERCENT
---------- -------
<S> <C> <C>
Kopp Investment Advisors, Inc.(2)....................................... 2,800,670 22.7%
6600 France Ave. So., Suite 672
Edina, MN 55435
Philip F. Otto(3)....................................................... 140,681 1.1
David B. Leeson(4)...................................................... 97,886 *
Robert A. Helliwell(5).................................................. 27,250 *
Gilbert F. Johnson(6)................................................... 47,513 *
Douglas H. Morais(7).................................................... 21,926 *
Arthur H. Hausman(8).................................................... 8,000 *
Alfred M. Gray(9)....................................................... 5,000 *
Frederick P. Collins.................................................... 0 *
Edward E. David, Jr.(10)................................................ 2,000 *
David E. Hershberg(11).................................................. -- --
All Executive Officers and Directors as a Group (13 persons)(12)........ 459,765 3.7%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares.
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<PAGE> 77
(1) The stockholders named in the table have sole voting power and dispositive
power with respect to all shares of stock shown as beneficially owned by
them, except as otherwise indicated in the footnotes to this table. Amounts
indicated for shares which a person has an option to acquire are issuable
upon exercise of outstanding options which were exercisable on January 31,
1995 or within 60 days thereafter.
(2) Kopp Investment Advisors, Inc. reported no voting power with respect to
2,800,670 shares of CMI Common Stock and shared dispositive powers with
respect to 2,800,670 shares of CMI Common Stock.
(3) Includes 102,500 shares of CMI Common Stock which Mr. Otto has an option to
acquire and 1,231 shares of CMI Common Stock pursuant to the conversion of
subordinated debentures.
(4) Includes 5,000 shares of CMI Common Stock which Dr. Leeson has an option to
acquire.
(5) Includes 7,000 shares of CMI Common Stock which Mr. Helliwell has an option
to acquire.
(6) Includes 34,250 shares of CMI Common Stock which Mr. Johnson has an option
to acquire.
(7) Includes 18,750 shares of CMI Common Stock which Dr. Morais has an option
to acquire and 176 shares of CMI Common Stock pursuant to conversion of
subordinated debentures.
(8) Includes 1,000 shares held by Mr. Hausman and his wife as Trustees of the
Hausman Family Trust and 7,000 shares of CMI Common Stock which Mr. Hausman
has an option to acquire.
(9) Includes 5,000 shares of CMI Common Stock which Mr. Gray has an option to
acquire.
(10) Includes 2,000 shares of CMI Common Stock which Dr. David has an option to
acquire.
(11) Mr. Hershberg ceased to be an employee of CMI prior to January 31, 1995.
CMI has no knowledge as to Mr. Hershberg's current ownership of CMI Common
Stock.
(12) Includes 229,537 shares of CMI Common Stock which officers have an option
to acquire.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information on the directors and
executive officers of CMI as of the date of this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Philip F. Otto................... 53 Chairman of the Board, President, Chief Executive Officer
and Director
Gilbert F. Johnson............... 64 President of the Government Group, Director
Garrett E. Pierce................ 50 Executive Vice President and Chief Financial Officer
Dr. Douglas H. Morais............ 52 President of the Wireless Products Group
Leon F. Blachowicz............... 55 President of the Satellite Communications Group
George L. Spillane............... 60 Vice President and Secretary
Michael L. Foster................ 48 Vice President--Financial Planning and Treasurer
Lanny B. Myers................... 57 Vice President--Controller
Dr. Edward E. David, Jr.......... 70 Director
Alfred M. Gray................... 66 Director
Arthur H. Hausman................ 71 Director
Dr. Robert A. Helliwell.......... 74 Director
Dr. David B. Leeson.............. 57 Director
</TABLE>
PHILIP F. OTTO rejoined CMI as a Director and President of the Wireless
Products Group in January 1992, became President and Chief Executive Officer of
CMI in March 1992 and Chairman of the Board in January 1993. He served as
Executive Vice President, Chief Financial Officer and a Director of General
Cellular Corporation, a cellular telecommunications company, from 1989 to 1991.
Subsequent to Mr. Otto's employment by General Cellular Corporation, that
corporation negotiated a "pre-packaged" plan of reorganization under Chapter 11
of the U.S. Bankruptcy Code that involved the infusion of additional capital. He
also served as President of Netline Communications Corporation, a
telecommunications software company, in 1988; as a consultant to the
telecommunications industry from 1986 to 1988; and as Chief Executive Officer
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<PAGE> 78
and a director of Telco Systems, Inc., a fiber optics telecommunications
equipment company, from 1981 to 1986. Mr. Otto served as Chief Financial Officer
of CMI from 1975 to 1980, was a director of CMI from 1976 to 1985 and was an
Executive Vice President of CMI from 1979 to 1981.
GILBERT F. JOHNSON has been a Director of CMI since 1980. He served as
CMI's President and Chief Operating Officer from 1985 to 1991 and became
President of the Government Group in 1991. He served as CMI's Executive Vice
President and Chief Operating Officer from 1982 to 1985.
GARRETT E. PIERCE joined CMI in April 1994 as Executive Vice President and
Chief Financial Officer. From September 1980 to July 1993, Mr. Pierce served in
various executive capacities at Materials Research Corporation, a wholly owned
subsidiary of Sony U.S.A., Inc., becoming its President and Chief Operating
Officer in March 1989 and Chief Executive Officer in April 1992.
DR. DOUGLAS H. MORAIS joined California Microwave in February 1993 as
Senior Vice President--Corporate Development and became President of the
Wireless Products Group in July 1993. From October 1992 to February 1993, Dr.
Morais engaged in private business development and investment; from October 1990
to October 1992 he was an officer of Digital Microwave Corporation, becoming its
President and Chief Operating Officer in May 1991. Prior to joining Digital
Microwave, Dr. Morais spent 24 years at the Farinon Division of Harrison
Corporation and headed the division as general manager from 1983 to 1990.
LEON F. BLACHOWICZ joined CMI in January 1995 as President of the Satellite
Communications Group. From 1989 to 1995 he was Vice President/General Manager of
Varian's Microwave Equipment Products division. Prior to that time he was Vice
President of Harris' Business Communications System Division for the last three
of his 20 years at Harris.
GEORGE L. SPILLANE has served as Secretary of CMI since 1981. From 1980 to
April 1994 he served as CMI's Vice President--Finance and Chief Financial
Officer and since then he has continued to serve as Vice President of CMI.
MICHAEL L. FOSTER became a Vice President of CMI in October 1990 after
serving as Staff Vice President since 1983.
LANNY B. MYERS became a Vice President of CMI in July 1991 after serving as
Corporate Controller since 1977.
DR. EDWARD E. DAVID, JR. became a Director of CMI in 1992. He served as
President of Exxon Research and Engineering Company from 1977 to 1986 and has
served as President of EED, Inc. since 1976. Dr. David serves on the Boards of
Directors of Compression Labs, Inc., Intermagnetics General Corporation and
Protein Polymer Technologies, Inc. He is a U.S. representative to the NATO
Science Committee and a member of the Bellcore Advisory Council.
GENERAL ALFRED M. GRAY, USMC (Ret.) became a Director of CMI in 1993. He
served as the Commandant of the U.S. Marine Corps and was a member of the Joint
Chiefs of Staff from 1987 to 1991. He is a member of the National Security
Agency Science Advisory Board.
ARTHUR H. HAUSMAN became a Director of CMI in 1990. He served as President
and Chief Executive Officer of Ampex Corporation from 1971 through 1980 and as
its Chairman of the Board, President and Chief Executive Officer from 1981
through 1982 and as Chairman of the Board from 1983 through 1987 when he became
Chairman of the Board Emeritus. He is a Director of TCI International, Inc.,
Drexler Technology, Inc. and California Amplifier, Inc.
DR. ROBERT A. HELLIWELL has been a Director of CMI since 1968 and a
Professor of Electrical Engineering at Stanford University since 1946.
DR. DAVID B. LEESON, founder of CMI, was Chief Executive Officer and a
Director of CMI from its inception in 1968 until March 1992 and was Chairman of
the Board from CMI's inception until January 1993. He commenced service as a
consultant to CMI under a three-year consulting agreement in January 1993.
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<PAGE> 79
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The total number of meetings of the Board of Directors (including regularly
scheduled and special meetings) during fiscal 1994 was ten. Each of the
incumbent directors attended at least 75% of the aggregate of (1) the total
number of meetings of the Board during the year, and (2) the total number of
meetings of all committees of the Board on which he served. CMI has an Audit
Committee, a Compensation Committee and a Nominating Committee.
The responsibilities of the Audit Committee include (1) reviewing and
consulting with the auditors concerning CMI's financial statements, accounting
and financial policies, and internal controls; (2) reviewing the scope of the
independent auditors' activities and the fees of the independent auditors; (3)
maintaining good communications on accounting matters among the Committee, CMI's
independent accountants and CMI's management; and (4) reviewing the activities
of CMI's internal auditor. The members of the Audit Committee, which met five
times during fiscal 1994, are Messrs. David, Hausman and Leeson.
The functions of the Compensation Committee are to review CMI's
compensation philosophy; to recommend to the Board of Directors the total
compensation to be paid to the Chief Executive Officer and CMI's other officers;
to approve the form and terms of all incentive and stock plans, including stock
option plans and to consider the dilutive impact of the stock plans; and to
prepare the Compensation Committee Report and approve the peer groups and stock
valuation methods for CMI's annual Proxy Statement. The members of the
Compensation Committee, which met ten times during fiscal 1994, are Messrs.
Hausman, Gray and Helliwell.
The function of the Nominating Committee is to recommend to the Board a
slate of director candidates to be nominated for election to the Board and to
fill vacancies that occur on the Board. The Nominating Committee will consider
nominees recommended by stockholders, provided such recommendations are
submitted in writing to the Secretary of CMI, are timely, and contain sufficient
background information concerning the nominee to enable a proper judgment to be
made as to the proposed nominee's qualifications, and include a written consent
of the proposed nominee to stand for election if nominated and to serve if
elected. The members of the Nominating Committee, which met once during fiscal
1994, are Messrs. Leeson, David, Gray and Helliwell.
BOARD COMPENSATION
Directors who are employees of CMI do not receive additional compensation
for their service as directors. During the fiscal year ended June 30, 1994,
directors who were not employees of CMI received compensation at the rate of
$20,000 per year for their services as Board members, $500 per Committee meeting
attended, and reimbursement for expenses incurred in attending meetings of the
Board or any Committee of the Board. In addition, each director of CMI who is
not an employee of CMI automatically receives a non-qualified stock option under
CMI's 1992 Stock Option Plan immediately following each Annual Meeting of
Stockholders of CMI. The first such option received by a director covers 5,000
shares of common stock of CMI and each such option received by a director
thereafter covers 2,000 shares of common stock. Each such option has an exercise
price equal to the fair market value of the common stock of CMI on the date of
the annual meeting of stockholders to which it relates, and becomes fully vested
one year after the date of grant. In fiscal 1994, Messrs. David, Hausman and
Helliwell each received an option to purchase 2,000 shares of Company common
stock at an exercise price of $23.625 per share, and Messrs. Gray and Leeson
each received an option to purchase 5,000 shares at an exercise price of $23.625
per share.
In January 1993, Dr. Leeson commenced service as a consultant to CMI under
a three-year consulting agreement. Under that agreement, Dr. Leeson will receive
$250,000 per year for consulting with CMI regarding its business, technology and
strategy and will at CMI's request serve as CMI's representative to certain
forums.
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<PAGE> 80
EXECUTIVE COMPENSATION
The following table shows specific compensation information, for the fiscal
years ending June 30, 1994, 1993 and 1992, for CMI's Chief Executive Officer and
the next four most highly compensated executive officers as of June 30, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
ANNUAL COMPENSATION -------------------- PAYOUTS
RESTRICTED STOCK ----------
------------------- STOCK OPTIONS LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) (NUMBER) PAYOUTS(2) COMPENSATION(3)
- ------------------------------- ---- -------- -------- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Philip F. Otto................. 1994 $275,000 $227,000 $ 0 24,000 $ 0 $19,375
Chairman, President and 1993 $250,000 $220,000 $ 0 80,000 $ 0 $ 6,477
Chief Executive Officer 1992 $106,435 $ 8,206 $393,125 100,000 $ 0 $ 679
Gilbert F. Johnson............. 1994 $218,000 $160,000 $ 0 15,000 $ 0 $13,087
President of the 1993 $220,781 $247,752 $ 46,000 50,000 $ 0 $13,151
Government Group 1992 $242,100 $ 24,019 $ 33,750 0 $ 9,546 $13,978
David E. Hershberg............. 1994 $206,712 $160,000 $ 0 5,000 $ 0 $17,380
President of the Satellite 1993 $209,654 $ 71,697 $ 46,000 50,000 $ 0 $ 8,226
Communications Group 1992 $225,904 $ 26,301 $ 33,750 0 $ 19,800 $ 6,132
and President of Satellite
Transmission Systems, Inc.(4)
Douglas H. Morais.............. 1994 $197,115 $188,000 $ 0 45,000 $ 0 $ 4,595
President, Wireless 1993 $ 63,177 $ 20,000 $ 44,250 30,000 $ 0 $ 600
Products Group 1992 $ 0 $ 0 $ 0 0 $ 0 $ 00
Fredrick P. Collins............ 1994 $158,269 $175,000 $ 0 0 $ 0 $10,908
Vice President of CMI 1993 $145,000 $ 0 $ 0 0 $ 0 $12,472
and Chief Technical 1992 $ 25,095 $ 0 $ 0 0 $ 0 $ 2,230
Officer of Microwave Radio
Corporation(5)
</TABLE>
- ---------------
(1) At June 30, 1994, the number and aggregate value of unvested restricted
stock holdings for the named executive officers were: Mr. Otto--15,000
shares, $235,875; Mr. Johnson--6,400 shares, $75,475; Mr. Hershberg--6,400
shares, $75,475; Mr. Morais--2,400 shares, $35,400; Mr. Collins--0 shares,
$0. The aggregate values shown in the table were computed by multiplying the
number of restricted shares granted by the closing market price of CMI's
Common Stock on the date of grant.
(2) In July 1992 CMI terminated its Multi-Year Incentive Plan and replaced it,
effective June 30, 1992, with an Executive Incentive Plan. Payments made in
connection with the terminated Multi-Year Incentive Plan are reflected
herein.
(3) Includes employer contributions to the California Microwave Tax-Deferred
Savings Plan (a 401(k) plan) for fiscal 1994 in the amount of $600 for the
benefit of each of Messrs. Otto, Johnson, Hershberg, Morais and Collins.
Also includes amounts paid by CMI for life insurance premiums for fiscal
1994, as follows: Mr. Otto--$2,603, Mr. Johnson--$5,211, Mr.
Hershberg--$3,276, Mr. Morais--$465, and Mr. Collins--$1,555. Matching
employer contributions may be increased for 1995. The balance represents
other personal benefits for each such individual.
(4) David E. Hershberg resigned as an officer of CMI in July 1994.
(5) Fredrick P. Collins served as President of MRC until February 1994 and as an
officer of CMI until October 28, 1994.
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STOCK OPTION TABLES
The following table shows information concerning stock options granted to
the individuals named in the Summary Compensation Table above during the fiscal
year ended June 30, 1994.
OPTION GRANTS IN FISCAL 1994
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(1)(2)
GRANTED EMPLOYEES PRICE EXPIRATION ---------------------------
NAME (NUMBER)(3) IN FISCAL YEAR ($/SH) DATE 0% 5% 10%
- -------------------------- ----------- -------------- -------- ---------- --- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Philip F. Otto............ 24,000 4.8% $ 18.375 7/29/03 $ 0 $277,320 $ 702,840
Gilbert F. Johnson........ 15,000 3.0% $ 18.375 7/29/03 $ 0 $173,325 $ 439,275
David E. Hershberg........ 5,000 1.0% $ 18.375 7/29/03 $ 0 $ 57,775 $ 146,425
Douglas H. Morais......... 35,000 7.0% $ 18.375 7/29/03 $ 0 $404,425 $1,024,975
10,000 2.0% $ 27.25 11/12/03 $ 0 $171,300 $ 434,300
Fredrick P. Collins....... 0 0% $ 0 $ 0 $ 0 $ 0
</TABLE>
- ---------------
(1) The 5% and the 10% assumed rates of appreciation applied to the option
exercise price over the ten-year option term are prescribed by the rules of
the Securities and Exchange Commission and do not represent CMI's estimate
or projection of the future price of Common Stock. The named executive
officers will receive benefit from the options only to the extent that CMI's
stock appreciates in value over the exercise price of the options.
(2) At assumed annual rates of appreciation of 0%, 5% and 10%, the aggregate
potential realizable increase in value for shares held by all stockholders
as of June 30, 1994 for the ten-year period from July 29, 1993 to July 29,
2003, would be $0, $139,010,047 and $352,307,160, and for the ten-year
period from November 12, 1993 to November 12, 2003 would be $0, $206,078,936
and $522,475,668.
(3) All options granted in fiscal 1994 were pursuant to the 1992 Stock Option
Plan. The options are incentive or non-qualified stock options that were
granted at 100% of the fair market value of the Common Stock on the date of
grant. The options expire ten years from the date of grant, unless otherwise
earlier terminated in certain events related to termination of employment.
The options vest 25% per year on each of the first four anniversaries of the
option grant date. Additional vesting of the right to exercise the options
ceases when the optionee's employment terminates.
The following table shows information concerning the value of unexercised
stock options held by the individuals named in the Summary Compensation Table
above as of June 30, 1994.
AGGREGATED OPTION EXERCISES(1) IN FISCAL 1994
AND JUNE 30, 1994 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT 6/30/94 OPTIONS AT 6/30/94 (2)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- ------------------------------- ---------------------------------
<S> <C> <C>
Philip F. Otto........................ 70,000/134,000 $581,875/$1,094,375
Gilbert F. Johnson.................... 19,080/53,250 $212,210/$411,656
David E. Hershberg.................... 24,258/43,500 $299,334/$392,000
Douglas H. Morais..................... 7,500/67,500 $60,000/$333,125
Fredrick P. Collins................... 0/0 $0/$0
</TABLE>
- ---------------
(1) No options were exercised by any of the named executive officers during
fiscal 1994.
(2) The value of unexercised options is calculated by multiplying the number of
options outstanding by the difference between the option exercise price and
the June 30, 1994 closing price of $22.75 per share of
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<PAGE> 82
CMI's common stock as reported on the Nasdaq National Market. Options with
an exercise price in excess of the June 30, 1994 closing price were not
included in this calculation.
EMPLOYMENT AGREEMENT
CMI's employment agreement with Mr. Otto, as amended, provides for a
payment to Mr. Otto, in the event CMI terminates his employment other than for
cause, of an amount equal to the greater of $750,000 or 300% of his then-current
base salary, in 36 monthly installments, and for continued health benefits for
two years or, if earlier, the date he obtains health benefits from a new
employer. Mr. Otto's base salary was increased from $275,000 to $335,000,
effective August 7, 1994. Mr. Otto's employment agreement, as amended, also
provides that CMI will pay or reimburse Mr. Otto for certain personal expenses.
In July 1994 CMI's Board of Directors authorized payment to Mr. Otto of a
bonus in the amount of $227,000.
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<PAGE> 83
INFORMATION CONCERNING MNI
INTRODUCTION
MNI designs, manufactures and markets microwave radios and related products
for a wide range of telecommunications applications used worldwide in wireless
networks. MNI's current products address the requirements for wireless voice and
data transmission typically for cellular and fixed base telephony applications.
MNI is a worldwide leader in the supply of quality digital and video microwave
transmission products and systems providing wireless radio interfaces in
frequency bands from 2 GHz to 38 GHz.
MNI was formed in 1981 in response to the increasing demand for reliable,
flexible and economical communications networks. Typical end users of MNI's
products include cellular operators, private businesses and domestic common
carriers.
MNI's products are marketed worldwide in areas which MNI believes offer
superior growth opportunities. MNI has a worldwide sales and service
organization operating through offices in seven different countries to address
MNI customers' individualized geographic, regulatory and infrastructure
requirements. Approximately 90% of MNI's revenues were generated from
international sales in fiscal 1994. MNI has become the largest high frequency
microwave supplier in Mexico, Venezuela and Australia, and other significant
sales have been made in Argentina, Peru, Taiwan, Hungary and Israel.
Historically, microwave radios have been used for public backbone, private
and cellular networks. However, microwave is especially well suited for
developing countries where the market for wireless transmission is growing
rapidly. Many developing countries have only limited wireline infrastructure,
and microwave systems are often the most cost effective means of expanding their
telecommunications networks. In addition, development of multiple, competitive
telecommunications systems is increasing as a result of privatization of
state-owned companies and licensing of additional carriers. Substantial capital
investment to support development of these new infrastructures is being provided
by U.S. and European telecommunications companies.
Microwave radio systems are especially well suited to the needs of emerging
countries because they can be quickly and easily installed, require relatively
low initial capital investment and can be upgraded and expanded over time.
Specific needs can be addressed through a wide variety of microwave radios
offering different frequencies, modulation techniques (analog or digital) and
transmission capacities. These qualities often make such systems a more
attractive alternative to the other presently available transmission media,
copper cable, fiber optic cable and satellite systems.
STRATEGY
MNI's objective is to become a leading, independent worldwide manufacturer
and supplier of quality digital microwave products and systems for wireless
networks. The principal elements of MNI's strategy are as follows:
Emerging Market Focus
The development of digital technology has vastly improved transmission
quality and, consequently, the range of applications for microwave products and
systems. MNI targets developing countries that are building out their
infrastructure. Market privatization and an increase in commercial and consumer
demand for modern communications have created a large potential market for
wireless telecommunications systems in such countries. MNI selects its markets
throughout the world where it believes it is best positioned to establish
long-term sales and customer relationships.
Flexible Product Architecture
MNI offers a broad product range which allows it to meet a wide variety of
applications requirements. MNI's product architecture is based upon a common
platform allowing the wireless network operator to easily maintain, reconfigure
and expand his network. The MNI equipment can be "field-tuned," enabling the
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<PAGE> 84
operator to retune the frequency of the equipment to reflect system changes. The
goal is lower overall operating costs and greater operating efficiencies. MNI
strives to deliver superior price and performance through technology advances,
innovative new features and manufacturing efficiencies.
In-Country Partners
In order to address the unique political, technical and regulatory issues
in MNI's target markets, MNI strives to develop relationships with in-country
partners who can provide the required local resources and business contacts to
establish a competitive position in those markets. In-country partner agreements
for distribution and representation of MNI products and services provide a
strong sales channel and assist MNI in capturing business. MNI also strives to
develop strategic relationships with large global companies and OEM accounts
that are participating in the emerging wireless services, privatization and
world telecommunication infrastructure growth.
Responsiveness to Customers
MNI strives to maintain a responsive manufacturing facility to provide
quick delivery and responsive customer support for efficient implementation of a
new network or expansion. In order to provide competitive prices to its
customers, MNI strives to lower manufacturing costs by utilizing new technology
and new production methods. MNI also applies total quality management as a
strategy to better understand the customer's needs and to achieve customer
satisfaction. Continuous improvement in all of MNI's processes and products
helps maintain flexibility and responsiveness in its manufacturing, delivery and
support services and helps differentiate MNI from its competition.
Customer Support
MNI believes it offers superior customer service and support. The technical
ability of MNI personnel allows MNI to provide engineering support to the
customer as required when implementing and expanding wireless networks.
Application assistance is provided both before and after a sale in order to
provide customers with an economical and reliable network by configuring the
equipment to meet particular requirements. MNI maintains engineering personnel
in all regional offices in order to provide a high level of technical customer
support.
KEY MARKETS
The market for interactive voice, data and video communications services is
increasing worldwide. The forces influencing this market growth are
technological and, in the developing countries, social, economic and political.
MNI's emerging market focus helps position MNI to take advantage of the growing
market for wireless telecommunications systems.
MNI believes that the worldwide market for low to medium capacity digital
microwave radio equipment, the market presently addressed by MNI's products, is
growing for the following reasons, among others: First, economical cellular
service can be established very quickly in areas which do not have adequate
conventional wired telephone service. Second, economic liberalization and
privatization taking place in many parts of the world, including Latin America,
Eastern Europe, China and the former Soviet Union, has attracted large amounts
of external capital to fund infrastructure development. MNI's sales organization
operates in five regions and is managed by senior sales executives responsible
for sales of MNI products in those regions:
Asia/Pacific. MNI began sales in the Asia/Pacific region in 1989 with
sales to customers in Taiwan. MNI established a sales office in 1991 in
Singapore to provide better coverage to potential customers in the Asia/Pacific
region. The Singapore sales office, which has now grown to a staff of six,
provides technical and sales support throughout the region, including Australia.
Significant business for this office has been received from customers in Taiwan,
the Philippines and Australia. Opportunities are also being pursued in China,
Vietnam, Malaysia, and Korea, and some initial orders have been received from
customers in those countries. A sales office was recently opened in Beijing and
a service and support center is being established in the Philippines.
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<PAGE> 85
Eastern Europe/Middle East. Beginning with sales to Hungary in 1991, MNI
has concentrated on sales to Eastern Europe where much privatization is ongoing.
MNI has been successful in obtaining significant business in Hungary and has
recently obtained customers in Israel, Poland and Russia. A sales office was
recently opened in the U.K. to provide better support in this region.
Mexico. Beginning initially as the transmission supplier for the first
cellular system in Mexico, MNI has now grown to be a significant supplier of low
to medium capacity microwave radios in Mexico. Recognizing the importance of
this market and the opportunities for rapid growth, MNI implemented several
strategies to establish this position. In 1991 MNI formed a wholly owned
subsidiary to provide technical support, training, equipment repair, and
installation and engineering services. Now staffed by experienced nationals,
this subsidiary has grown and has assumed the primary sales role for Mexico.
South America. A network of representatives/distributors has been
established in every major country in South America. Significant sales have been
made to cellular providers in Venezuela, Peru, Ecuador, Argentina, Brazil and
Colombia, and to telephone companies in Peru, Colombia and Brazil. MNI intends
to further invest in its sales force in South America to increase concentration
in that region.
United States/Canada/Western Europe. Because the United States, Canada and
Western Europe are all relatively mature markets for microwave products, MNI
does not focus on such markets and its sales in these regions are relatively
small. MNI tries to establish relationships with OEMs and key global players in
these regions, typically for sale in the country's targeted markets.
CUSTOMERS AND APPLICATIONS
MNI markets its products in many sectors of the telecommunications
industry. The principal market segments addressed by MNI, and examples of
applications within those markets, are set forth below:
Wireless Service Providers. Customers include cellular telephone companies
(in the United States and abroad) which use MNI's microwave radios to connect
cell sites and link them back to the mobile telephone switching office (MTSO)
which connects to the public switched telephone network. Cellular technology has
become the medium of choice in many developing countries where upgrading the
telecommunication infrastructure is a priority. Approximately 75% of MNI's
products are used in cellular telephone applications and networks.
Telephone Companies and Common Carriers. MNI's customers include domestic
and foreign telephone companies and long distance and inter-exchange carriers
desiring to provide their customers with a greater variety of services,
including direct access to long distance networks, trucking and local
distribution. In developing countries, telephone companies are connecting rural
villages to the network using microwave radio as a quick and relatively
inexpensive method to establish service.
Private Networks. Customers include private businesses, educational,
financial and medical institutions, railroads, pipelines, utilities, federal and
local governments and other organizations seeking greater control over the cost
and availability of their communications services. Typical applications in this
segment range from a single transmission link connecting two buildings to
complex major networks comprised of dozens of microwave terminals.
TECHNOLOGY AND PRODUCTS
MNI's digital microwave radio terminals consist of two components, a
digital modem, or interface, for interfacing with the customer's terminal
equipment, and a radio frequency (RF) unit for converting the information into a
high frequency microwave signal. Parabolic antennas are integrated with the
radio to amplify and direct the microwave signal to another terminal at a remote
location. The digital modems cover low to medium capacity requirements, from 1.5
Mbit/s (millions of bits per second) to 45 Mbit/s data rates, and are
manufactured to address both North American and International standards. MNI's
RF units operate in the 2, 7, 8, 13, 15, 18, 23 and 38 GHz frequency bands to
provide transmission paths from very short to long distances. Generally, the
higher the frequency (e.g. 38 GHz), the shorter the distance the signal can
travel, and vice versa. Microwave transmission generally requires a clear
"line-of-sight" path and can be adversely
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<PAGE> 86
affected by such things as rainfall, temperature and reflections. MNI often
assists its customers in designing reliable paths which use the proper frequency
depending on the customers' specific application and available spectrum. In
addition to digital radios, MNI also has manufactured broadcast quality analog
video radios, but is de-emphasizing this business due to other opportunities in
the marketplace.
MNI's common platform approach differentiates its family of digital
point-to-point microwave radios in the marketplace. The interchangeability of
the modems and the RF units provides customers with the flexibility of
upgradeable capacity, common network monitoring and control, and lower overall
operating costs. The commonality also provides greater operating efficiency with
ease of training, reduced sparing and reduced maintenance. MNI has two distinct
radio families, the K-Model and the Q-Model, for different types of
applications. The K-Model uses a proven robust modulation technique, 4-level
frequency shift keying (4FSK), while the Q-Model uses a more spectrally
efficient modulation arrangement, 16-level quadrature amplitude modulation
(16QAM). Set forth below is MNI's product chart, which illustrates the
frequencies and capacities of its products:
DIGITAL MICROWAVE PRODUCT MATRIX
(K = K-MODEL; Q = Q-MODEL)
<TABLE>
<CAPTION>
FREQUENCY (GHZ)
------------------------------------------------------
CAPACITY 2 7/8 13 15 18 23 38
- ------------------------------------------------- ------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
International Data Rates:
1X2 Mbit/s..................................... K K K K K
4/8X2 Mbit/s................................... K K K K K K
16X2 or 34 Mbit/s.............................. K or Q Q K K K K K
North American Data Rates:
1X1.5 Mbit/s................................... K K K K K
4/8X1.5 Mbit/s................................. K K K K K K
DS3 or 45 Mbit/s............................... K K K K K K
</TABLE>
K-Model RF Units
The K-Model radio provides RF units which operate in the 2, 13, 15, 18, 23
and 38 GHz frequency bands. New 15 and 23 GHz K-Model RF units began shipping in
1994, and new 18 and 38 GHz K-Model RF units will begin shipping during early
calendar 1995. The 15, 18 and 23 GHz K-Model RF units provide "direct digital
synthesis" (DDS) which uses new sophisticated synthesizer technology to provide
tunability over the entire frequency band. This simplifies the tuning, reduces
the manufacturing time for a complete radio terminal, and reduces the number of
spare models. MNI's use of advanced technologies, such as microwave monolithic
integrated circuits (MMIC), application specific integrated circuits (ASIC), and
surface mount components have enabled this new, cost effective design.
Q-Model RF Units
The Q-Model radio has RF units at 2, 7 and 8 GHz, and is presently
compatible with the 34/16X2 Mbit/s modem. The Q-Model, which began shipping in
early 1994, was designed in response to the recent International Telephone
Union's (ITU) recommendations (CCIR 283-5) to reduce spectrum congestion in the
low frequency bands and meets the required spectral efficiency of 34 Mbit/s in
14 MHz of bandwidth. The new Q-Model platform is envisioned to eventually become
interchangeable throughout all of MNI's radio frequency units from 2 GHz to 38
GHz and provide a competitive advantage in spectrally congested areas.
International Standard Modems
MNI manufactures a complete family of modems for use with international
G.703 data rates from 2.048 Mbit/s to 34 Mbit/s. The 34/16X2 Mbit/s modem, which
began shipping in early 1994, provides either a single 34 Mbit/s interface or up
to sixteen 2.048 Mbit/s data channels utilizing a fully integrated 16X2 Mbit/s
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<PAGE> 87
multiplexer. Containing an integrated network monitor and control system
("NMCS") compatible with the other MNI modems, it also offers technically
advanced features including forward error correction (FEC), error-free receiver
switching, both 2 and 34 Mbit/s integrated test sets, and adaptive time domain
equalization for the Q-Model. The 4/8X2 Mbit/s modem began shipping in 1991 and
is compatible with all K-Model RF units. Configured for either four or eight
2.048 Mbit/s data channels, this modem unit received early market acceptance
because of its compact size and the integrated multiplexer, bit-error rate test
set, and NMCS. MNI's lowest capacity modem for transmission of a single 2.048
Mbit/s data rate was introduced in 1992. This product was designed with a
minimal feature set to achieve a low market price ideal for "last mile"
applications and emerging providers of personal communications networks and
services who require inexpensive, low capacity connectivity.
North American Standard Modems
For those countries that are using the North American standard data rates
(DS1, DS3), MNI introduced a medium capacity 45 Mbit/s modem in 1989 that is
compatible with its K-Model RF units. The modem was designed for the U.S. and
Canadian requirements for a short distance radio link and provides customers
with a single DS3 interface. For lower capacity requirements, MNI provides a
4/8X1.5 Mbit/s modem which provides either 4 or 8 DS1 interfaces and a 1.5
Mbit/s modem which provides a single DS1 interface.
Integrated Network Monitoring and Control System
MNI's NMCS, which was introduced to the industry in 1991, allows
information about the status of an entire MNI radio system to be reviewed from
any networked front panel. It provides complete health and diagnostics and
operational information from any terminal about any other terminal on the
network up to a maximum of 253 terminals. Utilizing a PC-based software program
called RAMACS, the NMCS provides additional functionality by allowing for
continuous polling of radios, event logging and historical report generation.
MNI has announced the next generation of the RAMACS product, planned for release
in early calendar 1995, which allows open architecture compatibility with a
variety of higher order customer Network Management Systems and provides many
new features and enhanced graphic capability.
SALES AND MARKETING
MNI's strategy for increasing international sales is to establish
distribution with the strongest in-country partner available in each area or
market. MNI targets countries where its existing products are suitable for use
in telecommunications infrastructure development, usually new cellular systems.
MNI regional sales personnel work closely with the in-country partners in order
to obtain product orders and provide responsive customer support. When
international projects have multinational partners, the sales efforts include
working closely with the multinational partner, which can and often does
influence the choice of vendor. The domestic sales effort is intended to
complement the international effort by contacting the U.S.-based multinational
partners as well as generating sales through resellers.
With distribution in countries that are rapidly expanding their
telecommunications infrastructure and/or undergoing privatization, and with
relationships developed with the large multinational telecommunications
providers who are investing in global projects, MNI believes it is well
positioned to be selected as the microwave radio supplier when projects occur in
those countries. Particular emphasis is placed on developing and maintaining
good relationships with U.S.-based Bell companies and European telephone
companies who participate in global projects.
MNI's marketing strategy reflects the international focus of the market for
telecommunications products. Approximately 90% of MNI revenue is derived from
international sales primarily to Mexico, South America, Australia, Asia and
Eastern Europe. MNI commits a substantial portion of its sales and marketing
resources to the developing countries with emerging telecom markets and has
organized its sales efforts to attempt to effectively serve these regions.
MNI's sales orders typically originate through a bid process within the
country of origin. The process, which usually lasts from six to 18 months,
originates with and is fostered by MNI's in-country partners. MNI
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<PAGE> 88
actively supports and monitors each bid from its headquarters and regional
offices. When an order is awarded, MNI commonly is expected to fill such order
on a relatively quick three to six month basis.
MNI has historically relied upon major orders from a small number of
customers for a large portion of its revenues. Approximately 20%, 16% and 11% of
MNI's revenues in fiscal year 1994 were derived from sales to Radiomovil Dipsa,
Comsyst and Grupo Iusacell, respectively. While MNI's sales in each of the last
three years have been concentrated among a relatively small number of customers,
the customers change from year to year as MNI replaces completed projects with
new projects. There is no assurance that it can continue to obtain the new
projects, and any failure to obtain a sufficient number of new orders in the
future could have a material adverse effect on its business and results of
operations.
Total international sales for fiscal year 1994 and for the six months ended
December 31, 1994 were 93% and 96%, respectively, of total net sales. MNI
expects that international sales will continue to account for similar
percentages of its net sales in the foreseeable future. MNI is subject to the
risks of foreign currency fluctuations, and the changing value of the U.S.
dollar in relation to foreign currencies could negatively impact its operating
results. International operations and sales may also be adversely affected by
the imposition of government controls, export licensing requirements,
restrictions on the export of critical technology, political and economic
instability, trade restrictions, changes in tariffs and taxes, and general
economic conditions, including inflation.
CUSTOMER SERVICE AND SUPPORT
MNI believes that its reputation for service is a competitive advantage in
attracting new customers. MNI devotes considerable attention and resources to
customer needs from the bid stage to the maintenance of the installed network.
To monitor the needs of its customers, MNI has designed a sales and technical
support organization that maintains offices in the United States, Mexico,
Singapore, the United Kingdom and China, with an additional office planned for
the Philippines. In addition, MNI uses in-country partners that provide
additional sales and support worldwide. MNI maintains a toll-free 24-hour
service to respond to telephone inquiries on the use of MNI's products and to
assist customers with technical or installation problems. MNI warrants its
products against defects for varying periods.
Technical services at MNI include the Program Management, Systems
Engineering, Field Engineering, Transmission Engineering, and Training
Departments. An active Program Management function was established in 1994 to be
responsible for all assigned projects from order entry to customer acceptance.
MNI intends to expand this department as MNI grows so that the customer has a
consistent point of contact at MNI to answer questions and to resolve problems.
Systems Engineering supports special engineering requirements, qualification
testing for country type approvals, and technical responses for quotations and
proposals. MNI intends to expand Systems Engineering as MNI grows with
additional technical personnel in order to provide support to its customers. To
provide better service to customers, MNI has staffed Field Engineering and
Transmission Engineering Departments. The Field Engineering Department enables
MNI to support more engineer, furnish, and install (EF&I) requirements and to
provide on-site technical assistance to new customers who may not be familiar
with MNI equipment. The Transmission Department enables MNI to provide total
site and path engineering which is also required by customers to implement their
networks. By providing complete transmission engineering services as well as the
equipment, MNI believes that it is able to offer a total solution that meets the
customers' objectives. In addition, MNI trains its customers in the use of MNI
equipment at either of MNI's fully equipped labs or at the customer's
facilities. Training is provided in several languages.
RESEARCH AND DEVELOPMENT
MNI has a continuing program of research and development directed toward
the enhancement of existing products in response to customer needs and the
introduction of new products to broaden its product line. Approximately 11.9% of
MNI's net sales, or $4.4 million, was invested in research and development in
fiscal year 1994, compared to 9.4% of net sales, or $3.7 million, in fiscal year
1993. MNI formed a wholly owned subsidiary in Australia in 1993 to carry out
basic research in the use of MMIC technologies. This subsidiary
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has contracted with CSIRO, an Australian government laboratory, to provide key
engineering personnel and facilities. The costs of the Australian research
efforts have been partially offset by grants received from the Australian
government.
MANUFACTURING AND SUPPLIERS
MNI products are manufactured in its Houston facilities with most
subassembly and components supplied by qualified vendors. The manufacturing
process consists primarily of materials management, extensive unit and
environmental testing of components and subassemblies at each stage of the
manufacturing process, final assembly of the radios and, prior to shipment,
quality assurance testing and inspection of all products. The manufacturing
operations occupy approximately one-half of the 75,000 square foot Houston
facilities.
In 1993, MNI established a quality system certified to the ISO 9001 quality
standard and since then has passed three additional audits by the independent
auditors, Det Norske Veritas. ISO 9001 certification is important to MNI and its
international customers because it insures customers that MNI's manufacturing
process is in compliance with recognized standards. Formalized procedures for
all manufacturing, procurement and quality control are in use throughout MNI and
are certified to comply with ISO 9001. Vendors and sub-contractors are evaluated
periodically by MNI to assure quality. Statistical process control is used
extensively in manufacturing to monitor yields and determine root causes of
problems. MNI has automated the testing of nearly all of the printed circuit
boards and modules. Statistical data from each of the tested units is collected
and retained for yield and failure analysis. A staff of manufacturing engineers
and sustaining engineers addresses cost reduction and quality issues on a
continuous basis.
MNI has adopted a total quality management ("TQM") philosophy and strives
to improve quality in all areas of the company. In addition to manufacturing
process quality control, MNI engages in active component qualification, vendor
certification and monitoring, final quality inspection, and complete customer
service. As part of the TQM program, a steering committee supports company
quality objectives and oversees cross-functional, volunteer "Process Improvement
Teams." These teams work together to improve the MNI quality system, policies
and procedures. Training of employees will continue to be a major contributor to
the improvement of the quality level of MNI.
Due to the unique nature of the technologies and products developed and
manufactured by MNI, MNI is often dependent on a single supplier for certain
materials and components used in MNI's products. The lead time required to
obtain components from single source suppliers often exceeds the lead time that
customers give MNI, which in some cases results in delayed shipments to the
customers. While a portion of this problem is attributable to MNI's need to
obtain significantly larger quantities of components than it notifies its
suppliers to prepare to deliver, the inability to obtain components could
develop into a constraint on MNI's ability to compete for new orders. Although
MNI is attempting to obtain second source suppliers for some components, MNI
believes it will continue to be dependent to a significant degree upon single
source suppliers. Delays in delivery, quality problems or the inability of MNI
to obtain the components required to manufacture MNI's product on a cost
effective basis could have a material adverse effect on MNI's business and
results of operations. MNI has several key suppliers, and the failure of any one
to deliver quality components on a timely basis could have a material adverse
effect on the results of operations in any one or more of MNI's fiscal quarters.
See "Risk Factors--Dependence on Component Availability, Subcontractor
Performance and Key Suppliers."
BACKLOG
MNI's backlog at December 31, 1994 was approximately $16.9 million as
compared to $9.4 million as of December 31, 1993. MNI generally records an order
in backlog when it receives a firm contract or purchase order which identifies
product quantities and delivery dates. MNI's backlog should not be used as a
measure of future revenues. Orders are typically shipped within 90 days of
receipt. Backlog beyond 90 days delivery may represent temporary increases in
demand. MNI's backlog is subject to fluctuations, and there can be no assurance
that backlog as of any particular date will be a reliable measure of sales for
any future period.
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<PAGE> 90
COMPETITION
MNI is engaged in a highly competitive business. Most of MNI's competitors
have more extensive engineering, manufacturing and marketing capabilities and
substantially greater financial, technical and personnel resources than MNI.
Certain competitors can also offer a much wider range of products, services and
systems that may provide an advantage in procuring contracts and customers. In
addition, some of MNI's customers could develop the capability to manufacture
products similar to those manufactured by MNI. Existing and potential
competition in the industry has resulted in and will continue to result in
significant price competition. A strong U.S. dollar, for example, may make MNI's
products more expensive compared to those of its foreign competitors, which
would have an adverse effect on MNI. MNI believes that competition in its
markets is based primarily on delivery, customer support and relationships,
price, technological capability, reputation, reliability, in-country partners
and performance. MNI's future success will depend upon its ability to address
the increasingly sophisticated needs of its customers by enhancing its current
products, by the development and timely introduction of new products that keep
pace with technological developments and emerging industry standards, and by
providing such products at competitive prices. MNI's major competitors include:
Digital Microwave, Ericsson, Harris Farinon, Alcatel, NEC and Siemens. On
occasion, MNI has also competed with CMI. MNI also competes with other large
multinational companies. See "Risk Factors--Competition and Changing
Technology."
REGULATION
Radio frequency transmissions and emissions, and certain equipment used in
connection therewith, are regulated throughout the world. Regulatory approvals
generally must be obtained by MNI in connection with the manufacture and sale of
its products, and by MNI customers to operate MNI's products. The enactment by
governmental authorities of new laws or regulations or a change in the
interpretation of existing regulations could affect the market for MNI's
products. Although recent deregulation of international communications
industries have increased the potential demand for MNI's products by providing
users of those products with opportunities to establish new wireless
communications services, there can be no assurance that the trend toward
deregulation and current regulatory developments favorable to the promotion of
new and expanded personal communications services will continue or that other
future regulatory changes will have a positive impact on MNI. The increasing
demand for wireless communications has exerted pressure on regulatory bodies
worldwide to adopt new standards for such products, generally following
extensive investigation of and deliberation over competing technologies. The
delays inherent in this governmental approval process have in the past caused,
and may in the future cause, the cancellation, postponement or rescheduling of
the installation of communications systems by MNI's customers. Moreover, there
can be no assurance that MNI's technology will be suitable for adoption in such
applications. See "Risk Factors--Regulation."
Official homologations have been received in the U.S., Mexico, the U.K.,
Poland, Hungary, Israel, Venezuela, Israel, Australia and Taiwan. The process of
homologation involves the approval of MNI's products for use in a particular
country to insure compliance with the governmental standards of that country.
PATENTS AND LICENSES
Although MNI believes that its continued success will depend primarily on
continuing innovation, sales, marketing and technical expertise, the quality of
product support and customer relations, MNI must also protect the proprietary
technology contained in its products. MNI currently has no patent protection for
its products, and relies on a combination of copyright, trademark and trade
secret laws, nondisclosure and other contractual agreements and technical
measures to protect its proprietary technology. There can be no assurance that
MNI will attempt or be able to obtain any meaningful patent protection for its
technology in the future, nor can there be any assurance that the measures taken
by MNI will be adequate to prevent or deter misappropriation of its technology,
or that competitors will not be able to independently develop technologies
having similar functions and performance characteristics. Although MNI believes
that its products and technology do not infringe proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
in the future.
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<PAGE> 91
EMPLOYEES
At December 31, 1994, MNI has 358 total employees, 328 in Houston, 20 in
Mexico City, 6 in Singapore, 2 in Sydney, Australia, 1 in Beijing, China and 1
in the United Kingdom. None of MNI's employees is represented by a collective
bargaining agreement. MNI's future performance will depend in large measure on
its ability to attract and retain highly skilled employees. MNI believes that it
has good relations with its employees.
FACILITIES
MNI's principal administrative, sales, marketing, research and development
and manufacturing facilities are located in Houston, Texas in three buildings
totaling approximately 75,000 square feet. The leases on two of the buildings
expire in July 2001 and the lease on the third building expires in January 1998.
MNI believes that its existing facilities are adequate for its current
requirements and that additional space will be available on commercially
reasonable terms as needed.
LEGAL MATTERS
MNI is not involved in any pending legal proceedings, other than claims or
proceedings incidental to its business that management believes would not have a
material adverse effect on its financial condition or results of operations.
EXECUTIVE OFFICERS
The following table sets forth certain information on the executive
officers of MNI as of the date of this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Arthur W. Epley, III....... 53 President, Chief Executive Officer and Director
Carl B. Frampton........... 42 Chief Operating Officer and Chief Financial Officer
Charles W. Bentley......... 56 Vice President of Operations
W. F. Montgomery........... 41 Vice President of Sales, Asia/Pacific
Michael C. Engle........... 34 Vice President of Marketing
James R. Gordon............ 42 Vice President of Sales, Europe/Middle East/Africa
Fernando Vallarta.......... 62 Vice President of Sales, Mexico for MNI, and Director
General for Microwave Networks S.A., a subsidiary of MNI
R. Chris Brown............. 45 Vice President of Sales, Americas
</TABLE>
ARTHUR W. EPLEY, III, a founder of MNI, has served as MNI's President and
Chief Executive Officer since 1982. In 1968, Mr. Epley co-founded Datatex
Corporation, an electronics manufacturing company, and served as its Chief
Executive Officer until 1982. In 1975 Datatex was acquired by Augat Inc. and Mr.
Epley assumed additional management responsibilities with Augat until he
resigned in 1982 to join MNI. Mr. Epley has more than 28 years experience in the
telecommunications and electronics industries.
CARL B. FRAMPTON has served as Chief Operating Officer since August 1994
and Chief Financial Officer of MNI since November 1992. From 1985 to November
1992 Mr. Frampton served as Vice President and General Manager--U.S. Operations
as well as Chief Financial Officer of Multiflex, Inc., where he had financial
and operational responsibilities for the U.S., and financial responsibilities
for the U.K., Norwegian and Brazilian operations. Mr. Frampton is a Certified
Public Accountant and has more than 17 years experience in finance and
operations.
CHARLES W. BENTLEY, a founder of MNI, has served as Vice President of
Operations of MNI since 1982. Mr. Bentley also co-founded and served as Vice
President of Operations for Datatex Corporation until acquired by Augat Inc. and
held various other management positions post acquisition within Augat Inc. from
1968 to 1982. His experience includes various positions with responsibilities
for manufacturing, quality control,
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maintenance, customer service, computer operations and personnel over the last
30 years at Texas Instruments, Curtis Mathes, Datatex and Augat Inc.
W.F. MONTGOMERY, a founder of MNI, has served as Vice President of MNI
since 1982. Mr. Montgomery has also worked for Texas Instruments, Gardiner
Communications and B.E. Industries. He has more than 15 years experience in
microwave product design, systems engineering, sales and marketing.
MICHAEL C. ENGLE has served as Vice President of Marketing of MNI since
1993. From 1989 to 1993 Mr. Engle was in charge of market planning for Harris
Farinon and had 13 years of sales and marketing experience with Harris
Corporation. Mr. Engle has more than 15 years of sales and marketing experience
in the communications industry.
JAMES R. GORDON has served as Vice President of Sales of MNI since 1988.
From 1984 to 1988 Mr. Gordon was Vice President and General Manager of SANBAR
Corporation and has served in several engineering and sales assignments with
Harris Farinon. Mr. Gordon has more than 17 years experience in the microwave
industry and has held various sales and management positions.
FERNANDO VALLARTA has served as Vice President of Sales, Mexico of MNI
since January 1994 and Director General, Microwave Networks S.A. de C.V. since
February 1993. From 1968 to January 1993 Mr. Vallarta acted as a consultant to
various banks in Mexico. From 1964 to 1968, Mr. Vallarta served as President of
Banco Mexicano de Puebla, S.A. and from 1950 to 1964 served as Vice President of
Banco de Comercio, S.A. Mr. Vallarta has more than 30 years of business
management expertise in Mexico, including assisting a conglomeration of banks in
Mexico in mergers and consolidations, which initiated multibanking for the
country.
R. CHRIS BROWN has served as Vice President of Sales, Americas of MNI since
October 1994. From 1984 to October 1994, Mr. Brown served as International Sales
Manager of Andrew Corporation.
All directors hold office until the next annual meeting of stockholders of
MNI and until their successors have been elected and qualified. Officers serve
at the discretion of the Board of Directors.
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee and a Compensation
Committee. The Audit Committee reviews the scope and results of the annual audit
of MNI's consolidated financial statements conducted by MNI's independent
accountants, the scope of other services provided by MNI's independent
accountants, proposed changes in MNI's financial and accounting standards and
principles, and MNI's policies and procedures with respect to its internal
accounting, auditing and financial controls, and makes recommendations to the
Board of Directors on the engagement of the independent accountants, as well as
other matters which may come before it or as directed by the Board of Directors.
The Compensation Committee administers MNI's compensation programs,
including the Stock Option Plans, and performs such other duties as may from
time to time be determined by the Board of Directors.
BOARD COMPENSATION
The MNI Board of Directors has not received any compensation for services
as members of the Board of Directors in the past. Non-employee members of the
MNI Board of Directors receive options to purchase 1,000 shares of MNI Common
Stock for each year of service, and an initial option to purchase 10,000 shares
of MNI Common Stock upon commencement of service on the Board, under the 1990
MNI Non-Qualified Stock Option Plan for Nonemployee Directors and Consultants.
EMPLOYMENT AND CONSULTING AGREEMENTS
MNI has entered into consulting agreements with Erik H. van der Kaay and
Richard Long, directors of MNI, for their services as strategic and business
advisors. The agreements provide for payments of $1,000 per month plus expenses.
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None of MNI's executive officers has entered into an employment agreement
with MNI. However, upon closing of the Merger, Messrs. Epley, Frampton, Bentley
and Montgomery will enter into employment agreements with MNI and MNI will use
its best efforts to enter into employment arrangements with certain other key
employees of MNI specified by CMI. See "Terms of the Merger--Employment
Agreements and Covenants Not to Compete" and "Risk Factors--Organization;
Dependence on Key Personnel."
EXECUTIVE COMPENSATION
The following table sets forth in summary form all compensation paid by MNI
to the Chief Executive Officer and its other four most highly compensated
executive officers (collectively, the "MNI Named Executive Officers") for
services rendered in all capacities to MNI for the fiscal years ended June 30,
1992, 1993 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1) OPTIONS(#)
- ---------------------------------- ---- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Arthur W. Epley, III.............. 1994 $150,000 $ 0 $ 1,500 0
President, Chief Executive 1993 148,333 89,000 2,704 0
Officer and Director 1992 130,000 0 433 0
Fernando Vallarta................. 1994 137,912 0 0 25,000
Vice President of Sales, Mexico 1993 37,158 0 0 5,000
and Director General of 1992 0 0 0 0
Microwave Networks S.A. de C.V.
W.F. Montgomery III............... 1994 123,106 0 588 5,000
Vice President of Sales, 1993 160,960 0 0 5,000
Asia/Pacific 1992 87,661 0 0 5,000
James R. Gordon................... 1994 101,226 0 890 5,000
Vice President of Sales, 1993 89,416 47,200 1,425 0
Europe/Middle East/Africa 1992 103,065 6,000 340 5,000
Charles W. Bentley................ 1994 99,223 15,600 466 0
Vice President of Operations 1993 88,533 28,533 548 0
and Director 1992 85,760 4,000 267 0
</TABLE>
- ---------------
(1) Represents employer contributions to the Microwave Networks 401(k)
Retirement Savings Plan.
Stock Option Plans. In November 1989, MNI's Board of Directors adopted the
1990 Microwave Networks Incorporated Non-Qualified Stock Option Plan for
Employees and the 1990 Microwave Networks Incorporated Non-Qualified Stock
Option Plan for Nonemployee Directors and Consultants (the "MNI Option Plans"),
which were amended in 1993 by the Board of Directors. The stockholders have
approved the MNI Option Plans, as amended.
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Stock Compensation Table. The following table sets forth certain
information concerning stock options granted under the MNI Option Plans during
the 1994 fiscal year to the Chief Executive Officer and each of the four other
most highly compensated executive officers of MNI:
OPTION GRANTS IN FISCAL 1994
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK
-------------------- PRICE APPRECIATION
% OF TOTAL FOR OPTION
OPTIONS TERM(2)(3)
OPTIONS GRANTED TO EXERCISE EXPIRATION -------------------
GRANTED EMPLOYEES PRICE(1) DATE 5% 10%
------- ---------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Arthur W. Epley, III................. 0 0% 0 -- 0 0
Fernando Vallarta.................... 25,000 9.5% $.95 5/19/99 $ 6,562 $14,500
W.F. Montgomery III.................. 5,000 1.9% $.95 5/19/99 $ 1,312 3,000
James R. Gordon...................... 5,000 1.9% $.95 5/19/99 $ 1,312 3,000
Charles W. Bentley................... 0 0% 0 -- 0 0
</TABLE>
- ---------------
(1) The exercise price is equal to the fair market value of the MNI Common Stock
on the date of grant, as determined by the MNI Board of Directors.
(2) The 5% and the 10% assumed rates of appreciation applied to the option
exercise price over the five year option term are prescribed by the rules of
the Securities and Exchange Commission and do not represent MNI's estimate
or projection of the future price of MNI Common Stock.
(3) All options granted in fiscal 1994 were pursuant to the 1990 MNI
Non-Qualified Stock Option Plan. The options are non-qualified stock options
that were granted at 100% of the fair market value of the MNI Common Stock
on the date of grant. The options expire five years from the date of grant,
unless otherwise earlier terminated related to termination of employment.
The options vest 25% on date of grant and 25% per year on each of the first
three anniversaries of the option grant date.
Option Value Table. The following table sets forth certain information
concerning options exercised during MNI's 1994 fiscal year, and the number of
unexercised options and the value of unexercised options as of June 30, 1994 to
the Chief Executive Officer and each of the four other most highly compensated
executive officers of MNI:
AGGREGATED OPTION EXERCISES IN FISCAL 1994 AND JUNE 30, 1994 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT 6/30/94 AT 6/30/94(1)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur W. Epley, III.......... 0 0 0 0 0 0
Fernando Vallarta............. 2,500 $ 375 6,250 21,250 $ 0 $ 375
W.F. Montgomery III........... 0 0 40,000 7,500 $22,625 $ 750
James R. Gordon............... 30,000 $ 17,000 25,000 5,000 $13,750 $ 500
Charles W. Bentley............ 0 0 0 0 0 0
</TABLE>
- ---------------
(1) The value of unexercised options is calculated by multiplying the number of
options outstanding by the difference between the option exercise price and
the June 30, 1994 fair market value of $.95 per share of MNI Common Stock as
determined by MNI's Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office and manufacturing facilities from a joint venture
owned by Arthur W. Epley, III, President, Chief Executive Officer and Director
of MNI, and Don Mullins, a shareholder of MNI, under
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<PAGE> 95
two separate leases that expire in July 2001. Rent expense associated with the
joint venture was $165,573, $194,349 and $279,331 in fiscal 1992, 1993 and 1994,
respectively.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of MNI Capital Stock as of January 31, 1995 and the beneficial
ownership of CMI Common Stock such shares will represent after the Merger
(assuming an Exchange Ratio of .3511) (i) by each person who is known by MNI to
own beneficially more than 5% of the outstanding shares of MNI Capital Stock,
(ii) by MNI's Chief Executive Officer and each of its next four most highly
compensated executive officers; (iii) by the directors individually; and (iv) by
all directors and executive officers as a group. Except as otherwise indicated,
MNI believes that the beneficial owners of the securities listed below, based on
information provided by such owners, have sole investment and voting power with
respect to the MNI Capital Stock shown as being beneficially owned by them. The
number of shares of MNI Capital Stock and calculation of percent ownership takes
into account those shares underlying stock options that are exercisable within
60 days of January 31, 1995.
<TABLE>
<CAPTION>
MNI SHARES CMI SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO MERGER AFTER MERGER(1)
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Arthur W. Epley, III(2)............................ 1,698,079 18.5% 596,195 3.8%
10795 Rockley Road
Houston, TX 77099
W.S. Farish Company................................ 1,117,127 12.2 392,223 2.5
1100 Louisiana, Suite 1200
Houston, TX 77002
Peregrine Ventures
Peregrine Ventures II.............................. 1,431,802 15.6 502,705 3.2
20833 Stevens Creek Blvd., Suite 100
Cupertino, CA 95014
Criterion Venture Capital
Criterion-Bermuda.................................. 717,963 7.8 252,076 1.6
1999 Broadway, Suite 2100
Denver, CO 80202
Charles W. Bentley................................. 375,873 4.1 131,969 *
W.F. Montgomery III(3)............................. 160,000 1.7 56,176 *
James R. Gordon(4)................................. 55,000 * 19,310 *
Terry Ward(5)...................................... 33,628 * 5,487 *
Erik van der Kaay(6)............................... 24,296 * 6,715 *
Richard Long(7).................................... 23,546 * 5,750 *
Frank LaHaye(8).................................... 10,750 * 3,774 *
Fernando Vallarta(9)............................... 10,000 * 3,511 *
Al Paladino(10).................................... 10,000 * 3,511 *
All executive officers and directors as a group (12
persons)(11)(12)................................. 5,440,157 59.2 1,910,039 12.1
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares.
(1) Post Merger CMI shares are calculated by using the assumed Exchange Ratio
of .3511 CMI shares per share of MNI Capital Stock.
(2) Excludes 299,211 shares of MNI Capital Stock owned by Mr. Epley's three
adult children.
(3) Includes 40,000 shares of MNI Common Stock which Mr. Montgomery has an
option to acquire.
(4) Includes 5,000 shares of MNI Common Stock which Mr. Gordon has an option to
acquire.
(5) Includes 1,750 shares of MNI Common Stock which Mr. Ward has an option to
acquire. Does not include the shares of W.S. Farish Company, with respect
to which Mr. Ward exercises voting power.
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<PAGE> 96
(6) Includes 2,750 shares of MNI Common Stock which Mr. van der Kaay has an
option to acquire.
(7) Includes 6,250 shares of MNI Common Stock which Mr. Long has an option to
acquire.
(8) Includes 10,750 shares of MNI Common Stock which Mr. LaHaye has an option
to acquire. Does not include the shares of Peregrine Ventures and Peregrine
Ventures II, with respect to which Mr. LaHaye exercises voting power.
(9) Includes 1,250 shares of MNI Common Stock which Mr. Vallarta has an option
to acquire.
(10) Includes 10,000 shares of MNI Common Stock which Mr. Paladino has an option
to acquire. Does not include 453,806 shares of MNI Capital Stock (159,331
shares of CMI Common Stock after the Merger) of Advanced Technology
Ventures, with respect to which Mr. Paladino exercises voting power.
(11) Includes 114,000 shares of MNI Common Stock which executive officers and
directors have an option to acquire.
(12) Includes 3,002,735 shares of MNI Capital Stock over which certain directors
exercise voting power for their respective investment partnerships.
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<PAGE> 97
DESCRIPTION OF CMI COMMON STOCK
CMI is authorized to issue 29,200,000 shares of Common Stock, par value
$.10 per share. The holders of Common Stock of CMI are entitled to receive
dividends as and when declared by the Board of Directors out of funds legally
available therefor, and in the event of liquidation, dissolution or winding up
of CMI, to share ratably in all assets remaining after payment of liabilities.
The holders of the Common Stock are entitled to one vote for each share of such
stock held of record by them and may cumulate votes in the election of
directors. The holders of Common Stock have no preemptive or conversion rights
and are not subject to further calls or assessments by CMI. There are no
redemptions or sinking fund provisions applicable to the Common Stock. The
Common Stock currently outstanding is, and the Common Stock to be issued
pursuant to the Merger Agreement will be, fully paid and nonassessable.
In 1989, the stockholders approved a rights agreement (the "Rights
Agreement") pursuant to which CMI distributed to its stockholders the right to
buy, for $35, one share of Common Stock for each share of Common Stock held by
such stockholders. The rights will only become exercisable if a person or group
acquires 20% or more of the Common Stock or announces an offer to acquire 30% or
more of the Common Stock. In the event CMI is acquired, or upon the occurrence
of certain other events, each right may under certain circumstances entitle the
holder to purchase, for $35, $70 worth of Common Stock. Until such events occur,
the rights are redeemable at any time by CMI for $.01 per right. The rights
agreement expires in July 1999.
The First National Bank of Boston is the Transfer Agent and the Registrar
of CMI's Common Stock.
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<PAGE> 98
COMPARISON OF RIGHTS OF HOLDERS OF CMI COMMON STOCK
AND HOLDERS OF MNI CAPITAL STOCK
CMI is incorporated under the laws of the State of Delaware and,
accordingly, the rights of CMI's stockholders are governed by CMI's Restated
Certificate of Incorporation, as amended, CMI's Bylaws and Delaware law. MNI is
incorporated under the laws of the State of Texas and, accordingly, the rights
of MNI stockholders are governed by MNI's Articles of Incorporation, as amended,
MNI's Bylaws and Texas law.
Upon consummation of the Merger, MNI's stockholders will become
stockholders of CMI, and as such, their rights will be governed by CMI's
Restated Certificate of Incorporation, CMI's Bylaws and Delaware law. The
following is a summary of certain significant differences between Texas and
Delaware law, as well as between the articles and bylaws of CMI and MNI, that
might significantly affect the rights of MNI's stockholders.
Certain provisions of CMI's Restated Certificate of Incorporation and
Bylaws, (including the provisions concerning fair pricing of certain business
combinations involving CMI), and of its Rights Agreement could limit the ability
of others to acquire control of CMI or to engage in certain transactions. These
provisions also could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging third parties from seeking to obtain control of CMI in a tender
offer or similar transactions. CMI believes, however, that such provisions may
provide certain benefits to CMI, such as requiring persons seeking control of
CMI to negotiate with its management regarding the price to be paid for the
shares required to obtain such control and enhancing and promoting continuity
and stability of CMI.
ANTI-TAKEOVER MEASURES
Section 203 ("Section 203") of the Delaware General Corporation Law (the
"DGCL") provides that, with certain exceptions, a Delaware corporation cannot
engage in any "business combination" with an "interested stockholder" during a
period of three years after such person becomes an interested stockholder.
For purposes of Section 203, a person (defined to include entities) becomes
an interested stockholder if such person becomes the beneficial owner, or became
the beneficial owner after December 23, 1987, of at least 15% of the outstanding
voting stock of a Delaware corporation, including shares owned by certain
affiliates or associates of such person and subject to certain exemptions. A
person is also an interested stockholder if such person met the foregoing test
at any time within the three-year period prior to the date as of which such
status is being determined and is an affiliate or associate of the corporation
at such date.
Subject to certain exclusions, Section 203 generally defines a business
combination as (i) any reorganization involving an interested stockholder,
including a merger of the corporation or any majority-owned subsidiary or any
sale, lease, mortgage or other transfer (including by way of dissolution) of 10%
or more of the aggregate assets of the corporation or any majority-owned
subsidiary, (ii) any issuance of stock of the corporation or any majority-owned
subsidiary to the interested stockholder which would have the effect of
increasing the proportionate share of the stock of any class or series of the
corporation which is owned by the interested stockholder (other than upon the
exercise of conversion or purchase rights in respect of securities outstanding
prior to the time the interested stockholder became such), (iii) any other
transaction which has the effect of increasing the interested stockholder's
proportionate share of any class of outstanding securities of the corporation or
any majority-owned subsidiary and (iv) any financial transaction involving the
corporation or any majority-owned subsidiary (such as loans, guarantees,
pledges, etc.) which results in financial benefits to the interested
stockholder.
The three year moratorium does not apply to a business combination with an
interested stockholder under the following circumstances: (i) if the interested
stockholder receives the approval of the corporation's board of directors,
either as to the specific business combination being proposed or as to the
transaction whereby the person becomes an interested stockholder, prior to the
time the person becomes an interested stockholder; (ii) if the interested
stockholder acquires at least 85% of the outstanding voting stock of the
corporation (excluding, for this purpose, shares held by directors who are also
officers and shares held under certain employee stock plans) in the transaction
as a result of which the person becomes an interested stockholder; or
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<PAGE> 99
(iii) if the proposed business combination receives both the approval of the
corporation's board of directors and the affirmative vote of 66 2/3% of the
outstanding shares (excluding, for this purpose, shares owned by the interested
stockholder). In addition, any transaction is exempt from the statutory ban if
it is proposed at a time when the corporation has proposed, and a majority of
certain continuing directors of the corporation have approved, a transaction
with a party who is not an interested stockholder of the corporation (or who
becomes such with board approval) if the proposed transaction involves (a)
certain mergers or consolidations involving the corporation, (b) a sale or other
transfer of over 50% of the aggregate assets of the corporation, or (c) a tender
or exchange offer for 50% or more of the outstanding voting stock of the
corporation.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of corporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such bylaw or
charter amendment shall not become effective until 12 months after the date it
is adopted. CMI has not adopted such a charter or bylaw amendment.
The provisions of Section 203 are currently applicable to CMI. In addition,
CMI's Certificate of Incorporation contains "fair price" provisions and other
provisions designed to deter attempts to acquire control of CMI and to ensure
continuity of management. See "Description of CMI Common Stock."
Section 203 has been challenged in lawsuits arising out of ongoing takeover
disputes, and it is not yet clear whether and to what extent its
constitutionality will be upheld by the courts. Although the United States
District Court for the District of Delaware has consistently upheld the
constitutionality of Section 203, the Delaware Supreme Court has not yet
considered the issue. CMI believes that so long as the constitutionality of
Section 203 is upheld, Section 203 will encourage any potential acquiror to
negotiate with CMI's Board of Directors. Section 203 also has the effect of
limiting the ability of a potential acquiror to make a two-tiered bid for CMI in
which all stockholders would not be treated equally. Section 203 should also
discourage certain potential acquirors unwilling to comply with its provisions.
Neither the TBCA nor MNI's Articles of Incorporation or Bylaws contain
similar fair price provisions.
AMENDMENTS TO THE ARTICLES OR CERTIFICATE OF INCORPORATION
Under the TBCA, an amendment to a corporation's articles of incorporation
requires the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the corporation entitled to vote thereon and the
affirmative vote of the holders of at least two-thirds of the shares within each
class or series of outstanding shares entitled to vote thereon as a class. Under
MNI's Articles of Incorporation, in addition to the affirmative percentage vote
required by law of all shareholders having voting rights, the consent of the
holders of at least two-thirds of all issued and outstanding shares of a series
of MNI Preferred Stock shall be required for any of the following actions: (i)
any action which alters or changes the rights, preferences or privileges of such
series, or (ii) any action which increases the authorized number of shares of
such series.
Under the DGCL, an amendment to a corporation's certificate of
incorporation requires the affirmative vote of the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon and a majority of
the outstanding stock of each class entitled to vote thereon as a class, unless
the corporation's certificate of incorporation provides for a higher percentage.
Under CMI's Restated Certificate of Incorporation, the affirmative vote of the
holders of two-thirds of the then outstanding CMI Common Stock is required to
amend any provisions inconsistent with certain articles of the CMI Restated
Certificate of Incorporation relating to stockholder meetings and amendments or
certain business combinations proposed by certain interested stockholders.
MERGERS, EXCHANGES, CONSOLIDATIONS AND DISSOLUTIONS
Under the TBCA, a Texas corporation must have a plan of merger or exchange
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding shares entitled to vote thereon unless any class or series of shares
of any such corporation is entitled to vote as a class thereon, in which event
the vote required shall be the affirmative vote of the holders of at least
two-thirds of the outstanding shares within each class or series of shares
entitled to vote thereon as a class and at least two-thirds of the outstanding
shares
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<PAGE> 100
otherwise entitled to vote thereon, unless the board of directors conditions its
submission to stockholders of a plan of merger or exchange by requiring a
greater vote or a vote by class or series. Under the TBCA, the same two-thirds
approval is required if the corporation wishes to dissolve by act of the
corporation.
Under the DGCL, the holders of a majority of the outstanding stock of the
corporation entitled to vote thereon may approve an agreement of merger or
consolidation or the dissolution of a corporation.
DISPOSITION OF ASSETS
Under the TBCA, the sale, lease, exchange or other disposition of all, or
substantially all, of the assets of a corporation, when made in the usual and
regular course of business of the corporation, may be made without the
authorization or consent of the stockholders. A transaction is in the usual and
regular course of business if the corporation shall, directly or indirectly,
either continue to engage in one or more businesses or apply a portion of the
consideration received in connection with the transaction to conduct the
business in which it engages following the transaction. A disposition of assets
not made in the usual and regular course of business of the corporation requires
the affirmative vote of the holders of at least two-thirds of the outstanding
shares entitled to vote thereon and the affirmative vote of the holders of at
least two-thirds of the outstanding shares within each class or series entitled
to vote thereon as a class.
Under the DGCL, all sales, leases or exchanges of all, or substantially
all, of the assets of a corporation must be authorized by a resolution adopted
by the holders of a majority of the outstanding stock of the corporation
entitled to vote thereon.
CUMULATIVE VOTING
Under the TBCA, every stockholder of a corporation has the right to
cumulate votes for the election of directors unless cumulative voting is
expressly prohibited by the articles of incorporation of the corporation. The
MNI Articles of Incorporation expressly prohibit cumulative voting for the
election of directors.
Under the DGCL, a corporation's certificate of incorporation may provide
that at all elections of directors of the corporation, or at elections held
under specified circumstances, each holder of stock or of any class or classes
or of a series or series thereof shall be entitled to as many votes as shall
equal the number of votes which (except for such provision as to cumulative
voting) such holder would be entitled to cast for the election of directors with
respect to such holders shares of stock multiplied by the number of directors to
be elected, and that such holder may cast all of such votes for a single
director or may distribute them among the number to be voted for, or for any two
or more of them as he may see fit. The CMI Restated Certificate of Incorporation
permits holders of CMI Common Stock to cumulate their votes as provided under
the DGCL. Further, a CMI stockholder intending to cumulate votes for the
election of directors must notify CMI of such intention prior to the
commencement of the voting for directors. If any CMI stockholder has given such
notice, every CMI stockholder may cumulate votes for candidates placed in
nomination prior to the voting. The persons named in the proxy will, unless
authority to do so is withheld, exercise their discretion with respect to the
cumulative voting of shares represented by proxy in order to assure the election
of as many of the nominees of the Board of Directors of CMI as possible.
CHANGE IN NUMBER OF DIRECTORS
Under the TBCA, the number of directors may be increased or decreased by
amendment to, or in the manner provided in, the articles of incorporation or
Bylaws, but no decrease may have the effect of shortening the term of an
incumbent director. The MNI Bylaws provide that the number of directors which
shall constitute the whole Board of Directors shall be not less than three or
more than nine as determined by the MNI stockholders.
Under the DGCL, the authorized number of directors may be changed by an
amendment to the Bylaws adopted by the directors unless the certificate of
incorporation fixes the number of directors in which case a change in the number
of directors shall be made only by amendment of the certificate. The CMI Bylaws
provide that the number of directors shall be determined from time to time by a
resolution adopted by a
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<PAGE> 101
majority of the board of directors or the affirmative vote of the holding of a
majority of the total voting power of the then-outstanding voting stock.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under the TBCA, any vacancy occurring in the board of directors may be
filled by the affirmative vote of a majority of the remaining directors, though
less than a quorum, or by election at an annual or special meeting of
shareholders called for that purpose. The MNI Bylaws provide that any such
vacancy shall be filled by a majority of the remaining directors, though less
than a quorum. The corporation may only fill two such directorships during the
period between any two successive annual meetings of stockholders.
Section 223 of the DGCL provides that vacancies and newly created
directorships may be filled by a majority of the directors then in office (even
though less than a quorum) unless (i) otherwise provided in the certificate of
incorporation or bylaws of the corporation (CMI's Restated Certificate of
Incorporation and Bylaws do not provide otherwise) or (ii) the certificate of
incorporation directs that a particular class is to elect such director, in
which case any other directors elected by such class, or a sole remaining
director, shall fill such vacancy (CMI's Restated Certificate of Incorporation
does not have such a provision). In addition, if, at the time of filling any
vacancy or newly created directorship, the directors then in office constitute
less than a majority of the whole board, the Delaware Court of Chancery may,
upon application of stockholders holding at least ten percent of the shares
outstanding at the time and entitled to vote for such directors, summarily order
an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office. Such elections are to be conducted in accordance with the procedures
provided by the DGCL. Unless otherwise provided in the certificate of
incorporation or bylaws, when one or more directors resign from the board, a
majority of directors then in office, including those who have so resigned, may
vote to fill the vacancy (CMI's Restated Certificate of Incorporation and Bylaws
do not provide otherwise).
REMOVAL OF DIRECTORS
The TBCA provides that directors may be removed in accordance with the
provisions of the bylaws or articles of incorporation of the corporation. The
MNI Bylaws provide that at any meeting of stockholders called expressly for the
purpose of removing a director, any director or the entire board of directors
may be removed, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote at an election of directors.
Under Section 141 of the DGCL, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares entitled to vote at an election of directors, except (i) unless the
certificate of incorporation otherwise provides (CMI's Restated Certificate of
Incorporation does not otherwise provide), in the case of a corporation having a
classified board (CMI does not have a classified board), stockholders may effect
such removal only for cause and (ii) in the case of a corporation having
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.
DIVIDENDS
A Texas corporation may not make a distribution to its stockholders if the
corporation would be insolvent as a result thereof or if the distribution
exceeds the corporation's surplus, except in certain limited situations
involving the dissolution of the corporation.
A Delaware corporation may, subject to restrictions in its certificate of
incorporation, make a distribution to its stockholders out of its net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year even if such corporation is insolvent. CMI's Restated Certificate of
Incorporation contains no such restrictions.
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<PAGE> 102
POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS
Under the TBCA, special meetings of stockholders may be called (i) by the
president, the board of directors or such other person or persons as may be
authorized in the articles of incorporation or the by-laws or (ii) by the
holders of at least ten percent of all the shares entitled to vote at the
proposed special meeting. MNI's Bylaws provide that a special meeting of
stockholders may be called at any time (i) by MNI's president, at the request in
writing of the holders of at least ten percent of all the outstanding stock
entitled to vote at such meeting or the majority of the Board of Directors, (ii)
by MNI's Board of Directors, or (iii) by MNI's president.
Under the DGCL, special meetings of stockholders may be called by the board
of directors or by such person or persons as may be authorized by the
certificate of incorporation or by the bylaws. CMI's Bylaws provide that special
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the Chief Executive Officer, the President, the Board or
a committee of the Board which has been duly designated by the Board and whose
powers and authority, as provided in a resolution of the Board or in the Bylaws,
include the power to call such meetings and by a person or persons owning,
directly or indirectly, shares possessing not less than 10% of the votes
eligible to be cast for the election of directors at the time any such
determination is being made.
STOCKHOLDER ACTION WITHOUT A MEETING
Under the TBCA, if the articles of incorporation of a corporation so
provide, any action required or permitted to be taken at any meeting of
stockholders may be taken without a meeting if a written consent setting forth
the action shall have been signed by the holders of shares having not less than
the minimum number of votes that would be necessary to take such action at a
meeting at which the holders of all shares entitled to vote on the action were
present and voted. MNI's Articles of Incorporation do not contain such a
provision. The TBCA and MNI's Bylaws also provide that any action required or
permitted to be taken at any meeting of stockholders may be taken without a
meeting if a written consent setting forth the action shall have been signed by
the holders of all shares entitled to vote with respect to the action.
Under the DGCL, unless the certificate of incorporation provides otherwise,
any action required or permitted to be taken at any meeting of stockholders may
be taken without a meeting if a consent setting forth the action so taken is
signed by the holders of outstanding stock have not less than the minimum number
of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted. The CMI
Restated Certificate of Incorporation does not provide otherwise.
CONFLICT OF INTEREST TRANSACTIONS WITH DIRECTORS
The DGCL and the TBCA both contain provisions which shift to the holders of
shares of a corporation the burden of proving that the directors have breached
their fiduciary duty to the corporation by authorizing corporate transactions in
which a director has an interest if the transaction is approved in a specified
manner.
Such statutes also provide that no contract or transaction between one or
more of its directors or officers or any organization in which any of them has a
financial interest is void or voidable solely because the director or officer
participates in the meeting of the board or committee at which the contract or
transaction is authorized or solely because his votes are counted for such
purpose if the contract or transaction is fair to the corporation or if the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or known (i) to the board of directors and the
contract or transaction is authorized by a majority of the disinterested
directors or (ii) to the stockholders and the contract or transaction is
specifically approved by a vote of the stockholders.
DISSENTERS' RIGHTS
Under the TBCA, stockholders of MNI have the right to dissent from and
obtain appraisal rights in connection with any merger, exchange, sale, lease or
other disposition of all, or substantially all, of the property
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<PAGE> 103
or assets of the corporation in a transaction requiring stockholder approval.
These dissenters' rights are summarized under "Terms of Merger--Dissenters'
Rights."
Section 262 of the DGCL provides for appraisal rights only in the case of a
statutory merger or consolidation of the corporation where the petitioning
stockholder does not consent to the transaction. In addition, no appraisal
rights are available where the corporation is to be the surviving corporation
and a vote of its stockholders is not required under DGCL Section 251(f). There
are also no appraisal rights, unless otherwise provided for in a corporation's
certificate of incorporation, for shares of stock listed on a national
securities exchange or held by more than 2,000 holders of record, unless such
stockholders would be required to accept anything other than shares of stock of
the surviving corporation, shares of another corporation so listed or held by
such number of holders of record, cash in lieu of fractional shares of such
stock or any combination thereof. The Certificate of Incorporation of CMI does
not provide for such additional appraisal rights.
INDEMNIFICATION
The TBCA and the DGCL both authorize a corporation to include in its
charter provisions limiting the liability of directors to the corporation or the
holders of its shares. MNI and CMI have adopted provisions which eliminate the
liability of directors to the full extent permitted under the TBCA and the DGCL,
respectively. The DGCL does not permit elimination of liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) for unlawful dividends or
stock repurchases; or (iv) for any transaction from which the director received
an improper personal benefit. The TBCA does not permit elimination of liability
for (i) a breach of the director's duty of loyalty to the corporation or its
shareholders or members; (ii) an act or omission not in good faith that
constitutes a breach of duty of the director to the corporation or an act or
omission that involves intentional misconduct or a knowing violation of the law;
(iii) a transaction from which the director received an improper benefit; or
(iv) an act or omission for which the liability of a director is expressly
prohibited by an applicable statute.
LEGAL MATTERS
The validity of CMI Common Stock issuable pursuant to the Merger and
certain other legal matters relating thereto will be passed upon for CMI by
Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, A Professional
Corporation, San Francisco, California. Andrews & Kurth L.L.P., Houston, Texas,
is acting as counsel for MNI in connection with certain legal matters relating
to the Merger and the transactions contemplated thereby.
EXPERTS
The consolidated financial statements of California Microwave, Inc. at June
30, 1993 and 1994, and for each of the three years in the period ended June 30,
1994, appearing in this Prospectus/Proxy Statement and the related financial
statement schedule appearing elsewhere in the Registration Statement on Form S-4
filed in connection with this Prospectus/Proxy Statement ("Registration
Statement") have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Microwave Networks Incorporated as
of June 30, 1993 and 1994 and for each of the three fiscal years in the period
ended June 30, 1994 included in this Prospectus/Proxy Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 104
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CALIFORNIA MICROWAVE, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Financial Statements at June 30, 1993 and 1994 and for each of the three
years ended June 30, 1994
Consolidated Statements of Income................................................... F-3
Consolidated Balance Sheets......................................................... F-4
Consolidated Statements of Stockholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Condensed Consolidated Interim Financial Statements (Unaudited) at December 31, 1994
and for the three and six months ended December 31, 1993 and 1994
Condensed Consolidated Statements of Income......................................... F-17
Condensed Consolidated Balance Sheets............................................... F-18
Condensed Consolidated Statements of Cash Flows..................................... F-19
Notes to Condensed Consolidated Financial Statements................................ F-20
MICROWAVE NETWORKS INCORPORATED
Report of Ernst & Young LLP, Independent Auditors..................................... F-21
Consolidated Financial Statements at June 30, 1993 and 1994 and for each of the three
years ended June 30, 1994
Consolidated Statements of Income................................................... F-22
Consolidated Balance Sheets......................................................... F-23
Consolidated Statements of Shareholders' Equity..................................... F-25
Consolidated Statements of Cash Flows............................................... F-26
Notes to Consolidated Financial Statements.......................................... F-27
Condensed Consolidated Interim Financial Statements (Unaudited) at December 31, 1994
and for the three and six months ended December 31, 1993 and 1994
Condensed Consolidated Statements of Income......................................... F-33
Condensed Consolidated Balance Sheet................................................ F-34
Condensed Consolidated Statements of Cash Flows..................................... F-35
Notes to Condensed Consolidated Financial Statements................................ F-36
</TABLE>
F-1
<PAGE> 105
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
California Microwave, Inc.
We have audited the accompanying consolidated balance sheets of California
Microwave, Inc. at June 30, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements refereed to above present fairly,
in all material respects, the consolidated financial position of California
Microwave, Inc. at June 30, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
August 5, 1994
F-2
<PAGE> 106
CALIFORNIA MICROWAVE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1992 1993 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
SALES...................................................... $199,003 $267,181 $369,017
Cost of products sold...................................... 153,246 198,368 273,415
-------- -------- --------
Gross margin............................................... 45,757 68,813 95,602
-------- -------- --------
EXPENSES:
Research and development................................... 5,021 8,242 13,203
Marketing and administration............................... 31,320 41,024 54,142
Amortization of intangible assets.......................... 797 1,554 2,068
-------- -------- --------
Total expenses............................................. 37,138 50,820 69,413
-------- -------- --------
OPERATING INCOME........................................... 8,619 17,993 26,189
Interest expense........................................... (908) (2,327) (2,809)
Interest income............................................ 269 213 520
-------- -------- --------
INCOME BEFORE INCOME TAXES................................. 7,980 15,879 23,900
Provision for income taxes................................. 2,892 5,875 8,844
-------- -------- --------
NET INCOME................................................. $ 5,088 $ 10,004 $ 15,056
======== ======== ========
Average shares and equivalents............................. 9,111 10,168 12,572
NET INCOME PER SHARE....................................... $ .56 $ .98 $ 1.20
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 107
CALIFORNIA MICROWAVE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1993 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 5,251 $ 13,268
Short-term investments............................................... 162 434
Accounts receivable, less $820 allowance for doubtful accounts
($551 in 1993).................................................... 57,938 107,925
Inventories.......................................................... 44,055 69,700
Prepaid expenses..................................................... 931 1,927
-------- --------
Total current assets................................................. 108,337 193,254
-------- --------
Property, plant and equipment, at cost............................... 51,798 66,712
Less accumulated depreciation and amortization....................... 27,016 33,557
-------- --------
Net property, plant and equipment.................................... 24,782 33,155
-------- --------
Intangible assets of businesses acquired, less accumulated
amortization of $6,896 ($4,828 in 1993)........................... 34,709 64,511
Other assets........................................................... 1,797 3,063
-------- --------
$169,625 $293,983
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 289 $ 389
Accounts payable..................................................... 21,687 36,273
Accrued income taxes................................................. 892 2,108
Other accrued liabilities............................................ 22,279 42,510
-------- --------
Total current liabilities.................................... 45,147 81,280
-------- --------
LONG-TERM LIABILITIES:
Loans and bonds payable.............................................. 5,290 4,901
Other long-term liabilities.......................................... 1,857
Convertible subordinated notes....................................... 65,200
-------- --------
Total long-term liabilities.................................. 5,290 71,958
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, 29,200,000 shares authorized:
12,030,294 shares issued and outstanding (11,643,765 in 1993)..... 1,164 1,203
Capital in excess of par value....................................... 60,189 66,187
Retained earnings.................................................... 59,074 74,130
Unamortized restricted stock plan expense............................ (1,239) (775)
-------- --------
Total stockholders' equity................................... 119,188 140,745
-------- --------
$169,625 $293,983
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 108
CALIFORNIA MICROWAVE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED JUNE 30, 1994
----------------------------------------------------------------------------------------
COMMON STOCK CAPITAL IN UNAMORTIZED TOTAL
--------------------- EXCESS OF RETAINED RESTRICTED STOCK STOCKHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS PLAN EXPENSE EQUITY
---------- ------ ---------- -------- ---------------- -------------
(IN THOUSANDS, EXCEPT FOR SHARES)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1991....... 8,575,315 $ 858 $ 23,336 $43,982 $ (680) $ 67,496
---------- ------ ---------- -------- -------- -------------
Common stock issued under:
Stock option and purchase
plans.................... 215,511 21 2,301 2,322
Restricted stock plan...... 64,400 6 1,052 (679) 379
Net income................... 5,088 5,088
---------- ------ ---------- -------- -------- -------------
BALANCE, JUNE 30, 1992....... 8,855,226 885 26,689 49,070 (1,359) 75,285
---------- ------ ---------- -------- -------- -------------
Proceeds from public offering
of common stock............ 2,530,000 253 30,934 31,187
Common stock issued under:
Stock option and purchase
plans.................... 230,039 23 2,235 2,258
Restricted stock plan...... 28,500 3 331 120 454
Net income................... 10,004 10,004
---------- ------ ---------- -------- -------- -------------
BALANCE, JUNE 30, 1993....... 11,643,765 1,164 60,189 59,074 (1,239) 119,188
---------- ------ ---------- -------- -------- -------------
Common stock issued under:
Stock option and purchase
plans.................... 386,202 39 5,948 5,987
Restricted stock plan...... (5,700) (1 ) (59) 464 404
Other...................... 6,027 1 109 110
Net income................... 15,056 15,056
---------- ------ ---------- -------- -------- -------------
BALANCE, JUNE 30, 1994....... 12,030,294 $1,203 $ 66,187 $74,130 $ (775) $ 140,745
========== ======= ========= ======== ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 109
CALIFORNIA MICROWAVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1992 1993 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 5,088 $ 10,004 $15,056
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 5,133 7,769 9,629
Loss on equipment retired................................. 126 131 349
Write-down of investments................................. 100 50 100
NET EFFECT OF CHANGES IN:
Accounts receivable....................................... (9,751) (12,543) (33,056)
Inventories............................................... 6,066 (7,149) (9,196)
Prepaid expenses.......................................... (119) (283) 559
Accounts payable.......................................... 74 6,489 1,208
Accrued income taxes...................................... (577) 849 2,664
Other accrued liabilities................................. 2,905 5,034 (7,974)
-------- -------- -------
Net Cash provided by (used in) operating activities......... 9,045 10,351 (20,661)
-------- -------- -------
INVESTING ACTIVITIES:
Capital expenditures........................................ (8,024) (10,780) (11,248)
Acquisition of MRC.......................................... (33,490) (1,550)
Acquisition of TTS.......................................... (24,196)
Proceeds from sale of assets................................ 5 98 142
Unexpended plant and equipment funds........................ (3,322) 2,981 341
Other....................................................... (679) 173 (257)
-------- -------- -------
Net Cash provided by (used in) investing activities......... (45,510) (7,528) (36,768)
-------- -------- -------
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible subordinated
notes..................................................... 61,103
Payments on long-term obligations........................... (3,000) (35,100) (289)
Proceeds from issuance of long-term debt.................... 38,203 246
Proceeds from issuance of common stock...................... 1,683 32,959 4,632
-------- -------- -------
Net cash provided by (used in) financing activities......... 36,886 (1,895) 65,446
-------- -------- -------
Net increase in cash and cash equivalents................... 421 928 8,017
Cash and cash equivalents at beginning of year.............. 3,902 4,323 5,251
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 4,323 $ 5,251 $13,268
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 576 $ 2,693 $ 2,535
Income taxes.............................................. 4,581 5,462 6,180
======== ======== =======
Supplemental disclosure of non-cash investing and financing
activity:
Additional purchase price for MRC's stock................... $ $ 1,400 $ 9,600
Tax benefit of options exercised............................ 639 437 1,448
Notes used to purchase TTS' assets.......................... 2,000
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 110
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
California Microwave, Inc. and all subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to June 30 and
includes 53 weeks in fiscal 1993 and 52 weeks in fiscal 1994 and 1992. For
clarity of presentation, all fiscal periods are reported as ending on a calendar
month-end.
Revenue Recognition
Generally, sales are recorded at the time individual items are shipped.
Sales on certain long-term, small quantity, high unit-value contracts are
recognized at the completion of significant project milestones which generally
are contract line items. Scheduled billings and retainages under certain
contracts (principally export contracts) have deferred billing provisions
resulting in unbilled accounts receivable at June 30, 1993 and June 30, 1994 of
$1,889,000 and $21,359,000, respectively. The unbilled receivable at June 30,
1994 is expected to be collected within one year.
Inventories and Cost of Products Sold
Inventories are recorded at the lower of cost or market. Project
inventories are transferred to cost of products sold at the time revenue is
recognized based on the estimated total manufacturing costs and total contract
prices under each contract. Losses on contracts are recognized in full when the
losses become determinable. The cost of other inventories is generally based on
standard costs which approximate actual costs as determined by the first-in,
first-out method.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid investments with maturities of
three months or less. The Company's short-term investments are carried at cost
which approximates market. The Company invests its excess cash principally in
commercial paper of highly rated large industrial companies and in bankers'
acceptances and certificates of deposits of large banks. Generally, these
investments mature within 90 days. The Company has not experienced losses
related to these investments. In May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 115--Accounting for
Investments in Debt and Equity Securities, which is effective for fiscal years
beginning after December 15, 1993. The adoption of this standard is not expected
to have a material impact on the Company's financial position or results of
operations.
Credit Risk
The Company manufactures and sells communications products and systems to
large commercial customers, principally domestic and foreign telephone companies
and major common carriers and to the U.S. government. The Company generally
requires no collateral, but generally requires letters of credit, denominated in
U.S. dollars, from its foreign customers. In 1992, 1993 and 1994, the Company
expensed $694,000, $188,000 and $324,000, respectively, for its provision for
doubtful accounts.
F-7
<PAGE> 111
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Exchange Contracts
The Company enters into forward currency exchange contracts to hedge its
foreign currency exposure. The gains or losses on these contracts are included
in income when the underlying accounts receivable are paid. Contracts to sell
7.7 million United Kingdom pounds and 25.4 million German marks (total U.S.
dollar equivalent of approximately $28 million) were outstanding at June 30,
1994 and mature from July 1994 through March 1995. The net gains and losses
resulting from these and other foreign currency transactions have not been
material.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed under the straight-line method based on the estimated useful lives of
the related assets.
Net Income Per Share
Net income per share is based on the weighted average number of shares
outstanding including the effect of the assumed exercise of stock options which
are dilutive common stock equivalents. Fully diluted net income per share
assuming conversion of the convertible subordinated notes and the related
reduction of interest expense is not presented as such computation does not
result in material dilution.
2. SALES
The Company operates in one industry--the manufacture of electronics
equipment for communications, including telephone, data, control, detection,
ranging and surveillance. A breakdown of sales, by product class and by market
sector for the last three years is shown below.
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Satellite communications........................... $130,582 $157,282 $178,119
66% 59% 48%
Wireless........................................... 23,812 61,005 139,424
12% 23% 38%
Intelligence....................................... 38,714 45,511 49,796
19% 17% 14%
Other.............................................. 5,895 3,383 1,678
3% 1%
-------- -------- --------
Total.................................... $199,003 $267,181 $369,017
======== ======== ========
Export sales....................................... $ 69,700 $109,835 $154,086
35% 41% 42%
U.S. commercial sales.............................. 62,620 75,887 113,061
32% 28% 30%
U.S. government sales.............................. 66,683 81,459 101,870
33% 31% 28%
-------- -------- --------
Total.................................... $199,003 $267,181 $369,017
======== ======== ========
</TABLE>
F-8
<PAGE> 112
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales by geographic area were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia................................................ $21,943 $ 25,744 $ 56,881
Europe.............................................. 27,882 36,784 45,894
Latin America....................................... 9,381 12,425 22,601
Africa and Middle East.............................. 9,024 28,212 17,735
Other--principally Canada........................... 1,470 6,670 10,975
------- -------- --------
$69,700 $109,835 $154,086
======= ======== ========
</TABLE>
3. ACQUISITIONS
TeleCom Transmission Systems, Inc. (formerly TeleSciences Transmission
Systems, Inc.). The Company acquired substantially all of the assets and
certain of the liabilities of TeleSciences Transmission Systems, Inc. (TTS), a
wholly owned subsidiary of TeleSciences Inc., on October 26, 1993. TTS' product
line consists of digital and analog microwave radios for the cellular, personal
communications network and private network markets. The Company paid $28.7
million for those net assets at the closing, consisting of $23.7 million in cash
and a $5 million, five-year 5% convertible subordinated note, convertible (after
the resolution of certain acquisition-related matters) at the option of the
holder into common stock of the Company at a conversion price of $28.50 per
share. Of the $5 million note, $3 million has been offset against advances from
TTS to its parent during the period prior to the closing of the acquisition and
is no longer payable. Concurrent with the closing of this transaction, the
Company issued for cash to Motorola, Inc., an investor in TeleSciences, Inc., a
$5.7 million, five-year 5% convertible subordinated note, convertible at
Motorola's option into the Company's common stock at a price of $28.50 per
share. The acquisition was accounted for as a purchase transaction and
accordingly, the acquired assets and liabilities were recorded at their
estimated fair value at the date of acquisition. The net assets at acquisition
were adjusted from preliminary estimates as information regarding asset and
liability valuations and customer commitments was obtained and finalized. The
excess of the purchase price over the valuation of the net assets acquired
($22,103,000) is being amortized on a straight line basis over thirty years. The
operating results of TTS have been included in the Consolidated Statements of
Income from the acquisition date.
A contingent payment, payable in cash or common stock of the Company, at
the Company's option, may be payable based on TTS' sales for the 18-month period
commencing July 1, 1993. The amount of the contingent payment is based on the
extent to which specified TTS-related sales exceed $117 million during that
period, but in no event will the contingent payment exceed $29.9 million. For
the year ended June 30, 1994, TTS' sales were $72.6 million. The amount of
contingent payment, if any, will be accounted for as additional purchase price
and will be amortized over the remaining life of the purchased intangibles
related to the TTS acquisition.
F-9
<PAGE> 113
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effect of the acquisition of TTS on the Consolidated Statements of Cash
Flows were as follows:
<TABLE>
<CAPTION>
1994
--------------
(IN THOUSANDS)
<S> <C> <C>
Working capital acquired (excluding cash).................... $ 97
Property, plant and equipment................................ 5,188
Other assets................................................. 497
Other long-term obligations.................................. (1,689)
Excess of purchase price over valuation of net assets
acquired................................................... $22,103
Less note used in acquisition of TTS......................... 2,000 20,103
------- --------------
Total cash price, net of cash received....................... $ 24,196
===========
</TABLE>
The following pro forma combined results for 1994 and 1993 are as if the
above acquisitions of TTS had been consummated on July 1, 1992.
<TABLE>
<CAPTION>
1993 1994
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Sales.................................................................. $331,795 $389,882
Income before income taxes............................................. 13,843 19,775
Net income............................................................. 8,721 12,445
Net income per share................................................... $ .86 $ .99
Average shares outstanding............................................. 10,168 12,572
</TABLE>
The pro forma results, which are based upon certain assumptions and
estimates which the Company believes are reasonable, do not purport to be
indicative of results that actually would have occurred had the acquisition
closed on July 1, 1992, and are not intended to be a projection of future
results.
Microwave Radio Corporation. In April 1992, the Company acquired all the
shares of Microwave Radio Corporation (MRC), a manufacturer of digital and
analog fixed-line and portable microwave radios. The Company paid $33 million in
cash at the time of the acquisition and $11 million in cash in additional
payments based upon MRC's income for the 27-month period ended June 30, 1994.
The acquisition was accounted for as a purchase transaction and accordingly, the
acquired assets and liabilities were recorded at their estimated fair value at
the date of acquisition. The operating results of MRC have been included in the
Consolidated Statements of Income from the acquisition date. The excess of the
purchase price over the valuation of the net assets acquired ($37,519,000) is
being amortized on a straight line basis over thirty years.
The additional payments of $11 million have been accounted for as
additional purchase price and are being amortized over the remaining life of the
purchased intangibles related to the MRC acquisition. For the periods ended June
30, 1993 and June 30, 1994, the Company recorded $1.4 million and $9.6 million,
respectively, as additional purchase price under this agreement.
F-10
<PAGE> 114
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects of the acquisition of MRC on the 1992 Consolidated Statements
of Cash Flows were as follows:
<TABLE>
<CAPTION>
1992
--------------
(IN THOUSANDS)
<S> <C>
Working capital acquired (excluding cash).............................. $ 4,164
Property, plant and equipment.......................................... 1,806
Advances to MRC........................................................ 1,151
Excess of purchase price over value of net assets acquired............. 26,369
--------------
Total cash price, net of cash received................................. $ 33,490
===========
</TABLE>
Intangible assets resulting from acquisitions made prior to 1992 are being
amortized over periods ranging from five to thirty years.
4. INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Projects in process.............................................. $17,423 $20,963
Less progress billings........................................... 1,623 4,702
------- -------
15,800 16,261
Work-in-process and finished goods............................... 16,276 28,208
Raw materials and parts.......................................... 11,979 25,231
------- -------
$44,055 $69,700
======= =======
</TABLE>
5. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
LIFE (IN
YEARS) 1993 1994
-------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................. $ 1,693 $ 2,514
Buildings........................................ 30-40 9,539 9,838
Test equipment and machinery..................... 3-10 27,472 35,524
Office equipment................................. 5-10 9,040 14,266
Vehicles......................................... 3-5 1,570 1,441
Leasehold improvements........................... Term of lease 2,484 3,129
------- -------
$51,798 $66,712
======= =======
</TABLE>
Depreciation and amortization expense was $7,572,000 for the year ended
June 30, 1994 ($3,784,000 and $5,180,000 in 1992 and 1993, respectively).
F-11
<PAGE> 115
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries, bonuses and commissions................................ $ 6,288 $ 9,942
Vacations........................................................ 3,135 4,450
Other payroll related............................................ 1,456 4,112
Product warranties............................................... 1,082 4,849
Advance payments................................................. 4,494 2,605
Due to former MRC shareholders................................... 1,400 9,600
Other............................................................ 4,424 6,952
------- -------
$22,279 $42,510
======= =======
</TABLE>
7. DEBT
Debt at June 30, 1993 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1993 1994
------ -------
(IN THOUSANDS)
<S> <C> <C>
Industrial development bonds:
Suffolk County, NY.............................................. $2,230 $ 2,130
Monroe County, NY............................................... 2,720 2,550
City of Rochester, NY loans....................................... 629 610
------ -------
$5,579 $ 5,290
====== =======
Current portion of above.......................................... $ 289 $ 389
====== =======
Long-term portion of above........................................ $5,290 $ 4,901
====== =======
Convertible subordinated notes:
5 1/4% notes due 2003........................................... $57,500
5% notes due 1998............................................... 7,700
-------
$65,200
=======
</TABLE>
Debt maturing in each of the next five years and thereafter is as follows:
1995 -- $389,000; 1996-- $302,000; 1997--$413,000; 1998--$314,000;
1999--$8,126,000; 2000 and thereafter--$60,946,000.
The industrial development bonds listed in the above table bear interest at
a floating rate, based upon prevailing market conditions, which is redetermined
every seven days. The weighted average interest rate in effect on both bonds as
of June 30, 1994, was 2.64%. The Suffolk County bonds are scheduled for
repayment in 15 annual installments beginning November 1993, while the Monroe
County bonds are scheduled for payment in 20 annual installments beginning June
1993. Both bonds may be prepaid at any time, without penalty, and are based by
letters of credit. The City of Rochester loans bear an interest rate of 5.9% and
require monthly repayments. Both the bonds and the city loans are secured by
mortgages on the properties involved.
On December 15, 1993, the Company issued $57,500,000 of 5 1/4% convertible
subordinated notes, due December 15, 2003. These notes are convertible, at the
option of the holder, at a price of $28.4375 per share at any time prior to
maturity. These notes are redeemable at any time on or after January 1, 1997, at
the option of the Company. Interest is payable semi-annually commencing June 15,
1994. The notes are subordinated to
F-12
<PAGE> 116
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
all existing and future senior indebtedness of the Company. These notes are
traded in the Nasdaq Stock Market. At June 30, 1994, the fair value of the
outstanding bonds was $55.5 million, based on quoted market prices (which
reflect the market value of the underlying securities into which they are
convertible, as well as current interest rates), compared to the carrying amount
of $57.5 million.
Concurrent with the closing of the acquisition of TTS in October 1993, the
Company issued $7,700,000 of five-year 5% convertible subordinated notes to
TeleSciences, Inc. and Motorola, Inc. convertible at each holder's option into
the Company's common stock at a price of $28.50 per share. At its option, the
Company may redeem these notes without penalty, at any time after December 31,
1994. The notes are subordinated to all existing and future senior indebtedness
of the Company.
In May and June 1993, the Company obtained two unsecured committed credit
facilities totaling $33.5 million. In October 1993, the Company amended one of
these agreements to increase its credit facilities to a total of $48.5 million.
In February 1994, the unsecured committed credit facilities were reduced to
$33.5 million, of which $25 million expires in October 1995, and $8.5 million
expires in April 1995. As of June 30, 1994, there were no borrowings and $10.8
million of standby letters of credit outstanding under these credit lines. The
standby letters of credit support certain export contracts. The facilities
require 1/4% annual commitment fees and interest rates for borrowings will not
exceed the banks' reference rates.
All of the above credit agreements contain similar covenants requiring the
Company to maintain certain financial ratios.
The maximum amount of interest-bearing debt during 1994 was $70,670,00 and
the average amount borrowed was $45,827,000 at an average interest rate of 4.9%.
Comparable figures for 1992 and 1993 were $41,230,000 and $42,443,000 maximum
borrowings, $11,014,000 and $29,321,000 average borrowings, and 6.3% and 5.3%
average rates, respectively.
8. COMMON STOCK
Stockholder Rights. In October 1989, the stockholders approved a rights
agreement under which there was distributed to the Company's stockholders the
right to buy, for $35, one share of common stock for each share of common stock
held by such stockholders. The rights will only become exercisable if a person
or group acquires 20% or more of the Company's common stock or announces an
offer to acquire 30% or more of the Company's common stock. In the event the
Company is acquired, or upon the occurrence of certain other events, each right
may under certain circumstances entitle the holder to purchase, for $35, $70
worth of common stock. Until such events occur, the rights are redeemable at any
time by the Company for $.01 per right.
Public Offering. In March 1993, the Company sold in a public offering
2,530,000 shares of its common stock at $13.25 per share. The net proceeds of
$31.2 million were used in retiring the bridge loan incurred in the acquisition
of MRC.
Options and Other Stock Plans. Stock options have been granted to
officers, directors and key employees under the Company's stock option plans at
fair market value on the date of grant. Most options currently outstanding
become exercisable in annual installments of 25%, beginning one year after date
of grant. Options granted under the 1986 and 1992 Stock Option Plans expire
after ten years.
F-13
<PAGE> 117
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 21, 1993, the Company's stockholders approved an increase of
500,000 in the number of shares available for grant under its 1992 Stock Option
Plan. A summary of activity for fiscal 1994 under the 1986 and 1992 Stock Option
Plans is presented below:
<TABLE>
<CAPTION>
SHARES
AVAILABLE OPTIONS OPTION PRICE
FOR GRANT OUTSTANDING PER SHARE
--------- ----------- -------------
<S> <C> <C> <C>
Beginning of year............................. 445,064 1,280,667 $ .49-$21.00
Additional authorized......................... 500,000
Granted....................................... (502,400) 502,400 18.38- 27.25
Exercised..................................... (300,354) .56- 21.00
Canceled...................................... 76,512 (76,512) 7.25- 24.25
--------- ----------- -------------
End of year................................... 519,176 1,406,201 $ .49-$27.25
======== ========= ============
Exercisable................................... 368,363 $ .49-$21.00
========= ============
</TABLE>
Stock grants have been made to officers and other key employees under the
1988 restricted stock plan at no charge to the employees. These grants generally
vest 20% per year, beginning one year after the date of issue. The fair market
value of the shares, at grant date, is charged to compensation expense over the
five-year period. Compensation expense relating to this plan for the past three
years was: 1992--$379,000; 1993-- $454,000; 1994--$404,000. On October 21, 1993,
the Company's 1992 Restricted Stock Plan covering 250,000 shares was terminated.
A summary of activity in the restricted stock plans is as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE NON-VESTED
FOR GRANT SHARES
--------- ----------
<S> <C> <C>
Beginning of year.............................................. 269,200 129,200
1992 Plan terminated........................................... (250,000)
Granted........................................................ (600) 600
Canceled....................................................... 6,300 (6,300)
Vested......................................................... (40,200)
--------- ----------
End of year.................................................... 24,900 83,300
======== ========
</TABLE>
The Company has an employee stock purchase plan under which employees may
purchase shares, subject to certain limitations, at no less than 85% of the
lower of the fair market value of the shares at the beginning or end of a
six-month purchase period. During the year, 87,480 shares were issued for
$1,271,000, leaving 82,923 shares reserved for future issuances.
Subsequent to June 30, 1994, the Company's board of directors approved,
subject to stockholders' approval, an increase of 500,000 and 300,000 shares,
respectively, in the number of shares covered by the stock option and employee
stock purchase plans.
9. RETIREMENT PLANS
The Company has a defined contribution retirement plan covering
substantially all employees. One part of the plan is a 40l(k) savings plan which
allows employees to contribute pre-tax compensation up to the lesser of 20% of
total annual compensation or the statutory limit (currently $9,240). The Company
matches 50% of the first $1,200 of each employee's contributions per year. In
fiscal 1994, the Company converted its previous cash profit sharing plan to a
defined contribution plan. In fiscal 1994, the Company contributed approximately
5% of pre-tax income to this plan, and the contributions were allocated based on
the employee's
F-14
<PAGE> 118
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
salary and length of California Microwave employment. All of the above employer
contributions are determined by and subject to the approval of the Company's
board of directors.
Contributions to these plans are summarized below. Included in these
amounts are amounts expensed under California Microwave's previous cash profit
sharing plan and MRC's separate 40l(k) plan. MRC's employees participated in the
MRC 401(k) through June 30, 1994. They began participation in the Company's
retirement plans on July 1, 1994.
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
- ----------- --------------
<S> <C> <C>
1994.............................................................. $2,114
1993.............................................................. 1,229
1992.............................................................. 769
</TABLE>
10. INCOME TAXES
Effective July 1, 1992, the Company changed its method of accounting for
income taxes to the liability method required by Statement of Financial
Accounting Standards (SFAS) Number 109, "Accounting for Income Taxes." The
current and cumulative effects of adopting SFAS 109 were not material. As
permitted under the new standard, prior years' financial statements have not
been restated.
The provision (credit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1992 1993 1994
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $ 3,519 $5,150 $ 9,178
State................................................ 730 1,143 2,282
------- ------ -------
4,249 6,293 11,460
Deferred:
Federal.............................................. (1,357) (3) (2,192)
State................................................ -- (415) (424)
------- ------ -------
$ 2,892 $5,875 $ 8,844
======= ====== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
in reporting revenue and expense for financial statement and income tax
purposes. At the end of fiscal 1993 and 1994, gross deferred tax assets were
$3.7 million and $5.8 million, respectively, and deferred liabilities were $1.7
million and $1.2 million, respectively, and there was no valuation allowance for
deferred tax assets. Deferred tax assets relate primarily to accruals and
reserves not currently deductible for tax purposes. Deferred tax liabilities are
mainly due to the acceleration of tax depreciation over book depreciation.
The difference between the U.S. federal statutory income tax rate and the
Company's effective rate were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. federal statutory income tax rate.......................... 34% 34% 35%
State income taxes, net of federal benefit...................... 6 5 5
FSC tax benefit................................................. (4) (3) (4)
Others, including amortization of goodwill...................... -- 1 1
---- ---- ----
36% 37% 37%
==== ==== ====
</TABLE>
F-15
<PAGE> 119
CALIFORNIA MICROWAVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS
All of the buildings occupied by the Company, except for the Company-owned
Hauppauge and Rochester, New York, and Melbourne, Florida facilities, are under
operating leases which expire in one to ten years. Certain of these leases
contain escalation clauses. Total lease expense for the past three years was:
1992--$2,320,000; 1993--$2,599,000; 1994--$3,753,000. Lease commitments,
exclusive of property taxes, which are payable by the Company, will be due as
follows: 1995--$3,860,000; 1996--$3,555,000; 1997-- $3,412,000;
1998--$1,738,000; 1999--$1,210,000; 2000 through 2004--$5,580,000.
12. EVENT SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On January 31, 1995, the Company entered into an agreement and plan of
Reorganization and Merger with Microwave Networks Incorporated (MNI). MNI
designs, manufactures, and markets digital microwave radios and related products
for a wide range of telecommunications applications used worldwide in wireless
networks. The merger is expected to be completed by March 31, 1995 and is
subject to approval by the stockholders of each Company and other customary
conditions.
The holders of MNI capital stock will receive approximately .3511 of a
share of the Company's common stock for each share of MNI capital stock.
Approximately 3,350,000 shares of the Company's common stock will be exchanged
for MNI stock and options and will represent approximately 18% of the combined
company on a pro forma and fully diluted basis. Following the merger, MNI will
become a wholly-owned subsidiary of the Company. The transaction will be
accounted for as a pooling of interests.
F-16
<PAGE> 120
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS END SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
-------------------- ---------------------
1993 1994 1993 1994
------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales............................................ $82,596 $103,637 $145,112 $205,855
Cost of products sold............................ 59,485 74,940 103,694 150,613
------- -------- -------- --------
Gross margin..................................... 23,111 28,697 41,418 55,242
------- -------- -------- --------
Expenses:
Research and development......................... 3,542 5,348 5,788 10,207
Marketing and administration..................... 12,634 14,424 22,895 28,259
Amortization of intangible assets................ 520 634 902 1,268
------- -------- -------- --------
Total expenses......................... 16,696 20,406 29,585 39,734
------- -------- -------- --------
Operating income................................. 6,415 8,291 11,833 15,508
Interest expense................................. (657) (1,207) (753) (2,248)
Interest income.................................. 28 48 142 225
------- -------- -------- --------
Income before income taxes....................... 5,786 7,132 11,222 13,485
Provision for income taxes....................... 2,257 2,639 4,377 4,989
------- -------- -------- --------
Net income....................................... $ 3,529 $ 4,493 $ 6,845 $ 8,496
======= ======== ======== ========
Net income per share:
Primary.......................................... $ .28 $ .35 $ .55 $ .67
======= ======== ======== ========
Fully diluted.................................... $ .28 $ .33 $ .55 $ .64
======= ======== ======== ========
Average shares and equivalents outstanding:
Primary.......................................... 12,596 12,872 12,523 12,725
Fully diluted.................................... 13,203 15,250 12,836 15,093
</TABLE>
See accompanying notes.
F-17
<PAGE> 121
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED, SEE NOTE A)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1994
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 13,268 $ 4,426
Short-term investments............................................. 434 456
Accounts receivable................................................ 107,925 121,960
Inventories........................................................ 69,700 67,738
Prepaid expenses................................................... 1,927 2,288
-------- ------------
Total current assets....................................... 193,254 196,868
-------- ------------
Net property, plant and equipment.................................... 33,155 33,610
Intangibles and other assets......................................... 67,574 66,510
-------- ------------
$293,983 $296,988
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................. $ 389 $ 10,000
Accounts payable................................................... 36,273 30,492
Accrued income taxes............................................... 2,108 2,189
Other accrued liabilities.......................................... 42,510 29,382
-------- ------------
Total current liabilities.................................. 81,280 72,063
-------- ------------
Long-term liabilities................................................ 71,958 71,532
Total stockholders' equity........................................... 140,745 153,393
-------- ------------
$293,983 $296,988
======== ==========
</TABLE>
A-- The balance sheet at June 30, 1994 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-18
<PAGE> 122
CALIFORNIA MICROWAVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
DECEMBER 31
---------------------
1993 1994
-------- --------
<S> <C> <C>
Operating activities:
Net income............................................................. $ 6,845 $ 8,496
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 3,201 4,673
Amortization of intangibles.......................................... 902 1,268
Other................................................................ (30) (47)
Net effect of changes in:
Accounts receivable.................................................. 5,535 (14,035)
Inventories.......................................................... (12,791) 1,962
Prepaid expenses..................................................... 35 (369)
Accounts payable..................................................... (8,575) (5,772)
Accrued income taxes................................................. 1,652 393
Other accrued liabilities............................................ (11,119) (3,528)
-------- --------
Net cash provided by (used in) operating activities.................... (14,345) (6,959)
-------- --------
Investing activities:
Capital expenditures................................................. (3,531) (5,128)
Acquisition of net assets of business purchased (TTS), net of cash
acquired.......................................................... (24,096) --
Acquisition of MRC................................................... -- (9,600)
Unexpended plant and equipment funds................................. 214 --
Other................................................................ (315) (296)
-------- --------
Net cash provided by (used in) investing activities.................... (27,728) (15,024)
-------- --------
Financing activities:
Proceeds from issuance of $63,200 of convertible subordinated notes,
net of costs and expenses......................................... 61,365 --
Payments on long-term debt........................................... (109) (209)
Proceeds from issuance of common stock............................... 3,241 3,650
Proceeds from short-term borrowings.................................. -- 9,700
-------- --------
Net cash provided by (used in) financing activities.................... 64,497 13,141
-------- --------
Net increase (decrease) in cash and cash equivalents................... 22,424 (8,842)
Cash and cash equivalents at beginning of year......................... 5,251 13,268
-------- --------
Cash and cash equivalents at end of period............................. $ 27,675 $ 4,426
======== ========
Cash paid during the period for:
Interest............................................................. $ 759 $ 1,861
Income taxes......................................................... $ 3,599 $ 4,677
======== ========
</TABLE>
F-19
<PAGE> 123
CALIFORNIA MICROWAVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The information at December 31, 1994, and for the three- and six-month
periods ended December 31, 1994 and 1993, is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) which the
management of California Microwave, Inc., believes are necessary for fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of results for a full year. The consolidated interim
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 1994 included in the California
Microwave, Inc. 1994 Annual Report to Stockholders.
NOTE 2
The Company's six months and fiscal year periods end on the Saturday
closest to December 31 and June 30, respectively. For clarity of presentation,
all fiscal periods are reported as ending on a calendar month end.
NOTE 3 INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1994
-------- ------------
<S> <C> <C>
Projects in process........................................... $ 20,963 $ 26,487
Less progress billings........................................ 4,702 7,098
-------- ------------
16,261 19,389
Work-in-process and finished goods............................ 28,208 24,647
Raw materials and parts....................................... 25,231 23,702
-------- ------------
$ 69,700 $ 67,738
======= ==========
</TABLE>
NOTE 4 UNBILLED ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1994 and June 30, 1994 were
$19,615,000 and $21,359,000, respectively, of unbilled receivables principally
due to provisions contained in certain export contracts and to a lesser degree
the billing provisions of a government contract.
The balance at December 31, 1994 is expected to be billed and collected
within one year.
F-20
<PAGE> 124
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Microwave Networks Incorporated
We have audited the accompanying consolidated balance sheets of Microwave
Networks Incorporated (the "Company") as of June 30, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Microwave Networks Incorporated at June 30, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 4 and 7, the consolidated financial statements
reflect the cumulative effects on prior years of the Company's change in
accounting for income taxes and the change in accounting for overhead costs in
inventory for the year ended June 30, 1992.
ERNST & YOUNG LLP
Houston, Texas
August 5, 1994 except as to Note 9 as to
which the date is February 2, 1995
F-21
<PAGE> 125
MICROWAVE NETWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Equipment sales (Note 6)............................ $19,681,516 $36,205,350 $34,669,806
Cost of equipment sales............................. 12,150,907 19,725,679 19,963,046
----------- ----------- -----------
Gross profit on equipment sales..................... 7,530,609 16,479,671 14,706,760
Service revenues (Note 6)........................... 2,821,265 3,177,805 2,306,391
Cost of service revenues............................ 2,660,417 2,802,436 1,516,031
----------- ----------- -----------
Gross profit on service revenues.................... 160,848 375,369 790,360
----------- ----------- -----------
Total gross profit........................ 7,691,457 16,855,040 15,497,120
Expenses:
Sales and marketing............................... 4,285,453 5,870,875 6,095,352
Research and development.......................... 2,218,176 3,690,527 4,383,786
General and administrative........................ 1,739,164 2,527,456 2,637,658
----------- ----------- -----------
8,242,793 12,088,858 13,116,796
----------- ----------- -----------
Income (loss) from operations....................... (551,336) 4,766,182 2,380,324
Other income (expense):
Interest income................................... -- 2,625 856
Interest expense.................................. (231,222) (249,229) (236,230)
Other income (loss)............................... -- 17,527 (39,684)
----------- ----------- -----------
Income (loss) before federal income taxes and
cumulative effects of changes in accounting
principles........................................ (782,558) 4,537,105 2,105,266
Income taxes (Note 4)
Current expense................................... 1,500 820,858 612,845
Deferred tax provision (benefit).................. (40,413) 14,763 (120,160)
----------- ----------- -----------
(38,913) 835,621 492,685
Income (loss) before cumulative effects of changes
in accounting principles.......................... (743,645) 3,701,484 1,612,581
Cumulative effects on prior years of changes in
accounting principles:
Method of accounting for income taxes (Note 4).... 604,326 -- --
Method of accounting for overhead costs in
inventory (Note 7)............................. 345,000 -- --
----------- ----------- -----------
Net income.......................................... $ 205,681 $ 3,701,484 $ 1,612,581
========== ========== ==========
Income (loss) per share before cumulative effects of
changes in accounting principles.................. (.09) .42 .18
Cumulative effects on prior years of changes in
accounting principles:
Method of accounting for income taxes............. .07 -- --
Method of accounting for overhead costs in
inventory...................................... .04 -- --
----------- ----------- -----------
Net income per share................................ $ .02 $ .42 $ .18
========== ========== ==========
Shares used to compute net income per share......... 8,277,000 8,782,000 9,074,000
========== ========== ==========
</TABLE>
See accompanying notes.
F-22
<PAGE> 126
MICROWAVE NETWORKS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1993 1994
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash............................................................ $ 302,014 $ 681,148
Accounts receivable, net of allowance for doubtful accounts of
$105,000 and $125,500 in 1994 and 1993, respectively (Note
2)........................................................... 6,789,867 8,018,024
Inventories (Note 2):
Raw materials and subassemblies.............................. 5,930,148 7,046,576
Work in process.............................................. 1,722,219 2,357,620
Finished goods............................................... 299,511 388,275
----------- -----------
7,951,878 9,792,471
Deferred tax asset (Note 4).................................. 366,410 548,837
Prepaid expenses............................................. 198,723 215,408
Federal income taxes refundable.............................. 96,167 187,420
Deposits..................................................... 58,969 37,324
----------- -----------
Total current assets.................................... 15,764,028 19,480,632
Property and equipment (Note 2):
Machinery and equipment...................................... 3,903,742 4,780,889
Furniture and fixtures....................................... 1,679,223 2,028,426
----------- -----------
5,582,965 6,809,315
Less accumulated depreciation................................ 2,381,083 3,503,246
----------- -----------
Net property and equipment........................................ 3,201,882 3,306,069
Other assets...................................................... 39,618 83,375
Deferred tax asset (Note 4)....................................... 263,566 201,299
----------- -----------
Total assets............................................ $19,269,094 $23,071,375
========== ==========
</TABLE>
See accompanying notes.
F-23
<PAGE> 127
MICROWAVE NETWORKS INCORPORATED
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1993 1994
----------- -----------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable................................................ $ 3,129,982 $ 3,415,108
Notes payable (Note 2).......................................... 1,500,000 3,400,000
Accrued liabilities............................................. 1,385,902 1,211,071
Deferred revenue................................................ 142,933 59,645
Current portion of capital lease obligations (Note 5)........... 188,794 234,384
Current portion of long-term debt (Note 2)...................... 35,000 75,600
----------- -----------
Total current liabilities............................... 6,382,611 8,395,808
Long-term debt (Note 2)........................................... 76,296 302,400
Capital lease obligations (Note 5)................................ 588,543 537,200
Commitments (Note 5)
Shareholders' equity (Notes 3 and 9):
Preferred stock to be converted to common stock:
Series A mandatory redeemable convertible preferred stock,
$.01 par value (aggregate liquidation preference of
$2,000,000):
Shares authorized, issued, and outstanding--2,000,000... 20,000 20,000
Series B mandatory redeemable convertible preferred stock,
$.01 par value (aggregate liquidation preference of
$3,957,943):
Shares authorized--3,250,000............................
Shares issued and outstanding--3,166,354................ 31,664 31,664
Series C mandatory redeemable convertible preferred stock,
$.01 par value (aggregate liquidation preference of
$5,481,200):
Shares authorized, issued and outstanding--2,037,621.... 20,376 20,376
Common stock, $.01 par value:
Shares authorized--15,000,000
Shares issued--1,602,385 and 1,698,145 in 1993 and 1994,
respectively............................................ 16,024 16,982
Additional paid-in capital...................................... 11,235,526 11,265,346
Retained earnings............................................... 943,848 2,556,429
Foreign currency translation adjustment......................... 2,726 (21,354)
----------- -----------
12,270,164 13,889,443
Less treasury stock, at cost
(70,750 and 78,500 shares of common stock in 1993 and 1994,
respectively)............................................... (48,520) (53,476)
----------- -----------
Total shareholders' equity.............................. 12,221,644 13,835,967
----------- -----------
Total liabilities and shareholders' equity.............. $19,269,094 $23,071,375
========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE> 128
MICROWAVE NETWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C COMMON STOCK
-------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1991...... 2,000,000 $20,000 3,166,354 $31,664 1,480,000 $14,800 1,458,675 $14,587
Issuance of stock upon
exercise of stock options... -- -- -- -- -- -- 45,575 456
Net Income.................... -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balance at June 30, 1992...... 2,000,000 20,000 3,166,354 31,664 1,480,000 14,800 1,504,250 15,043
Net proceeds from issuance of
557,621 shares of Series C
mandatory redeemable
convertible preferred
stock....................... -- -- -- -- 557,621 5,576 -- --
Issuance of stock upon
exercise of stock
warrants.................... -- -- -- -- -- -- 23,936 239
Repurchase of 20,750 shares of
common stock................ -- -- -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- --
Issuance of stock upon
exercise of stock options... -- -- -- -- -- -- 74,199 742
Net income.................... -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balance at June 30, 1993...... 2,000,000 20,000 3,166,354 31,664 2,037,621 20,376 1,602,385 16,024
Issuance of stock upon
exercise of stock
warrants.................... -- -- -- -- -- -- 22,660 227
Repurchase of 7,750 shares of
common stock................ -- -- -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- --
Issuance of stock upon
exercise of stock options... -- -- -- -- -- -- 73,100 731
Net income.................... -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- --------- -------
Balance at June 30, 1994...... 2,000,000 $20,000 3,166,354 $31,664 2,037,621 $20,376 1,698,145 $16,982
======== ======= ======== ======= ======== ======= ======== =======
<CAPTION>
FOREIGN
ADDITIONAL RETAINED CURRENCY TOTAL
PAID-IN EARNINGS TRANSLATION TREASURY SHAREHOLDERS
CAPITAL (DEFICIT) ADJUSTMENT STOCK EQUITY
----------- ----------- ----------- -------- ------------
<S> <<C> <C> <C> <C> <C>
Balance at June 30, 1991...... $ 9,702,307 $(2,963,317) -- $(43,333) $ 6,776,708
Issuance of stock upon
exercise of stock options... 13,404 -- -- -- 13,860
Net Income.................... -- 205,681 -- -- 205,681
----------- ----------- ----------- -------- ------------
Balance at June 30, 1992...... 9,715,711 (2,757,636) -- (43,333) 6,996,249
Net proceeds from issuance of
557,621 shares of Series C
mandatory redeemable
convertible preferred
stock....................... 1,494,424 -- -- -- 1,500,000
Issuance of stock upon
exercise of stock
warrants.................... (239) -- -- -- --
Repurchase of 20,750 shares of
common stock................ -- -- -- (5,187) (5,187 )
Foreign currency translation
adjustment.................. -- -- 2,726 -- 2,726
Issuance of stock upon
exercise of stock options... 25,630 -- -- -- 26,372
Net income.................... -- 3,701,484 -- -- 3,701,484
----------- ----------- ----------- -------- ------------
Balance at June 30, 1993...... 11,235,526 943,848 2,726 (48,520) 12,221,644
Issuance of stock upon
exercise of stock
warrants.................... (227) -- -- -- --
Repurchase of 7,750 shares of
common stock................ -- -- -- (4,956) (4,956 )
Foreign currency translation
adjustment.................. -- -- (24,080) -- (24,080 )
Issuance of stock upon
exercise of stock options... 30,047 -- -- -- 30,778
Net income.................... -- 1,612,581 -- -- 1,612,581
----------- ----------- ----------- -------- ------------
Balance at June 30, 1994...... $11,265,346 $ 2,556,429 $ (21,354) $(53,476) $13,835,967
========== ========== ========== ======== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE> 129
MICROWAVE NETWORKS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income.......................................... $ 205,681 $ 3,701,484 $ 1,612,581
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 651,463 904,419 1,122,163
Deferred tax expense (benefit)................. (644,739) 14,763 (120,160)
Change in operating assets and liabilities:
Accounts receivable.......................... (1,603,556) (1,016,920) (1,228,157)
Inventories.................................. (1,035,144) (2,375,626) (1,840,593)
Prepaid expenses............................. (11,209) (50,781) (16,685)
Federal income taxes refundable.............. (12,569) (83,598) (91,253)
Deposits..................................... (4,635) (49,782) 21,645
Other assets................................. (44,330) 43,771 (43,757)
Accounts payable............................. 452,470 244,258 285,126
Accrued liabilities.......................... 263,871 568,888 (174,831)
Deferred revenue............................. 85,852 47,731 (83,288)
Federal income taxes payables................ (5,905) -- --
----------- ----------- -----------
Net cash provided by (used in) operating
activities........................................ (1,702,750) 1,948,607 (557,209)
Investing activities
Capital expenditures................................ (1,237,119) (1,108,723) (1,018,252)
Financing activities
Net borrowings (repayments) under line of credit.... 2,900,000 (1,950,000) 1,900,000
Principal payments on capital lease obligations..... (76,724) (160,432) (213,851)
Proceeds from issuance of stock and warrants........ 13,860 1,526,374 30,778
Principal payments on long-term debt................ -- (30,558) (111,296)
Proceeds from issuance of long-term debt............ 141,854 -- 378,000
Purchase of treasury stock.......................... -- (5,187) (4,956)
----------- ----------- -----------
Net cash provided by (used in) financing
activities........................................ 2,978,990 (619,803) 1,978,675
Foreign currency translation adjustment............. -- 2,726 (24,080)
----------- ----------- -----------
Net increase in cash................................ 39,121 222,807 379,134
Cash at beginning of year........................... 40,086 79,207 302,014
----------- ----------- -----------
Cash at end of year................................. $ 79,207 $ 302,014 $ 681,148
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............ $ 231,222 $ 249,229 $ 236,231
Cash paid during the year for federal and foreign
income taxes................................... $ 10,250 $ 886,023 $ 704,098
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
The Company incurred capital lease obligations for equipment with a cost of
$208,098, $547,526 and $466,967 upon entering into leases for new equipment in
1994, 1993 and 1992, respectively.
See accompanying notes.
F-26
<PAGE> 130
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1994
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
On March 3, 1981, Microwave Networks Incorporated (the "Company") was
incorporated under the laws of the state of Texas. The Company is engaged in the
design, manufacture, sales, and installation of high performance microwave
radios and transmission products.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated upon consolidation.
Inventories
Inventories are stated at the lower of cost (weighted average) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation for financial
statement purposes is computed using the straight-line method over periods
ranging from three to five years. The accelerated cost recovery and modified
accelerated cost recovery systems of depreciation are used for federal income
tax purposes.
Revenue Recognition
Sales are recorded upon shipment of units. Deferred revenue consists of
down payments received from customers for units not yet delivered.
Research and Development Costs
Research and development costs are expensed as incurred.
Warranty Expense
The Company sells its products with warranties which extend to 24 months.
The estimated costs to be incurred over the warranty period are accrued at the
time the related units are shipped.
Income Taxes
Effective July 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement
109, the liability method is used in accounting for income taxes. Under this
method, deferred tax liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted marginal tax rates and laws that will be in effect when the
differences reverse. Prior to the adoption of Statement 109, income tax expense
was based on items of income and expense that were reported in different years
in the financial statements and tax returns and were measured at the tax rate in
effect in the year the difference originated. The cumulative effect of the
accounting change on fiscal years prior to the year ended June 30, 1992 resulted
in a $604,326 increase in net income as of July 1, 1991.
Per Share Information:
Income per share has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of the
F-27
<PAGE> 131
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incremental shares issuable upon conversion of the convertible preferred stock
and common stock equivalent shares from the exercise of stock options (using the
treasury stock method). Common stock equivalent shares from stock options are
excluded from the computations if their effect is antidultive. Loss per share
has been computed by dividing the net loss by the weighted average number of
common and common equivalent shares from convertible preferred stock outstanding
during the period.
2. NOTES PAYABLE AND LONG-TERM DEBT
At June 30, 1994, notes payable consists of funds borrowed under a
$7,622,000 line of credit with a bank which expires in November 1994. The line,
bearing interest at prime, is secured by accounts receivable, inventory and
general intangibles. The borrowing base is limited to 80% of eligible accounts
receivable and 20% of eligible inventory (as defined in the loan agreement).
Under the terms of the loan agreement, the Company is required to maintain
certain ratios of current assets to current liabilities, maintain a specified
level of net worth, meet a maximum debt to worth ratio, and achieve a specified
level of net income. At June 30, 1994, the unused portion of the line of credit
was $4,222,000. The line of credit includes commitment fees, paid quarterly, of
.5% of the unused portion of the line of credit. At June 30, 1993, the notes
payable, which bore interest at prime plus .5%, consisted of funds borrowed
under a $3,250,000 line of credit and a $4,000,000 line of credit with a bank.
At June 30, 1992, the note payable, which bore interest at prime plus .5%,
consisted of funds borrowed under a $3,500,000 line of credit with a bank.
<TABLE>
<S> <C>
At June 30, 1994, long-term debt consists of the following:
Note payable to bank, monthly installments of $6,300 plus interest at
prime through June 1997, at which time the unpaid principle plus
interest is due, secured by accounts receivable, inventory, general
intangibles, and computer equipment.................................. $378,000
Less current portion...................................................... 75,600
--------
$302,400
========
</TABLE>
As of June 30, 1994, scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
- ------------------
<S> <C> <C>
1995.................................................................... $ 75,600
1996.................................................................... 75,600
1997.................................................................... 226,800
--------
$378,000
========
</TABLE>
3. SHAREHOLDERS' EQUITY
Convertible preferred stock to be converted to common stock upon the
consummation of the business combination discussed in Note 9.
Effective November 29, 1990, the Company issued 1,480,000 shares of Series
C preferred stock at a price of $2.69 per share. In conjunction therewith,
effective October 26, 1990, the Company also issued 46,596 warrants to those
Series C preferred shareholders who participated in a bridge loan to the Company
prior to the preferred stock issuance to purchase an equal number of shares of
common stock. The warrants were exercisable at $.01 per share at any time after
October 26, 1992 until expiration on October 26, 1993. During the fiscal year
ended June 30, 1993, a total of 23,936 warrants were exercised. During the
fiscal year ended June 30, 1994, the remaining 22,660 warrants were exercised.
Provided that the holders of at least two-thirds of Series B and Series C
stock, voting together as a class, have consented, each holder of Series B or
Series C preferred stock has the option to have one-third of the holder's Series
B of Series C preferred stock redeemed on each of the dates noted below, on a
cumulative
F-28
<PAGE> 132
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
basis, for the original cost of $1.25 or $2.69 per share, respectively, plus
accrued but unpaid dividends, by giving notice 45 days prior to each of the
fourth, fifth, and sixth anniversary dates of the Series C stock issue date of
November 29, 1990. Similarly, provided that the holders of at least two-thirds
of Series A stock have consented, each holder of Series A stock has the option
to have one-third of the holder's stock redeemed, on a cumulative basis, at a
price of $1.00 per share, plus accrued but unpaid dividends, by giving notice 45
days prior to each of the seventh, eighth, and ninth anniversary dates of the
Series C stock issue date.
Each holder of Series A, Series B or Series C preferred stock has the
option to convert the stock into an equal number of shares of common stock at
any time, with provisions for adjustments to prevent dilution. Each holder of
Series A, Series B, and Series C preferred stock has the right to one vote equal
to each share of common stock. Upon consummation of a firmly underwritten public
offering of common stock at a price of at least $4.00 per share with net cash
proceeds to the Company of at least $10,000,000, each share of preferred stock
will automatically convert into common stock.
In the event of liquidation of the Company, preferred shareholders will be
entitled to receive $2.69 per share for Series C preferred stock, $1.25 per
share for Series B preferred stock, or $1.00 per share for Series A preferred
stock, plus accrued but unpaid dividends. Series C and Series B preferred stock
have liquidation preference over Series A preferred stock.
There are no dividend requirements with respect to the preferred stock.
Under a covenant in the Series B preferred stock purchase agreement, no
dividends will be paid on any equity securities so long as the Series B
shareholders hold at least 25% of the outstanding shares.
Effective April 16, 1990, the Company approved the 1990 Microwave Networks
Incorporated Non-Qualified Stock Option Plans, including a separate plan for
nonemployed directors and consultants and a separate plan for employees. The
aggregate amount of stock which may be purchased pursuant to options granted
under the plans is 730,000 shares of common stock. Effective January 21, 1993,
the Company's Articles of Incorporation and the plans were amended to increase
the number of shares reversed for issuance under the plans from 730,000 to
1,600,000. Options under the plans must be granted within ten years of the
effective date and expire five years from the dates of grant. The purchase price
is based on the fair market value of the shares as determined by a committee
appointed by the Board of Directors. The plans are a replacement for the 1984,
1986, and 1987 Stock Option Plans and the options issued to nonemployee
directors through January 1989, all of which were terminated effective April 16,
1990. Options granted under these previously existing plans were cancelled and
options for the same number of shares (i.e., 229,000) were issued under the new
plans effective April 16, 1990. The options are exercisable at $.25 per share
and expire in April 1995.
During the fiscal year ended June 30, 1992, a total of 214,250 options were
granted under the plans at a price of $.55 per share and a total of 45,575
options were exercised. At June 30, 1992, 33,900 options previously granted had
terminated.
During the fiscal year ended June 30, 1993, 39,100 options were granted at
a price of $.55 per share, 47,000 options were granted at a price of $.75 per
share, 5,000 options were granted at a price of $.80 per share, and 113,500
options were granted at a price of $.85 per share under the plans, and a total
of 74,199 options were exercised. At June 30, 1993, 97,275 options previously
granted had terminated.
During the fiscal year ended June 30, 1994, 264,000 options were granted at
a price of $.95 per share under the plans, and a total of 73,100 options were
exercised. At June 30, 1994, 134,325 options previously granted had terminated.
F-29
<PAGE> 133
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1994, the following number of shares of common stock are
reserved for issuance:
<TABLE>
<S> <C>
Shares for conversion of Series A preferred stock......................... 2,000,000
Shares for conversion of Series B preferred stock......................... 3,166,354
Shares for conversion of Series C preferred stock......................... 2,037,621
Shares for grant to directors, officers, employees and consultants of the
Company in the future under the stock option plans...................... 613,650
Shares for outstanding stock options...................................... 704,801
---------
Total number of shares of reserved.............................. 8,522,426
=========
</TABLE>
4. INCOME TAXES
The Company accounts for deferred taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." For
the year ended June 30, 1994, net operating loss carryforwards with a tax effect
of $83,085 were utilized to offset federal income taxes otherwise payable.
Deferred taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities used for financial reporting purposes
and the amounts used for income tax purposes. The net deferred tax asset
reflected on the balance sheet as of June 30, 1994 results from the recognition
of benefits from net operating loss carryforwards, unused foreign tax credits,
and differences between tax and financial reporting methods of accounting for
inventory and receivable reserves, and warranty and vacation accruals, which
were netted against deferred tax liabilities resulting from differences between
tax and financial reporting methods of accounting for depreciation and other
timing differences. The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1993 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserve.............................................. $147,308 $255,096
Foreign tax credits............................................ 236,023 223,724
Net operating loss carryforward................................ 307,643 224,558
Vacation accrual............................................... 68,427 91,696
Warranty accrual............................................... 61,885 63,920
Other.......................................................... 43,670 107,067
-------- --------
Total deferred tax assets........................................ 864,956 966,061
Deferred tax liabilities:
Tax over book depreciation..................................... 73,858 92,768
Deductions for tax not for book................................ 161,122 123,157
-------- --------
Total deferred tax liabilities................................... 234,980 215,925
-------- --------
Net deferred tax assets.......................................... $629,976 $750,136
======== ========
</TABLE>
A reconcilitation of total income tax expense to the amounts calculated by
applying the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate.......................... (34 )% 34 % 34%
FSC tax benefit and other non-deductible expenses............... -- (8 ) (9)
Losses of foreign subsidiary.................................... 25 -- --
R&D and other tax credits....................................... (4 ) (4 ) (3)
Other........................................................... 4 (4 ) 1
---- ---- ----
Income tax expense (benefit).................................... (9 )% 18 % 23%
==== ==== ====
</TABLE>
F-30
<PAGE> 134
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1994, the Company has available net operating loss
carryforwards of approximately $661,000, all of which is subject to limitation
(described below) and unused foreign tax credits of approximately $223,000,
which expire in 1998 and 1999, which will provide future tax benefits.
In 1987, as a result of the issuance of the Series A and Series B preferred
stock, the Company experienced an ownership change and consequently is subject
to limitation on the utilization of its net operating loss and tax credit
carryforwards under the Internal Revenue Code of 1986. The annual limitation for
utilizing the net operating losses and credits generated prior to the ownership
change is approximately $244,000. To the extent the annual limitation exceeds
the Company's taxable income for the given year, the excess may be added to a
subsequent year's limitation.
5. COMMITMENTS
The Company leases office and manufacturing facilities from a joint venture
owned by an officer and a shareholder of the Company under two leases with terms
expiring in July, 2001. In addition, the Company leases test equipment under
various leases with three- and five-year terms which began during the fiscal
year 1991. At June 30, 1994, future minimum lease payments under these operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
- -------------------
<S> <C> <C>
1995..................................................................... $ 304,165
1996..................................................................... 297,123
1997..................................................................... 288,467
1998..................................................................... 288,000
1999..................................................................... 288,000
Thereafter............................................................... 600,000
-----------
$ 2,065,755
=========
</TABLE>
Rent expense for 1992, 1993 and 1994 was $221,542, $268,521 and $344,968,
respectively, of which $279,331, $194,349 and $165,573, respectively, was
associated with the related joint venture.
The Company also leases test equipment under various capital leases with
five-year terms. Property, plant and equipment includes equipment under capital
leases of $464,230 less accumulated amortization of $100,590 at June 30, 1992,
$962,860 less accumulated amortization of $429,121 at June 30, 1993 and
$1,170,958, less accumulated amortization of $450,599 at June 30, 1994. Future
minimum lease payments under these capital leases at June 30, 1994, together
with the present value of the minimum lease payments, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
- -------------------
<S> <C> <C>
1995....................................................................... $311,295
1996....................................................................... 268,714
1997....................................................................... 200,834
1998....................................................................... 128,375
Thereafter................................................................. 28,900
--------
938,118
Less amount representing interest and sales tax............................ 166,534
--------
Present value of minimum lease payments.................................... 771,584
Current portion............................................................ 234,384
--------
$537,200
========
</TABLE>
F-31
<PAGE> 135
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SALES TO MAJOR CUSTOMERS
The Company had sales to three customers which accounted for 20%, 16% and
11%, respectively, of the Company's total sales for the year ended June 30,
1994. The Company had sales to two customers which accounted for 30% and 17%,
respectively, of the Company's total sales for the year ended June 30, 1993. The
Company had sales to two customers which accounted for 36% and 17%,
respectively, of the Company's total sales for the year ended June 30, 1992.
7. CHANGE IN ACCOUNTING PRINCIPLE
In 1992, the Company changed its method of allocating overhead costs to
inventory from overhead allocated based on direct labor dollars to overhead
allocated based on direct labor dollars and material purchases. The Company
believes the new method more accurately reflects the true costs of its inventory
and costs of goods sold. The cumulative effect of the change in method as of
July 1, 1991 resulted in an increase in net income of approximately $345,000,
which is shown separately in the consolidated statement of income for the year
ended June 30, 1992. Pro forma net income (loss) for the years ended June 30,
1992 and 1991 based on the revised method of accounting for overhead costs in
inventory would have been $(139,319) and $753,567, respectively.
8. DEFINED-CONTRIBUTION PLAN
The Company sponsors a defined-contribution plan which became effective
January 1, 1992 and covers all eligible employees. The Company will match all
voluntary contributions up top 25% of the first 4% of each employee's salary.
The Company recognized costs of $17,327, $10,897 and $12,278 related to the plan
during the fiscal years 1992, 1993 and 1994, respectively.
9. SUBSEQUENT EVENT
In January 1995, the Company entered into an Agreement and Plan of
Reorganization and Merger with another company. The merger will be effected by
the issuance of new shares by the acquiring company in exchange for all of the
capital stock of Microwave Networks Incorporated and is subject to the approval
by the shareholders of each company. Each share of Common Stock and Preferred
Stock of the Company issued and outstanding immediately prior to the
consummation of the merger will be converted into the common stock of the
acquiring company according to the formula stipulated in the merger agreement.
The merger is anticipated to be completed by March 31, 1995.
F-32
<PAGE> 136
MICROWAVE NETWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ---------------------
1993 1994 1993 1994
------ ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales.......................................... $7,797 $15,892 $16,601 $28,813
Cost of product sales.......................... 4,656 9,021 9,725 16,219
------ ------- ------- -------
Gross Margin................................... 3,141 6,871 6,876 12,594
Expenses:
Research and Development....................... 998 1,668 2,108 2,988
Marketing and Administration................... 2,055 2,865 4,090 5,452
------ ------- ------- -------
Total expenses....................... 3,053 4,533 6,198 8,440
------ ------- ------- -------
Operating income............................... 88 2,338 678 4,154
Interest expense and other..................... (66) (29) (111) (109)
------ ------- ------- -------
Income before income taxes..................... 22 2,309 567 4,045
Provision for income taxes..................... 6 767 133 1,328
------ ------- ------- -------
Net income........................... $ 16 $ 1,542 $ 434 $ 2,717
====== ======= ======= =======
Net income per share........................... $ -- $ .17 $ .05 $ .29
Average shares and equivalents outstanding..... 9,037 9,279 9,016 9,242
</TABLE>
See accompanying notes.
F-33
<PAGE> 137
MICROWAVE NETWORKS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, SEE NOTE A)
<TABLE>
<CAPTION>
JUNE
30, DECEMBER 31,
1994 1994
------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 681 $ 501
------- ------------
Accounts receivable................................................. 8,018 12,505
Inventories......................................................... 9,792 14,962
Other current assets................................................ 441 423
Deferred tax benefit................................................ 549 549
------- ------------
Total current assets............................................. 19,481 28,940
Net property, plant and equipment..................................... 3,306 4,559
Other assets.......................................................... 284 341
------- ------------
$23,071 $ 33,840
======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................... $ 3,400 $ 4,890
Current portion of capital lease obligations........................ 234 369
Current portion of long-term debt................................... 76 400
Accounts payable.................................................... 3,415 6,835
Accrued income taxes................................................ -- 65
Other accrued liabilities........................................... 1,271 2,061
------- ------------
Total current liabilities........................................ 8,396 14,620
Deferred tax liability, non-current................................. -- 141
Capital lease obligations, non-current.............................. 537 891
Long-term debt, net of current...................................... 302 1,600
Total stockholders' equity............................................ 13,836 16,588
------- ------------
$23,071 $ 33,840
======= ==========
</TABLE>
A-The balance sheet at June 30, 1994 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
F-34
<PAGE> 138
MICROWAVE NETWORKS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
DECEMBER 31,
---------------------
1993 1994
------- -------
DOLLARS IN THOUSANDS
<S> <C> <C>
Operating activities:
Net income............................................................. $ 434 $ 2,717
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................ 560 727
Deferred tax expense (benefit)....................................... -- 141
Net effect of changes in:
Accounts receivable.................................................. (1,152) (4,487)
Inventories.......................................................... (412) (5,170)
Other current assets................................................. (48) 18
Other assets......................................................... (63) (57)
Accounts payable..................................................... (335) 3,420
Accrued income taxes................................................. 27 65
Other accrued liabilities............................................ (269) 790
------- -------
Net cash used in operating activities.................................. (1,258) (1,836)
Investing activities:
Capital expenditures................................................. (619) (1,930)
Financing activities:
Proceeds from issuance of long-term debt............................. -- 1,647
Net capital lease additions.......................................... 7 488
Foreign currency translation adjustment.............................. 1 (21)
Purchase of treasury stock........................................... (4) --
Payments on long-term debt........................................... (17) (25)
Proceeds from issuance of common stock............................... 25 57
Proceeds from short-term borrowings.................................. 2,397 1,490
------- -------
Net cash provided by financing activities.............................. 2,409 3,636
Net increase (decrease) in cash and cash equivalents................... 532 (180)
Cash and cash equivalents at beginning of year......................... 302 681
------- -------
Cash and cash equivalents at end of period............................. $ 834 $ 501
======= =======
Cash paid during the period for:
Interest............................................................. $ 111 $ 151
Income taxes......................................................... $ 107 $ 990
</TABLE>
See accompanying notes
F-35
<PAGE> 139
MICROWAVE NETWORKS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The information at December 31, 1994, and for the six-month period ended
December 31, 1994 and 1993, is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) which the management of
Microwave Networks Incorporated believes are necessary for fair presentation of
the results for the periods presented. Interim results are not necessarily
indicative of results for a full year. The consolidated interim financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended June 30, 1994 included in the Microwave Networks
Incorporated 1994 Annual Audited Financial Statements.
NOTE 2 INVENTORIES ($000)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1994
-------- ------------
<S> <C> <C>
Raw Materials and Subassemblies............................... $7,046 $ 9,445
Work in Process............................................... 2,358 5,279
Finished Goods................................................ 388 238
-------- ------------
$9,792 $ 14,962
====== ==========
</TABLE>
NOTE 3 NOTES PAYABLE AND LONG-TERM DEBT
Effective November 1, 1994, the Company amended the credit agreement with
its bank. The previously existing line of credit was converted into a $6,000,000
line of credit with a $1,500,000 letter of credit sublimit, which expires
November 1, 1997. The line, bearing interest at prime, is secured by accounts
receivable, inventory, and general intangibles. The borrowing base is limited to
80% of eligible accounts receivable and 20% of eligible inventory (as defined in
the loan agreement). The commitment fee is .25% of the unused portion of the
line, payable quarterly. The Company is required to maintain certain financial
ratios and a minimum net worth, similar to the previously existing line of
credit.
Also effective November 1, 1994, the Company entered into a term note with
its bank for $2,000,000. The note bears interest at prime and expires November
1, 1997. Principle of $100,000 and interest are payable quarterly beginning
March 31, 1995, and quarterly thereafter until maturity, when the remaining
principle balance is due. The term note is secured by equipment and is cross
collateralized with the line of credit.
F-36
<PAGE> 140
APPENDIX A
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG
CALIFORNIA MICROWAVE, INC.,
CMI ACQUISITION CORPORATION, AND
MICROWAVE NETWORKS INCORPORATED
<PAGE> 141
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS................................................................. A-1
1.1 Affiliates................................................................. A-1
1.2 Closing.................................................................... A-1
1.3 Closing Date............................................................... A-1
1.4 CMI........................................................................ A-1
1.5 CMI's Stockholders Meeting................................................. A-1
1.6 Code....................................................................... A-1
1.7 Company.................................................................... A-1
1.8 Dissenting Company Shares.................................................. A-1
1.9 Effective Time............................................................. A-1
1.10 Escrow Agreement........................................................... A-2
1.11 Escrow Holder.............................................................. A-2
1.12 Exchange Act............................................................... A-2
1.13 Exchange Agent............................................................. A-2
1.14 Holders.................................................................... A-2
1.15 HSR Act.................................................................... A-2
1.16 Merger..................................................................... A-2
1.17 Merger Agreement........................................................... A-2
1.18 1933 Act................................................................... A-2
1.19 Proxy Statement............................................................ A-2
1.20 S-4 Registration Statement................................................. A-2
1.21 SEC........................................................................ A-2
1.22 Stockholder Representatives................................................ A-2
1.23 Subsidiary................................................................. A-2
1.24 Voting Agreements.......................................................... A-2
ARTICLE II MERGER, CLOSING AND CONVERSION OF SHARES................................... A-2
2.1 Merger..................................................................... A-2
2.2 Closing....................................................................
2.3 Conversion of Shares....................................................... A-2
2.4 Escrow..................................................................... A-3
2.5 Company Options............................................................ A-4
2.6 Exchange of Certificates................................................... A-4
2.7 Dissenting Company Shares.................................................. A-5
2.8 Registration on S-4 Registration Statement................................. A-5
2.9 Tax Free Reorganization.................................................... A-5
2.10 Pooling of Interests....................................................... A-5
2.11 Voting Agreements.......................................................... A-5
ARTICLE III REPRESENTATIONS OF THE COMPANY............................................ A-5
3.1 Organization............................................................... A-5
3.2 Capitalization of the Company.............................................. A-5
3.3 Subsidiaries............................................................... A-6
3.4 Authorization.............................................................. A-6
3.5 Financial Statements....................................................... A-6
3.6 Order Backlog.............................................................. A-7
3.7 Litigation................................................................. A-7
3.8 Insurance.................................................................. A-8
</TABLE>
A-i
<PAGE> 142
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.9 Intangible Property........................................................ A-8
3.10 Property, Plant and Equipment.............................................. A-8
3.11 Business Practices......................................................... A-8
3.12 Tax Matters................................................................ A-8
3.13 Books and Records.......................................................... A-9
3.14 Contracts and Commitments.................................................. A-9
3.15 Compliance with Agreements and Laws........................................ A-10
3.16 Employee Relations......................................................... A-11
3.17 Employee Benefit Plans..................................................... A-11
3.18 Absence of Certain Changes or Events....................................... A-12
3.19 Prepayments and Deposits................................................... A-13
3.20 Indebtedness to and from Employees, Directors and Stockholders............. A-13
3.21 Banking Facilities......................................................... A-13
3.22 Powers of Attorney and Suretyships......................................... A-13
3.23 Conflicts of Interest...................................................... A-13
3.24 Regulatory Approvals....................................................... A-13
3.25 No Existing Discussions.................................................... A-13
3.26 Fees and Costs in Connection with IPO...................................... A-13
3.27 Disclosure................................................................. A-14
ARTICLE IV REPRESENTATIONS OF CMI..................................................... A-14
4.1 Organization and Authority................................................. A-14
4.2 CMI Capital Structure...................................................... A-14
4.3 SEC Filings; Financial Statements.......................................... A-15
4.4 CMI's Authorization........................................................ A-15
4.5 Opinion of Financial Advisor............................................... A-15
4.6 Regulatory Approvals....................................................... A-15
4.7 Acquisition Corp........................................................... A-16
4.8 Disclosure................................................................. A-16
ARTICLE V CERTAIN COVENANTS OF THE COMPANY............................................ A-16
5.1 Conduct of Business and Certain Key Employees.............................. A-16
5.2 Absence of Material Changes................................................ A-16
5.3 Reports, Taxes............................................................. A-17
5.4 Non-Solicitation........................................................... A-17
5.5 Option Plans............................................................... A-17
ARTICLE VI ADDITIONAL COVENANTS....................................................... A-18
6.1 Proxy Statement/Prospectus/Registration StatA-18ement......................
6.2 Access to Information...................................................... A-18
6.3 Stockholders Meetings...................................................... A-18
6.4 Legal Conditions to Merger................................................. A-18
6.5 Public Disclosure.......................................................... A-18
6.6 Tax-Free Organization...................................................... A-18
6.7 Pooling Accounting......................................................... A-18
6.8 Affiliate Agreements....................................................... A-19
6.9 Nasdaq Quotation........................................................... A-19
6.10 Consents................................................................... A-19
6.11 Brokers or Finders......................................................... A-19
</TABLE>
A-ii
<PAGE> 143
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.12 Registration of Shares of CMI.............................................. A-19
6.13 Additional Agreements; Reasonable Efforts.................................. A-20
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF CMI AND
ACQUISITION CORP.................................................. A-20
7.1 Representations and Warranties True at Closing............................. A-20
7.2 Covenants Performed........................................................ A-20
7.3 Certificate................................................................ A-20
7.4 Stockholder Approval....................................................... A-21
7.5 Pooling Letter from CMI's Accountants...................................... A-21
7.6 Dissenting Company Shares.................................................. A-21
7.7 Opinion of Counsel to the Company.......................................... A-21
7.8 Affiliates Agreements...................................................... A-21
7.9 Fairness Opinion........................................................... A-21
7.10 S-4 Registration Statement................................................. A-21
7.11 Employment Agreements and Covenants Not to Compete......................... A-21
7.12 Merger Agreement........................................................... A-21
7.13 Material Changes in the Business of the Company
Between the Date of this Agreement and the Closing......................... A-21
7.14 Litigation................................................................. A-21
7.15 Consents................................................................... A-21
7.16 Documentation.............................................................. A-21
7.17 CMI Due Diligence.......................................................... A-21
7.18 HSR Act Compliance......................................................... A-21
7.19 Escrow Agreement........................................................... A-21
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE COMPANY............................. A-22
8.1 Representations and Warranties True at Closing............................. A-22
8.2 Covenants Performed........................................................ A-22
8.3 Certificate................................................................ A-22
8.4 Stockholder Approval....................................................... A-22
8.5 Tax-Free Reorganization.................................................... A-22
8.6 Opinion of Counsel to CMI.................................................. A-22
8.7 Nasdaq Notification........................................................ A-22
8.8 S-4 Registration Statement................................................. A-22
8.9 Merger Agreement........................................................... A-22
8.10 Pooling Letter from CMI's Accountants...................................... A-22
8.11 Material Changes in the Business of CMI Between
the Date of this Agreement and the Closing................................. A-22
8.12 Litigation................................................................. A-22
8.13 Consents................................................................... A-22
8.14 Documentation
8.15 Company Due Diligence...................................................... A-22
8.16 HSR Act Compliance......................................................... A-23
ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION.................................................... A-23
9.1 Survival of Representations and Warranties................................. A-23
9.2 Indemnification by the Company and Holders................................. A-23
9.3 Indemnification by CMI..................................................... A-23
9.4 Limitation................................................................. A-23
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.5 Claims for Indemnification................................................. A-24
9.6 Defense by Indemnifying Party.............................................. A-24
9.7 Arbitration................................................................ A-25
ARTICLE X TERMINATION................................................................. A-26
10.1 Mutual Agreement........................................................... A-26
10.2 Termination by CMI......................................................... A-26
10.3 Termination by the Company................................................. A-26
ARTICLE XI MISCELLANEOUS
11.1 Expenses................................................................... A-26
11.2 Amendment.................................................................. A-26
11.3 Entire Agreement........................................................... A-26
11.4 Governing Law.............................................................. A-26
11.5 Headings................................................................... A-26
11.6 Notices.................................................................... A-26
11.7 Severability............................................................... A-27
11.8 Waiver.....................................................................
11.9 Assignment.................................................................
11.10 Counterparts...............................................................
11.11 Attorneys Fees............................................................. A-27
EXHIBITS
Exhibit A -- Escrow Agreement
Exhibit B -- Agreement of Merger
Exhibit C -- Voting Agreement
Exhibit D -- Opinion of Andrews & Kurth, L.L.P.
Exhibit E -- Form of Employment Agreement
Exhibit F -- Form of Covenant Not to Compete
Exhibit G -- Opinion of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin,
A Professional Corporation
</TABLE>
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AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG CALIFORNIA MICROWAVE, INC.,
CMI ACQUISITION CORPORATION AND
MICROWAVE NETWORKS INCORPORATED
This Agreement and Plan of Reorganization and Merger ("Agreement") is made
as of January 31, 1995 among California Microwave, Inc., a Delaware corporation
("CMI"), CMI Acquisition Corporation, a Texas corporation and a wholly-owned
subsidiary of CMI ("Acquisition Corp."), and Microwave Networks Incorporated, a
Texas corporation (the "Company").
RECITAL:
The parties hereto desire that Acquisition Corp. be merged with and into
the Company; that the Company be the surviving corporation and become a
wholly-owned subsidiary of CMI; and that the shares of the capital stock of the
Company which are outstanding immediately prior to the effective time of the
merger, other than those shares which become "dissenting shares" within the
meaning of Articles 5.11 et seq. of the Texas Business Corporation Act (the
"TBCA"), be converted as set forth in this Agreement into shares of common stock
of CMI ("CMI common stock").
Now Therefore, in consideration of the premises and the mutual agreements
set forth herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
The terms defined in this Article I shall, for purposes of this Agreement,
have the meanings specified in this Article I unless the context otherwise
requires:
1.1 Affiliates. "Affiliates" of any party to the Agreement shall be
persons that directly or indirectly through one or more intermediaries, control,
or are controlled by, or are under common control, with such party.
1.2 Closing. "Closing" shall mean the delivery by the parties hereto of
the various documents contemplated by this Agreement or otherwise required in
order to consummate the Merger.
1.3 Closing Date. "Closing Date" shall have the meaning set forth in
Section 2.2 of this Agreement.
1.4 CMI. "CMI" shall include California Microwave, Inc. and all of its
Subsidiaries.
1.5 CMI's Stockholders Meeting. "CMI's Stockholders Meeting" shall mean
the meeting of stockholders of CMI called for the purpose of approving this
Agreement and the Merger.
1.6 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.7 Company. "Company" shall include Microwave Networks Incorporated and
all of its Subsidiaries.
1.8 Dissenting Company Shares. "Dissenting Company Shares" shall mean all
shares, if any, of the outstanding capital stock of the Company for which
dissenters' rights shall be perfected under Articles 5.11 et seq. of the TBCA.
1.9 Effective Time. "Effective Time" shall mean the time when the Merger
Agreement is filed with the Secretary of State of the State of Texas and the
Merger becomes effective.
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1.10 Escrow Agreement. "Escrow Agreement" shall mean the Agreement
relating to an escrow of certain shares of CMI common stock pursuant to Section
2.4 of this Agreement, in the form attached to this Agreement as Exhibit A.
1.11 Escrow Holder. "Escrow Holder" shall mean First National Bank of
Boston.
1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.13 Exchange Agent. "Exchange Agent" shall have the meaning set forth in
Section 2.6 of this Agreement.
1.14 Holders. "Holders" shall mean holders of Company capital stock
immediately prior to the Effective Time.
1.15 HSR Act. HSR Act means The Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.16 Merger. "Merger" shall mean the merger of Acquisition Corp. with and
into the Company.
1.17 Merger Agreement. "Merger Agreement" shall mean the Articles of
Merger and Agreement of Merger, in the form attached to this Agreement as
Exhibit B.
1.18 1933 Act. "1933 Act" shall mean the Securities Act of 1933, as
amended.
1.19 Proxy Statement. "Proxy Statement" shall mean the joint proxy
statement to be mailed to the stockholders of CMI and the stockholders of the
Company in connection with the Merger.
1.20 S-4 Registration Statement. "S-4 Registration Statement" shall mean
the Registration Statement on Form S-4 to be filed by CMI with the SEC in
connection with the issuance of CMI common stock pursuant to the Merger.
1.21 SEC. "SEC" shall mean the Securities and Exchange Commission.
1.22 Stockholder Representatives. "Stockholder Representatives" shall mean
the three persons selected by the Board of Directors of the Company and
authorized by this Agreement to act as representatives of the stockholders of
the Company under the Escrow Agreement, and any substitute representatives
selected in accordance with the Escrow Agreement.
1.23 Subsidiary. "Subsidiary" shall mean, with respect to a particular
party hereto, any corporation or other organization, whether incorporated or
unincorporated, of which at least a majority of the securities or interests are
directly or indirectly owned by such party or by one or more Subsidiaries of
such party.
1.24 Voting Agreements. "Voting Agreements" shall have the meaning set
forth in Article 2.11 of this Agreement.
ARTICLE II
MERGER, CLOSING AND CONVERSION OF SHARES
2.1 Merger. Subject to and in accordance with the terms and conditions of
this Agreement and the Merger Agreement, CMI, Acquisition Corp. and the Company
shall execute and file the Merger Agreement with the Secretary of State of the
State of Texas, whereupon Acquisition Corp. shall be merged with and into the
Company pursuant to Articles 5.01 et seq. of the TBCA.
2.2 Closing. The Closing shall take place at the offices of Andrews &
Kurth, L.L.P. in Houston, Texas, at 10:00 a.m., within 5 business days following
the date on which the Merger is approved by the stockholders of CMI or on such
other day and time as shall be agreed to by the parties (the "Closing Date").
2.3 Conversion of Shares. In accordance with the Merger Agreement, (a)
each share of Acquisition Corp. common stock issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted at and as of the
Effective Time
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into one share of common stock of the Company, and (b) each share of capital
stock of the Company issued and outstanding immediately prior to the Effective
Time (except those shares which are Dissenting Company Shares) shall, by virtue
of the Merger and without any action on the part of the Holders, be converted at
and as of the Effective Time into that number of shares of CMI common stock
determined by dividing 3,350,000 (the "Numerator") by the total number of shares
of capital stock of the Company outstanding immediately prior to the Closing
(including for this purpose any capital stock of the Company issuable under then
outstanding options, warrants or other convertible securities) and rounding the
quotient thereof off to the nearest ten-thousandth (.0001). Notwithstanding the
foregoing, (i) the Company shall have the right to terminate this Agreement if
the average closing price of CMI common stock on the Nasdaq National Market for
the 15 consecutive trading days immediately preceding the date of CMI's
Stockholders Meeting ("Final Closing Price") is less than $30.00 (as reported by
Nasdaq), provided that if the Company exercises this right, the termination
shall not be effective if CMI agrees to increase the Numerator to the number
which when multiplied by the Final Closing Price equals $100,500,000, and (ii)
CMI shall have the right to terminate this Agreement if the Final Closing Price
is more than $41.375, provided that if CMI exercises this right, the termination
shall not be effective if the Company agrees to decrease the Numerator to the
number which when multiplied by the Final Closing Price is equal to
$138,606,250. The right of either CMI or the Company to terminate this Agreement
under the provisions of this Section 2.3 shall be exercised by written notice
given to the other party by 2:00 p.m., San Francisco time, on the day prior to
the date of CMI's Stockholders Meeting; the right to increase or decrease the
Numerator, as the case may be, provided for in the immediately preceding
sentence may be exercised by written notice given to the other party by 8:00
p.m., San Francisco time, on that same day. The Numerator shall be appropriately
adjusted in the event of any stock dividend, stock split or similar change in
the capitalization of CMI prior to the Effective Time.
The Holders shall receive only whole shares of CMI common stock; in lieu of
any fractional share of CMI common stock, Holders shall receive in cash the fair
market value of such fractional share, valuing CMI common stock at the closing
price for such stock on the Nasdaq National Market on the trading day
immediately preceding the Closing Date, as reported by Nasdaq.
2.4 Escrow. In order to provide indemnification in accordance with Article
IX of this Agreement and with the Escrow Agreement, at the Effective Time or as
soon thereafter as possible, a stock certificate representing 10% of the whole
shares of CMI common stock (rounded down to the nearest whole share) into which
the Holders' shares of capital stock of the Company were converted pursuant to
Section 2.3 of this Agreement (the "Escrow Fund") shall be delivered to the
Escrow Holder (which shares shall be withheld from each Holder ratably based on
the number of shares of capital stock of the Company held by such Holder
immediately prior to the Effective Time). The Stockholder Representatives are
authorized by this Agreement to act hereunder and under the Escrow Agreement
with the powers and authority provided for herein and therein, as
representatives of the Holders and their successors. Approval of this Agreement
and the Merger by the stockholders of the Company shall constitute approval (i)
of the terms and conditions of the Escrow Agreement and ratification of the
selection of the Stockholder Representatives and of their authority to act
hereunder and under the Escrow Agreement on behalf of the Holders and their
successors and (ii) constitute the agreement of each stockholder to advance
funds to the Stockholder Representatives, on a pro rata basis based on the
number of shares of capital stock of the Company owned by such stockholders,
upon the request of the Stockholder Representatives, in order to pay any
expenses incurred in connection with any disputes or obligations relating to the
Escrow Agreement or to Article IX of this Agreement relating to indemnification
and defenses and disputes related thereto. To the extent available for
distribution to stockholders of the Company pursuant to the Escrow Agreement, in
order to enforce the foregoing obligation to advance funds, the Stockholder
Representatives may attach and dispose of any such available shares of Common
Stock in the Escrow Fund held for the benefit of stockholders who do not comply
with the foregoing obligations. Any rights of the Holders to receive any shares
placed in such escrow shall in no circumstances be sold, assigned or otherwise
transferred by them other than by will or pursuant to the laws of descent and
distribution. All certificates representing securities delivered to the Escrow
Holder shall be accompanied by separate stock powers endorsed in blank by a
Stockholder Representative on behalf of the Holders. Subject to the Escrow
Agreement, the Holders shall retain their voting rights with respect to
securities deposited with the Escrow Holder in accordance with this Section 2.4.
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2.5 Company Options. At the Effective Time, each of the outstanding
options to purchase common stock of the Company under the Company's
Non-Qualified Stock Option Plan for Nonemployed Directors and Consultants (the
"Nonemployee Option Plan") and the Company's Non-Qualified Stock Option Plan for
Employees (the "Employee Option Plan") shall thereafter entitle the holder
thereof to receive for each share of Company common stock subject to such
option, upon exercise thereof, the number of shares of CMI common stock to be
exchanged under Section 2.3 above for each share of capital stock of the Company
(the "Exchange Ratio"), at an exercise price for each full share of CMI common
stock equal to the quotient obtained by dividing (a) the exercise price per
share of Company common stock with respect to such option by (b) the Exchange
Ratio, which exercise price per share shall be rounded down to the nearest whole
cent. The number of shares of CMI common stock that may be purchased by a holder
under any option assumed by CMI hereunder shall not include any fractional share
of CMI common stock but shall be rounded up to the next higher whole share of
CMI common stock. The assumption by CMI of the options hereunder shall not
terminate or modify (except as required hereunder) any right, vesting schedule,
or other restriction on transferability relating to such options or give the
holders of such options any additional benefits which they did not have
immediately prior to the Effective Time. Continuous employment with the Company
shall be credited to an optionee for vesting purposes after the Effective Time.
Nothing contained in this Section 2.5 shall require CMI to offer or sell shares
of CMI common stock upon the exercise of options assumed by CMI hereunder if, in
the reasonable judgment of CMI or its counsel, such offer or sale would not be
in accordance with the applicable federal or state securities laws, provided
that CMI shall use its best efforts to take such actions, if any, as are
necessary for such offer or sale to be in accordance with such laws, including
without limitation the filing with the SEC within 45 days following the
Effective Time of a registration statement on Form S-8 under the 1933 Act
covering the shares of CMI common stock issuable upon exercise of options
assumed hereunder by CMI.
2.6 Exchange of Certificates.
(a) Prior to the Closing Date, CMI shall appoint the Escrow Agent to
also act as exchange agent (the "Exchange Agent") in the Merger.
(b) Promptly after the Closing Date, but in no event later than three
business days thereafter, CMI shall give instructions to the Exchange Agent
to make available within three business days thereafter for exchange in
accordance with this Section 2.6, the shares of CMI common stock issuable
pursuant to Section 2.3 in exchange for outstanding shares of capital stock
of the Company, subject to the issuance of 10% of the shares of CMI common
stock issuable to the Holders into escrow pursuant to Section 2.4 hereof.
(c) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each Holder of record of a stock certificate that,
immediately prior to the Effective Time, represented outstanding shares of
capital stock of the Company (a "Certificate"), whose shares are being
converted into CMI common stock pursuant to Section 2.3, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as CMI may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates evidencing CMI common stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the Holder of such Certificate shall be
entitled to receive in exchange therefor the number of shares of CMI common
stock and payments in lieu of fractional shares to which the Holder is
entitled pursuant to Section 2.3 hereof. Until surrendered as contemplated
by this Section 2.6(c), each Certificate shall be deemed at any time after
the Effective Time to represent only the right to receive upon such
surrender such whole number of shares of CMI common stock and payments for
fractional shares as is provided for in Section 2.3.
(d) No dividends or distributions payable to holders of record of CMI
common stock after the Effective Time, or cash payable in lieu of
fractional shares, shall be paid to the Holder of any unsurrendered
Certificate until the Holder of the Certificate shall surrender such
Certificate.
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2.7 Dissenting Company Shares. Holders of Dissenting Company Shares shall
have those rights, but only those rights, of holders of "dissenting shares"
under Articles 5.11 et seq. of the TBCA. The Company shall give CMI prompt
notice of any demand, purported demand, objection, notice, petition, or other
communication received from stockholders or provided to stockholders by the
Company with respect to any Dissenting Company Shares or shares claimed to be
Dissenting Company Shares, and CMI shall have the right to participate in all
negotiations and proceedings with respect to such shares. The Company agrees
that, without the prior written consent of CMI, it shall not voluntarily make
any payment with respect to, or settle or offer to settle, any demand or
purported demand respecting such shares.
2.8 Registration on S-4 Registration Statement. The CMI common stock to be
issued in the Merger shall be registered under the 1933 Act on a Form S-4
Registration Statement.
2.9 Tax Free Reorganization. The parties intend to adopt this Agreement as
a plan of reorganization and to consummate the Merger in accordance with the
provisions of Section 368(a) of the Code.
2.10 Pooling of Interests. The parties intend that the Merger qualify as a
"pooling of interests" for accounting purposes.
2.11 Voting Agreements. Concurrently with the execution of this Agreement,
each of the directors of the Company shall enter into a Voting Agreement in the
form attached hereto as Exhibit C, pursuant to which they shall agree, subject
to the terms and conditions of the Voting Agreement, to vote all the shares of
capital stock of the Company held by them or by the entities they represent in
favor of the Merger. The Company will use its best efforts to have the officers
of the Company enter into Voting Agreements promptly after the execution of the
Agreement. There shall be no amendments or modifications to the Voting
Agreements without the written consent of CMI.
ARTICLE III
REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to CMI that, except as set forth in the
Disclosure Schedule dated as of the date hereof and signed by the Chief
Executive Officer of the Company (the "Disclosure Schedule"), each of which
exceptions shall specifically identify the relevant Section hereof to which it
relates:
3.1 Organization. The Company and each of its Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their incorporation, and have all requisite power
and authority to own their properties and to carry on their businesses as now
being conducted. The Company has all requisite power to execute and deliver this
Agreement and the agreements contemplated herein, and to consummate the
transactions contemplated hereby and thereby. The Company and its Subsidiaries
are duly qualified to do business and in good standing in all jurisdictions in
which ownership of property or the character of their business requires such
qualification and where failure to be so qualified would have a material adverse
effect on the Company and its Subsidiaries, taken as a whole. Certified copies
of the Articles of Incorporation and Bylaws of the Company, as amended to date,
have been previously delivered to CMI, are complete and correct, and no
amendments have been made thereto or have been authorized since the date
thereof.
3.2 Capitalization of the Company. The Company's authorized capital stock
consists of 15,000,000 shares of common stock, $0.01 par value per share, of
which 1,745,233 shares are issued and outstanding on the date hereof, and
7,845,240 shares of Preferred Stock, classified into three series, as follows:
2,000,000 shares of Series A Convertible Preferred Stock, of which 2,000,000
shares are issued and outstanding on the date hereof; 3,250,000 of Series B
Convertible Preferred Stock, of which 3,166,354 shares are issued and
outstanding as of the date hereof; and 2,595,240 shares of Series C Convertible
Preferred Stock, of which 2,037,621 shares are issued and outstanding as of the
date hereof. Shares of Preferred Stock are convertible into shares of Common
Stock on a share-for-share basis. All issued and outstanding shares of the
Company's capital stock are duly authorized, validly issued, fully paid and
non-assessable. There are options outstanding under the Nonemployee Option Plan
covering 56,375 shares of common stock of the Company and options
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outstanding under the Employee Option Plan covering 536,375 shares of common
stock of the Company, all of which options shall be assumed by CMI pursuant to
the provisions of Section 2.5 hereof. Except for the Company's Preferred Stock
and options outstanding under the Nonemployee Option Plan and the Employee
Option Plan, there are not outstanding (i) any options, warrants or other rights
to purchase from the Company any capital stock of the Company; (ii) any
securities convertible into or exchangeable for shares of capital stock of the
Company; or (iii) any other commitments or rights of any kind for the issuance
by the Company of additional shares of capital stock or options, warrants or
other securities of the Company.
3.3 Subsidiaries. The only Subsidiaries of the Company are those listed in
the Disclosure Schedule. All of the outstanding shares of capital stock of each
of the Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and all such shares are owned by the Company or another Subsidiary
of the Company free and clear of all security interests, liens, claims, pledges,
agreements, limitations on the Company's voting rights, charges or other
encumbrances of any nature.
3.4 Authorization. Subject to the obtaining of the approval of the
Company's stockholders, the execution and delivery by the Company of this
Agreement and the agreements provided for herein, and the consummation by the
Company of all transactions contemplated hereunder and thereunder by the
Company, have been duly authorized by all requisite corporate action. This
Agreement has been duly executed by the Company. Subject to the obtaining of the
approval of the Company's stockholders, this Agreement and all other agreements
and obligations entered into and undertaken in connection with the transactions
contemplated hereby to which the Company is a party constitute the valid and
legally binding obligations of the Company enforceable against it in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other similar laws affecting
the rights of creditors generally. The execution, delivery and performance by
the Company of this Agreement and the agreements provided for herein, and the
consummation by the Company of the transactions contemplated hereby and thereby,
do not and will not, with or without the giving of notice or the passage of time
or both, (a) violate the provisions of any law, rule or regulation applicable to
the Company (assuming compliance with the requirements of the HSR Act) which
violation would have a material adverse effect on the Company; (b) violate the
provisions of the Certificate of Incorporation or Bylaws of the Company; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator applicable to the Company; or (d) conflict with or result in the
breach or termination of any term or provision of, or constitute a default
under, or cause any acceleration under, or cause the creation of any lien,
charge or encumbrance upon the properties or assets of the Company or of any of
its Subsidiaries pursuant to, any indenture, mortgage, deed of trust or other
instrument or agreement to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
properties is or may be bound. The Disclosure Schedule sets forth a true,
correct and complete list of all consents and approvals of third parties that
are required in connection with the execution, delivery or performance of this
Agreement by the Company or the consummation by the Company of the transactions
contemplated by this Agreement or in order to permit the continuation after the
Closing Date of the business activities of the Company and its Subsidiaries in
the manner such business is presently carried on by them.
3.5 Financial Statements.
(a) The Company has previously delivered to CMI the audited
consolidated balance sheets of the Company as of June 30, 1994 and June 30,
1993 (the "Audited Balance Sheets") and the related consolidated statements
of income, shareholders' equity and cash flows of the Company for the two
fiscal years then ended (collectively, the "Audited Financial Statements").
The Company has also previously delivered to CMI the unaudited consolidated
balance sheet of the Company as of December 31, 1994 (the "Current Balance
Sheet") and the related consolidated statements of income, shareholders'
equity and cash flows for the six-month period then ended (collectively,
the "Current Financial Statements"). The Audited Financial Statements and
Current Financial Statements are in accordance with the books and records
of the Company and have been prepared in accordance with generally accepted
accounting principles applied consistently with past practices (except that
the Current Financial Statements do not include notes but do include all
adjustments, which consist only of normal recurring adjustments,
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necessary for fair presentation) and the Audited Financial Statements have
been certified without qualification by the Company's auditors.
(b) The Audited Financial Statements and the Current Financial
Statements fairly present, as of their respective dates, the consolidated
financial condition, retained earnings, assets and liabilities of the
Company and the consolidated results of operations of the Company's
business for the periods indicated and the Audited Financial Statements and
the Current Financial Statements contain and reflect adequate reserves with
respect to taxes and except for the absence of notes on the Current
Financial Statements adequately reflect the material contracts or
commitments of the Company and the Subsidiaries.
(c) Except for such claims, debts and liabilities as are reflected on
the Current Balance Sheet, including any notes thereto, the Company and its
Subsidiaries do not have any outstanding indebtedness for money borrowed
and are not subject to any claims or liabilities, contingent or otherwise,
other than obligations incurred in the ordinary course of business since
the date of the Current Balance Sheet, in amounts usual and normal,
individually and in the aggregate and other than as may not have been
required under generally accepted accounting principles to be disclosed or
reserved for as contingencies as of the date of the Current Balance Sheet.
(d) The inventories of the Company and its Subsidiaries shown on the
Current Balance Sheet, or thereafter acquired prior to the Closing Date,
consist of items of a quality and quantity usable, saleable or leasable in
the normal course of business, except for obsolete and slow moving items
and items below standard quality reflected on the Current Balance Sheet,
all of which have been written down on the Current Balance Sheet to the
lower of cost or market value or are the subject of adequate reserves
reflected in the Current Balance Sheet. The value at which such inventories
are carried on the Current Balance Sheet reflect the normal inventory
valuation policies of the Company. All items included in the inventories of
the Company and its Subsidiaries are the property of the Company and its
Subsidiaries, except for sales made in the ordinary course of business
since the date of such Current Balance Sheet, and no items included in the
inventories have been pledged as collateral or are held by the Company or
any of its Subsidiaries on consignment from others.
(e) All of the accounts receivable (trade or otherwise) and notes
receivable reflected in the Current Balance Sheet, result from the sale of
inventory or products, and subject to the reserve therefor on said balance
sheet, the Company knows of no reason that such accounts are not
collectible in the full amount thereof in the ordinary course of business.
All such accounts receivable and notes receivable are owned by the Company
and its Subsidiaries free and clear of all liens, claims, charges,
encumbrances and other interests of third parties (subject to any reserves
therefor on said balance sheet).
3.6 Order Backlog. The Disclosure Schedule contains a list of the
aggregate backlog of orders for the products of the Company and its Subsidiaries
as of December 31, 1994. All such orders have been or will be filled in the
ordinary course of business, and the Company knows of no reason why any customer
placing any such order may refuse delivery of the ordered products or fail
timely to pay for such products in accordance with the terms of such orders.
3.7 Litigation. Except as set forth in the Disclosure Schedule, (a) there
is no action, suit, or proceeding to which the Company or any of its
Subsidiaries is a party (either as a plaintiff or defendant) pending or, to the
knowledge of the Company, threatened before any court or governmental agency,
authority, body or arbitrator which could adversely affect the Company, its
assets or the transactions contemplated hereby; (b) to the knowledge of the
Company, there is no investigation pending by any governmental agency, authority
or body which could adversely affect the Company, its assets or the transaction
contemplated hereby; (c) neither the Company nor to the best knowledge of the
Company, any Subsidiary, officer, director, stockholder or employee of the
Company, has been permanently or temporarily enjoined by any order, judgment or
decree of any court or any governmental agency, authority or body from engaging
in or continuing any conduct or practice in connection with the business,
assets, or properties of the Company or any of its Subsidiaries; and (d) there
is not in existence on the date hereof any order, judgment or decree of any
court, tribunal or agency enjoining or requiring the Company to take any action
of any kind with respect to its
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business, assets or properties or which has had an adverse effect on the
business practices of the Company. The Company knows of no valid basis for any
such action, suit, proceeding or investigation.
3.8 Insurance. The Disclosure Schedule sets forth a true, correct and
complete list of all fire, theft, casualty, general liability, workers
compensation, business interruption, environmental impairment, product
liability, automobile and other insurance policies maintained by the Company and
of all life insurance policies maintained by the Company on the lives of its
employees, specifying the type of coverage, the amount of coverage, the premium,
the insurer and the expiration date of each such policy (collectively, the
"Insurance Policies"). All premiums due on the Insurance Policies or renewals
thereof have been paid. All Insurance Policies will remain in full force and
effect through the Closing Date and also as to claims arising out of events that
occur prior to the Closing.
3.9 Intangible Property. The Company and its Subsidiaries own or license
(or prior to the Closing Date will own or license), all patents, trademarks,
trade names, copyrights, technology, know-how and processes necessary for the
conduct of their business as heretofore conducted (the "Intangible Property").
The Disclosure Schedule sets forth a true, correct and complete list of such
United States and foreign patents, trademarks, and trademark registrations,
copyrights and copyright registrations, and applications for any of the
foregoing, and sets forth a description of the terms of all licenses and other
agreements relating to the Intangible Property. The consummation of the
transactions contemplated by this Agreement will not alter or impair any
material Intangible Property rights. No claims have been asserted by any person
challenging the ownership or use of the Intangible Property, and the Company
knows of no valid basis for any such claim. To the best knowledge of the
Company, the use by the Company and its Subsidiaries of the Intangible Property
does not infringe on the rights of any other person. The Company is not aware of
any infringement of any of its Intangible Property rights by any other party.
3.10 Property, Plant and Equipment. The Company and its Subsidiaries do
not own any real property. The Company and its Subsidiaries have good title to
all of their material properties and assets, including, without limitation, all
of the properties and assets reflected in the Current Balance Sheet (except for
properties and assets sold since the date of the Current Balance Sheet in the
ordinary course of business and consistent with past practice), and all of the
properties or assets purchased by them since the date of the Current Balance
Sheet. None of such properties or assets is subject to any mortgage, pledge,
lien, security interest, encumbrance or charge of any kind except (a) liens
shown on the Current Balance Sheet as securing specified liabilities or
obligations with respect to which no default exists; (b) liens arising in the
ordinary course of business and consistent with past practice since the date of
the Current Balance Sheet and liens arising by operation of law or minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or materially impairs the use of the property
subject thereto, or materially impairs the operations of the Company or any of
its Subsidiaries; and (c) liens for current taxes not yet due, or, if due, that
are being contested in good faith in the ordinary course of business. Other than
the buildings located at 10935 S. Wilcrest Avenue and 10795 Rockley Road,
Houston, Texas, the Company does not use in its business any assets owned by a
stockholder or Affiliate of the Company. None of the plants, structures or
equipment of the Company and its Subsidiaries is in need of material maintenance
or repairs except for ordinary or routine maintenance and repairs.
3.11 Business Practices. Neither the Company nor any of its Subsidiaries
has made, offered or agreed to offer anything of value to any government
official, political party or candidate for government office nor have any of
them taken any action which would be in violation of the Foreign Corrupt
Practices Act of 1977 or any anti-boycott or export laws.
3.12 Tax Matters.
(a) Except as set forth in the Disclosure Schedule:
(i) Within the times and in the manner prescribed by law, the
Company and its Subsidiaries have filed all federal, state and local tax
returns and all tax returns for foreign countries, provinces and other
governing bodies having jurisdiction to levy taxes which are required to
be filed, and all information provided in such tax returns is true,
complete and accurate in all material respects;
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(ii) The Company and its Subsidiaries have paid all taxes,
interest, penalties, assessments and deficiencies which have become due
or which have been claimed to be due or have provided adequate reserves
therefor, including without limitation income, franchise, real estate,
sales and withholding taxes and other employee benefits, taxes and
imports;
(iii) The Company and its Subsidiaries have not waived or extended
any applicable statute of limitations relating to the assessment of
federal, state, local or foreign taxes;
(iv) No examination of the federal, state, local or foreign tax
returns of the Company or any of its Subsidiaries is currently in
progress nor, to the knowledge of the Company, threatened and no
deficiencies have been asserted or assessed against any of them as a
result of any audit by the Internal Revenue Service or any state, local
or foreign taxing authority and no such deficiency has been proposed or
threatened;
(v) The Company and its Subsidiaries have not changed their general
method of accounting, or accounting with respect to inventory, during
the preceding four year period; and
(vi) The Company and its Subsidiaries do not have any material
liability for taxes other than in respect of the current taxable year,
and adequate reserves for taxes are reflected on their financial
statements in conformity with generally accepted accounting principles.
(b) The Disclosure Schedule sets forth those taxable years for which
the tax returns of the Company or any of its Subsidiaries have been
reviewed or audited by applicable federal, state, local and foreign taxing
authorities and those tax years for which said tax returns have received
clearances or other indications of approval from applicable federal, state,
local and foreign taxing authorities.
3.13 Books and Records. The general ledgers and books of account of the
Company and its Subsidiaries and all federal, state, local and foreign income,
franchise, property and other tax returns filed by the Company and its
Subsidiaries are in all material respects complete and correct.
3.14 Contracts and Commitments. The Disclosure Schedule contains a true,
complete and correct list and description of the following contracts and
agreements, whether written or oral (collectively, the "Contracts"):
(a) all loan agreements, promissory notes, indentures, mortgages,
guaranties, pledge agreements, security agreements, deeds of trust or
similar agreements or instruments creating or granting a lien on any asset
or any other instrument for or relating to any borrowing of money or the
deferred purchase price of property, the unpaid balances of any of which
exceed $25,000, to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries or any of their property
is bound;
(b) all contracts, agreements, commitments, purchase orders or other
understandings or arrangements to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
or any of their property is bound which involve payments or receipts of
more than $100,000 in the case of any single contract, agreement,
commitment, understanding or arrangement or under which full performance
(including payment) will not be completed within one year of the date
hereof;
(c) all plans or agreements for collective bargaining, employment,
consulting, executive compensation, bonus, deferred compensation, pension,
profit-sharing, severance, retirement, employee stock option or stock
purchase, and group life, health, accident insurance and other similar
employee benefit or employment plans, agreements, arrangements or
commitments to which the Company or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries or any of their property is
bound;
(d) all agency, distributor, sales representative, franchise or
similar agreements to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
property is bound;
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(e) all contracts, agreements or other arrangements imposing a
non-competition or non-solicitation obligation on the Company or any of its
Subsidiaries or, to the knowledge of the Company, any officer of the
Company relating to the business of the Company;
(f) all agreements or arrangements for the purchase or sale of any
assets other than in the ordinary course of business;
(g) all material agreements, contracts or commitments with the United
States Government or any agency or instrumentality thereof;
(h) all agreements, contracts or commitments related to Intangible
Property;
(i) all agreements, contracts or commitments between the Company and
any officer, director or stockholder of the Company or of any Subsidiary;
(j) all agreements, contracts or commitments which would reasonably be
expected to have a material adverse effect on the assets, liabilities,
financial condition or results of operations of the Company or any of its
Subsidiaries; and
(k) All leases of real property, and all leases of personal property
that have terms longer than a year and provide for remaining payments in
excess of $25,000.
All such contracts are valid, binding and enforceable and in full force and
effect. Neither the Company nor any of its Subsidiaries is in default under any
such contract and there have been no claims of defaults and there are no
existing factors or conditions which, with the passage of time or giving of
notice or both would constitute such a default or in any case in which such
default would give rise to a right of termination by the other party thereto or
which would result in any material cost, expense or penalty to the Company or
any of its Subsidiaries.
3.15 Compliance with Agreements and Laws. The Company and each of its
Subsidiaries have all material licenses, permits or other authorizations and
certificates, including environmental, health and safety permits, from federal,
state and local authorities necessary to the conduct of their businesses as
currently conducted (collectively, the "Permits"). The Disclosure Schedule sets
forth a true, correct and complete list of all such Permits. Neither the Company
nor any of its Subsidiaries is in violation of any law, regulation or ordinance,
directive, order or other requirement (including, without limitation, any law,
regulation or ordinance relating to building, zoning, environmental, disposal,
manufacture, processing, generation, distribution, use, treatment, storage,
discharge, emission, release, clean-up, transport or handling of hazardous
wastes, substances or materials, land use or similar matters) relating to its
properties, which violation would have a material adverse effect on the results
of operations, condition (financial or otherwise), assets, properties, business
or prospects of the Company and its Subsidiaries, taken as a whole. Neither the
Company nor any of its Subsidiaries is in violation of, in any material respect,
any federal, state, local or foreign law, regulation or order, directive or
other requirement (including, but not limited to, any of the foregoing relating
to employment discrimination, occupational safety, environmental protection,
manufacture, processing, generation, distribution, use, treatment, storage,
discharge, emission, release, clean-up, transport or handling of hazardous
wastes, substances or materials, conservation, or corrupt practices), the
enforcement of which would have a material adverse effect on the Company or any
of its Subsidiaries. The Company has not had notice or communication from any
federal, state or local governmental or regulatory authority or otherwise of any
such violation or noncompliance and, to the best knowledge of the Company, no
such violation or noncompliance exists. To the knowledge of the Company, no real
property or facility now or formerly owned, leased, or used by the Company or
any of its Subsidiaries contains asbestos or has located on or under it any
fuel, oil or gasoline storage tanks, or is contaminated with any substance or
material that requires investigation, remediation or clean-up under any federal,
state or local law, regulation, order, directive or other requirement.
For purposes of this Section 3.15, "hazardous wastes" means "hazardous
wastes" as defined in the Resource Conservation and Recovery Act, as amended, 42
U.S.C. sec.6921 et seq., and the regulations adopted pursuant thereto.
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3.16 Employee Relations.
(a) The Company and each of its Subsidiaries are in compliance in all
material respects with all federal, state, local and foreign laws
respecting employment and employment practices, terms and conditions of
employment, and wages and hours, and are not engaged in any unfair labor
practice, and there are no arrears in the payment of wages or social
security taxes.
(b) Except as set forth in the Disclosure Schedule:
(i) none of the employees of the Company or of any Subsidiary is
represented by any labor union and neither the Company nor any of its
Subsidiaries are parties to any collective bargaining agreement;
(ii) there is no unfair labor practice complaint against the
Company or any of its Subsidiaries pending before the National Labor
Relations Board or any state, local or foreign agency; and
(iii) there is no pending labor strike or other material labor
trouble affecting the Company or any of its Subsidiaries (including,
without limitation, any organizational drive).
3.17 Employee Benefit Plans.
(a) The Disclosure Schedule contains a true, correct and complete list
of all pension, benefit, profit sharing, retirement, deferred compensation,
welfare, insurance, disability, bonus, vacation pay, severance pay and
other similar plans, programs and agreements, whether reduced to writing or
not, other than any "multiemployer plan" as such term is defined in Section
4001(a)(3) of ERISA, relating to the Company's employees that are currently
maintained by the Company or by any other member of any controlled group of
corporations, group of trades or businesses under common control, or
affiliated service group (as defined for purposes of Section 414(b), (c)
and (m), respectively, of the Code) (the "Employee Plans").
(b) Neither the Company nor any of its Affiliates, directors,
officers, employees or agents, or any "party in interest" or "disqualified
person," as such terms are defined in Section 3 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the
Code has, with respect to any Employee Plan, engaged in or been a party to
any non-exempt "prohibited transaction," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, in connection with which,
directly or indirectly, CMI or any of its Affiliates, directors or
employees or any Employee Plan or any related funding medium could be
subject to either a material penalty assessed pursuant to Section 502(i) of
ERISA or a material tax imposed by Section 4975 of the Code.
(c) With respect to all Employee Plans, the Company and its Affiliates
are in compliance in all material aspects with the requirements prescribed
by ERISA and the Code, applicable to such Employee Plans. Except as set
forth on the Disclosure Schedule attached hereto: (i) none of the Employee
Plans which are subject to Title IV of ERISA has been terminated in whole
or in part within the meaning of ERISA or the Code; (ii) no liability has
been incurred to the Pension Benefit Guaranty Corporation ("PBGC") with
respect to any Employee Plan (other than the payment of annual premiums
under Section 4007 of ERISA or benefits payable in accordance with the
terms of such Employee Plan); (iii) no Employee Plan that is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code, or
both, incurred any "accumulated funding deficiency" (as defined in ERISA)
whether or not waived; (iv) neither the Company nor any Affiliate has
failed to pay any material amounts due and owing as required by the terms
of any Employee Plan; (v) there has been no "reportable event" within the
meaning of Section 4043(b)(1)-(9) of ERISA, or any event described in
Section 4063(a) of ERISA, with respect to any Employee Plan, other than as
disclosed herein or on accompanying schedules; (vi) neither the Company nor
any Affiliate has failed to make any payment to an Employee Plan required
under Section 302 of ERISA; and (vii) the PBGC has not instituted any
proceedings to terminate an Employee Plan pursuant to Section 4042 of
ERISA.
(d) Except as set forth in the Disclosure Schedule, no Employee Plan
provides health or life insurance benefits for retirees.
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(e) Except as set forth in the Disclosure Schedule, there are no
pending or, to the knowledge of the Company, threatened claims, suits or
other proceedings by present or former employees of the Company or its
Affiliates, plan participants, beneficiaries or spouses of any of the
above, the Internal Revenue Service, the PBGC, or any other person or
entity involving any Employee Plan including claims against the assets of
any trust, involving any Employee Plan, or any rights or benefits
thereunder, other than ordinary and usual claims for benefits by
participants or beneficiaries including claims pursuant to domestic
relations orders.
3.18 Absence of Certain Changes or Events. Since the date of the Current
Balance Sheet, neither the Company nor any of its Subsidiaries has entered into
any transaction which is not in the usual and ordinary course of business or
has:
(a) incurred any material obligation or liability for borrowed money;
(b) discharged or satisfied any lien or encumbrance or paid any
obligation or liability other than (i) current liabilities reflected in the
Current Balance Sheet or (ii) those incurred in the ordinary course of
business and in normal amounts since the date of the Current Balance Sheet
consistent with past practices;
(c) made any material amendment to or termination of any contract or
lease or done any act or omitted to do any act which would cause the breach
of any contract or lease;
(d) suffered any loss of personal or real property in excess of
$50,000 in the aggregate, or waived any rights of any value;
(e) authorized any declaration or payment of dividends, or paid any
such dividends, or authorized any transfer of assets of any kind whatsoever
to any of its stockholders (other than payments or transfers by any
Subsidiary of the Company to the Company);
(f) made any material change in the terms, status or funding condition
of any Employee Plan;
(g) made any capital expenditure in excess of $100,000 in any instance
or $250,000 in the aggregate;
(h) suffered any material adverse change in its assets, liabilities,
financial condition or results of operations;
(i) acquired or disposed of, or committed to acquire or dispose of,
any asset, or entered or committed to enter into any contract, agreement or
commitment, in any such case which involves the payment in the case of an
acquisition of more than $100,000, or in the case of a disposition of more
than $25,000, except agreements, commitments or transactions involving the
purchase of inventory or supplies in the ordinary course of business
consistent with past practice and which do not have a remaining term
exceeding twelve months;
(j) increased or agreed to increase the compensation or bonuses
payable or to become payable to any employees with annual salaries
exceeding $50,000, or increased any salaries or bonuses payable or to
become payable to any employees in any manner not in the ordinary course of
business consistent with past practices;
(k) made or agreed to make any loan to any of its employees, officers,
stockholders or directors, other than travel advances made in the ordinary
course of business consistent with past practices;
(l) granted or agreed to grant to any person any option, right or
warrant or other commitment calling for the issuance or sale of any shares
of capital stock, bonds or other corporate securities; or
(m) granted or voluntarily subjected any material asset to a lien or
encumbrance (other than any purchase money security interest, conditional
title retention arrangement, mechanic's lien, lien for taxes not yet due or
lien arising by operation of law).
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3.19 Prepayments and Deposits. The Disclosure Schedule sets forth all
prepayments and deposits, which have been received by the Company or any of its
Subsidiaries as of the date hereof, from customers for products to be shipped,
or services to be performed, after the Closing Date. Since the date of the
Current Balance Sheet, no claims have been asserted against the Company or any
of its Subsidiaries to return products by reason of alleged overshipments,
defects or otherwise which exceed $25,000 in the aggregate. There are no
products of the Company that have been sold to customers under an understanding
that such products would be returnable. There has been no adverse change in the
business relationship of the Company or of any of its Subsidiaries with any
customer or supplier which is material to the financial condition, operations or
prospects of the Company and its Subsidiaries.
3.20 Indebtedness to and from Employees, Directors and
Stockholders. Neither the Company nor any of its Subsidiaries is indebted,
directly or indirectly, to any person who is an employee, director or
stockholder or any Affiliate of any such person (other than indebtedness of any
Subsidiary of the Company to the Company) in any amount whatsoever other than
for salaries for services rendered or reimbursable business expenses, and no
such employee, director, stockholder or Affiliate is indebted to the Company or
any of its Subsidiaries except for advances made to employees in the ordinary
course of business to meet reimbursable business expenses.
3.21 Banking Facilities. The Disclosure Schedule sets forth a true,
correct and complete list of:
(a) each bank, savings and loan or other financial institution in
which the Company or any of its Subsidiaries has an account or safety
deposit box and the numbers of the accounts or safety deposit boxes
maintained by the Company or any of its Subsidiaries thereat; and
(b) the names of all persons authorized to draw on each such account
or to have access to any such safety deposit box facility.
3.22 Powers of Attorney and Suretyships. Neither the Company nor any of
its Subsidiaries has any general or special powers of attorney outstanding
(whether as grantor or grantee thereof) or has any obligation or liability
(whether actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity, except as endorser or maker of checks or letters
of credit, respectively, endorsed or made in the ordinary course of business.
3.23 Conflicts of Interest. No officer or director of the Company nor, to
the knowledge of the Company, any Affiliate of any such person, now has or
within the last year had, either directly or indirectly, an equity or debt
interest in any corporation, partnership, joint venture, association,
organization or other person or entity which furnishes or sells or during such
period furnished or sold services or products to the Company or any of its
Subsidiaries, or purchases or during such period purchased from the Company or
any of its Subsidiaries any goods or services, or otherwise during such period
did business with the Company or any of its Subsidiaries, other than for an
interest of less than one (1) percent in any publicly-held corporation.
3.24 Regulatory Approvals. All consents, approvals, authorizations or
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company or any of its Subsidiaries and which the
failure to obtain would have a material adverse effect on the business of the
Company or any of its Subsidiaries and which are necessary for the execution and
delivery by the Company of this Agreement or any documents to be executed and
delivered by the Company in connection herewith or the consummation of the
transactions consummated hereby are set forth in the Disclosure Schedule and
have been, or prior to the Closing Date will be, obtained and satisfied.
3.25 No Existing Discussions. As of the date hereof, the Company is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined in Section
5.4(a)).
3.26 Fees and Costs in Connection with IPO. Investment banker or advisor
fees and costs incurred by the Company in connection with its recent proposed
initial public offering do not exceed $75,000.
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3.27 Disclosure. No representation or warranty of the Company in this
Agreement, any Exhibit attached hereto or the Disclosure Schedule contains or
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated herein or therein or necessary to make the statements
and facts contained herein or therein, in the light of the circumstances under
which they are made, not misleading; provided, however, that the representations
and warranties in this Section 3.27 shall not supersede or replace any specific
representations and warranties set forth in this Agreement, any Exhibit attached
hereto or the Disclosure Schedule.
ARTICLE IV
REPRESENTATIONS OF CMI
CMI represents and warrants to the Company as follows:
4.1 Organization and Authority. CMI and each of its Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their incorporation, and have all requisite power
and authority (corporate and other) to own their properties and to carry on
their business as now being conducted. CMI has full power to execute and deliver
this Agreement and the agreements contemplated herein, and to consummate the
transactions contemplated hereby and thereby. CMI and its Subsidiaries are duly
qualified to do business and in good standing in all jurisdictions in which
their ownership of property or the character of their business requires such
qualification and where failure to be so qualified could have a material adverse
effect. Certified copies of the Certificate of Incorporation and the Bylaws of
CMI, as amended to date, have been previously delivered to the Company, are
complete and correct, and no amendments have been made thereto or have been
authorized since the date thereof.
4.2 CMI Capital Structure. The authorized capital stock of CMI consists of
29,200,000 shares of common stock, $.10 par value. As of December 31, 1994, (i)
12,259,161 shares of CMI common stock were issued and outstanding, all of which
are duly authorized, validly issued, fully paid and nonassessable, (ii)
2,292,153 shares of CMI common stock were reserved for future issuance upon
conversion of outstanding convertible securities, and (iii) 2,604,333 shares of
CMI common stock were reserved for future issuance pursuant to CMI's stock
option plans, Employee Stock Purchase Plan, and Restricted Stock Plan. No
material change in the capitalization of CMI has occurred since December 31,
1994. All of the outstanding shares of capital stock of each of CMI's
Subsidiaries are duly authorized, validly issued, fully paid and nonassessable
and all such shares are owned by CMI or another Subsidiary of CMI free and clear
of all security interests, liens, claims, pledges, agreements, limitations on
CMI's voting rights, charges or other encumbrances of any nature. The shares of
CMI common stock issued pursuant to this Agreement or options assumed pursuant
to this Agreement will, when issued, be duly authorized, validly issued, fully
paid and nonassessable.
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4.3 SEC Filings; Financial Statements.
(a) CMI has filed and made available to the Company all forms, reports
and documents required to be filed by CMI with the SEC since June 30, 1993
(including its Form 10-Q filed for the quarter ending September 30, 1994)
other than registration statements on Form S-8 (collectively, the "CMI SEC
Reports"). The CMI SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act
and the Exchange Act, as the case may be, and (ii) did not at the time they
were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated in such CMI SEC Reports or necessary in order to make the
statements in such CMI SEC Reports, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the CMI SEC Reports, complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q or the SEC) and fairly presented the consolidated
financial position of CMI and its Subsidiaries as at the respective dates
and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements
do not include notes, but do include all adjustments, which consist only of
normal recurring adjustments, necessary for fair presentation.
(c) Since September 30, 1994 there has not been any material adverse
change in the assets, liabilities, financial condition or results of
operations of CMI and its Subsidiaries, taken as a whole.
4.4 CMI's Authorization. Subject to the obtaining of the approval of CMI's
stockholders, the execution and delivery by CMI and Acquisition Corp. of this
Agreement, and the agreements provided for herein, and the consummation by CMI
and Acquisition Corp. of the transactions contemplated hereby and thereby, have
been duly authorized by all requisite corporate action. This Agreement has been
duly executed by CMI and Acquisition Corp. Subject to the obtaining of approval
of CMI's stockholders, this Agreement and all such other agreements and written
obligations entered into and undertaken in connection with the transactions
contemplated hereby constitute the valid and legally binding obligations of CMI
and Acquisition Corp., enforceable against them in accordance with their
respective terms. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by CMI and Acquisition
Corp. of the transactions contemplated hereby and thereby, do not and will not,
with or without the giving of notice of the passage of time or both, (a) violate
the provisions of any law, rule or regulation applicable to CMI (assuming
compliance with the requirements of the HSR Act); (b) violate the provisions of
the Certificates of Incorporation or Bylaws of CMI or Acquisition Corp.; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator; (d) conflict with or result in the breach or termination of any term
or provision of, or constitute a default under, or cause any acceleration under,
or cause the creation of any lien, charge or encumbrance upon the properties or
assets of CMI or of any of its Subsidiaries pursuant to, any indenture,
mortgage, deed of trust or other agreement or instrument to which CMI or any of
its Subsidiaries is a party or by which CMI or any of its Subsidiaries is or may
be bound.
4.5 Opinion of Financial Advisor. The financial advisor of CMI, Bear,
Stearns & Co. Inc., has delivered to CMI an opinion dated the date of this
Agreement to the effect that the Merger is fair from a financial point of view
to the stockholders of CMI.
4.6 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by CMI and Acquisition Corp. and which the failure to
obtain would have a material adverse effect on the business of CMI and which are
necessary for the execution and delivery by CMI and Acquisition Corp. of the
Agreement or any documents to be executed and delivered by CMI and Acquisition
Corp. in connection herewith or for the consummation of the transactions
contemplated by this Agreement have been, or will be prior to the Closing Date,
obtained and satisfied.
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4.7 Acquisition Corp. Acquisition Corp. has been formed by CMI for the
purpose of effecting the Merger and has no significant assets or liabilities.
The authorized capital stock of Acquisition Corp. consists of 1000 shares of
common stock, of which 100 shares are issued and outstanding. All of the issued
and outstanding common stock of Acquisition Corp. is owned by CMI and is validly
issued, fully paid and nonassessable.
4.8 Disclosure. No representation or warranty by CMI in this Agreement or
in any Exhibit hereto contains or will contain any untrue statement of a
material fact or omits or will omit any material fact required to be stated
herein or therein or necessary in order to make the statements and facts
contained herein or therein, in the light of the circumstances under which they
are made, not misleading; provided, however, that the representations and
warranties in this Section 4.8 shall not supersede or replace any specific
representations and warranties set forth in this Agreement or any Exhibit
attached hereto.
ARTICLE V
CERTAIN COVENANTS OF THE COMPANY
From and after the date hereof and until the Closing Date:
5.1 Conduct of Business and Certain Key Employees. The Company and its
Subsidiaries shall carry on their business diligently in the ordinary course and
substantially in the same manner as heretofore conducted. All of the property of
the Company and its Subsidiaries shall be used, operated, repaired and
maintained in a manner consistent with past practice. The Company will use its
best efforts to maintain the relationships of the Company and its Subsidiaries
with their employees, customers and suppliers and will use its best efforts to
enter into employment arrangements satisfactory to CMI with key employees
identified by CMI in writing prior to the Closing.
5.2 Absence of Material Changes. Without the prior written consent of CMI,
neither the Company nor any of its Subsidiaries shall:
(a) take any action to amend its charter documents or bylaws;
(b) issue any stock (except upon the exercise of outstanding options
or warrants to purchase common stock in exchange for full payment), bonds
or other corporate securities or grant any option or issue any warrant to
purchase or subscribe for any of such securities or issue any securities
convertible into such securities;
(c) incur any obligation or liability (absolute or contingent), except
current liabilities incurred and obligations under contracts entered into
in the ordinary course of business;
(d) declare or make any payment or distribution to its stockholders or
purchase or redeem any shares of its capital stock;
(e) mortgage, pledge, or subject to any lien, charge or any other
encumbrance any of their assets or properties, other than mechanic's liens
or liens arising by operation of law;
(f) sell, assign, or transfer any of their assets, except for
inventory sold in the ordinary course of business;
(g) cancel any debts or claims, except in the ordinary course of
business;
(h) merge or consolidate with or into any corporation or other entity;
(i) make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination,
revocation or cancellation of any such election or any consent or
compromise or settle any claim for past or present tax due; or
(j) enter into any lease, contract, agreement or understanding, other
than those entered into in the ordinary course of business calling for
payments by the Company and its Subsidiaries which in the
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aggregate do not exceed $25,000 for each such lease, contract, agreement or
understanding or extend for more than one year from the date hereof.
5.3 Reports, Taxes. The Company and its Subsidiaries will duly and timely
file all reports or returns required to be filed with federal, state, local and
foreign authorities and will promptly pay all federal, state, local and foreign
taxes, assessments and governmental charges levied or assessed upon them or any
of their properties (unless contesting such in good faith and adequate provision
has been made therefor).
5.4 Non-Solicitation.
(a) The Company shall not, directly or indirectly, through any
officer, director, employee, representative or agent, (i) solicit,
initiate, or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, or sale of
shares of capital stock, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in
this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations
or discussions concerning, or provide any non-public information to any
person or entity relating to, any Acquisition Proposal, or (iii) agree to,
approve or recommend any Acquisition Proposal, provided, however, that
nothing contained in this Agreement shall prevent the Company or its Board
of Directors from furnishing nonpublic information to, or entering into
discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide written Acquisition Proposal by such person or
entity or recommending an unsolicited bona fide written Acquisition
Proposal to the stockholders of the Company, if the Board of Directors of
the Company believes in good faith (after consultation with its financial
advisor) that such Acquisition Proposal would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial
point of view than the transaction contemplated by this Agreement (any such
more favorable Acquisition Proposal being referred to in this Agreement as
a "Superior Proposal") and the Board of Directors of the Company determines
in good faith after consultation with outside legal counsel that such
action is necessary for the Company to comply with its fiduciary duties to
stockholders under applicable law.
(b) The Company shall notify CMI immediately (and no later than 24
hours) after receipt by the Company (or its advisors), of any Acquisition
Proposal or any request for nonpublic information in connection with an
Acquisition Proposal or for access to the properties, books or records of
the Company by any person or entity that informs the Company that it is
considering making an Acquisition Proposal. Such notice to CMI shall be
made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal,
inquiry or contact.
(c) If this Agreement is terminated by the Company or the Company
fails to consummate the transactions contemplated hereby by reason of
receipt of an Acquisition Proposal, and in accordance with Section 5.4 and
Section 10.3 hereof the company will have such termination right, the
Company shall pay to CMI upon demand (by wire transfer of immediately
available federal funds to an account designated by CMI for such purpose)
the amount of documented out-of-pocket expenses incurred by CMI in
connection with the transactions contemplated hereby (including, without
limitation, fees and expenses of legal counsel, lenders, investment bankers
and accountants), whether incurred before or after the date of this
Agreement, plus an amount equal to three percent (3%) of the total
consideration payable to the Company and/or its stockholders under the
Superior Proposal.
5.5 Option Plans. The Company agrees to take all action necessary under
the Nonemployee Option Plan and the Employee Option Plan to assure that all
options outstanding under such Plans can be assumed by CMI pursuant to the
provisions of Section 2.5 hereof. The Company also agrees not to take any action
that would result in acceleration of vesting of any option outstanding under
either of such Plans.
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ARTICLE VI
ADDITIONAL COVENANTS
6.1 Proxy Statement/Prospectus/Registration Statement.
(a) As promptly as practical after the execution of this Agreement,
CMI and the Company shall prepare the Proxy Statement and CMI shall prepare
and file with the SEC an S-4 Registration Statement in which the Proxy
Statement will be included as a prospectus. CMI and the Company shall use
all reasonable efforts to cause the S-4 Registration Statement to become
effective as soon after such filing as practical. The Proxy Statement shall
include the recommendations of the Boards of Directors of CMI and the
Company in favor of this Agreement and the Merger; provided that the Board
of Directors of the Company may withdraw such recommendation if such Board
of Directors believes in good faith that a Superior Proposal has been made
and shall have determined in good faith, after consultation with its
outside legal counsel, that the withdrawal of such recommendation is
necessary for such Board of Directors to comply with its fiduciary duties
under applicable law.
(b) The information supplied by CMI and the Company for inclusion in
the S-4 Registration Statement shall not at the time the S-4 Registration
Statement is declared effective by the SEC contain any untrue statement of
a material fact or omit to state any material fact required to be stated in
the S-4 Registration Statement or necessary in order to make the statements
in the S-4 Registration Statement, in the light of the circumstances under
which they were made, not misleading.
6.2 Access to Information. Upon reasonable notice, CMI and the Company
shall each afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all information concerning its business,
properties and personnel as may reasonably be requested. Unless otherwise
required by law, the parties will hold any such information which is nonpublic
in confidence. No information or knowledge obtained in any investigation
pursuant to this Section 6.2 shall affect or be deemed to modify any
representation or warranty construed in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.
6.3 Stockholders Meetings. CMI and the Company each shall call a meeting
of its respective stockholders to be held as promptly as practicable for the
purpose of voting upon this Agreement. Subject to Section 5.4(a) hereof and
satisfaction of the other conditions contained in this Agreement, CMI and the
Company will, through their respective Boards of Directors, recommend to their
respective stockholders approval of this Agreement and the Merger and will
coordinate and cooperate with respect to the timing of such meetings and shall
use their best efforts to hold such meetings on the same day and as soon as
practicable after the date hereof. Each party shall use all reasonable efforts
to solicit from stockholders of such party proxies in favor of such matters.
6.4 Legal Conditions to Merger. Each of CMI and the Company shall take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other governmental
entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed in connection with the Merger.
6.5 Public Disclosure. CMI and the Company shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law.
6.6 Tax-Free Organization. CMI and the Company shall each use its best
efforts to cause the Merger to be treated as a reorganization within the meaning
of Section 368(a) of the Code.
6.7 Pooling Accounting. CMI and the Company shall each use its best
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. The Company shall use its best efforts
to cause its Affiliates not to take any action that would adversely affect the
ability of CMI to
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account for the business combination to be effected by the Merger as a pooling
of interests and to cause its Affiliates to sign and deliver to CMI a customary
"pooling letter" in form and substance agreed upon by CMI and the Company.
6.8 Affiliate Agreements. The Company will promptly provide CMI with a
list of those persons who are in its reasonable judgment, Affiliates of the
Company, within the meaning of Rule 145 promulgated under the 1933 Act ("Rule
145"). The Company shall use its best efforts to deliver or cause to be
delivered to CMI prior to the Effective Time from each of the Affiliates of the
Company, an executed Affiliate Agreement, in form and substance satisfactory to
CMI, by which each Affiliate of the Company agrees to comply with the applicable
requirements of Rule 145 ("Affiliate Agreement"). CMI shall be entitled to place
appropriate legends on the certificates evidencing any CMI common stock to be
received by such Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the CMI
common stock, consistent with the terms of the Affiliate Agreements.
6.9 Nasdaq Quotation. CMI shall use its best efforts to cause the shares
of CMI common stock to be issued in the Merger to be approved for quotation on
the Nasdaq National Market, subject to official notice of issuance, prior to the
Effective Time.
6.10 Consents. Each of CMI and the Company shall use reasonable efforts to
obtain all necessary consents, waivers and approvals under any of their material
agreements, contracts, licenses or leases in connection with the Merger.
6.11 Brokers or Finders. Each of CMI and the Company represents that no
agent, broker, investment banker, financial advisor or other firm or person is
or will be entitled to any broker's or finder's fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement, except Bear, Stearns & Co. Inc., whose fees and expenses will be paid
by CMI in accordance with CMI's agreement with such firm, Hambrecht & Quist
Incorporated, whose fees and expenses will be paid by the Company in accordance
with the Company's agreement with such firm (copies of which have been delivered
to CMI prior to the date of this Agreement), and the fees and costs referred to
in Section 3.26 hereof, and each of CMI and the Company agrees to indemnify and
hold the other harmless from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such party or its Affiliate. CMI acknowledges that the fees and expenses of
Hambrecht & Quist will not be included in the calculation of management bonuses
for management of the Company under the existing management bonus plan of the
Company.
6.12 Registration of Shares of CMI. CMI agrees that:
(a) If at any time CMI files a registration statement under the
Securities Act on a Form S-1, Form S-2 or Form S-3 Registration Statement
in respect of a proposed distribution by CMI of CMI common stock, it shall
give not less than 15 days prior written notice of each such filing to each
of the stockholders of the Company who execute an Affiliate Agreement (at
the last address of record for such stockholder) and who then owns shares
of CMI common stock acquired pursuant to this Agreement. If within 10 days
of the date on which CMI's notice is postmarked, any such stockholder
requests the inclusion in such registration statement of any shares of CMI
common stock acquired by such stockholder hereunder, which such stockholder
then proposes to sell or distribute publicly, CMI will so include such
shares subject to the other terms and conditions of this Section; provided,
however that such shares will not be so included if the investment banking
firm primarily responsible for managing the offer and sale under such
registration statement is of the opinion that an immediate sale of such
shares under the registration statement would adversely impact the
marketability of the offering and provided further that such investment
banking firm may, as a condition to the registration of the shares, require
their sale to or through the underwriters. The rights provided for in this
Section 6.12(a) shall apply only to the first two of such registration
statements filed by CMI after the date on which CMI first publicly
announces the combined results of operations of CMI and the Company
covering a period of at least 30 days subsequent to the Merger, excluding
for this purpose any registration statement not available to such
stockholders by reason of the proviso in the preceding sentence.
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(b) The shares of CMI common stock received by any stockholder
pursuant to this Agreement need not be registered under the terms of
Section 6.12(a) if in the opinion of counsel for CMI registration under the
Securities Act of such shares is not necessary under the circumstances of
the proposed transfer; if counsel for CMI is of such opinion, a copy of the
opinion shall be supplied to the stockholder.
(c) In connection with any registration under the Securities Act
pursuant hereto, CMI shall promptly furnish each person whose shares are so
registered three (3) copies of the registration statement and all
amendments thereto, will keep the prospectus current for a period of three
months from the effective date of the registration statement, and will
supply each person with copies of any prospectus included therein (provided
that no such prospectus need be supplied more than three months after the
effective date of such registration statement) in such quantities as may be
necessary for the purpose of such proposed sale or distribution.
(d) Each stockholder shall pay any sales commissions or underwriting
fees incurred on the sale of such stockholder's stock. All other expenses,
disbursements and fees incurred in connection with any registration
provided for above, including without limitation, registration fees,
printing costs, legal fees (but not including any legal fees of such
stockholder), and audit expenses, shall be borne by CMI.
(e) In connection with any of the above registrations, the
stockholders whose shares are being registered shall furnish CMI with such
information concerning such persons and the proposed sale or distribution
as shall, in the opinion of counsel for CMI, be required for use by CMI in
the preparation of a registration statement. CMI shall indemnify the holder
of any securities being registered in accordance with the provisions hereof
against all claims, losses, damages and liabilities, and reasonable counsel
fees incurred in connection therewith, caused by any untrue statement of
any material fact contained in any such registration statement or
prospectus or by any omission to state therein a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, except insofar as the same may have been caused by an untrue
statement or omission based upon information furnished to CMI in writing by
such holder expressly for use therein, in which case such holder shall
indemnify CMI to the same extent as such stockholder is indemnified in
accordance herewith for statements or omissions made by CMI.
6.13 Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. In case at any time after the Effective Time any further action
is reasonably necessary or desirable to carry out the purposes of this Agreement
each party to this Agreement shall take all such necessary action.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF CMI AND ACQUISITION CORP.
The obligations of CMI and Acquisition Corp. to consummate the Merger are
subject to the fulfillment, at or before the Closing of all the following
conditions, any one or more of which may be waived by CMI.
7.1 Representations and Warranties True at Closing. The representations
and warranties of the Company contained in this Agreement shall be true in all
material respects as of the Closing, subject to changes in the Disclosure
Schedule that have been approved in writing by CMI.
7.2 Covenants Performed. All of the obligations of the Company to be
performed at or before the Closing pursuant to the terms of this Agreement shall
have been duly performed, including without limitation those set forth in 5.5
hereof.
7.3 Certificate. At the Closing, CMI shall have received a certificate
signed by the Chief Executive Officer of the Company to the effect that the
conditions set forth in Sections 7.1 and 7.2 have been satisfied.
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7.4 Stockholder Approval. This Agreement and the Merger Agreement shall
have been duly approved by the stockholders of the Company, Acquisition Corp.
and CMI.
7.5 Pooling Letter from CMI's Accountants. The Board of Directors of CMI
shall have received a pooling letter from Ernst & Young, L.L.P. as of the date
of Closing stating that the Merger qualifies as a "pooling of interests" for
accounting purposes.
7.6 Dissenting Company Shares. The aggregate number of Dissenting Company
Shares shall not exceed 5 percent of the aggregate of the outstanding shares of
capital stock of the Company.
7.7 Opinion of Counsel to the Company. Andrews & Kurth, L.L.P., counsel to
the Company, shall have issued an opinion in favor of CMI in the form of Exhibit
D hereto.
7.8 Affiliates Agreements. The Company shall have delivered to CMI the
letter required by Section 6.8 naming all persons who are considered to be
"Affiliates" of the Company, and each such Affiliate shall have executed and
delivered to CMI an Affiliates Agreement.
7.9 Fairness Opinion. CMI shall have received an opinion, dated as of the
date of the Agreement and confirmed as of the dates of (a) mailing of the Proxy
Statement to the CMI stockholders and (b) the CMI Stockholders Meeting that the
terms of the Merger are fair to the stockholders of CMI, which opinion shall be
in form and substance satisfactory to CMI.
7.10 S-4 Registration Statement. The S-4 Registration Statement shall have
become effective under the 1933 Act and shall not be the subject of any stop
order or proceedings seeking a stop order and the Proxy Statement shall on the
Closing Date not be subject to any proceeding commenced or threatened by the
SEC.
7.11 Employment Agreements and Covenants Not to Compete. CMI shall have
received employment agreements executed by Arthur W. Epley, III, Charles W.
Bentley, W. F. Montgomery and Carl B. Frampton in substantially the form of
Exhibit E hereto, and covenants not to compete executed by Arthur W. Epley III,
Charles W. Bentley and W. F. Montgomery in substantially the form of Exhibit F
hereto.
7.12 Merger Agreement. The Merger Agreement shall have been filed with the
Secretary of State of the State of Texas.
7.13 Material Changes in the Business of the Company Between the Date of
this Agreement and the Closing. There shall have been no material adverse
change in the financial position, results of operations, assets, liabilities or
business of the Company and its Subsidiaries, taken as a whole, between the date
of this Agreement and the Closing.
7.14 Litigation. No action or proceeding before a court or any other
governmental agency or body shall have been instituted and be pending or
threatened to restrain or prohibit any of the transactions contemplated hereby.
7.15 Consents. Each of CMI and the Company shall have received in writing
all consents, approvals, and waivers required in connection with the Merger.
7.16 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by CMI to be executed and
delivered to CMI in order to carry out this Agreement and to consummate the
Merger, and all of the relevant legal matters, shall be reasonably satisfactory
to CMI and its counsel.
7.17 CMI Due Diligence. There shall have been satisfactory completion by
CMI of its due diligence, provided that the condition contained in this Section
7.17 shall not be available after March 3, 1995 as a basis for not closing the
transactions contemplated hereby; the proviso contained herein shall not limit
in any way CMI's right not to close the transactions provided for herein if any
of the other conditions contained in this Article VII is not satisfied.
7.18 HSR Act Compliance. All waiting, review and investigation periods
(and any extensions thereof) applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
7.19 Escrow Agreement. The Escrow Agreement shall have been executed by
the Stockholder Representatives and the Escrow Holder.
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ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the Merger are subject to the
fulfillment, at or before the Closing, of all of the following conditions, any
one or more of which may be waived by the Company:
8.1 Representations and Warranties True at Closing. The representations
and warranties of CMI and Acquisition Corp. contained in this Agreement shall be
true in all material respects as of the Closing.
8.2 Covenants Performed. All of the obligations of CMI and Acquisition
Corp. to be performed at or before the Closing pursuant to the terms of this
Agreement shall have been duly performed.
8.3 Certificate. At the Closing, the Company shall have received a
certificate signed by the Chief Executive Officer of each of CMI and Acquisition
Corp. to the effect that the conditions set forth in Sections 8.1 and 8.2 have
been satisfied.
8.4 Stockholder Approval. This Agreement and the Merger Agreement shall
have been duly approved by the stockholders of the Company, Acquisition Corp.
and CMI.
8.5 Tax-Free Reorganization. The Company shall have received the opinion
of its counsel to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
8.6 Opinion of Counsel to CMI. Howard, Rice, Nemerovski, Canady,
Robertson, Falk & Rabkin, counsel to CMI, shall have issued an opinion in favor
of the Company in the form of Exhibit G.
8.7 Nasdaq Notification. CMI shall have notified the Nasdaq National
Market of the proposed issuance of CMI common stock pursuant to the Merger and
upon exercise of the stock options of the Company assumed by CMI pursuant to the
Merger and such stock shall have been approved for quotation on the Nasdaq
National Market.
8.8 S-4 Registration Statement. The S-4 Registration Statement shall have
become effective under the 1933 Act and shall not be the subject of any stop
order or proceedings seeking a stop order and the Proxy Statement shall on the
Closing Date not be subject to any proceeding commenced or threatened by the
SEC.
8.9 Merger Agreement. The Merger Agreement shall have been filed with the
Secretary of State of the State of Texas.
8.10 Pooling Letter from CMI's Accountants. The Board of Directors of CMI
shall have received a pooling letter from Ernst & Young, L.L.P. dated as of the
date of the Closing that the Merger qualifies as a "pooling of interest" for
accounting purposes.
8.11 Material Changes in the Business of CMI Between the Date of this
Agreement and the Closing. There shall have been no material adverse change in
the financial position, results of operations, assets, liabilities or business
of CMI and its Subsidiaries, taken as a whole, between the date of this
Agreement and the Closing.
8.12 Litigation. No action or proceeding before a court or any other
governmental agency or body shall have been instituted and be pending or
threatened to restrain or prohibit any of the transactions contemplated hereby.
8.13 Consents. Each of CMI and the Company shall have received in writing
all consents, approvals, and waivers required in connection with the Merger.
8.14 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by the Company to be executed
and delivered to the Company in order to carry out this Agreement and to
consummate the Merger, and all of the relevant legal matters, shall be
reasonably satisfactory to the Company and its counsel.
8.15 Company Due Diligence. There shall have been satisfactory completion
by the Company of its due diligence, provided that the condition contained in
this Section 8.15 shall not be available after March 3, 1995
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as a basis for not closing the transactions contemplated hereby; the proviso
contained herein shall not limit in any way the Company's right not to close the
transactions provided for herein if any of the other conditions contained in
this Article VIII is not satisfied.
8.16 HSR Act Compliance. All waiting, review and investigation periods
(and any extensions thereof) applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
9.1 Survival of Representations and Warranties. All statements contained
in any exhibit, certificate, schedule or other instrument delivered or to be
delivered by or on behalf of the parties hereto, or in connection with the
transactions contemplated hereby, shall be deemed representations and warranties
hereunder. All such representations, warranties, and indemnification rights
contained herein shall survive the Closing and any audit or investigation made
by or on behalf of the parties, but shall expire on the earlier of (a) the date
on which financial results containing 30 days of combined operations of CMI and
the Company after the Merger are publicly announced or (b) September 30, 1995,
and no claims for indemnification hereunder may be made after such date.
9.2 Indemnification by the Company and Holders.
(a) The Company agrees (and the Holders by their approval of this
Agreement and the Merger shall be deemed to have agreed jointly) to
indemnify and hold CMI and its directors, officers, employees, fiduciaries,
agents and Affiliates, and each other person, if any, who controls such
persons harmless against any claims, actions, suits, proceedings,
investigations, losses, expenses, damages, obligations, liabilities,
judgments, fines, fees, costs and expenses (including costs and reasonable
attorneys' fees) and amounts paid in settlement of any pending, threatened
or completed claim, action, suit, proceeding or investigation (collectively
"Loss" or "Losses") which arise out of or result from or are related to (i)
any breach by or failure of the Company to perform any of its covenants or
agreements set forth herein, or (ii) the inaccuracy of any representation
or warranty made by the Company herein.
(b) If CMI is entitled to indemnification under this Agreement, it
shall be entitled to recover shares of CMI common stock pursuant to the
Escrow Agreement having an aggregate value, calculated on the basis of the
closing price of CMI common stock on the Nasdaq National Market (as
reported by Nasdaq) on the Closing Date, equal to the amount of its Loss or
Losses.
9.3 Indemnification by CMI. CMI agrees to indemnify and hold the Company,
the Holders and the Company's directors, officers, employees, fiduciaries,
agents and Affiliates and each other person, if any, who controls such persons
harmless against any Loss or Losses which arise out of or result from or are
related to (a) any breach by or failure of CMI to perform any of its covenants
or agreements set forth herein, or (b) the inaccuracy of any representation or
warranty made by CMI herein.
9.4 Limitation. Notwithstanding the foregoing, the Holders shall be liable
for Losses incurred as a result of any breach, failure or inaccuracy of any
representation, warranty, covenant or agreement made by the Company herein only
if the aggregate of such Losses exceeds $85,000, and CMI shall be liable for
Losses incurred as a result of any breach, failure or inaccuracy of any
representation, warranty, covenant or agreement made by it herein only if the
aggregate of such Losses exceeds $85,000; provided, however, that in each case
full indemnification shall be required, and the $85,000 limitation shall not
apply, if such $85,000 threshold is exceeded and provided further that the
$85,000 limitation shall not apply with respect to any breach, failure or
inaccuracy of any representation and warranty contained in Section 3.2 hereof or
the covenant contained in Section 5.5 hereof. The aggregate liability of the
Holders for Losses incurred as a result of any breach, failure or inaccuracy of
any representation, warranty, covenant or agreement made by the Company herein
shall not exceed the Escrow Fund and the aggregate liability of CMI for Losses
incurred as a result of any breach, failure or inaccuracy of any representation,
warranty, covenant or agreement made by it herein shall not
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exceed $10,050,000. The liability of the Holders for Losses incurred as a result
of any breach, failure or inaccuracy of any representation, warranty, covenant
or agreement of the Company shall be limited to the return of the CMI Common
Stock in the Escrow Fund.
9.5 Claims for Indemnification. Whenever any claim shall arise for
indemnification hereunder, the Indemnified Party shall notify in writing within
30 days (or such earlier time as might be required to avoid prejudicing the
Indemnifying Party's position) of receiving notice of or obtaining actual
knowledge of facts constituting the basis of such claim (whichever occurs
first), the Indemnifying Party of the claim and, when known, the facts
constituting the basis for such claim. The failure to notify the Indemnifying
Party will not vitiate the right of the Indemnified Party to indemnity to the
extent the Indemnifying Party is not prejudiced as a result of such failure. In
the event of any claim for indemnification, the Indemnified Party shall be
entitled to full indemnification in the amount claimed unless, within 30 days
after receipt of written notice of a claim for indemnification, the Indemnifying
Party delivers a written notice to the Indemnified Party objecting to the claim
for indemnification, which notice specifies in reasonable detail the basis for
the objection. If the parties are unable to resolve the dispute within 30 days,
the claim for indemnification shall be submitted to arbitration in the manner
specified in Section 9.7 hereof. In the event of any such claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, the notice to the Indemnifying Party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom. The Indemnified Party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, unless suit shall
have been instituted against the Indemnified Party and the Indemnifying Party
shall not have taken control of such suit after notification thereof as provided
in Section 9.6 below.
9.6 Defense by Indemnifying Party. In connection with any claims giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party at its sole cost and expense may, upon written notice to the Indemnified
Party, assume, the defense of any such claim or legal proceedings; provided
that, if by reason of the claim of such third party a lien, attachment,
garnishment or execution has been placed on any material portion of the property
or assets of the Indemnified Party at the time of such election, the
Indemnifying Party, if it desires to exercise the right to assume the defense,
shall furnish a satisfactory indemnity bond to obtain the release of such lien,
attachment, garnishment or execution. The Indemnified Party shall be entitled to
participate in (but not control) the defense of any such action, with its
counsel and at its own expense. If the Indemnifying Party assumes the defense,
it shall take all actions and steps reasonably necessary to defend or settle any
claim against the Indemnified Party. The Indemnified Party shall reasonably
cooperate with the Indemnifying Party in such defense. In the event that the
Indemnifying Party proposes a settlement to any such claim or legal proceeding,
which settlement is satisfactory to the party instituting such claim or legal
proceeding and includes (i) an unconditional release of the Indemnified Party,
from all liability with respect to such claim or litigation or the dismissal of
such claim or litigation against the Indemnified Party with prejudice and (ii)
provision that all damages and settlement payments are to be made by the
Indemnifying Party, and the Indemnified Party withholds its consent to such
settlement, then in any such case the Indemnifying Party shall have no
obligation to indemnify the Indemnified Party under this Agreement against and
in respect of the amount by which the damages resulting from a final judgment
relating to such claim or legal proceeding exceeds the amount of the proposed
settlement. In the event that the Indemnifying Party shall assume the defense of
any such claim or legal proceeding and it is later determined that such claim
was not a claim for which the Indemnifying Party is required to indemnify the
Indemnified Party under this Article IX, the Indemnified Party shall reimburse
the Indemnifying Party for all its reasonable costs and expenses with respect to
such defense, including reasonable attorneys' fees and disbursements. If the
Indemnifying Party does not assume the defense of any such claim or legal
proceeding resulting therefrom within 30 days after the date of receipt of the
notice referred to in Section 9.5 above (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim), (a)
the Indemnified Party may defend against such claim or legal proceeding, in such
manner as it may deem appropriate, including, but not limited to, settling such
claim or legal proceeding on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to participate in
(but not control) the defense of such action, with its counsel and at its own
expense.
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9.7 Arbitration.
(a) Either CMI or the Stockholders' Representatives may submit a
dispute that has not been resolved pursuant to the provisions of Section
9.5 above to arbitration by notifying the other party hereto in writing.
Within 10 days after receipt of such notice, CMI and the Stockholders'
Representatives shall designate in writing one arbitrator to resolve the
dispute; provided, that if CMI and the Stockholders' Representatives cannot
agree on an arbitrator within such 10-day period, the arbitrator shall be
selected by the American Arbitration Association. The arbitrator so
designated shall not be a current or former employee, consultant, officer,
director or stockholder of any party hereto or any Affiliate of any party
to this Agreement.
(b) Within 15 days after the designation of the arbitrator, the
arbitrator, CMI and the Stockholders' Representatives shall meet, at which
time CMI and the Stockholders' Representatives shall be required to set
forth in writing all disputed issues and a proposed ruling on each such
issue.
(c) The arbitrator shall set a date for a hearing, which shall be no
later than 30 days after the submission of written proposals pursuant to
paragraph (b) above, to discuss each of the issues identified by CMI and
the Stockholders' Representatives. Each such party shall have the right to
be represented by counsel. The arbitration shall be governed by the rules
of the American Arbitration Association.
(d) The determination of the arbitrator as to the resolution of any
dispute shall be binding and conclusive upon all parties hereto. All
rulings of the arbitrator shall be in writing and shall be delivered to the
parties hereto. The arbitrator shall have full discretion to award to
either party or allocate between them the costs of the arbitration
proceedings, including reasonable attorneys fees.
(e) Any arbitration pursuant to this Section 9.9 shall be conducted in
San Francisco, California. Any arbitration award may be entered in and
enforced by any court having jurisdiction thereover and the parties hereby
consent and commit themselves to the jurisdiction of the courts of the
State of California and the United States District Court for the Northern
District of California for purposes of the enforcement of any arbitration
award.
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ARTICLE X
TERMINATION
10.1 Mutual Agreement. This Agreement may be terminated at any time prior
to the Effective Time by approval by CMI and the Company, even if and after the
stockholders of CMI and the Company have approved this Agreement and the Merger.
10.2 Termination by CMI. This Agreement may be terminated by CMI alone, by
means of written notice to the Company if (a) the Company breaches any of the
representations or warranties or fails to perform any material covenant of the
Company contained in this Agreement, or (b) on May 31, 1995, any of the
conditions set forth in Article VII of this Agreement shall not have been
satisfied by the Company or waived by CMI.
10.3 Termination by the Company. This Agreement may be terminated by the
Company alone, by means of written notice to CMI if (a) CMI breaches any of the
representations or warranties or fails to perform any material covenant of CMI
contained in this Agreement or (b) on May 31, 1995, any of the conditions set
forth in Article VIII of this Agreement shall not have been satisfied by CMI or
waived by the Company, or (c) pursuant to the provisions of Section 5.4 hereof,
subject to the Company's meeting its obligations to CMI under that Section.
ARTICLE XI
MISCELLANEOUS
11.1 Expenses. Except as otherwise provided herein, each of CMI and the
Company shall pay its own costs and expenses, including legal, accounting and
investment banking fees and expenses, relating to this Agreement, the
negotiations leading up to this Agreement and the transactions contemplated by
this Agreement.
11.2 Amendment. This Agreement shall not be amended except by a writing
duly executed by both parties and shall not be amended after it has been
approved by the stockholders of CMI or MNI, without further stockholder
approval, if the amendment would alter or change the Exchange Ratio or have a
material adverse effect on the stockholders of CMI or MNI.
11.3 Entire Agreement. This Agreement, including the Exhibits, Schedules,
and other documents delivered pursuant to this Agreement, contains all the terms
and conditions agreed upon by the parties relating to the subject matter of this
Agreement and supersedes all prior agreements, negotiations, correspondence,
undertakings, and communications of the parties, whether oral or written,
respecting that subject matter.
11.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
entered into by California residents and entirely to be performed within
California without regard to principles of conflicts of law.
11.5 Headings. The headings contained in this Agreement are intended for
convenience and shall not be used to determine the rights of the parties.
11.6 Notices. All notices, requests, demands, and other communications
made in connection with this Agreement shall be in writing and shall be deemed
to have been duly given on the date of delivery if delivered by hand delivery or
by facsimile to the persons identified below or two days after mailing by air
courier addressed as follows:
If to CMI or Acquisition Corp.:
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, California 94086
Attention: Philip F. Otto, Chief Executive Officer
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With a copy to:
Howard, Rice, Nemerovski, Canady,
Robertson, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, Seventh Floor
San Francisco, California 94111
Attention: Richard W. Canady
If to the Company:
Microwave Networks Incorporated
10795 Rockley Road
Houston, Texas 77099-3751
Attention: Arthur W. Epley, President and Chief Executive Officer
With a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
600 Travis Street
Houston, Texas 77002
Attention: P. Dexter Peacock
Such addresses may be changed, from time to time by means of a notice given
in the manner provided in this section.
11.7 Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent possible.
In any event, all other provisions of this Agreement shall be deemed valid and
enforceable to the full extent.
11.8 Waiver. Waiver of any term or condition of this Agreement by any
party shall not be construed as a waiver of a subsequent breach or failure of
the same term or condition, or a waiver of any other term or condition in this
Agreement.
11.9 Assignment. Neither party may assign, by operation of law or
otherwise, all or any portion of its rights or duties under this Agreement
without the prior written consent of the other party, which consent may be
withheld in the absolute discretion of the party asked to give consent.
11.10 Counterparts. This Agreement may be signed in counterparts with the
same effect as if the signatures to each party were upon a single instrument.
All counterparts shall be deemed an original of this Agreement.
11.11 Attorneys Fees. The prevailing party shall be entitled to the
recovery of reasonable attorneys fees in the event any action is brought
relating to this Agreement or the Merger.
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IN WITNESS WHEREOF, CMI, Acquisition Corp. and the Company have executed
this Agreement as of the date first above written.
CALIFORNIA MICROWAVE, INC.
By: /s/ DOUGLAS MORAIS
--------------------------------------
Title: President -- Wireless Products
Group
MICROWAVE NETWORKS INCORPORATED
By: /s/ ARTHUR W. EPLEY, III
--------------------------------------
Title: President
CMI ACQUISITION CORPORATION
By: /s/ DOUGLAS MORAIS
--------------------------------------
Title: President
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APPENDIX B
ARTICLES OF MERGER
PROVIDING FOR THE MERGER
OF
CMI ACQUISITION CORPORATION
INTO
MICROWAVE NETWORKS INCORPORATED
Pursuant to Section 5.04 of the Texas Business Corporation Act, CMI
Acquisition Corporation, a Texas corporation ("CMI Acquisition"), California
Microwave, Inc., a Delaware corporation ("CMI"), and Microwave Networks
Incorporated, a Texas corporation ("MNI"), adopt the following Articles of
Merger effecting the merger (the "Merger") of CMI Acquisition with and into MNI,
with MNI as the surviving corporation.
1. The Agreement of Merger, attached hereto as Exhibit A, and the
performance thereof, was duly authorized and approved by the board of directors
and shareholders of (i) each of CMI Acquisition and MNI in the manner prescribed
by the Texas Business Corporation Act and by the respective articles of
incorporation and bylaws of CMI Acquisition and MNI and (ii) CMI in the manner
prescribed by the Delaware General Corporation Law and its certificate of
incorporation and bylaws.
2. CMI Acquisition has 100 shares of Common Stock outstanding, all of which
were voted in favor of the Agreement of Merger. CMI has shares of Common
Stock outstanding, of which were voted in favor of the Agreement of Merger
and of which were voted against the Agreement of Merger. MNI has a total of
shares of capital stock outstanding, of which shares were voted in
favor of the Agreement of Merger and shares were voted against the
Agreement of Merger. Of the total MNI shares outstanding, the number of shares
outstanding entitled to vote as a class or series and the respective votes are
as follows: (i) shares of Common Stock outstanding, of which were
voted in favor of the Agreement of Merger and of which were voted against
the Agreement of Merger, (ii) 2,000,000 shares of Series A Preferred Stock
outstanding, of which were voted in favor of the Agreement of Merger and
of which were voted against the Agreement of Merger, (iii) 3,166,354 shares
of Series B Preferred Stock outstanding, of which were voted in favor of
the Agreement of Merger and of which were voted against the Agreement of
Merger, and (iv) 2,037,621 shares of Series C Preferred Stock outstanding,
of which were voted in favor of the Agreement of Merger and of which were
voted against the Agreement of Merger.
IN WITNESS WHEREOF, the undersigned officers of the respective corporations
have submitted these Articles of Merger, dated this day of March, 1995.
CMI ACQUISITION CORPORATION
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
MICROWAVE NETWORKS INCORPORATED
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
CALIFORNIA MICROWAVE, INC.
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
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AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Merger Agreement") is made and entered into
as of , 1995, by and among Microwave Networks Incorporated,
a Texas corporation (the "Company"), California Microwave, Inc., a Delaware
corporation ("CMI") and CMI Acquisition Corporation, a Texas corporation
("Acquisition Corp.").
WITNESSETH
WHEREAS, the Company is a corporation duly organized and validly existing
under the laws of the State of Texas, with authorized capital stock consisting
of 15,000,000 shares of Common Stock, $0.01 par value per share, of which
shares are issued and outstanding on the date hereof, and 7,845,240
shares of Preferred Stock, classified into three series, as follows: 2,000,000
shares of Series A Convertible Preferred Stock, of which 2,000,000 shares are
issued and outstanding on the date hereof; 3,250,000 of Series B Convertible
Preferred Stock, of which 3,166,354 shares are issued and outstanding as of the
date hereof; and 2,595,240 shares of Series C Convertible Preferred Stock, of
which 2,037,621 shares are issued and outstanding as of the date hereof;
WHEREAS, CMI is a corporation duly organized, validly existing and in good
standing in the State of Delaware, with authorized capital stock consisting of
29,200,000 shares of Common Stock, $.10 par value ("CMI Common Stock"), of which
shares were issued and outstanding as of , 1995.
WHEREAS, there are options outstanding under the Company's Non-Qualified
Stock Option Plan for Nonemployed Directors and Consultants ("Nonemployee Option
Plan") covering shares of Common Stock of the Company and options
outstanding under the Company's Non-Qualified Stock Option Plan for Employees
("Employee Option Plan") covering shares of Common Stock of the
Company, all of which options shall be converted into options to acquire CMI
Common Stock pursuant to the provisions hereof; and
WHEREAS, Acquisition Corp. is a corporation duly organized and validly
existing under the laws of the State of Texas, with authorized capital stock
consisting of 1,000 shares of common stock (the "Acquisition Corp. Common
Stock"), of which 100 shares are issued and outstanding and owned by CMI; and
WHEREAS, the respective Boards of Directors of the Company, CMI and
Acquisition Corp. have determined that it is advisable and to the advantage of
such corporations and their shareholders that Acquisition Corp. merge with and
into the Company (the "Merger") upon the terms and conditions herein provided;
and
WHEREAS, the Boards of Directors of the Company, CMI and Acquisition Corp.
have approved this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, it is agreed as follows:
1. Merger. Acquisition Corp. shall be merged with and into the Company on
the terms and conditions hereinafter expressed (the "Merger"). At the Effective
Time (as defined hereinafter), the separate existence of Acquisition Corp. shall
cease and the Company shall be the surviving entity (the "Surviving Entity").
The Merger shall be effective upon the filing of Articles of Merger, together
with a copy of this Merger Agreement, with the Secretary of State of the State
of Texas in the manner required by Article 5.01 et. seq. of the Texas Business
Corporation Act ("TBCA") and upon the issuance of the Certificate of Merger by
the Secretary of State (the "Effective Time").
2. Directors and Officers and Governing Documents. The Articles of
Incorporation of the Company, as in effect at the Effective Time, shall continue
to be the Articles of Incorporation of the Surviving Entity as the surviving
corporation without change or amendment. The Bylaws of the Company as amended
and in effect at the Effective Time, shall continue to be the Bylaws of the
Surviving Entity as the surviving corporation without change or amendment. The
directors and officers of the Surviving Entity shall be the same upon the
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Effective Time as they are immediately prior thereto until their successors have
been duly appointed or elected in accordance with the Articles of Incorporation
and Bylaws of the Surviving Entity.
3. Succession. At the Effective Time, the Surviving Entity shall succeed
to Acquisition Corp. in the manner of and as more fully set forth in Article
5.06 of the Texas Business Corporation Act. All rights, title and interests to
all real estate and other property owned by Acquisition Corp. shall be allocated
to and vested in the Surviving Entity without reversion or impairment, without
further act or deed, and without any transfer or assignment having occurred, but
subject to any existing liens or other encumbrances thereon. All liabilities and
obligations of Acquisition Corp. shall be allocated to the Surviving Entity and
the Surviving Entity shall be the primary obligor therefor and, except as
otherwise provided by law or contract, no other party to the Merger shall be
liable therefor.
4. Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action by the holders thereof:
(a) each share of Acquisition Corp. Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be
converted at and as of the Effective Time into one share of Common Stock of
the Company;
(b) each share of Common Stock and Preferred Stock of the Company
issued and outstanding immediately prior to the Effective Time, except
those shares which are "dissenting shares" (as defined below), shall, by
virtue of the Merger and without any action on the part of the holders
thereof, be converted at and as of the Effective Time into of a share
of CMI Common Stock. Only whole shares of CMI Common Stock shall be issued;
in lieu of any fractional share of CMI Common Stock, each such holder shall
receive in cash the fair market value of such fractional share, valuing CMI
Common Stock at the closing price for such stock on the Nasdaq National
Market on the trading day immediately preceding the day on which the Merger
becomes effective, as reported by Nasdaq.
5. Escrow. In order to provide indemnification in accordance with Article
IX of the Agreement and Plan of Reorganization and Merger among CMI, Acquisition
Corp. and the Company, dated as of January 31, 1995 (the "Agreement") and with
the Escrow Agreement (as defined in the Agreement), at the Effective Time or as
soon thereafter as possible, a stock certificate representing 10% of the whole
shares of CMI Common Stock (rounded down to the nearest whole share) into which
the shares of capital stock of the Company were converted pursuant to Section
4(b) of this Merger Agreement shall be delivered to the Escrow Holder (as
defined in the Escrow Agreement) (which shares shall be withheld from the former
holders of Common Stock and Preferred Stock of the Company ratably based on the
number of shares of stock of the Company held by such holder immediately prior
to the Effective Time).
6. Company Options. At the Effective Time and pursuant to the terms of the
Agreement, each of the outstanding options to purchase Common Stock of the
Company under the Nonemployee Option Plan and the Employee Option Plan shall
thereafter entitle the holder thereof to receive for each share of Common Stock
of the Company subject to such option, upon exercise thereof, of a share of
CMI Common Stock, at an exercise price for each full share of CMI Common Stock
equal to the quotient obtained by dividing (a) the exercise price per share of
Common Stock of the Company with respect to such option by (b) , which
exercise price per share shall be rounded down to the nearest whole cent. The
number of shares of CMI Common Stock that may be purchased by a holder under any
option assumed by CMI hereunder shall not include any fractional share of CMI
Common Stock, but shall be rounded up to the next higher whole share of CMI
Common Stock.
7. Dissenting Shares. Notwithstanding the provisions of Section 4 hereof,
if a holder of shares of capital stock of the Company files a written objection
to the Merger with the Company prior to the vote of the shareholders of the
Company on the Merger and if the shares of stock of the Company held by such
holder were not voted in favor of the Merger and are not tendered by such holder
for payment pursuant to Section 8 below (such shares being the "Potentially
Dissenting Shares"), the Company shall mail to the record owners of such shares
the notice relating to dissenters' rights required by Article 5.12 of the TBCA,
accompanied by copies of Articles 5.12 and 5.13 of the TBCA. The Potentially
Dissenting Shares shall not be converted into
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the right to receive the per share payment specified in Section 4(b) hereof,
except as provided hereinafter. Potentially Dissenting Shares which do not
become "dissenting shares" pursuant to Article 5.12 of the TBCA within the
statutory notice period shall be converted in accordance with Section 4(b)
hereof. Holders of Potentially Dissenting Shares that become "dissenting
shareholders" within the statutory notice period shall be entitled to the rights
provided in Articles 5.12 and 5.13 of the TBCA. The Company shall be the entity
obligated for the payment of the fair value of any shares held by a shareholder
who has complied with the requirements of Article 5.12 of the TBCA for the
recovery of the fair value of his shares.
8. Surrender of Stock Certificates; Payment.
On and after the Effective Time, all of the outstanding certificates which
prior to that time represented Common or Preferred Stock of the Company, except
for certificates representing dissenting shares, shall be deemed for all
purposes to evidence ownership of and the right to receive the CMI Common Stock
into which the stock represented by such certificates has been converted as
provided herein. At or as soon as practicable after the Effective Time, each
holder of record of a certificate or certificates that immediately prior to the
Effective Time represented Common or Preferred Stock of the Company, except for
dissenting shares, shall surrender such certificates to the First National Bank
of Boston as the Exchange Agent of CMI in accordance with the provisions
contained in the Agreement and the Exchange Agent, in exchange for the surrender
of such certificates, shall deliver to such holder the consideration which such
holder is entitled to receive pursuant to Section 4(b) above, subject to the
provisions of Section 5 above.
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IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolutions of the Boards of Directors and shareholders of the Company, CMI
and Acquisition Corp., is hereby executed on behalf of each of said corporations
by their respective officers thereunto duly authorized.
<TABLE>
<S> <C>
MICROWAVE NETWORKS INCORPORATED
A Texas corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
CALIFORNIA MICROWAVE, INC.
A Delaware corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
CMI ACQUISITION CORPORATION
A Texas corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
</TABLE>
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APPENDIX C
TEXAS BUSINESS CORPORATION ACT, ART. 5.11-5.13
ART. 5.11 RIGHTS OF DISSENTING STOCKHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any stockholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if stockholder
approval is required by Article 5.03 or 5.16 of this Act and the stockholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise.
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the stockholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the stockholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
stockholder shall not have the right to dissent from any plan of exchange, if
(1) the shares held by the stockholder are part of a class shares of which are
listed on a national securities exchange, or are held of record by not less than
2,000 holders, on the record date fixed to determine the stockholders entitled
to vote on the plan of merger or the plan of exchange, and (2) the stockholder
is not required by the terms of the plan of merger or the plan of exchange to
accept for his shares any consideration other than (a) shares of a corporation
that, immediately after the effective time of the merger or exchange, will be
part of a class or series of shares of which are (i) listed, or authorized for
listing upon official notice of issuance, on a national securities exchange, or
(ii) held of record by not less than 2,000 holders, and (b) cash in lieu of
fractional shares otherwise entitled to be received.
ART. 5.12 PROCEDURE FOR DISSENT BY STOCKHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any stockholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to
a vote of stockholders at a meeting, the stockholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the stockholder's right to dissent will be exercised if
the action is effective and giving the stockholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the stockholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the stockholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the stockholder written notice that the action has been
effected, and the stockholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the stockholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the stockholder and the fair value of the
shares as estimated by the stockholder. Any stockholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
stockholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to
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each stockholder of record as of the effective date of the action notice of
the fact and date of the action and that the stockholder may exercise the
stockholder's right to dissent from the action. The notice shall be
accompanied by a copy of this Article and any articles or documents filed
by the corporation with the Secretary of State to effect the action. If the
stockholder shall not have consented to the taking of the action, the
stockholder may, within twenty (20) days after the mailing of the notice,
make written demand on the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, for payment of the fair
value of the stockholder's shares. The fair value of the shares shall be
the value thereof as of the date the written consent authorizing the action
was delivered to the corporation pursuant to Section A of Article 9.10 of
this Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting stockholder and the fair value of the shares as estimated by the
stockholder. Any stockholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting stockholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the stockholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
stockholder that the stockholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
stockholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the stockholder shall cease to have any interest in the shares or in
the corporation.
B. If, within sixty (60) days after the date on which the corporate action
was effected, the stockholder and the existing, surviving or new corporation
(foreign or domestic) or other entity, as the case may be, do not so agree, then
the stockholder of the corporation (foreign or domestic) or other entity may,
within sixty (60) days after the expiration of the sixty (60) day period, file a
petition in any court or competent jurisdiction in the county in which the
principal office of the domestic corporation is located, asking for a finding
and determination of the fair value of the stockholder's shares. Upon the filing
of any such petition by the stockholder, service of a copy thereof shall be made
upon the corporation (foreign or domestic) or other entity, which shall, within
ten (10) days after service, file in the office of the clerk of the court in
which the petition was filed a list containing the names and addresses of all
stockholders of the domestic corporation who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the corporation (foreign or domestic) or other entity. If the
petition shall be filed by the corporation (foreign or domestic) or other
entity, the petition shall be accompanied by such a list. The clerk of the court
shall give notice of the time and place fixed for the hearing of the petition by
registered mail to the corporation (foreign or domestic) or other entity and to
the stockholders named on the list at the addresses therein stated. The forms of
the notices by mail shall be approved by the court. All stockholders thus
notified and the corporation (foreign or domestic) or other entity shall
thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
stockholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which whey are charged with the duty of
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<PAGE> 180
valuing, and they shall make a determination of the fair value of the shares
upon such investigation as to them may seem proper. The appraisers shall also
afford a reasonable opportunity to the parties interested to submit to them
pertinent evidence as to the value of the shares. The appraisers shall also have
such power and authority as may be conferred on Masters in Chancery by the Rules
of Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
stockholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the stockholders entitled to
payment for their shares and shall direct the payment of the value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the stockholder elected to dissent was
effected to the date of such judgment, to the stockholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for the shares. Upon payment of the judgment, the
dissenting stockholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of the treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a stockholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the stockholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
stockholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the stockholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING STOCKHOLDERS
A. Any stockholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a stockholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of stockholders.
B. Upon receiving a demand for payment from any dissenting stockholder, the
corporation shall make an appropriate notation thereof in its stockholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such stockholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
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<PAGE> 181
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting stockholder had after making demand for payment of the fair
value thereof.
C. Any stockholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to section B
of this Article the corporation shall terminate the stockholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if not petition asking
for a finding and determination of fair value of such shares by court shall have
been filed within the time provided in Article 5.12 or 5.16 of this Act, as the
case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such stockholder is not entitled to
the relief provided by those articles, then, in any such case, such stockholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such stockholder to be paid the fair value of his
shares shall cease, and his status as a stockholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such stockholder shall be entitled to receive any dividends or
other distributions made to stockholders in the interim.
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<PAGE> 182
APPENDIX D
February , 1995
Board of Directors
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, CA 94086
Attention: Philip F. Otto, Chairman, President and Chief Executive Officer
Dear Sirs:
We understand that California Microwave, Inc. ("California Microwave") and
Microwave Networks Incorporated ("MNI") are considering a transaction pursuant
to which a newly formed subsidiary of California Microwave would merge with and
into MNI and all of the outstanding shares of common and preferred stock of MNI
(including common shares of MNI issuable upon exercise of outstanding options)
would be converted into an aggregate of 3,350,000 newly issued common shares of
California Microwave (the "Transaction"). You have provided us with the
Agreement and Plan of Reorganization and Merger, dated as of January 31, 1995,
among California Microwave, CMI Acquisition Corporation, and MNI (the "Merger
Agreement"). We understand that the Transaction will be accounted for as a
pooling-of-interests as contemplated by the Merger Agreement.
You have asked us to render our opinion as to whether the Transaction is
fair, from a financial point of view, to the shareholders of California
Microwave.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Merger Agreement;
2. reviewed MNI's audited consolidated financial statements for the fiscal
years ended June 30, 1991 through 1994, and its unaudited consolidated
financial statements for the six month periods ended December 31, 1993
and 1994;
3. reviewed California Microwave's Annual Reports to Shareholders and
Annual Reports on Form 10-K for the fiscal years ended June 30, 1992
through 1994, and its Quarterly Report on Form 10-Q for the periods
ended September 30, 1994 [and December 31, 1994],
4. reviewed certain operating and financial information, including
projections, provided to us by the managements of California Microwave
and MNI relating to their respective businesses and prospects;
5. met with certain members of MNI's senior management to discuss MNI's
operations, historical financial statements and future prospects, as
well as their views of the business, operational and strategic
benefits, potential synergies (including revenue enhancements and cost
savings) and other implications of the Transaction;
6. met with certain members of California Microwave's senior management to
discuss California Microwave's operations, historical financial
statements and future prospects, as well as their views with respect to
the operations, historical financial statements and future prospects of
MNI, and their views of the business, operational and strategic
benefits, potential synergies (including revenue enhancements and cost
savings) and other implications of the Transaction;
7. reviewed the pro forma financial impact of the Transaction on
California Microwave;
8. reviewed the historical prices and trading volume of the common shares
of California Microwave;
9. reviewed publicly available financial data and stock market performance
data of companies which we deemed generally comparable to California
Microwave and MNI;
D-1
<PAGE> 183
10. reviewed the terms of recent acquisitions which we deeded generally
comparable to the Transaction, and
11. conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In the course of our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information provided to us by
California Microwave an MNI. With respect to California Microwave's and MNI's
projected financial results, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of California Microwave and MNI as to the expected
future performance of California Microwave and MNI, respectively. We have not
assumed any responsibility for the information or projections provided to us and
we have further relied upon the assurances of the managements of California
Microwave and MNI that they are unaware of any facts that would make the
information or projections provided to us incomplete or misleading. In arriving
at our opinion, we have not performed or obtained any independent appraisal of
the assets of California Microwave or MNI. Our opinion is necessarily based on
economic, market and other conditions, and the information made available to us,
as of the date hereof.
We have acted as financial advisor to California Microwave in connection
with the Transaction and will receive a fee for such services, payment of a
significant portion of which is contingent upon the consummation of the
Transaction.
Based on the foregoing, it is our opinion that the Transaction is fair,
from a financial point of view, to the shareholders of California Microwave.
In the ordinary course of our business, we may actively trade the equity
securities of California Microwave for our own account and for the accounts of
customers and accordingly, may, at any time, hold a long or short position in
such securities.
It is understood that this letter is intended solely for the use of the
Board of Directors of California Microwave and may not be disseminated, quoted
or referred to at any time without our prior written consent
Very truly yours,
BEAR, STEARNS & CO. INC.
By:
--------------------------------------
Managing Director
D-2
<PAGE> 184
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by sections 102 and 145 of the Delaware General Corporation
Law, the Registrant's certificate of incorporation eliminates a director's
personal liability for monetary damages to the Registrant and its stockholders
arising from a breach or alleged breach of a director's fiduciary duty except
for liability under section 174 of the Delaware General Corporation Law or
liability for any breach of the director's duty of loyalty to the Registrant or
its stockholder, for acts or omissions not in good faith or which involve
international misconduct or a knowing violation of law, or for any transaction
from which the director derived an improper personal benefit. The effect of this
provision in the certificate of incorporation is to eliminate the rights of the
Registrant and its stockholders (through stockholder's derivative suits on
behalf of the Registrant to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above.
The Registrant's bylaws provide for indemnification of its directors,
officers and agents, and the Company has entered into an indemnification
agreement with each of its officers and directors (an "Indemnitee"). Under the
bylaws and such indemnification agreements, the Registrant must indemnify an
Indemnitee to the fullest extent permitted by Delaware law for losses and
expenses incurred in connection with actions in which the Indemnitee is involved
by reason of having been a director or officer of the Registrant. In certain
circumstances, the Registrant is also obligated to advance expenses an
Indemnitee may incur in connection with such actions before any resolution of
the action, and the Indemnitee may sue to enforce his or her right to
indemnification or advancement of expenses.
The Registrant also maintains an insurance policy insuring its directors
and officers against liability for certain acts and omissions while acting in
their official capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- ------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger among Registrant, CMI Acquisition
Corporation and Microwave Networks Incorporated, dated January 31, 1995, with
exhibits
3.1 Restated Certificate of Incorporation of Registrant (Exhibit to Registrant's Form 8
dated February 19, 1993, constituting Amendment No. 1 to Registrant's Registration
Statement on Form 8-A for its Common Stock; incorporated herein by reference)
3.2 Bylaws of Registrant (incorporated by reference to Exhibit to Registrant's Form 10-K
for its fiscal year ended June 30, 1994)
5.1 Opinion of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, A
Professional Corporation, as to the legality of securities being issued
21.1 List of subsidiaries of registrant
23.1 Independent Auditors' Consent and Report on Schedules
23.2 Independent Auditors' Consent
23.3 Consent of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin, A
Professional Corporation (contained in Exhibit No. 5.1 above)
25.1 Powers of Attorney (contained on page II-4)
99.1 Form of Proxy
</TABLE>
(b) Financial Statement Schedules.
II-1
<PAGE> 185
The following financial statement schedules of registrant are included in
Part II of this registration statement:
Schedule VIII -- Valuation and Qualifying Accounts
All other schedules are omitted because the information is not required or
because the information required is included in the Consolidated Financial
Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the registrant's
Certificate of Incorporation, Delaware General Corporate Law, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(3) Every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415(sec.230.415), will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective. For purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) The undersigned registrant will respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(5) The registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on the 3rd day of February, 1995.
CALIFORNIA MICROWAVE, INC.
By: /s/ PHILIP F. OTTO
------------------------------------
Philip F. Otto
Chairman of the Board, President
and
Chief Executive Officer
II-3
<PAGE> 187
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Philip F. Otto and George L. Spillane, jointly
and severally his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Registration Statement
on Form S-4, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ PHILIP F. OTTO Chairman of the Board, February 3,
- --------------------------------------------- President and Chief Executive 1995
Philip F. Otto Officer (principal executive
officer)
/s/ GARRETT E. PIERCE Executive Vice President and February 3,
- --------------------------------------------- Chief Financial Officer 1995
Garrett E. Pierce (principal financial officer
and principal accounting
officer)
/s/ GILBERT F. JOHNSON President of the Government February 3,
- --------------------------------------------- Group and Director 1995
Gilbert F. Johnson
Director February ,
- --------------------------------------------- 1995
Edward E. David, Jr.
/s/ ALFRED M. GRAY Director February 3,
- --------------------------------------------- 1995
Alfred M. Gray
/s/ ARTHUR H. HAUSMAN Director February 3,
- --------------------------------------------- 1995
Arthur H. Hausman
/s/ ROBERT A. HELLIWELL Director February 3,
- --------------------------------------------- 1995
Robert A. Helliwell
/s/ DAVID B. LEESON Director February 3,
- --------------------------------------------- 1995
David B. Leeson
- ---------------------------------------------
George L. Spillane,
Attorney-in-fact
</TABLE>
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<PAGE> 188
CALIFORNIA MICROWAVE, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT ADDITIONS BALANCE
BEGINNING CHARGED AT END
OF YEAR TO INCOME DEDUCTIONS OF YEAR
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts................... $ 551 $ 324 $ 55 $ 820
Estimated liability for product warranties........ 1,082 9,118(1) 5,351 4,849
Allowance for excess facilities................... 1,094 1,451(2) 576 1,969
1993
Allowance for doubtful accounts................... $ 407 $ 188 $ 44 $ 551
Estimated liability for product warranties........ 860 1,578 1,356 1,082
Allowance for excess facilities................... 1,450 356 1,094
1992
Allowance for doubtful accounts................... $ 57 $ 694 $ 344 $ 407
Estimated liability for product warranties........ 470 1,056(3) 666 860
Allowance for excess facilities................... 175 1,450 175 1,450
</TABLE>
Amounts from acquisition not charged to income:
1. 1994 -- TeleSciences Transmission Systems, Inc. -- $5,955
2. 1994 -- TeleSciences Transmission Systems, Inc. -- $1,451
3. 1992 -- Microwave Radio Corporation -- $300
S-1
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG
CALIFORNIA MICROWAVE, INC.,
CMI ACQUISITION CORPORATION, AND
MICROWAVE NETWORKS INCORPORATED
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS.................................................................. 1
1.1 Affiliates.................................................................. 1
1.2 Closing..................................................................... 1
1.3 Closing Date................................................................ 1
1.4 CMI......................................................................... 1
1.5 CMI's Stockholders Meeting.................................................. 1
1.6 Code........................................................................ 1
1.7 Company..................................................................... 1
1.8 Dissenting Company Shares................................................... 1
1.9 Effective Time.............................................................. 1
1.10 Escrow Agreement............................................................ 2
1.11 Escrow Holder............................................................... 2
1.12 Exchange Act................................................................ 2
1.13 Exchange Agent.............................................................. 2
1.14 Holders..................................................................... 2
1.15 HSR Act..................................................................... 2
1.16 Merger...................................................................... 2
1.17 Merger Agreement............................................................ 2
1.18 1933 Act.................................................................... 2
1.19 Proxy Statement............................................................. 2
1.20 S-4 Registration Statement.................................................. 2
1.21 SEC......................................................................... 2
1.22 Stockholder Representatives................................................. 2
1.23 Subsidiary.................................................................. 2
1.24 Voting Agreements........................................................... 2
ARTICLE II MERGER, CLOSING AND CONVERSION OF SHARES.................................... 2
2.1 Merger...................................................................... 2
2.2 Closing.....................................................................
2.3 Conversion of Shares........................................................ 2
2.4 Escrow...................................................................... 3
2.5 Company Options............................................................. 4
2.6 Exchange of Certificates.................................................... 4
2.7 Dissenting Company Shares................................................... 5
2.8 Registration on S-4 Registration Statement.................................. 5
2.9 Tax Free Reorganization..................................................... 5
2.10 Pooling of Interests........................................................ 5
2.11 Voting Agreements........................................................... 5
ARTICLE III REPRESENTATIONS OF THE COMPANY............................................. 5
3.1 Organization................................................................ 5
3.2 Capitalization of the Company............................................... 5
3.3 Subsidiaries................................................................ 6
3.4 Authorization............................................................... 6
3.5 Financial Statements........................................................ 6
3.6 Order Backlog............................................................... 7
3.7 Litigation.................................................................. 7
3.8 Insurance................................................................... 8
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.9 Intangible Property......................................................... 8
3.10 Property, Plant and Equipment............................................... 8
3.11 Business Practices.......................................................... 8
3.12 Tax Matters................................................................. 8
3.13 Books and Records........................................................... 9
3.14 Contracts and Commitments................................................... 9
3.15 Compliance with Agreements and Laws......................................... 10
3.16 Employee Relations.......................................................... 11
3.17 Employee Benefit Plans...................................................... 11
3.18 Absence of Certain Changes or Events........................................ 12
3.19 Prepayments and Deposits.................................................... 13
3.20 Indebtedness to and from Employees, Directors and Stockholders.............. 13
3.21 Banking Facilities.......................................................... 13
3.22 Powers of Attorney and Suretyships.......................................... 13
3.23 Conflicts of Interest....................................................... 13
3.24 Regulatory Approvals........................................................ 13
3.25 No Existing Discussions..................................................... 13
3.26 Fees and Costs in Connection with IPO....................................... 13
3.27 Disclosure.................................................................. 14
ARTICLE IV REPRESENTATIONS OF CMI...................................................... 14
4.1 Organization and Authority.................................................. 14
4.2 CMI Capital Structure....................................................... 14
4.3 SEC Filings; Financial Statements........................................... 15
4.4 CMI's Authorization......................................................... 15
4.5 Opinion of Financial Advisor................................................ 15
4.6 Regulatory Approvals........................................................ 15
4.7 Acquisition Corp............................................................ 16
4.8 Disclosure.................................................................. 16
ARTICLE V CERTAIN COVENANTS OF THE COMPANY............................................. 16
5.1 Conduct of Business and Certain Key Employees............................... 16
5.2 Absence of Material Changes................................................. 16
5.3 Reports, Taxes.............................................................. 17
5.4 Non-Solicitation............................................................ 17
5.5 Option Plans................................................................ 17
ARTICLE VI ADDITIONAL COVENANTS........................................................ 18
6.1 Proxy Statement/Prospectus/Registration Stat18ement.........................
6.2 Access to Information....................................................... 18
6.3 Stockholders Meetings....................................................... 18
6.4 Legal Conditions to Merger.................................................. 18
6.5 Public Disclosure........................................................... 18
6.6 Tax-Free Organization....................................................... 18
6.7 Pooling Accounting.......................................................... 18
6.8 Affiliate Agreements........................................................ 19
6.9 Nasdaq Quotation............................................................ 19
6.10 Consents.................................................................... 19
6.11 Brokers or Finders.......................................................... 19
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
6.12 Registration of Shares of CMI............................................... 19
6.13 Additional Agreements; Reasonable Efforts................................... 20
ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF CMI AND
ACQUISITION CORP................................................... 20
7.1 Representations and Warranties True at Closing.............................. 20
7.2 Covenants Performed......................................................... 20
7.3 Certificate................................................................. 20
7.4 Stockholder Approval........................................................ 21
7.5 Pooling Letter from CMI's Accountants....................................... 21
7.6 Dissenting Company Shares................................................... 21
7.7 Opinion of Counsel to the Company........................................... 21
7.8 Affiliates Agreements....................................................... 21
7.9 Fairness Opinion............................................................ 21
7.10 S-4 Registration Statement.................................................. 21
7.11 Employment Agreements and Covenants Not to Compete.......................... 21
7.12 Merger Agreement............................................................ 21
7.13 Material Changes in the Business of the Company
Between the Date of this Agreement and the Closing.......................... 21
7.14 Litigation.................................................................. 21
7.15 Consents.................................................................... 21
7.16 Documentation............................................................... 21
7.17 CMI Due Diligence........................................................... 21
7.18 HSR Act Compliance.......................................................... 21
7.19 Escrow Agreement............................................................ 21
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.............................. 22
8.1 Representations and Warranties True at Closing.............................. 22
8.2 Covenants Performed......................................................... 22
8.3 Certificate................................................................. 22
8.4 Stockholder Approval........................................................ 22
8.5 Tax-Free Reorganization..................................................... 22
8.6 Opinion of Counsel to CMI................................................... 22
8.7 Nasdaq Notification......................................................... 22
8.8 S-4 Registration Statement.................................................. 22
8.9 Merger Agreement............................................................ 22
8.10 Pooling Letter from CMI's Accountants....................................... 22
8.11 Material Changes in the Business of CMI Between
the Date of this Agreement and the Closing.................................. 22
8.12 Litigation.................................................................. 22
8.13 Consents.................................................................... 22
8.14 Documentation
8.15 Company Due Diligence....................................................... 22
8.16 HSR Act Compliance.......................................................... 23
ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION..................................................... 23
9.1 Survival of Representations and Warranties.................................. 23
9.2 Indemnification by the Company and Holders.................................. 23
9.3 Indemnification by CMI...................................................... 23
9.4 Limitation.................................................................. 23
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9.5 Claims for Indemnification.................................................. 24
9.6 Defense by Indemnifying Party............................................... 24
9.7 Arbitration................................................................. 25
ARTICLE X TERMINATION.................................................................. 26
10.1 Mutual Agreement............................................................ 26
10.2 Termination by CMI.......................................................... 26
10.3 Termination by the Company.................................................. 26
ARTICLE XI MISCELLANEOUS............................................................... 26
11.1 Expenses.................................................................... 26
11.2 Amendment................................................................... 26
11.3 Entire Agreement............................................................ 26
11.4 Governing Law............................................................... 26
11.5 Headings.................................................................... 26
11.6 Notices..................................................................... 26
11.7 Severability................................................................ 27
11.8 Waiver......................................................................
11.9 Assignment..................................................................
11.10 Counterparts................................................................
11.11 Attorneys Fees.............................................................. 27
EXHIBITS
Exhibit A -- Escrow Agreement
Exhibit B -- Agreement of Merger
Exhibit C -- Voting Agreement
Exhibit D -- Opinion of Andrews & Kurth, L.L.P.
Exhibit E -- Form of Employment Agreement
Exhibit F -- Form of Covenant Not to Compete
Exhibit G -- Opinion of Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin,
A Professional Corporation
</TABLE>
iv
<PAGE> 6
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG CALIFORNIA MICROWAVE, INC.,
CMI ACQUISITION CORPORATION AND
MICROWAVE NETWORKS INCORPORATED
This Agreement and Plan of Reorganization and Merger ("Agreement") is made
as of January 31, 1995 among California Microwave, Inc., a Delaware corporation
("CMI"), CMI Acquisition Corporation, a Texas corporation and a wholly-owned
subsidiary of CMI ("Acquisition Corp."), and Microwave Networks Incorporated, a
Texas corporation (the "Company").
RECITAL:
The parties hereto desire that Acquisition Corp. be merged with and into
the Company; that the Company be the surviving corporation and become a
wholly-owned subsidiary of CMI; and that the shares of the capital stock of the
Company which are outstanding immediately prior to the effective time of the
merger, other than those shares which become "dissenting shares" within the
meaning of Articles 5.11 et seq. of the Texas Business Corporation Act (the
"TBCA"), be converted as set forth in this Agreement into shares of common stock
of CMI ("CMI common stock").
Now Therefore, in consideration of the premises and the mutual agreements
set forth herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
The terms defined in this Article I shall, for purposes of this Agreement,
have the meanings specified in this Article I unless the context otherwise
requires:
1.1 Affiliates. "Affiliates" of any party to the Agreement shall be
persons that directly or indirectly through one or more intermediaries, control,
or are controlled by, or are under common control, with such party.
1.2 Closing. "Closing" shall mean the delivery by the parties hereto of
the various documents contemplated by this Agreement or otherwise required in
order to consummate the Merger.
1.3 Closing Date. "Closing Date" shall have the meaning set forth in
Section 2.2 of this Agreement.
1.4 CMI. "CMI" shall include California Microwave, Inc. and all of its
Subsidiaries.
1.5 CMI's Stockholders Meeting. "CMI's Stockholders Meeting" shall mean
the meeting of stockholders of CMI called for the purpose of approving this
Agreement and the Merger.
1.6 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.7 Company. "Company" shall include Microwave Networks Incorporated and
all of its Subsidiaries.
1.8 Dissenting Company Shares. "Dissenting Company Shares" shall mean all
shares, if any, of the outstanding capital stock of the Company for which
dissenters' rights shall be perfected under Articles 5.11 et seq. of the TBCA.
1.9 Effective Time. "Effective Time" shall mean the time when the Merger
Agreement is filed with the Secretary of State of the State of Texas and the
Merger becomes effective.
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1.10 Escrow Agreement. "Escrow Agreement" shall mean the Agreement
relating to an escrow of certain shares of CMI common stock pursuant to Section
2.4 of this Agreement, in the form attached to this Agreement as Exhibit A.
1.11 Escrow Holder. "Escrow Holder" shall mean First National Bank of
Boston.
1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.13 Exchange Agent. "Exchange Agent" shall have the meaning set forth in
Section 2.6 of this Agreement.
1.14 Holders. "Holders" shall mean holders of Company capital stock
immediately prior to the Effective Time.
1.15 HSR Act. HSR Act means The Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.16 Merger. "Merger" shall mean the merger of Acquisition Corp. with and
into the Company.
1.17 Merger Agreement. "Merger Agreement" shall mean the Articles of
Merger and Agreement of Merger, in the form attached to this Agreement as
Exhibit B.
1.18 1933 Act. "1933 Act" shall mean the Securities Act of 1933, as
amended.
1.19 Proxy Statement. "Proxy Statement" shall mean the joint proxy
statement to be mailed to the stockholders of CMI and the stockholders of the
Company in connection with the Merger.
1.20 S-4 Registration Statement. "S-4 Registration Statement" shall mean
the Registration Statement on Form S-4 to be filed by CMI with the SEC in
connection with the issuance of CMI common stock pursuant to the Merger.
1.21 SEC. "SEC" shall mean the Securities and Exchange Commission.
1.22 Stockholder Representatives. "Stockholder Representatives" shall mean
the three persons selected by the Board of Directors of the Company and
authorized by this Agreement to act as representatives of the stockholders of
the Company under the Escrow Agreement, and any substitute representatives
selected in accordance with the Escrow Agreement.
1.23 Subsidiary. "Subsidiary" shall mean, with respect to a particular
party hereto, any corporation or other organization, whether incorporated or
unincorporated, of which at least a majority of the securities or interests are
directly or indirectly owned by such party or by one or more Subsidiaries of
such party.
1.24 Voting Agreements. "Voting Agreements" shall have the meaning set
forth in Article 2.11 of this Agreement.
ARTICLE II
MERGER, CLOSING AND CONVERSION OF SHARES
2.1 Merger. Subject to and in accordance with the terms and conditions of
this Agreement and the Merger Agreement, CMI, Acquisition Corp. and the Company
shall execute and file the Merger Agreement with the Secretary of State of the
State of Texas, whereupon Acquisition Corp. shall be merged with and into the
Company pursuant to Articles 5.01 et seq. of the TBCA.
2.2 Closing. The Closing shall take place at the offices of Andrews &
Kurth, L.L.P. in Houston, Texas, at 10:00 a.m., within 5 business days following
the date on which the Merger is approved by the stockholders of CMI or on such
other day and time as shall be agreed to by the parties (the "Closing Date").
2.3 Conversion of Shares. In accordance with the Merger Agreement, (a)
each share of Acquisition Corp. common stock issued and outstanding immediately
prior to the Effective Time shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted at and as of the
Effective Time
2
<PAGE> 8
into one share of common stock of the Company, and (b) each share of capital
stock of the Company issued and outstanding immediately prior to the Effective
Time (except those shares which are Dissenting Company Shares) shall, by virtue
of the Merger and without any action on the part of the Holders, be converted at
and as of the Effective Time into that number of shares of CMI common stock
determined by dividing 3,350,000 (the "Numerator") by the total number of shares
of capital stock of the Company outstanding immediately prior to the Closing
(including for this purpose any capital stock of the Company issuable under then
outstanding options, warrants or other convertible securities) and rounding the
quotient thereof off to the nearest ten-thousandth (.0001). Notwithstanding the
foregoing, (i) the Company shall have the right to terminate this Agreement if
the average closing price of CMI common stock on the Nasdaq National Market for
the 15 consecutive trading days immediately preceding the date of CMI's
Stockholders Meeting ("Final Closing Price") is less than $30.00 (as reported by
Nasdaq), provided that if the Company exercises this right, the termination
shall not be effective if CMI agrees to increase the Numerator to the number
which when multiplied by the Final Closing Price equals $100,500,000, and (ii)
CMI shall have the right to terminate this Agreement if the Final Closing Price
is more than $41.375, provided that if CMI exercises this right, the termination
shall not be effective if the Company agrees to decrease the Numerator to the
number which when multiplied by the Final Closing Price is equal to
$138,606,250. The right of either CMI or the Company to terminate this Agreement
under the provisions of this Section 2.3 shall be exercised by written notice
given to the other party by 2:00 p.m., San Francisco time, on the day prior to
the date of CMI's Stockholders Meeting; the right to increase or decrease the
Numerator, as the case may be, provided for in the immediately preceding
sentence may be exercised by written notice given to the other party by 8:00
p.m., San Francisco time, on that same day. The Numerator shall be appropriately
adjusted in the event of any stock dividend, stock split or similar change in
the capitalization of CMI prior to the Effective Time.
The Holders shall receive only whole shares of CMI common stock; in lieu of
any fractional share of CMI common stock, Holders shall receive in cash the fair
market value of such fractional share, valuing CMI common stock at the closing
price for such stock on the Nasdaq National Market on the trading day
immediately preceding the Closing Date, as reported by Nasdaq.
2.4 Escrow. In order to provide indemnification in accordance with Article
IX of this Agreement and with the Escrow Agreement, at the Effective Time or as
soon thereafter as possible, a stock certificate representing 10% of the whole
shares of CMI common stock (rounded down to the nearest whole share) into which
the Holders' shares of capital stock of the Company were converted pursuant to
Section 2.3 of this Agreement (the "Escrow Fund") shall be delivered to the
Escrow Holder (which shares shall be withheld from each Holder ratably based on
the number of shares of capital stock of the Company held by such Holder
immediately prior to the Effective Time). The Stockholder Representatives are
authorized by this Agreement to act hereunder and under the Escrow Agreement
with the powers and authority provided for herein and therein, as
representatives of the Holders and their successors. Approval of this Agreement
and the Merger by the stockholders of the Company shall constitute approval (i)
of the terms and conditions of the Escrow Agreement and ratification of the
selection of the Stockholder Representatives and of their authority to act
hereunder and under the Escrow Agreement on behalf of the Holders and their
successors and (ii) constitute the agreement of each stockholder to advance
funds to the Stockholder Representatives, on a pro rata basis based on the
number of shares of capital stock of the Company owned by such stockholders,
upon the request of the Stockholder Representatives, in order to pay any
expenses incurred in connection with any disputes or obligations relating to the
Escrow Agreement or to Article IX of this Agreement relating to indemnification
and defenses and disputes related thereto. To the extent available for
distribution to stockholders of the Company pursuant to the Escrow Agreement, in
order to enforce the foregoing obligation to advance funds, the Stockholder
Representatives may attach and dispose of any such available shares of Common
Stock in the Escrow Fund held for the benefit of stockholders who do not comply
with the foregoing obligations. Any rights of the Holders to receive any shares
placed in such escrow shall in no circumstances be sold, assigned or otherwise
transferred by them other than by will or pursuant to the laws of descent and
distribution. All certificates representing securities delivered to the Escrow
Holder shall be accompanied by separate stock powers endorsed in blank by a
Stockholder Representative on behalf of the Holders. Subject to the Escrow
Agreement, the Holders shall retain their voting rights with respect to
securities deposited with the Escrow Holder in accordance with this Section 2.4.
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<PAGE> 9
2.5 Company Options. At the Effective Time, each of the outstanding
options to purchase common stock of the Company under the Company's
Non-Qualified Stock Option Plan for Nonemployed Directors and Consultants (the
"Nonemployee Option Plan") and the Company's Non-Qualified Stock Option Plan for
Employees (the "Employee Option Plan") shall thereafter entitle the holder
thereof to receive for each share of Company common stock subject to such
option, upon exercise thereof, the number of shares of CMI common stock to be
exchanged under Section 2.3 above for each share of capital stock of the Company
(the "Exchange Ratio"), at an exercise price for each full share of CMI common
stock equal to the quotient obtained by dividing (a) the exercise price per
share of Company common stock with respect to such option by (b) the Exchange
Ratio, which exercise price per share shall be rounded down to the nearest whole
cent. The number of shares of CMI common stock that may be purchased by a holder
under any option assumed by CMI hereunder shall not include any fractional share
of CMI common stock but shall be rounded up to the next higher whole share of
CMI common stock. The assumption by CMI of the options hereunder shall not
terminate or modify (except as required hereunder) any right, vesting schedule,
or other restriction on transferability relating to such options or give the
holders of such options any additional benefits which they did not have
immediately prior to the Effective Time. Continuous employment with the Company
shall be credited to an optionee for vesting purposes after the Effective Time.
Nothing contained in this Section 2.5 shall require CMI to offer or sell shares
of CMI common stock upon the exercise of options assumed by CMI hereunder if, in
the reasonable judgment of CMI or its counsel, such offer or sale would not be
in accordance with the applicable federal or state securities laws, provided
that CMI shall use its best efforts to take such actions, if any, as are
necessary for such offer or sale to be in accordance with such laws, including
without limitation the filing with the SEC within 45 days following the
Effective Time of a registration statement on Form S-8 under the 1933 Act
covering the shares of CMI common stock issuable upon exercise of options
assumed hereunder by CMI.
2.6 Exchange of Certificates.
(a) Prior to the Closing Date, CMI shall appoint the Escrow Agent to
also act as exchange agent (the "Exchange Agent") in the Merger.
(b) Promptly after the Closing Date, but in no event later than three
business days thereafter, CMI shall give instructions to the Exchange Agent
to make available within three business days thereafter for exchange in
accordance with this Section 2.6, the shares of CMI common stock issuable
pursuant to Section 2.3 in exchange for outstanding shares of capital stock
of the Company, subject to the issuance of 10% of the shares of CMI common
stock issuable to the Holders into escrow pursuant to Section 2.4 hereof.
(c) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each Holder of record of a stock certificate that,
immediately prior to the Effective Time, represented outstanding shares of
capital stock of the Company (a "Certificate"), whose shares are being
converted into CMI common stock pursuant to Section 2.3, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as CMI may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for
certificates evidencing CMI common stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the Holder of such Certificate shall be
entitled to receive in exchange therefor the number of shares of CMI common
stock and payments in lieu of fractional shares to which the Holder is
entitled pursuant to Section 2.3 hereof. Until surrendered as contemplated
by this Section 2.6(c), each Certificate shall be deemed at any time after
the Effective Time to represent only the right to receive upon such
surrender such whole number of shares of CMI common stock and payments for
fractional shares as is provided for in Section 2.3.
(d) No dividends or distributions payable to holders of record of CMI
common stock after the Effective Time, or cash payable in lieu of
fractional shares, shall be paid to the Holder of any unsurrendered
Certificate until the Holder of the Certificate shall surrender such
Certificate.
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<PAGE> 10
2.7 Dissenting Company Shares. Holders of Dissenting Company Shares shall
have those rights, but only those rights, of holders of "dissenting shares"
under Articles 5.11 et seq. of the TBCA. The Company shall give CMI prompt
notice of any demand, purported demand, objection, notice, petition, or other
communication received from stockholders or provided to stockholders by the
Company with respect to any Dissenting Company Shares or shares claimed to be
Dissenting Company Shares, and CMI shall have the right to participate in all
negotiations and proceedings with respect to such shares. The Company agrees
that, without the prior written consent of CMI, it shall not voluntarily make
any payment with respect to, or settle or offer to settle, any demand or
purported demand respecting such shares.
2.8 Registration on S-4 Registration Statement. The CMI common stock to be
issued in the Merger shall be registered under the 1933 Act on a Form S-4
Registration Statement.
2.9 Tax Free Reorganization. The parties intend to adopt this Agreement as
a plan of reorganization and to consummate the Merger in accordance with the
provisions of Section 368(a) of the Code.
2.10 Pooling of Interests. The parties intend that the Merger qualify as a
"pooling of interests" for accounting purposes.
2.11 Voting Agreements. Concurrently with the execution of this Agreement,
each of the directors of the Company shall enter into a Voting Agreement in the
form attached hereto as Exhibit C, pursuant to which they shall agree, subject
to the terms and conditions of the Voting Agreement, to vote all the shares of
capital stock of the Company held by them or by the entities they represent in
favor of the Merger. The Company will use its best efforts to have the officers
of the Company enter into Voting Agreements promptly after the execution of the
Agreement. There shall be no amendments or modifications to the Voting
Agreements without the written consent of CMI.
ARTICLE III
REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to CMI that, except as set forth in the
Disclosure Schedule dated as of the date hereof and signed by the Chief
Executive Officer of the Company (the "Disclosure Schedule"), each of which
exceptions shall specifically identify the relevant Section hereof to which it
relates:
3.1 Organization. The Company and each of its Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their incorporation, and have all requisite power
and authority to own their properties and to carry on their businesses as now
being conducted. The Company has all requisite power to execute and deliver this
Agreement and the agreements contemplated herein, and to consummate the
transactions contemplated hereby and thereby. The Company and its Subsidiaries
are duly qualified to do business and in good standing in all jurisdictions in
which ownership of property or the character of their business requires such
qualification and where failure to be so qualified would have a material adverse
effect on the Company and its Subsidiaries, taken as a whole. Certified copies
of the Articles of Incorporation and Bylaws of the Company, as amended to date,
have been previously delivered to CMI, are complete and correct, and no
amendments have been made thereto or have been authorized since the date
thereof.
3.2 Capitalization of the Company. The Company's authorized capital stock
consists of 15,000,000 shares of common stock, $0.01 par value per share, of
which 1,745,233 shares are issued and outstanding on the date hereof, and
7,845,240 shares of Preferred Stock, classified into three series, as follows:
2,000,000 shares of Series A Convertible Preferred Stock, of which 2,000,000
shares are issued and outstanding on the date hereof; 3,250,000 of Series B
Convertible Preferred Stock, of which 3,166,354 shares are issued and
outstanding as of the date hereof; and 2,595,240 shares of Series C Convertible
Preferred Stock, of which 2,037,621 shares are issued and outstanding as of the
date hereof. Shares of Preferred Stock are convertible into shares of Common
Stock on a share-for-share basis. All issued and outstanding shares of the
Company's capital stock are duly authorized, validly issued, fully paid and
non-assessable. There are options outstanding under the Nonemployee Option Plan
covering 56,375 shares of common stock of the Company and options
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<PAGE> 11
outstanding under the Employee Option Plan covering 536,375 shares of common
stock of the Company, all of which options shall be assumed by CMI pursuant to
the provisions of Section 2.5 hereof. Except for the Company's Preferred Stock
and options outstanding under the Nonemployee Option Plan and the Employee
Option Plan, there are not outstanding (i) any options, warrants or other rights
to purchase from the Company any capital stock of the Company; (ii) any
securities convertible into or exchangeable for shares of capital stock of the
Company; or (iii) any other commitments or rights of any kind for the issuance
by the Company of additional shares of capital stock or options, warrants or
other securities of the Company.
3.3 Subsidiaries. The only Subsidiaries of the Company are those listed in
the Disclosure Schedule. All of the outstanding shares of capital stock of each
of the Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and all such shares are owned by the Company or another Subsidiary
of the Company free and clear of all security interests, liens, claims, pledges,
agreements, limitations on the Company's voting rights, charges or other
encumbrances of any nature.
3.4 Authorization. Subject to the obtaining of the approval of the
Company's stockholders, the execution and delivery by the Company of this
Agreement and the agreements provided for herein, and the consummation by the
Company of all transactions contemplated hereunder and thereunder by the
Company, have been duly authorized by all requisite corporate action. This
Agreement has been duly executed by the Company. Subject to the obtaining of the
approval of the Company's stockholders, this Agreement and all other agreements
and obligations entered into and undertaken in connection with the transactions
contemplated hereby to which the Company is a party constitute the valid and
legally binding obligations of the Company enforceable against it in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other similar laws affecting
the rights of creditors generally. The execution, delivery and performance by
the Company of this Agreement and the agreements provided for herein, and the
consummation by the Company of the transactions contemplated hereby and thereby,
do not and will not, with or without the giving of notice or the passage of time
or both, (a) violate the provisions of any law, rule or regulation applicable to
the Company (assuming compliance with the requirements of the HSR Act) which
violation would have a material adverse effect on the Company; (b) violate the
provisions of the Certificate of Incorporation or Bylaws of the Company; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator applicable to the Company; or (d) conflict with or result in the
breach or termination of any term or provision of, or constitute a default
under, or cause any acceleration under, or cause the creation of any lien,
charge or encumbrance upon the properties or assets of the Company or of any of
its Subsidiaries pursuant to, any indenture, mortgage, deed of trust or other
instrument or agreement to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
properties is or may be bound. The Disclosure Schedule sets forth a true,
correct and complete list of all consents and approvals of third parties that
are required in connection with the execution, delivery or performance of this
Agreement by the Company or the consummation by the Company of the transactions
contemplated by this Agreement or in order to permit the continuation after the
Closing Date of the business activities of the Company and its Subsidiaries in
the manner such business is presently carried on by them.
3.5 Financial Statements.
(a) The Company has previously delivered to CMI the audited
consolidated balance sheets of the Company as of June 30, 1994 and June 30,
1993 (the "Audited Balance Sheets") and the related consolidated statements
of income, shareholders' equity and cash flows of the Company for the two
fiscal years then ended (collectively, the "Audited Financial Statements").
The Company has also previously delivered to CMI the unaudited consolidated
balance sheet of the Company as of December 31, 1994 (the "Current Balance
Sheet") and the related consolidated statements of income, shareholders'
equity and cash flows for the six-month period then ended (collectively,
the "Current Financial Statements"). The Audited Financial Statements and
Current Financial Statements are in accordance with the books and records
of the Company and have been prepared in accordance with generally accepted
accounting principles applied consistently with past practices (except that
the Current Financial Statements do not include notes but do include all
adjustments, which consist only of normal recurring adjustments,
6
<PAGE> 12
necessary for fair presentation) and the Audited Financial Statements have
been certified without qualification by the Company's auditors.
(b) The Audited Financial Statements and the Current Financial
Statements fairly present, as of their respective dates, the consolidated
financial condition, retained earnings, assets and liabilities of the
Company and the consolidated results of operations of the Company's
business for the periods indicated and the Audited Financial Statements and
the Current Financial Statements contain and reflect adequate reserves with
respect to taxes and except for the absence of notes on the Current
Financial Statements adequately reflect the material contracts or
commitments of the Company and the Subsidiaries.
(c) Except for such claims, debts and liabilities as are reflected on
the Current Balance Sheet, including any notes thereto, the Company and its
Subsidiaries do not have any outstanding indebtedness for money borrowed
and are not subject to any claims or liabilities, contingent or otherwise,
other than obligations incurred in the ordinary course of business since
the date of the Current Balance Sheet, in amounts usual and normal,
individually and in the aggregate and other than as may not have been
required under generally accepted accounting principles to be disclosed or
reserved for as contingencies as of the date of the Current Balance Sheet.
(d) The inventories of the Company and its Subsidiaries shown on the
Current Balance Sheet, or thereafter acquired prior to the Closing Date,
consist of items of a quality and quantity usable, saleable or leasable in
the normal course of business, except for obsolete and slow moving items
and items below standard quality reflected on the Current Balance Sheet,
all of which have been written down on the Current Balance Sheet to the
lower of cost or market value or are the subject of adequate reserves
reflected in the Current Balance Sheet. The value at which such inventories
are carried on the Current Balance Sheet reflect the normal inventory
valuation policies of the Company. All items included in the inventories of
the Company and its Subsidiaries are the property of the Company and its
Subsidiaries, except for sales made in the ordinary course of business
since the date of such Current Balance Sheet, and no items included in the
inventories have been pledged as collateral or are held by the Company or
any of its Subsidiaries on consignment from others.
(e) All of the accounts receivable (trade or otherwise) and notes
receivable reflected in the Current Balance Sheet, result from the sale of
inventory or products, and subject to the reserve therefor on said balance
sheet, the Company knows of no reason that such accounts are not
collectible in the full amount thereof in the ordinary course of business.
All such accounts receivable and notes receivable are owned by the Company
and its Subsidiaries free and clear of all liens, claims, charges,
encumbrances and other interests of third parties (subject to any reserves
therefor on said balance sheet).
3.6 Order Backlog. The Disclosure Schedule contains a list of the
aggregate backlog of orders for the products of the Company and its Subsidiaries
as of December 31, 1994. All such orders have been or will be filled in the
ordinary course of business, and the Company knows of no reason why any customer
placing any such order may refuse delivery of the ordered products or fail
timely to pay for such products in accordance with the terms of such orders.
3.7 Litigation. Except as set forth in the Disclosure Schedule, (a) there
is no action, suit, or proceeding to which the Company or any of its
Subsidiaries is a party (either as a plaintiff or defendant) pending or, to the
knowledge of the Company, threatened before any court or governmental agency,
authority, body or arbitrator which could adversely affect the Company, its
assets or the transactions contemplated hereby; (b) to the knowledge of the
Company, there is no investigation pending by any governmental agency, authority
or body which could adversely affect the Company, its assets or the transaction
contemplated hereby; (c) neither the Company nor to the best knowledge of the
Company, any Subsidiary, officer, director, stockholder or employee of the
Company, has been permanently or temporarily enjoined by any order, judgment or
decree of any court or any governmental agency, authority or body from engaging
in or continuing any conduct or practice in connection with the business,
assets, or properties of the Company or any of its Subsidiaries; and (d) there
is not in existence on the date hereof any order, judgment or decree of any
court, tribunal or agency enjoining or requiring the Company to take any action
of any kind with respect to its
7
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business, assets or properties or which has had an adverse effect on the
business practices of the Company. The Company knows of no valid basis for any
such action, suit, proceeding or investigation.
3.8 Insurance. The Disclosure Schedule sets forth a true, correct and
complete list of all fire, theft, casualty, general liability, workers
compensation, business interruption, environmental impairment, product
liability, automobile and other insurance policies maintained by the Company and
of all life insurance policies maintained by the Company on the lives of its
employees, specifying the type of coverage, the amount of coverage, the premium,
the insurer and the expiration date of each such policy (collectively, the
"Insurance Policies"). All premiums due on the Insurance Policies or renewals
thereof have been paid. All Insurance Policies will remain in full force and
effect through the Closing Date and also as to claims arising out of events that
occur prior to the Closing.
3.9 Intangible Property. The Company and its Subsidiaries own or license
(or prior to the Closing Date will own or license), all patents, trademarks,
trade names, copyrights, technology, know-how and processes necessary for the
conduct of their business as heretofore conducted (the "Intangible Property").
The Disclosure Schedule sets forth a true, correct and complete list of such
United States and foreign patents, trademarks, and trademark registrations,
copyrights and copyright registrations, and applications for any of the
foregoing, and sets forth a description of the terms of all licenses and other
agreements relating to the Intangible Property. The consummation of the
transactions contemplated by this Agreement will not alter or impair any
material Intangible Property rights. No claims have been asserted by any person
challenging the ownership or use of the Intangible Property, and the Company
knows of no valid basis for any such claim. To the best knowledge of the
Company, the use by the Company and its Subsidiaries of the Intangible Property
does not infringe on the rights of any other person. The Company is not aware of
any infringement of any of its Intangible Property rights by any other party.
3.10 Property, Plant and Equipment. The Company and its Subsidiaries do
not own any real property. The Company and its Subsidiaries have good title to
all of their material properties and assets, including, without limitation, all
of the properties and assets reflected in the Current Balance Sheet (except for
properties and assets sold since the date of the Current Balance Sheet in the
ordinary course of business and consistent with past practice), and all of the
properties or assets purchased by them since the date of the Current Balance
Sheet. None of such properties or assets is subject to any mortgage, pledge,
lien, security interest, encumbrance or charge of any kind except (a) liens
shown on the Current Balance Sheet as securing specified liabilities or
obligations with respect to which no default exists; (b) liens arising in the
ordinary course of business and consistent with past practice since the date of
the Current Balance Sheet and liens arising by operation of law or minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or materially impairs the use of the property
subject thereto, or materially impairs the operations of the Company or any of
its Subsidiaries; and (c) liens for current taxes not yet due, or, if due, that
are being contested in good faith in the ordinary course of business. Other than
the buildings located at 10935 S. Wilcrest Avenue and 10795 Rockley Road,
Houston, Texas, the Company does not use in its business any assets owned by a
stockholder or Affiliate of the Company. None of the plants, structures or
equipment of the Company and its Subsidiaries is in need of material maintenance
or repairs except for ordinary or routine maintenance and repairs.
3.11 Business Practices. Neither the Company nor any of its Subsidiaries
has made, offered or agreed to offer anything of value to any government
official, political party or candidate for government office nor have any of
them taken any action which would be in violation of the Foreign Corrupt
Practices Act of 1977 or any anti-boycott or export laws.
3.12 Tax Matters.
(a) Except as set forth in the Disclosure Schedule:
(i) Within the times and in the manner prescribed by law, the
Company and its Subsidiaries have filed all federal, state and local tax
returns and all tax returns for foreign countries, provinces and other
governing bodies having jurisdiction to levy taxes which are required to
be filed, and all information provided in such tax returns is true,
complete and accurate in all material respects;
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(ii) The Company and its Subsidiaries have paid all taxes,
interest, penalties, assessments and deficiencies which have become due
or which have been claimed to be due or have provided adequate reserves
therefor, including without limitation income, franchise, real estate,
sales and withholding taxes and other employee benefits, taxes and
imports;
(iii) The Company and its Subsidiaries have not waived or extended
any applicable statute of limitations relating to the assessment of
federal, state, local or foreign taxes;
(iv) No examination of the federal, state, local or foreign tax
returns of the Company or any of its Subsidiaries is currently in
progress nor, to the knowledge of the Company, threatened and no
deficiencies have been asserted or assessed against any of them as a
result of any audit by the Internal Revenue Service or any state, local
or foreign taxing authority and no such deficiency has been proposed or
threatened;
(v) The Company and its Subsidiaries have not changed their general
method of accounting, or accounting with respect to inventory, during
the preceding four year period; and
(vi) The Company and its Subsidiaries do not have any material
liability for taxes other than in respect of the current taxable year,
and adequate reserves for taxes are reflected on their financial
statements in conformity with generally accepted accounting principles.
(b) The Disclosure Schedule sets forth those taxable years for which
the tax returns of the Company or any of its Subsidiaries have been
reviewed or audited by applicable federal, state, local and foreign taxing
authorities and those tax years for which said tax returns have received
clearances or other indications of approval from applicable federal, state,
local and foreign taxing authorities.
3.13 Books and Records. The general ledgers and books of account of the
Company and its Subsidiaries and all federal, state, local and foreign income,
franchise, property and other tax returns filed by the Company and its
Subsidiaries are in all material respects complete and correct.
3.14 Contracts and Commitments. The Disclosure Schedule contains a true,
complete and correct list and description of the following contracts and
agreements, whether written or oral (collectively, the "Contracts"):
(a) all loan agreements, promissory notes, indentures, mortgages,
guaranties, pledge agreements, security agreements, deeds of trust or
similar agreements or instruments creating or granting a lien on any asset
or any other instrument for or relating to any borrowing of money or the
deferred purchase price of property, the unpaid balances of any of which
exceed $25,000, to which the Company or any of its Subsidiaries is a party
or by which the Company or any of its Subsidiaries or any of their property
is bound;
(b) all contracts, agreements, commitments, purchase orders or other
understandings or arrangements to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
or any of their property is bound which involve payments or receipts of
more than $100,000 in the case of any single contract, agreement,
commitment, understanding or arrangement or under which full performance
(including payment) will not be completed within one year of the date
hereof;
(c) all plans or agreements for collective bargaining, employment,
consulting, executive compensation, bonus, deferred compensation, pension,
profit-sharing, severance, retirement, employee stock option or stock
purchase, and group life, health, accident insurance and other similar
employee benefit or employment plans, agreements, arrangements or
commitments to which the Company or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries or any of their property is
bound;
(d) all agency, distributor, sales representative, franchise or
similar agreements to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or any of their
property is bound;
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(e) all contracts, agreements or other arrangements imposing a
non-competition or non-solicitation obligation on the Company or any of its
Subsidiaries or, to the knowledge of the Company, any officer of the
Company relating to the business of the Company;
(f) all agreements or arrangements for the purchase or sale of any
assets other than in the ordinary course of business;
(g) all material agreements, contracts or commitments with the United
States Government or any agency or instrumentality thereof;
(h) all agreements, contracts or commitments related to Intangible
Property;
(i) all agreements, contracts or commitments between the Company and
any officer, director or stockholder of the Company or of any Subsidiary;
(j) all agreements, contracts or commitments which would reasonably be
expected to have a material adverse effect on the assets, liabilities,
financial condition or results of operations of the Company or any of its
Subsidiaries; and
(k) All leases of real property, and all leases of personal property
that have terms longer than a year and provide for remaining payments in
excess of $25,000.
All such contracts are valid, binding and enforceable and in full force and
effect. Neither the Company nor any of its Subsidiaries is in default under any
such contract and there have been no claims of defaults and there are no
existing factors or conditions which, with the passage of time or giving of
notice or both would constitute such a default or in any case in which such
default would give rise to a right of termination by the other party thereto or
which would result in any material cost, expense or penalty to the Company or
any of its Subsidiaries.
3.15 Compliance with Agreements and Laws. The Company and each of its
Subsidiaries have all material licenses, permits or other authorizations and
certificates, including environmental, health and safety permits, from federal,
state and local authorities necessary to the conduct of their businesses as
currently conducted (collectively, the "Permits"). The Disclosure Schedule sets
forth a true, correct and complete list of all such Permits. Neither the Company
nor any of its Subsidiaries is in violation of any law, regulation or ordinance,
directive, order or other requirement (including, without limitation, any law,
regulation or ordinance relating to building, zoning, environmental, disposal,
manufacture, processing, generation, distribution, use, treatment, storage,
discharge, emission, release, clean-up, transport or handling of hazardous
wastes, substances or materials, land use or similar matters) relating to its
properties, which violation would have a material adverse effect on the results
of operations, condition (financial or otherwise), assets, properties, business
or prospects of the Company and its Subsidiaries, taken as a whole. Neither the
Company nor any of its Subsidiaries is in violation of, in any material respect,
any federal, state, local or foreign law, regulation or order, directive or
other requirement (including, but not limited to, any of the foregoing relating
to employment discrimination, occupational safety, environmental protection,
manufacture, processing, generation, distribution, use, treatment, storage,
discharge, emission, release, clean-up, transport or handling of hazardous
wastes, substances or materials, conservation, or corrupt practices), the
enforcement of which would have a material adverse effect on the Company or any
of its Subsidiaries. The Company has not had notice or communication from any
federal, state or local governmental or regulatory authority or otherwise of any
such violation or noncompliance and, to the best knowledge of the Company, no
such violation or noncompliance exists. To the knowledge of the Company, no real
property or facility now or formerly owned, leased, or used by the Company or
any of its Subsidiaries contains asbestos or has located on or under it any
fuel, oil or gasoline storage tanks, or is contaminated with any substance or
material that requires investigation, remediation or clean-up under any federal,
state or local law, regulation, order, directive or other requirement.
For purposes of this Section 3.15, "hazardous wastes" means "hazardous
wastes" as defined in the Resource Conservation and Recovery Act, as amended, 42
U.S.C. sec.6921 et seq., and the regulations adopted pursuant thereto.
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3.16 Employee Relations.
(a) The Company and each of its Subsidiaries are in compliance in all
material respects with all federal, state, local and foreign laws
respecting employment and employment practices, terms and conditions of
employment, and wages and hours, and are not engaged in any unfair labor
practice, and there are no arrears in the payment of wages or social
security taxes.
(b) Except as set forth in the Disclosure Schedule:
(i) none of the employees of the Company or of any Subsidiary is
represented by any labor union and neither the Company nor any of its
Subsidiaries are parties to any collective bargaining agreement;
(ii) there is no unfair labor practice complaint against the
Company or any of its Subsidiaries pending before the National Labor
Relations Board or any state, local or foreign agency; and
(iii) there is no pending labor strike or other material labor
trouble affecting the Company or any of its Subsidiaries (including,
without limitation, any organizational drive).
3.17 Employee Benefit Plans.
(a) The Disclosure Schedule contains a true, correct and complete list
of all pension, benefit, profit sharing, retirement, deferred compensation,
welfare, insurance, disability, bonus, vacation pay, severance pay and
other similar plans, programs and agreements, whether reduced to writing or
not, other than any "multiemployer plan" as such term is defined in Section
4001(a)(3) of ERISA, relating to the Company's employees that are currently
maintained by the Company or by any other member of any controlled group of
corporations, group of trades or businesses under common control, or
affiliated service group (as defined for purposes of Section 414(b), (c)
and (m), respectively, of the Code) (the "Employee Plans").
(b) Neither the Company nor any of its Affiliates, directors,
officers, employees or agents, or any "party in interest" or "disqualified
person," as such terms are defined in Section 3 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the
Code has, with respect to any Employee Plan, engaged in or been a party to
any non-exempt "prohibited transaction," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, in connection with which,
directly or indirectly, CMI or any of its Affiliates, directors or
employees or any Employee Plan or any related funding medium could be
subject to either a material penalty assessed pursuant to Section 502(i) of
ERISA or a material tax imposed by Section 4975 of the Code.
(c) With respect to all Employee Plans, the Company and its Affiliates
are in compliance in all material aspects with the requirements prescribed
by ERISA and the Code, applicable to such Employee Plans. Except as set
forth on the Disclosure Schedule attached hereto: (i) none of the Employee
Plans which are subject to Title IV of ERISA has been terminated in whole
or in part within the meaning of ERISA or the Code; (ii) no liability has
been incurred to the Pension Benefit Guaranty Corporation ("PBGC") with
respect to any Employee Plan (other than the payment of annual premiums
under Section 4007 of ERISA or benefits payable in accordance with the
terms of such Employee Plan); (iii) no Employee Plan that is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code, or
both, incurred any "accumulated funding deficiency" (as defined in ERISA)
whether or not waived; (iv) neither the Company nor any Affiliate has
failed to pay any material amounts due and owing as required by the terms
of any Employee Plan; (v) there has been no "reportable event" within the
meaning of Section 4043(b)(1)-(9) of ERISA, or any event described in
Section 4063(a) of ERISA, with respect to any Employee Plan, other than as
disclosed herein or on accompanying schedules; (vi) neither the Company nor
any Affiliate has failed to make any payment to an Employee Plan required
under Section 302 of ERISA; and (vii) the PBGC has not instituted any
proceedings to terminate an Employee Plan pursuant to Section 4042 of
ERISA.
(d) Except as set forth in the Disclosure Schedule, no Employee Plan
provides health or life insurance benefits for retirees.
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(e) Except as set forth in the Disclosure Schedule, there are no
pending or, to the knowledge of the Company, threatened claims, suits or
other proceedings by present or former employees of the Company or its
Affiliates, plan participants, beneficiaries or spouses of any of the
above, the Internal Revenue Service, the PBGC, or any other person or
entity involving any Employee Plan including claims against the assets of
any trust, involving any Employee Plan, or any rights or benefits
thereunder, other than ordinary and usual claims for benefits by
participants or beneficiaries including claims pursuant to domestic
relations orders.
3.18 Absence of Certain Changes or Events. Since the date of the Current
Balance Sheet, neither the Company nor any of its Subsidiaries has entered into
any transaction which is not in the usual and ordinary course of business or
has:
(a) incurred any material obligation or liability for borrowed money;
(b) discharged or satisfied any lien or encumbrance or paid any
obligation or liability other than (i) current liabilities reflected in the
Current Balance Sheet or (ii) those incurred in the ordinary course of
business and in normal amounts since the date of the Current Balance Sheet
consistent with past practices;
(c) made any material amendment to or termination of any contract or
lease or done any act or omitted to do any act which would cause the breach
of any contract or lease;
(d) suffered any loss of personal or real property in excess of
$50,000 in the aggregate, or waived any rights of any value;
(e) authorized any declaration or payment of dividends, or paid any
such dividends, or authorized any transfer of assets of any kind whatsoever
to any of its stockholders (other than payments or transfers by any
Subsidiary of the Company to the Company);
(f) made any material change in the terms, status or funding condition
of any Employee Plan;
(g) made any capital expenditure in excess of $100,000 in any instance
or $250,000 in the aggregate;
(h) suffered any material adverse change in its assets, liabilities,
financial condition or results of operations;
(i) acquired or disposed of, or committed to acquire or dispose of,
any asset, or entered or committed to enter into any contract, agreement or
commitment, in any such case which involves the payment in the case of an
acquisition of more than $100,000, or in the case of a disposition of more
than $25,000, except agreements, commitments or transactions involving the
purchase of inventory or supplies in the ordinary course of business
consistent with past practice and which do not have a remaining term
exceeding twelve months;
(j) increased or agreed to increase the compensation or bonuses
payable or to become payable to any employees with annual salaries
exceeding $50,000, or increased any salaries or bonuses payable or to
become payable to any employees in any manner not in the ordinary course of
business consistent with past practices;
(k) made or agreed to make any loan to any of its employees, officers,
stockholders or directors, other than travel advances made in the ordinary
course of business consistent with past practices;
(l) granted or agreed to grant to any person any option, right or
warrant or other commitment calling for the issuance or sale of any shares
of capital stock, bonds or other corporate securities; or
(m) granted or voluntarily subjected any material asset to a lien or
encumbrance (other than any purchase money security interest, conditional
title retention arrangement, mechanic's lien, lien for taxes not yet due or
lien arising by operation of law).
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3.19 Prepayments and Deposits. The Disclosure Schedule sets forth all
prepayments and deposits, which have been received by the Company or any of its
Subsidiaries as of the date hereof, from customers for products to be shipped,
or services to be performed, after the Closing Date. Since the date of the
Current Balance Sheet, no claims have been asserted against the Company or any
of its Subsidiaries to return products by reason of alleged overshipments,
defects or otherwise which exceed $25,000 in the aggregate. There are no
products of the Company that have been sold to customers under an understanding
that such products would be returnable. There has been no adverse change in the
business relationship of the Company or of any of its Subsidiaries with any
customer or supplier which is material to the financial condition, operations or
prospects of the Company and its Subsidiaries.
3.20 Indebtedness to and from Employees, Directors and
Stockholders. Neither the Company nor any of its Subsidiaries is indebted,
directly or indirectly, to any person who is an employee, director or
stockholder or any Affiliate of any such person (other than indebtedness of any
Subsidiary of the Company to the Company) in any amount whatsoever other than
for salaries for services rendered or reimbursable business expenses, and no
such employee, director, stockholder or Affiliate is indebted to the Company or
any of its Subsidiaries except for advances made to employees in the ordinary
course of business to meet reimbursable business expenses.
3.21 Banking Facilities. The Disclosure Schedule sets forth a true,
correct and complete list of:
(a) each bank, savings and loan or other financial institution in
which the Company or any of its Subsidiaries has an account or safety
deposit box and the numbers of the accounts or safety deposit boxes
maintained by the Company or any of its Subsidiaries thereat; and
(b) the names of all persons authorized to draw on each such account
or to have access to any such safety deposit box facility.
3.22 Powers of Attorney and Suretyships. Neither the Company nor any of
its Subsidiaries has any general or special powers of attorney outstanding
(whether as grantor or grantee thereof) or has any obligation or liability
(whether actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any person, corporation, partnership, joint venture, association,
organization or other entity, except as endorser or maker of checks or letters
of credit, respectively, endorsed or made in the ordinary course of business.
3.23 Conflicts of Interest. No officer or director of the Company nor, to
the knowledge of the Company, any Affiliate of any such person, now has or
within the last year had, either directly or indirectly, an equity or debt
interest in any corporation, partnership, joint venture, association,
organization or other person or entity which furnishes or sells or during such
period furnished or sold services or products to the Company or any of its
Subsidiaries, or purchases or during such period purchased from the Company or
any of its Subsidiaries any goods or services, or otherwise during such period
did business with the Company or any of its Subsidiaries, other than for an
interest of less than one (1) percent in any publicly-held corporation.
3.24 Regulatory Approvals. All consents, approvals, authorizations or
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Company or any of its Subsidiaries and which the
failure to obtain would have a material adverse effect on the business of the
Company or any of its Subsidiaries and which are necessary for the execution and
delivery by the Company of this Agreement or any documents to be executed and
delivered by the Company in connection herewith or the consummation of the
transactions consummated hereby are set forth in the Disclosure Schedule and
have been, or prior to the Closing Date will be, obtained and satisfied.
3.25 No Existing Discussions. As of the date hereof, the Company is not
engaged, directly or indirectly, in any discussions or negotiations with any
other party with respect to an Acquisition Proposal (as defined in Section
5.4(a)).
3.26 Fees and Costs in Connection with IPO. Investment banker or advisor
fees and costs incurred by the Company in connection with its recent proposed
initial public offering do not exceed $75,000.
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3.27 Disclosure. No representation or warranty of the Company in this
Agreement, any Exhibit attached hereto or the Disclosure Schedule contains or
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated herein or therein or necessary to make the statements
and facts contained herein or therein, in the light of the circumstances under
which they are made, not misleading; provided, however, that the representations
and warranties in this Section 3.27 shall not supersede or replace any specific
representations and warranties set forth in this Agreement, any Exhibit attached
hereto or the Disclosure Schedule.
ARTICLE IV
REPRESENTATIONS OF CMI
CMI represents and warrants to the Company as follows:
4.1 Organization and Authority. CMI and each of its Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their incorporation, and have all requisite power
and authority (corporate and other) to own their properties and to carry on
their business as now being conducted. CMI has full power to execute and deliver
this Agreement and the agreements contemplated herein, and to consummate the
transactions contemplated hereby and thereby. CMI and its Subsidiaries are duly
qualified to do business and in good standing in all jurisdictions in which
their ownership of property or the character of their business requires such
qualification and where failure to be so qualified could have a material adverse
effect. Certified copies of the Certificate of Incorporation and the Bylaws of
CMI, as amended to date, have been previously delivered to the Company, are
complete and correct, and no amendments have been made thereto or have been
authorized since the date thereof.
4.2 CMI Capital Structure. The authorized capital stock of CMI consists of
29,200,000 shares of common stock, $.10 par value. As of December 31, 1994, (i)
12,259,161 shares of CMI common stock were issued and outstanding, all of which
are duly authorized, validly issued, fully paid and nonassessable, (ii)
2,292,153 shares of CMI common stock were reserved for future issuance upon
conversion of outstanding convertible securities, and (iii) 2,604,333 shares of
CMI common stock were reserved for future issuance pursuant to CMI's stock
option plans, Employee Stock Purchase Plan, and Restricted Stock Plan. No
material change in the capitalization of CMI has occurred since December 31,
1994. All of the outstanding shares of capital stock of each of CMI's
Subsidiaries are duly authorized, validly issued, fully paid and nonassessable
and all such shares are owned by CMI or another Subsidiary of CMI free and clear
of all security interests, liens, claims, pledges, agreements, limitations on
CMI's voting rights, charges or other encumbrances of any nature. The shares of
CMI common stock issued pursuant to this Agreement or options assumed pursuant
to this Agreement will, when issued, be duly authorized, validly issued, fully
paid and nonassessable.
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4.3 SEC Filings; Financial Statements.
(a) CMI has filed and made available to the Company all forms, reports
and documents required to be filed by CMI with the SEC since June 30, 1993
(including its Form 10-Q filed for the quarter ending September 30, 1994)
other than registration statements on Form S-8 (collectively, the "CMI SEC
Reports"). The CMI SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Act
and the Exchange Act, as the case may be, and (ii) did not at the time they
were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated in such CMI SEC Reports or necessary in order to make the
statements in such CMI SEC Reports, in the light of the circumstances under
which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the CMI SEC Reports, complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q or the SEC) and fairly presented the consolidated
financial position of CMI and its Subsidiaries as at the respective dates
and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements
do not include notes, but do include all adjustments, which consist only of
normal recurring adjustments, necessary for fair presentation.
(c) Since September 30, 1994 there has not been any material adverse
change in the assets, liabilities, financial condition or results of
operations of CMI and its Subsidiaries, taken as a whole.
4.4 CMI's Authorization. Subject to the obtaining of the approval of CMI's
stockholders, the execution and delivery by CMI and Acquisition Corp. of this
Agreement, and the agreements provided for herein, and the consummation by CMI
and Acquisition Corp. of the transactions contemplated hereby and thereby, have
been duly authorized by all requisite corporate action. This Agreement has been
duly executed by CMI and Acquisition Corp. Subject to the obtaining of approval
of CMI's stockholders, this Agreement and all such other agreements and written
obligations entered into and undertaken in connection with the transactions
contemplated hereby constitute the valid and legally binding obligations of CMI
and Acquisition Corp., enforceable against them in accordance with their
respective terms. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by CMI and Acquisition
Corp. of the transactions contemplated hereby and thereby, do not and will not,
with or without the giving of notice of the passage of time or both, (a) violate
the provisions of any law, rule or regulation applicable to CMI (assuming
compliance with the requirements of the HSR Act); (b) violate the provisions of
the Certificates of Incorporation or Bylaws of CMI or Acquisition Corp.; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator; (d) conflict with or result in the breach or termination of any term
or provision of, or constitute a default under, or cause any acceleration under,
or cause the creation of any lien, charge or encumbrance upon the properties or
assets of CMI or of any of its Subsidiaries pursuant to, any indenture,
mortgage, deed of trust or other agreement or instrument to which CMI or any of
its Subsidiaries is a party or by which CMI or any of its Subsidiaries is or may
be bound.
4.5 Opinion of Financial Advisor. The financial advisor of CMI, Bear,
Stearns & Co. Inc., has delivered to CMI an opinion dated the date of this
Agreement to the effect that the Merger is fair from a financial point of view
to the stockholders of CMI.
4.6 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by CMI and Acquisition Corp. and which the failure to
obtain would have a material adverse effect on the business of CMI and which are
necessary for the execution and delivery by CMI and Acquisition Corp. of the
Agreement or any documents to be executed and delivered by CMI and Acquisition
Corp. in connection herewith or for the consummation of the transactions
contemplated by this Agreement have been, or will be prior to the Closing Date,
obtained and satisfied.
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4.7 Acquisition Corp. Acquisition Corp. has been formed by CMI for the
purpose of effecting the Merger and has no significant assets or liabilities.
The authorized capital stock of Acquisition Corp. consists of 1000 shares of
common stock, of which 100 shares are issued and outstanding. All of the issued
and outstanding common stock of Acquisition Corp. is owned by CMI and is validly
issued, fully paid and nonassessable.
4.8 Disclosure. No representation or warranty by CMI in this Agreement or
in any Exhibit hereto contains or will contain any untrue statement of a
material fact or omits or will omit any material fact required to be stated
herein or therein or necessary in order to make the statements and facts
contained herein or therein, in the light of the circumstances under which they
are made, not misleading; provided, however, that the representations and
warranties in this Section 4.8 shall not supersede or replace any specific
representations and warranties set forth in this Agreement or any Exhibit
attached hereto.
ARTICLE V
CERTAIN COVENANTS OF THE COMPANY
From and after the date hereof and until the Closing Date:
5.1 Conduct of Business and Certain Key Employees. The Company and its
Subsidiaries shall carry on their business diligently in the ordinary course and
substantially in the same manner as heretofore conducted. All of the property of
the Company and its Subsidiaries shall be used, operated, repaired and
maintained in a manner consistent with past practice. The Company will use its
best efforts to maintain the relationships of the Company and its Subsidiaries
with their employees, customers and suppliers and will use its best efforts to
enter into employment arrangements satisfactory to CMI with key employees
identified by CMI in writing prior to the Closing.
5.2 Absence of Material Changes. Without the prior written consent of CMI,
neither the Company nor any of its Subsidiaries shall:
(a) take any action to amend its charter documents or bylaws;
(b) issue any stock (except upon the exercise of outstanding options
or warrants to purchase common stock in exchange for full payment), bonds
or other corporate securities or grant any option or issue any warrant to
purchase or subscribe for any of such securities or issue any securities
convertible into such securities;
(c) incur any obligation or liability (absolute or contingent), except
current liabilities incurred and obligations under contracts entered into
in the ordinary course of business;
(d) declare or make any payment or distribution to its stockholders or
purchase or redeem any shares of its capital stock;
(e) mortgage, pledge, or subject to any lien, charge or any other
encumbrance any of their assets or properties, other than mechanic's liens
or liens arising by operation of law;
(f) sell, assign, or transfer any of their assets, except for
inventory sold in the ordinary course of business;
(g) cancel any debts or claims, except in the ordinary course of
business;
(h) merge or consolidate with or into any corporation or other entity;
(i) make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination,
revocation or cancellation of any such election or any consent or
compromise or settle any claim for past or present tax due; or
(j) enter into any lease, contract, agreement or understanding, other
than those entered into in the ordinary course of business calling for
payments by the Company and its Subsidiaries which in the
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aggregate do not exceed $25,000 for each such lease, contract, agreement or
understanding or extend for more than one year from the date hereof.
5.3 Reports, Taxes. The Company and its Subsidiaries will duly and timely
file all reports or returns required to be filed with federal, state, local and
foreign authorities and will promptly pay all federal, state, local and foreign
taxes, assessments and governmental charges levied or assessed upon them or any
of their properties (unless contesting such in good faith and adequate provision
has been made therefor).
5.4 Non-Solicitation.
(a) The Company shall not, directly or indirectly, through any
officer, director, employee, representative or agent, (i) solicit,
initiate, or encourage any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, or sale of
shares of capital stock, other than the transactions contemplated by this
Agreement (any of the foregoing inquiries or proposals being referred to in
this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations
or discussions concerning, or provide any non-public information to any
person or entity relating to, any Acquisition Proposal, or (iii) agree to,
approve or recommend any Acquisition Proposal, provided, however, that
nothing contained in this Agreement shall prevent the Company or its Board
of Directors from furnishing nonpublic information to, or entering into
discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide written Acquisition Proposal by such person or
entity or recommending an unsolicited bona fide written Acquisition
Proposal to the stockholders of the Company, if the Board of Directors of
the Company believes in good faith (after consultation with its financial
advisor) that such Acquisition Proposal would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial
point of view than the transaction contemplated by this Agreement (any such
more favorable Acquisition Proposal being referred to in this Agreement as
a "Superior Proposal") and the Board of Directors of the Company determines
in good faith after consultation with outside legal counsel that such
action is necessary for the Company to comply with its fiduciary duties to
stockholders under applicable law.
(b) The Company shall notify CMI immediately (and no later than 24
hours) after receipt by the Company (or its advisors), of any Acquisition
Proposal or any request for nonpublic information in connection with an
Acquisition Proposal or for access to the properties, books or records of
the Company by any person or entity that informs the Company that it is
considering making an Acquisition Proposal. Such notice to CMI shall be
made orally and in writing and shall indicate in reasonable detail the
identity of the offeror and the terms and conditions of such proposal,
inquiry or contact.
(c) If this Agreement is terminated by the Company or the Company
fails to consummate the transactions contemplated hereby by reason of
receipt of an Acquisition Proposal, and in accordance with Section 5.4 and
Section 10.3 hereof the company will have such termination right, the
Company shall pay to CMI upon demand (by wire transfer of immediately
available federal funds to an account designated by CMI for such purpose)
the amount of documented out-of-pocket expenses incurred by CMI in
connection with the transactions contemplated hereby (including, without
limitation, fees and expenses of legal counsel, lenders, investment bankers
and accountants), whether incurred before or after the date of this
Agreement, plus an amount equal to three percent (3%) of the total
consideration payable to the Company and/or its stockholders under the
Superior Proposal.
5.5 Option Plans. The Company agrees to take all action necessary under
the Nonemployee Option Plan and the Employee Option Plan to assure that all
options outstanding under such Plans can be assumed by CMI pursuant to the
provisions of Section 2.5 hereof. The Company also agrees not to take any action
that would result in acceleration of vesting of any option outstanding under
either of such Plans.
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ARTICLE VI
ADDITIONAL COVENANTS
6.1 Proxy Statement/Prospectus/Registration Statement.
(a) As promptly as practical after the execution of this Agreement,
CMI and the Company shall prepare the Proxy Statement and CMI shall prepare
and file with the SEC an S-4 Registration Statement in which the Proxy
Statement will be included as a prospectus. CMI and the Company shall use
all reasonable efforts to cause the S-4 Registration Statement to become
effective as soon after such filing as practical. The Proxy Statement shall
include the recommendations of the Boards of Directors of CMI and the
Company in favor of this Agreement and the Merger; provided that the Board
of Directors of the Company may withdraw such recommendation if such Board
of Directors believes in good faith that a Superior Proposal has been made
and shall have determined in good faith, after consultation with its
outside legal counsel, that the withdrawal of such recommendation is
necessary for such Board of Directors to comply with its fiduciary duties
under applicable law.
(b) The information supplied by CMI and the Company for inclusion in
the S-4 Registration Statement shall not at the time the S-4 Registration
Statement is declared effective by the SEC contain any untrue statement of
a material fact or omit to state any material fact required to be stated in
the S-4 Registration Statement or necessary in order to make the statements
in the S-4 Registration Statement, in the light of the circumstances under
which they were made, not misleading.
6.2 Access to Information. Upon reasonable notice, CMI and the Company
shall each afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all information concerning its business,
properties and personnel as may reasonably be requested. Unless otherwise
required by law, the parties will hold any such information which is nonpublic
in confidence. No information or knowledge obtained in any investigation
pursuant to this Section 6.2 shall affect or be deemed to modify any
representation or warranty construed in this Agreement or the conditions to the
obligations of the parties to consummate the Merger.
6.3 Stockholders Meetings. CMI and the Company each shall call a meeting
of its respective stockholders to be held as promptly as practicable for the
purpose of voting upon this Agreement. Subject to Section 5.4(a) hereof and
satisfaction of the other conditions contained in this Agreement, CMI and the
Company will, through their respective Boards of Directors, recommend to their
respective stockholders approval of this Agreement and the Merger and will
coordinate and cooperate with respect to the timing of such meetings and shall
use their best efforts to hold such meetings on the same day and as soon as
practicable after the date hereof. Each party shall use all reasonable efforts
to solicit from stockholders of such party proxies in favor of such matters.
6.4 Legal Conditions to Merger. Each of CMI and the Company shall take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other governmental
entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed in connection with the Merger.
6.5 Public Disclosure. CMI and the Company shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law.
6.6 Tax-Free Organization. CMI and the Company shall each use its best
efforts to cause the Merger to be treated as a reorganization within the meaning
of Section 368(a) of the Code.
6.7 Pooling Accounting. CMI and the Company shall each use its best
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. The Company shall use its best efforts
to cause its Affiliates not to take any action that would adversely affect the
ability of CMI to
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account for the business combination to be effected by the Merger as a pooling
of interests and to cause its Affiliates to sign and deliver to CMI a customary
"pooling letter" in form and substance agreed upon by CMI and the Company.
6.8 Affiliate Agreements. The Company will promptly provide CMI with a
list of those persons who are in its reasonable judgment, Affiliates of the
Company, within the meaning of Rule 145 promulgated under the 1933 Act ("Rule
145"). The Company shall use its best efforts to deliver or cause to be
delivered to CMI prior to the Effective Time from each of the Affiliates of the
Company, an executed Affiliate Agreement, in form and substance satisfactory to
CMI, by which each Affiliate of the Company agrees to comply with the applicable
requirements of Rule 145 ("Affiliate Agreement"). CMI shall be entitled to place
appropriate legends on the certificates evidencing any CMI common stock to be
received by such Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the CMI
common stock, consistent with the terms of the Affiliate Agreements.
6.9 Nasdaq Quotation. CMI shall use its best efforts to cause the shares
of CMI common stock to be issued in the Merger to be approved for quotation on
the Nasdaq National Market, subject to official notice of issuance, prior to the
Effective Time.
6.10 Consents. Each of CMI and the Company shall use reasonable efforts to
obtain all necessary consents, waivers and approvals under any of their material
agreements, contracts, licenses or leases in connection with the Merger.
6.11 Brokers or Finders. Each of CMI and the Company represents that no
agent, broker, investment banker, financial advisor or other firm or person is
or will be entitled to any broker's or finder's fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement, except Bear, Stearns & Co. Inc., whose fees and expenses will be paid
by CMI in accordance with CMI's agreement with such firm, Hambrecht & Quist
Incorporated, whose fees and expenses will be paid by the Company in accordance
with the Company's agreement with such firm (copies of which have been delivered
to CMI prior to the date of this Agreement), and the fees and costs referred to
in Section 3.26 hereof, and each of CMI and the Company agrees to indemnify and
hold the other harmless from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such party or its Affiliate. CMI acknowledges that the fees and expenses of
Hambrecht & Quist will not be included in the calculation of management bonuses
for management of the Company under the existing management bonus plan of the
Company.
6.12 Registration of Shares of CMI. CMI agrees that:
(a) If at any time CMI files a registration statement under the
Securities Act on a Form S-1, Form S-2 or Form S-3 Registration Statement
in respect of a proposed distribution by CMI of CMI common stock, it shall
give not less than 15 days prior written notice of each such filing to each
of the stockholders of the Company who execute an Affiliate Agreement (at
the last address of record for such stockholder) and who then owns shares
of CMI common stock acquired pursuant to this Agreement. If within 10 days
of the date on which CMI's notice is postmarked, any such stockholder
requests the inclusion in such registration statement of any shares of CMI
common stock acquired by such stockholder hereunder, which such stockholder
then proposes to sell or distribute publicly, CMI will so include such
shares subject to the other terms and conditions of this Section; provided,
however that such shares will not be so included if the investment banking
firm primarily responsible for managing the offer and sale under such
registration statement is of the opinion that an immediate sale of such
shares under the registration statement would adversely impact the
marketability of the offering and provided further that such investment
banking firm may, as a condition to the registration of the shares, require
their sale to or through the underwriters. The rights provided for in this
Section 6.12(a) shall apply only to the first two of such registration
statements filed by CMI after the date on which CMI first publicly
announces the combined results of operations of CMI and the Company
covering a period of at least 30 days subsequent to the Merger, excluding
for this purpose any registration statement not available to such
stockholders by reason of the proviso in the preceding sentence.
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(b) The shares of CMI common stock received by any stockholder
pursuant to this Agreement need not be registered under the terms of
Section 6.12(a) if in the opinion of counsel for CMI registration under the
Securities Act of such shares is not necessary under the circumstances of
the proposed transfer; if counsel for CMI is of such opinion, a copy of the
opinion shall be supplied to the stockholder.
(c) In connection with any registration under the Securities Act
pursuant hereto, CMI shall promptly furnish each person whose shares are so
registered three (3) copies of the registration statement and all
amendments thereto, will keep the prospectus current for a period of three
months from the effective date of the registration statement, and will
supply each person with copies of any prospectus included therein (provided
that no such prospectus need be supplied more than three months after the
effective date of such registration statement) in such quantities as may be
necessary for the purpose of such proposed sale or distribution.
(d) Each stockholder shall pay any sales commissions or underwriting
fees incurred on the sale of such stockholder's stock. All other expenses,
disbursements and fees incurred in connection with any registration
provided for above, including without limitation, registration fees,
printing costs, legal fees (but not including any legal fees of such
stockholder), and audit expenses, shall be borne by CMI.
(e) In connection with any of the above registrations, the
stockholders whose shares are being registered shall furnish CMI with such
information concerning such persons and the proposed sale or distribution
as shall, in the opinion of counsel for CMI, be required for use by CMI in
the preparation of a registration statement. CMI shall indemnify the holder
of any securities being registered in accordance with the provisions hereof
against all claims, losses, damages and liabilities, and reasonable counsel
fees incurred in connection therewith, caused by any untrue statement of
any material fact contained in any such registration statement or
prospectus or by any omission to state therein a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, except insofar as the same may have been caused by an untrue
statement or omission based upon information furnished to CMI in writing by
such holder expressly for use therein, in which case such holder shall
indemnify CMI to the same extent as such stockholder is indemnified in
accordance herewith for statements or omissions made by CMI.
6.13 Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties agrees to use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement. In case at any time after the Effective Time any further action
is reasonably necessary or desirable to carry out the purposes of this Agreement
each party to this Agreement shall take all such necessary action.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF CMI AND ACQUISITION CORP.
The obligations of CMI and Acquisition Corp. to consummate the Merger are
subject to the fulfillment, at or before the Closing of all the following
conditions, any one or more of which may be waived by CMI.
7.1 Representations and Warranties True at Closing. The representations
and warranties of the Company contained in this Agreement shall be true in all
material respects as of the Closing, subject to changes in the Disclosure
Schedule that have been approved in writing by CMI.
7.2 Covenants Performed. All of the obligations of the Company to be
performed at or before the Closing pursuant to the terms of this Agreement shall
have been duly performed, including without limitation those set forth in 5.5
hereof.
7.3 Certificate. At the Closing, CMI shall have received a certificate
signed by the Chief Executive Officer of the Company to the effect that the
conditions set forth in Sections 7.1 and 7.2 have been satisfied.
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7.4 Stockholder Approval. This Agreement and the Merger Agreement shall
have been duly approved by the stockholders of the Company, Acquisition Corp.
and CMI.
7.5 Pooling Letter from CMI's Accountants. The Board of Directors of CMI
shall have received a pooling letter from Ernst & Young, L.L.P. as of the date
of Closing stating that the Merger qualifies as a "pooling of interests" for
accounting purposes.
7.6 Dissenting Company Shares. The aggregate number of Dissenting Company
Shares shall not exceed 5 percent of the aggregate of the outstanding shares of
capital stock of the Company.
7.7 Opinion of Counsel to the Company. Andrews & Kurth, L.L.P., counsel to
the Company, shall have issued an opinion in favor of CMI in the form of Exhibit
D hereto.
7.8 Affiliates Agreements. The Company shall have delivered to CMI the
letter required by Section 6.8 naming all persons who are considered to be
"Affiliates" of the Company, and each such Affiliate shall have executed and
delivered to CMI an Affiliates Agreement.
7.9 Fairness Opinion. CMI shall have received an opinion, dated as of the
date of the Agreement and confirmed as of the dates of (a) mailing of the Proxy
Statement to the CMI stockholders and (b) the CMI Stockholders Meeting that the
terms of the Merger are fair to the stockholders of CMI, which opinion shall be
in form and substance satisfactory to CMI.
7.10 S-4 Registration Statement. The S-4 Registration Statement shall have
become effective under the 1933 Act and shall not be the subject of any stop
order or proceedings seeking a stop order and the Proxy Statement shall on the
Closing Date not be subject to any proceeding commenced or threatened by the
SEC.
7.11 Employment Agreements and Covenants Not to Compete. CMI shall have
received employment agreements executed by Arthur W. Epley, III, Charles W.
Bentley, W. F. Montgomery and Carl B. Frampton in substantially the form of
Exhibit E hereto, and covenants not to compete executed by Arthur W. Epley III,
Charles W. Bentley and W. F. Montgomery in substantially the form of Exhibit F
hereto.
7.12 Merger Agreement. The Merger Agreement shall have been filed with the
Secretary of State of the State of Texas.
7.13 Material Changes in the Business of the Company Between the Date of
this Agreement and the Closing. There shall have been no material adverse
change in the financial position, results of operations, assets, liabilities or
business of the Company and its Subsidiaries, taken as a whole, between the date
of this Agreement and the Closing.
7.14 Litigation. No action or proceeding before a court or any other
governmental agency or body shall have been instituted and be pending or
threatened to restrain or prohibit any of the transactions contemplated hereby.
7.15 Consents. Each of CMI and the Company shall have received in writing
all consents, approvals, and waivers required in connection with the Merger.
7.16 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by CMI to be executed and
delivered to CMI in order to carry out this Agreement and to consummate the
Merger, and all of the relevant legal matters, shall be reasonably satisfactory
to CMI and its counsel.
7.17 CMI Due Diligence. There shall have been satisfactory completion by
CMI of its due diligence, provided that the condition contained in this Section
7.17 shall not be available after March 3, 1995 as a basis for not closing the
transactions contemplated hereby; the proviso contained herein shall not limit
in any way CMI's right not to close the transactions provided for herein if any
of the other conditions contained in this Article VII is not satisfied.
7.18 HSR Act Compliance. All waiting, review and investigation periods
(and any extensions thereof) applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
7.19 Escrow Agreement. The Escrow Agreement shall have been executed by
the Stockholder Representatives and the Escrow Holder.
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ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the Merger are subject to the
fulfillment, at or before the Closing, of all of the following conditions, any
one or more of which may be waived by the Company:
8.1 Representations and Warranties True at Closing. The representations
and warranties of CMI and Acquisition Corp. contained in this Agreement shall be
true in all material respects as of the Closing.
8.2 Covenants Performed. All of the obligations of CMI and Acquisition
Corp. to be performed at or before the Closing pursuant to the terms of this
Agreement shall have been duly performed.
8.3 Certificate. At the Closing, the Company shall have received a
certificate signed by the Chief Executive Officer of each of CMI and Acquisition
Corp. to the effect that the conditions set forth in Sections 8.1 and 8.2 have
been satisfied.
8.4 Stockholder Approval. This Agreement and the Merger Agreement shall
have been duly approved by the stockholders of the Company, Acquisition Corp.
and CMI.
8.5 Tax-Free Reorganization. The Company shall have received the opinion
of its counsel to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
8.6 Opinion of Counsel to CMI. Howard, Rice, Nemerovski, Canady,
Robertson, Falk & Rabkin, counsel to CMI, shall have issued an opinion in favor
of the Company in the form of Exhibit G.
8.7 Nasdaq Notification. CMI shall have notified the Nasdaq National
Market of the proposed issuance of CMI common stock pursuant to the Merger and
upon exercise of the stock options of the Company assumed by CMI pursuant to the
Merger and such stock shall have been approved for quotation on the Nasdaq
National Market.
8.8 S-4 Registration Statement. The S-4 Registration Statement shall have
become effective under the 1933 Act and shall not be the subject of any stop
order or proceedings seeking a stop order and the Proxy Statement shall on the
Closing Date not be subject to any proceeding commenced or threatened by the
SEC.
8.9 Merger Agreement. The Merger Agreement shall have been filed with the
Secretary of State of the State of Texas.
8.10 Pooling Letter from CMI's Accountants. The Board of Directors of CMI
shall have received a pooling letter from Ernst & Young, L.L.P. dated as of the
date of the Closing that the Merger qualifies as a "pooling of interest" for
accounting purposes.
8.11 Material Changes in the Business of CMI Between the Date of this
Agreement and the Closing. There shall have been no material adverse change in
the financial position, results of operations, assets, liabilities or business
of CMI and its Subsidiaries, taken as a whole, between the date of this
Agreement and the Closing.
8.12 Litigation. No action or proceeding before a court or any other
governmental agency or body shall have been instituted and be pending or
threatened to restrain or prohibit any of the transactions contemplated hereby.
8.13 Consents. Each of CMI and the Company shall have received in writing
all consents, approvals, and waivers required in connection with the Merger.
8.14 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by the Company to be executed
and delivered to the Company in order to carry out this Agreement and to
consummate the Merger, and all of the relevant legal matters, shall be
reasonably satisfactory to the Company and its counsel.
8.15 Company Due Diligence. There shall have been satisfactory completion
by the Company of its due diligence, provided that the condition contained in
this Section 8.15 shall not be available after March 3, 1995
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as a basis for not closing the transactions contemplated hereby; the proviso
contained herein shall not limit in any way the Company's right not to close the
transactions provided for herein if any of the other conditions contained in
this Article VIII is not satisfied.
8.16 HSR Act Compliance. All waiting, review and investigation periods
(and any extensions thereof) applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION
9.1 Survival of Representations and Warranties. All statements contained
in any exhibit, certificate, schedule or other instrument delivered or to be
delivered by or on behalf of the parties hereto, or in connection with the
transactions contemplated hereby, shall be deemed representations and warranties
hereunder. All such representations, warranties, and indemnification rights
contained herein shall survive the Closing and any audit or investigation made
by or on behalf of the parties, but shall expire on the earlier of (a) the date
on which financial results containing 30 days of combined operations of CMI and
the Company after the Merger are publicly announced or (b) September 30, 1995,
and no claims for indemnification hereunder may be made after such date.
9.2 Indemnification by the Company and Holders.
(a) The Company agrees (and the Holders by their approval of this
Agreement and the Merger shall be deemed to have agreed jointly) to
indemnify and hold CMI and its directors, officers, employees, fiduciaries,
agents and Affiliates, and each other person, if any, who controls such
persons harmless against any claims, actions, suits, proceedings,
investigations, losses, expenses, damages, obligations, liabilities,
judgments, fines, fees, costs and expenses (including costs and reasonable
attorneys' fees) and amounts paid in settlement of any pending, threatened
or completed claim, action, suit, proceeding or investigation (collectively
"Loss" or "Losses") which arise out of or result from or are related to (i)
any breach by or failure of the Company to perform any of its covenants or
agreements set forth herein, or (ii) the inaccuracy of any representation
or warranty made by the Company herein.
(b) If CMI is entitled to indemnification under this Agreement, it
shall be entitled to recover shares of CMI common stock pursuant to the
Escrow Agreement having an aggregate value, calculated on the basis of the
closing price of CMI common stock on the Nasdaq National Market (as
reported by Nasdaq) on the Closing Date, equal to the amount of its Loss or
Losses.
9.3 Indemnification by CMI. CMI agrees to indemnify and hold the Company,
the Holders and the Company's directors, officers, employees, fiduciaries,
agents and Affiliates and each other person, if any, who controls such persons
harmless against any Loss or Losses which arise out of or result from or are
related to (a) any breach by or failure of CMI to perform any of its covenants
or agreements set forth herein, or (b) the inaccuracy of any representation or
warranty made by CMI herein.
9.4 Limitation. Notwithstanding the foregoing, the Holders shall be liable
for Losses incurred as a result of any breach, failure or inaccuracy of any
representation, warranty, covenant or agreement made by the Company herein only
if the aggregate of such Losses exceeds $85,000, and CMI shall be liable for
Losses incurred as a result of any breach, failure or inaccuracy of any
representation, warranty, covenant or agreement made by it herein only if the
aggregate of such Losses exceeds $85,000; provided, however, that in each case
full indemnification shall be required, and the $85,000 limitation shall not
apply, if such $85,000 threshold is exceeded and provided further that the
$85,000 limitation shall not apply with respect to any breach, failure or
inaccuracy of any representation and warranty contained in Section 3.2 hereof or
the covenant contained in Section 5.5 hereof. The aggregate liability of the
Holders for Losses incurred as a result of any breach, failure or inaccuracy of
any representation, warranty, covenant or agreement made by the Company herein
shall not exceed the Escrow Fund and the aggregate liability of CMI for Losses
incurred as a result of any breach, failure or inaccuracy of any representation,
warranty, covenant or agreement made by it herein shall not
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exceed $10,050,000. The liability of the Holders for Losses incurred as a result
of any breach, failure or inaccuracy of any representation, warranty, covenant
or agreement of the Company shall be limited to the return of the CMI Common
Stock in the Escrow Fund.
9.5 Claims for Indemnification. Whenever any claim shall arise for
indemnification hereunder, the Indemnified Party shall notify in writing within
30 days (or such earlier time as might be required to avoid prejudicing the
Indemnifying Party's position) of receiving notice of or obtaining actual
knowledge of facts constituting the basis of such claim (whichever occurs
first), the Indemnifying Party of the claim and, when known, the facts
constituting the basis for such claim. The failure to notify the Indemnifying
Party will not vitiate the right of the Indemnified Party to indemnity to the
extent the Indemnifying Party is not prejudiced as a result of such failure. In
the event of any claim for indemnification, the Indemnified Party shall be
entitled to full indemnification in the amount claimed unless, within 30 days
after receipt of written notice of a claim for indemnification, the Indemnifying
Party delivers a written notice to the Indemnified Party objecting to the claim
for indemnification, which notice specifies in reasonable detail the basis for
the objection. If the parties are unable to resolve the dispute within 30 days,
the claim for indemnification shall be submitted to arbitration in the manner
specified in Section 9.7 hereof. In the event of any such claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, the notice to the Indemnifying Party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom. The Indemnified Party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, unless suit shall
have been instituted against the Indemnified Party and the Indemnifying Party
shall not have taken control of such suit after notification thereof as provided
in Section 9.6 below.
9.6 Defense by Indemnifying Party. In connection with any claims giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party at its sole cost and expense may, upon written notice to the Indemnified
Party, assume, the defense of any such claim or legal proceedings; provided
that, if by reason of the claim of such third party a lien, attachment,
garnishment or execution has been placed on any material portion of the property
or assets of the Indemnified Party at the time of such election, the
Indemnifying Party, if it desires to exercise the right to assume the defense,
shall furnish a satisfactory indemnity bond to obtain the release of such lien,
attachment, garnishment or execution. The Indemnified Party shall be entitled to
participate in (but not control) the defense of any such action, with its
counsel and at its own expense. If the Indemnifying Party assumes the defense,
it shall take all actions and steps reasonably necessary to defend or settle any
claim against the Indemnified Party. The Indemnified Party shall reasonably
cooperate with the Indemnifying Party in such defense. In the event that the
Indemnifying Party proposes a settlement to any such claim or legal proceeding,
which settlement is satisfactory to the party instituting such claim or legal
proceeding and includes (i) an unconditional release of the Indemnified Party,
from all liability with respect to such claim or litigation or the dismissal of
such claim or litigation against the Indemnified Party with prejudice and (ii)
provision that all damages and settlement payments are to be made by the
Indemnifying Party, and the Indemnified Party withholds its consent to such
settlement, then in any such case the Indemnifying Party shall have no
obligation to indemnify the Indemnified Party under this Agreement against and
in respect of the amount by which the damages resulting from a final judgment
relating to such claim or legal proceeding exceeds the amount of the proposed
settlement. In the event that the Indemnifying Party shall assume the defense of
any such claim or legal proceeding and it is later determined that such claim
was not a claim for which the Indemnifying Party is required to indemnify the
Indemnified Party under this Article IX, the Indemnified Party shall reimburse
the Indemnifying Party for all its reasonable costs and expenses with respect to
such defense, including reasonable attorneys' fees and disbursements. If the
Indemnifying Party does not assume the defense of any such claim or legal
proceeding resulting therefrom within 30 days after the date of receipt of the
notice referred to in Section 9.5 above (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim), (a)
the Indemnified Party may defend against such claim or legal proceeding, in such
manner as it may deem appropriate, including, but not limited to, settling such
claim or legal proceeding on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to participate in
(but not control) the defense of such action, with its counsel and at its own
expense.
24
<PAGE> 30
9.7 Arbitration.
(a) Either CMI or the Stockholders' Representatives may submit a
dispute that has not been resolved pursuant to the provisions of Section
9.5 above to arbitration by notifying the other party hereto in writing.
Within 10 days after receipt of such notice, CMI and the Stockholders'
Representatives shall designate in writing one arbitrator to resolve the
dispute; provided, that if CMI and the Stockholders' Representatives cannot
agree on an arbitrator within such 10-day period, the arbitrator shall be
selected by the American Arbitration Association. The arbitrator so
designated shall not be a current or former employee, consultant, officer,
director or stockholder of any party hereto or any Affiliate of any party
to this Agreement.
(b) Within 15 days after the designation of the arbitrator, the
arbitrator, CMI and the Stockholders' Representatives shall meet, at which
time CMI and the Stockholders' Representatives shall be required to set
forth in writing all disputed issues and a proposed ruling on each such
issue.
(c) The arbitrator shall set a date for a hearing, which shall be no
later than 30 days after the submission of written proposals pursuant to
paragraph (b) above, to discuss each of the issues identified by CMI and
the Stockholders' Representatives. Each such party shall have the right to
be represented by counsel. The arbitration shall be governed by the rules
of the American Arbitration Association.
(d) The determination of the arbitrator as to the resolution of any
dispute shall be binding and conclusive upon all parties hereto. All
rulings of the arbitrator shall be in writing and shall be delivered to the
parties hereto. The arbitrator shall have full discretion to award to
either party or allocate between them the costs of the arbitration
proceedings, including reasonable attorneys fees.
(e) Any arbitration pursuant to this Section 9.9 shall be conducted in
San Francisco, California. Any arbitration award may be entered in and
enforced by any court having jurisdiction thereover and the parties hereby
consent and commit themselves to the jurisdiction of the courts of the
State of California and the United States District Court for the Northern
District of California for purposes of the enforcement of any arbitration
award.
25
<PAGE> 31
ARTICLE X
TERMINATION
10.1 Mutual Agreement. This Agreement may be terminated at any time prior
to the Effective Time by approval by CMI and the Company, even if and after the
stockholders of CMI and the Company have approved this Agreement and the Merger.
10.2 Termination by CMI. This Agreement may be terminated by CMI alone, by
means of written notice to the Company if (a) the Company breaches any of the
representations or warranties or fails to perform any material covenant of the
Company contained in this Agreement, or (b) on May 31, 1995, any of the
conditions set forth in Article VII of this Agreement shall not have been
satisfied by the Company or waived by CMI.
10.3 Termination by the Company. This Agreement may be terminated by the
Company alone, by means of written notice to CMI if (a) CMI breaches any of the
representations or warranties or fails to perform any material covenant of CMI
contained in this Agreement or (b) on May 31, 1995, any of the conditions set
forth in Article VIII of this Agreement shall not have been satisfied by CMI or
waived by the Company, or (c) pursuant to the provisions of Section 5.4 hereof,
subject to the Company's meeting its obligations to CMI under that Section.
ARTICLE XI
MISCELLANEOUS
11.1 Expenses. Except as otherwise provided herein, each of CMI and the
Company shall pay its own costs and expenses, including legal, accounting and
investment banking fees and expenses, relating to this Agreement, the
negotiations leading up to this Agreement and the transactions contemplated by
this Agreement.
11.2 Amendment. This Agreement shall not be amended except by a writing
duly executed by both parties and shall not be amended after it has been
approved by the stockholders of CMI or MNI, without further stockholder
approval, if the amendment would alter or change the Exchange Ratio or have a
material adverse effect on the stockholders of CMI or MNI.
11.3 Entire Agreement. This Agreement, including the Exhibits, Schedules,
and other documents delivered pursuant to this Agreement, contains all the terms
and conditions agreed upon by the parties relating to the subject matter of this
Agreement and supersedes all prior agreements, negotiations, correspondence,
undertakings, and communications of the parties, whether oral or written,
respecting that subject matter.
11.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
entered into by California residents and entirely to be performed within
California without regard to principles of conflicts of law.
11.5 Headings. The headings contained in this Agreement are intended for
convenience and shall not be used to determine the rights of the parties.
11.6 Notices. All notices, requests, demands, and other communications
made in connection with this Agreement shall be in writing and shall be deemed
to have been duly given on the date of delivery if delivered by hand delivery or
by facsimile to the persons identified below or two days after mailing by air
courier addressed as follows:
If to CMI or Acquisition Corp.:
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, California 94086
Attention: Philip F. Otto, Chief Executive Officer
26
<PAGE> 32
With a copy to:
Howard, Rice, Nemerovski, Canady,
Robertson, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, Seventh Floor
San Francisco, California 94111
Attention: Richard W. Canady
If to the Company:
Microwave Networks Incorporated
10795 Rockley Road
Houston, Texas 77099-3751
Attention: Arthur W. Epley, President and Chief Executive Officer
With a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
600 Travis Street
Houston, Texas 77002
Attention: P. Dexter Peacock
Such addresses may be changed, from time to time by means of a notice given
in the manner provided in this section.
11.7 Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent possible.
In any event, all other provisions of this Agreement shall be deemed valid and
enforceable to the full extent.
11.8 Waiver. Waiver of any term or condition of this Agreement by any
party shall not be construed as a waiver of a subsequent breach or failure of
the same term or condition, or a waiver of any other term or condition in this
Agreement.
11.9 Assignment. Neither party may assign, by operation of law or
otherwise, all or any portion of its rights or duties under this Agreement
without the prior written consent of the other party, which consent may be
withheld in the absolute discretion of the party asked to give consent.
11.10 Counterparts. This Agreement may be signed in counterparts with the
same effect as if the signatures to each party were upon a single instrument.
All counterparts shall be deemed an original of this Agreement.
11.11 Attorneys Fees. The prevailing party shall be entitled to the
recovery of reasonable attorneys fees in the event any action is brought
relating to this Agreement or the Merger.
27
<PAGE> 33
IN WITNESS WHEREOF, CMI, Acquisition Corp. and the Company have executed
this Agreement as of the date first above written.
CALIFORNIA MICROWAVE, INC.
By: /s/ DOUGLAS MORAIS
--------------------------------------
Title: President -- Wireless Products
Group
MICROWAVE NETWORKS INCORPORATED
By: /s/ ARTHUR W. EPLEY, III
--------------------------------------
Title: President
CMI ACQUISITION CORPORATION
By: /s/ DOUGLAS MORAIS
--------------------------------------
Title: President
28
<PAGE> 34
EXHIBIT A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is made as of ,
1995 among California Microwave, Inc., a Delaware corporation ("CMI");
, (the "Stockholder Representatives"); and First
National Bank of Boston ("Escrow Holder").
RECITALS
1. Pursuant to an Agreement and Plan of Reorganization and Merger (the
"Agreement"), dated as of January 31, 1995, among CMI, CMI Acquisition Corp., a
wholly-owned subsidiary of CMI ("Acquisition Corp."), and Microwave Networks
Incorporated, a Texas corporation (the "Company"), Acquisition Corp. will be
merged with and into the Company and the Company will be the surviving
corporation and become a wholly-owned subsidiary of CMI (the "Merger").
2. This Escrow Agreement is being entered into pursuant to Section 2.4 and
Article IX of the Agreement. Execution and delivery of this Escrow Agreement is
a condition to the obligation of CMI to consummate the Merger.
3. As set forth in Section 2.4 of the Agreement, by their approval of the
Agreement and the Merger, those persons who immediately prior to the effective
time of the Merger (the "Effective Time") were the holders of shares of capital
stock of the Company (the "Holders") have authorized the Stockholder
Representatives to act as their representatives under this Escrow Agreement with
the powers and authority provided herein.
4. Pursuant to the Agreement, the shares of the capital stock of the
Company that are outstanding immediately prior to the Effective Time, other than
dissenting shares, will be converted into shares of the common stock of CMI.
5. Section 2.4 of the Agreement provides that at the Effective Time,
certain of the shares of the common stock of CMI issued in the Merger shall be
delivered on behalf of the Holders to the Escrow Holder in order to secure the
indemnification obligations of the Company and the Holders set forth in Article
IX of the Agreement.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
Unless otherwise defined herein, capitalized terms used herein shall have
the meanings set forth in the Agreement. In addition, for the purposes of this
Escrow Agreement, the following terms shall have the following meanings:
1.1 Claim Certificate. "Claim Certificate" shall mean a certificate signed
by an officer of CMI stating (i) that CMI has incurred or reasonably believes it
may in the future incur the amount of Losses specified in such Claim
Certificate, (ii) in reasonable detail, the facts alleged as the basis for such
claim and the section or sections of the Agreement alleged to have been
violated, and (iii) the number of Escrowed Shares to which CMI believes it is
entitled with respect to such Losses.
1.2 Escrow Fund. "Escrow Fund" shall mean the Escrowed Shares then held by
the Escrow Holder.
1.3 Escrowed Share. An "Escrowed Share" shall mean a share of CMI common
stock delivered to the Escrow Holder by the Exchange Agent on behalf of the
Holders in accordance with Section 2.4 and Section 2.6 of the Agreement,
together with any and all other shares of CMI common stock, other securities of
CMI or any other issuer, other property or cash received or receivable in
respect of such escrowed share of CMI common stock, including, without
limitation, any and all securities, property or cash to be issued or
1
<PAGE> 35
distributed in connection with any recapitalization, reclassification, split-up,
merger, consolidation, exchange, stock dividend, stock split or similar event
declared or effected with respect to shares of CMI common stock.
1.4 Value. "Value," when used with respect to an Escrowed Share, shall
have the meaning set forth in Section 9.2(b) of the Agreement.
ARTICLE II
CREATION OF ESCROW
2.1 Purpose. This Escrow Agreement is being executed and delivered, and
the deposit of the Escrow Fund hereunder is being made in accordance with
Section 2.4 of the Agreement, for the purpose of securing the indemnification
obligations of the Company and the Holders set forth in Article IX of the
Agreement.
2.2 Creation of Escrow Fund. At or promptly after the Effective Time, the
Stockholder Representatives shall instruct the Exchange Agent to deposit with
the Escrow Holder certificates representing those shares of CMI common stock
required to be so deposited under Section 2.4 of the Agreement. CMI and the
Holders agree that any other securities, property or cash which thereafter are
to become part of the Escrow Fund as provided in Section 1.4 of this Escrow
Agreement, shall be promptly deposited with the Escrow Holder upon receipt by or
on behalf of the Holders, and receipt by the Escrow Holder on behalf of the
Holders shall be deemed receipt by the Holders. Certificates representing
securities deposited in the Escrow Fund shall be accompanied by separate stock
powers endorsed in blank by the Stockholder Representatives on behalf of the
Holders.
ARTICLE III
CLAIMS
3.1 Payment After Delivery of Claim Certificate. If CMI gives the Escrow
Holder and the Stockholder Representatives a Claim Certificate, then, as soon as
practicable but not earlier than 30 days after the giving of such Claim
Certificate, the Escrow Holder, subject to the requirements of Section 3.2
hereof, shall deliver to CMI, from the Escrow Fund, on behalf of CMI or other
parties indemnified under the provisions of Section 9.2(a) of the Agreement that
number of Escrowed Shares having a Value (to the extent the Escrow Fund is
sufficient for such purpose) equal to the Losses specified in such Claim
Certificate.
3.2 Disputes Respecting Claims. Unless, within 30 days after the giving of
any Claim Certificate by CMI, CMI and the Escrow Holder receive a written notice
from the Stockholder Representatives stating that the Stockholder
Representatives question the accuracy of a matter asserted in such Claim
Certificate, such Claim Certificate shall constitute full authority to the
Escrow Holder to take the action provided for in Section 3.1 and shall be
conclusive and binding on all parties hereto and on the Holders. If, however,
the Stockholder Representatives timely give such a notice, the Escrow Holder
shall not make any distribution to CMI of that portion of the Escrow Fund which
the Stockholder Representatives assert in their notice should not be so
distributed until the Escrow Holder receives (i) the written instructions of the
Stockholder Representatives and CMI or (ii) a final decision of a court of
competent jurisdiction in the case of third party claims or of an arbitrator in
the case of a dispute between CMI and the Stockholder Representatives with
respect to the Claim Certificate; in each case specifiying the manner in which
such distribution shall be made. For this purpose, a final decision shall mean
the final judgment of any court of competent jurisdiction from which no appeal
is then allowed or a final decision of an arbitrator pursuant to Article IX of
the Agreement.
3.3 Notice and Defense of Third Party Claims. Notice and defense of third
party claims shall be handled in the manner provided in Article IX of the
Agreement.
2
<PAGE> 36
ARTICLE IV
DISTRIBUTION OF ESCROW FUND
4.1 Distribution of Undisputed Amounts. Subject to Section 4.2 hereof, on
the date specified in Section 9.1 of the Agreement (the "Escrow Termination
Date") the Escrow Holder shall promptly distribute the entire remaining Escrow
Fund to the Stockholder Representatives for the benefit of the Holders, or to
the Holders if and as the Stockholder Representatives shall direct, pro rata
according to the number of shares of Company capital stock held by the Holders
immediately prior to the Effective Time.
4.2 Distribution of Disputed Amounts. Notwithstanding the provisions of
Section 4.1 hereof, if, prior to the Escrow Termination Date, CMI shall have
given a Claim Certificate to the Stockholder Representatives and the Escrow
Holder and a dispute, in accordance with Section 3.2 hereof, respecting that
Claim Certificate or the subject matter of such Claim Certificate has not yet
been resolved in accordance with Section 3.2, then the Escrow Holder shall
continue to hold that portion of the Escrow Fund which is the subject of such
dispute. Any portion of the Escrow Fund so withheld shall continue to be held by
the Escrow Holder until it receives authorization to distribute the portion of
the Escrow Fund so withheld in accordance with the second sentence of Section
3.2.
ARTICLE V
ESCROW HOLDER
5.1 Limitation on Liability. It is agreed that the duties of the Escrow
Holder are limited to those herein specifically provided and are ministerial in
nature. It is further agreed that the Escrow Holder shall incur no liability
whatever except by reason of its willful misconduct or gross negligence. The
Escrow Holder shall be under no obligation in respect of the Escrow Fund other
than faithfully to follow the instructions herein contained or delivered to the
Escrow Holder in accordance with the Escrow Agreement. The Escrow Holder may
consult with counsel and shall be fully protected in any action taken in good
faith in accordance with the advice of such counsel. It shall not be required to
institute legal proceedings of any kind. It shall have no responsibility for the
genuineness or validity of any document or other item deposited with it, and it
shall be fully protected in acting in accordance with this Escrow Agreement upon
any written instructions given to it and believed by it to have been duly
executed by CMI or by the Stockholder Representatives, as the case may be, in
accordance herewith.
5.2 Compensation. CMI agrees to pay the Escrow Holder as compensation for
its services hereunder an acceptance fee of $500, and an annual administration
fee of $2,500 for so long as the Escrow Holder holds all or any portion of the
Escrow Fund.
5.3 Resignation. The Escrow Holder, or any successor to it hereafter
appointed, may at any time resign by giving notice in writing to CMI and the
Stockholder Representatives and, upon the appointment of a successor Escrow
Holder as hereinafter provided, shall be discharged from any further duties
hereunder. In the event of such resignation, a successor Escrow Holder, which
shall be a bank or trust company organized under the laws of the United States
of America, shall be appointed by CMI, subject to the approval of the
Stockholder Representatives, which approval shall not be unreasonably withheld.
Any such successor Escrow Holder shall deliver to CMI and the Stockholder
Representatives a written instrument accepting such appointment hereunder, and
thereupon it shall succeed to all of the unaccrued rights and duties of the
Escrow Holder hereunder and shall be entitled to receive all of the then
remaining Escrow Fund.
ARTICLE VI
STOCKHOLDER REPRESENTATIVES
The Stockholder Representatives shall have full power and authority to
represent all Holders with respect to all matters arising under this Escrow
Agreement. All action taken by the Stockholder Representatives hereunder shall
be binding upon the Holders as if expressly confirmed and ratified in writing by
each of them.
3
<PAGE> 37
Without limiting the generality of the foregoing, the Stockholder
Representatives shall have full power and authority on behalf of all of the
Holders to interpret all the terms and provisions of this Escrow Agreement, to
give all approvals and take any other actions with respect to the Holders in
connection with the subject matter of this Agreement and to consent to any
amendment hereof. All action to be taken by the Stockholder Representatives
hereunder shall be taken by, or at the written direction of, a majority of the
Stockholder Representatives (only after all of the Stockholder Representatives
have been consulted), and any action so taken shall be conclusive and binding
upon all of the Holders. CMI may deal solely with and rely solely upon the
Stockholder Representatives as the representatives of all the Holders. The
Stockholder Representatives shall incur no liability to the Holders except by
reason of their willful misconduct or gross negligence.
ARTICLE VII
MISCELLANEOUS
7.1 Notices. Except as expressly provided in this Escrow Agreement, all
notices (including any Claim Certificate) given in connection with this Escrow
Agreement shall be deemed to have been duly given on the date of delivery if
delivered by hand delivery or facsimile, or two days after mailing by air
courier, addressed as follows:
If to CMI:
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, California 94086
Attention: Philip F. Otto, Chief Executive Officer
With a copy to:
Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center, Seventh Floor
San Francisco, California 94111
Attention: Richard W. Canady
If to the Stockholder Representatives:
To such address or addresses as they shall specify in writing to the
other parties to this Agreement in the manner provided in this
Section 7.1.
With a copy to:
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
600 Travis Street
Houston, Texas 77002
Attention: P. Dexter Peacock
If to the Escrow Holder:
First National Bank of Boston
Corporate Trust Department
Mail Stop 45-02-15
150 Royall Street
Canton, Massachusetts 02021
Such addresses may be changed from time to time by means of a notice given
in the manner provided in this Section 7.1.
4
<PAGE> 38
7.2 Successors and Assigns. The Escrow Holder, the Stockholder
Representatives and CMI may not assign, by operation of law or otherwise, all or
any portion of its or their rights, obligations or liabilities under this Escrow
Agreement without the prior written consent of the other parties hereto, which
consent may be withheld in the absolute discretion of the party being asked for
the Consent. Any attempted assignment in violation of this Section 7.2 shall be
voidable. This Escrow Agreement and all action taken hereunder in accordance
with its terms shall be binding upon and inure to the benefit of CMI and the
other indemnified parties and their respective successors, assigns, heirs,
executors, administrators and legal representatives, the Holders and their
respective successors, assigns, heirs, executors, administrators and legal
representatives, the Escrow Holder and its successors and the Stockholder
Representatives and their successors, assigns, heirs, executors, administrators
and legal representatives.
7.3 Headings. The headings contained in this Escrow Agreement are intended
principally for convenience and shall not, by themselves, determine the rights
of the parties to this Escrow Agreement.
7.4 Waiver. Waiver of any term or condition of this Escrow Agreement by
any party shall not be construed as a waiver of a subsequent breach or failure
of the same term or condition, or a waiver of any other term or condition of
this Escrow Agreement.
7.5 Governing Law. This Escrow Agreement shall be governed by, and
construed in accordance with, the laws of the State of California as applied to
agreements entered into and entirely to be performed within the state.
7.6 Arbitration. The parties hereto agree that if any Claim for Losses is
made and not resolved, such Claim shall be submitted to arbitration under
Article IX of the Agreement.
5
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to
be signed the day and year first above written.
CALIFORNIA MICROWAVE, INC.
By:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER REPRESENTATIVES:
--------------------------------------
--------------------------------------
--------------------------------------
FIRST NATIONAL BANK OF BOSTON
By:
--------------------------------------
Title:
--------------------------------------
6
<PAGE> 40
EXHIBIT B
ARTICLES OF MERGER
PROVIDING FOR THE MERGER
OF
CMI ACQUISITION CORPORATION
INTO
MICROWAVE NETWORKS INCORPORATED
Pursuant to Section 5.04 of the Texas Business Corporation Act, CMI
Acquisition Corporation, a Texas corporation ("CMI Acquisition"), California
Microwave, Inc., a Delaware corporation ("CMI"), and Microwave Networks
Incorporated, a Texas corporation ("MNI"), adopt the following Articles of
Merger effecting the merger (the "Merger") of CMI Acquisition with and into MNI,
with MNI as the surviving corporation.
1. The Agreement of Merger, attached hereto as Exhibit A, and the
performance thereof, was duly authorized and approved by the board of directors
and shareholders of (i) each of CMI Acquisition and MNI in the manner prescribed
by the Texas Business Corporation Act and by the respective articles of
incorporation and bylaws of CMI Acquisition and MNI and (ii) CMI in the manner
prescribed by the Delaware General Corporation Law and its certificate of
incorporation and bylaws.
2. CMI Acquisition has 100 shares of Common Stock outstanding, all of which
were voted in favor of the Agreement of Merger. CMI has shares of Common
Stock outstanding, of which were voted in favor of the Agreement of Merger
and of which were voted against the Agreement of Merger. MNI has a total of
shares of capital stock outstanding, of which shares were voted in
favor of the Agreement of Merger and shares were voted against the
Agreement of Merger. Of the total MNI shares outstanding, the number of shares
outstanding entitled to vote as a class or series and the respective votes are
as follows: (i) shares of Common Stock outstanding, of which were
voted in favor of the Agreement of Merger and of which were voted against
the Agreement of Merger, (ii) 2,000,000 shares of Series A Preferred Stock
outstanding, of which were voted in favor of the Agreement of Merger and
of which were voted against the Agreement of Merger, (iii) 3,166,354 shares
of Series B Preferred Stock outstanding, of which were voted in favor of
the Agreement of Merger and of which were voted against the Agreement of
Merger, and (iv) 2,037,621 shares of Series C Preferred Stock outstanding,
of which were voted in favor of the Agreement of Merger and of which were
voted against the Agreement of Merger.
IN WITNESS WHEREOF, the undersigned officers of the respective corporations
have submitted these Articles of Merger, dated this day of March, 1995.
CMI ACQUISITION CORPORATION
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
MICROWAVE NETWORKS INCORPORATED
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
CALIFORNIA MICROWAVE, INC.
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
<PAGE> 41
EXHIBIT B
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (the "Merger Agreement") is made and entered into
as of , 1995, by and among Microwave Networks Incorporated,
a Texas corporation (the "Company"), California Microwave, Inc., a Delaware
corporation ("CMI") and CMI Acquisition Corporation, a Texas corporation
("Acquisition Corp.").
WITNESSETH
WHEREAS, the Company is a corporation duly organized and validly existing
under the laws of the State of Texas, with authorized capital stock consisting
of 15,000,000 shares of Common Stock, $0.01 par value per share, of which
shares are issued and outstanding on the date hereof, and 7,845,240
shares of Preferred Stock, classified into three series, as follows: 2,000,000
shares of Series A Convertible Preferred Stock, of which 2,000,000 shares are
issued and outstanding on the date hereof; 3,250,000 of Series B Convertible
Preferred Stock, of which 3,166,354 shares are issued and outstanding as of the
date hereof; and 2,595,240 shares of Series C Convertible Preferred Stock, of
which 2,037,621 shares are issued and outstanding as of the date hereof;
WHEREAS, CMI is a corporation duly organized, validly existing and in good
standing in the State of Delaware, with authorized capital stock consisting of
29,200,000 shares of Common Stock, $.10 par value ("CMI Common Stock"), of which
shares were issued and outstanding as of , 1995.
WHEREAS, there are options outstanding under the Company's Non-Qualified
Stock Option Plan for Nonemployed Directors and Consultants ("Nonemployee Option
Plan") covering shares of Common Stock of the Company and options
outstanding under the Company's Non-Qualified Stock Option Plan for Employees
("Employee Option Plan") covering shares of Common Stock of the
Company, all of which options shall be converted into options to acquire CMI
Common Stock pursuant to the provisions hereof; and
WHEREAS, Acquisition Corp. is a corporation duly organized and validly
existing under the laws of the State of Texas, with authorized capital stock
consisting of 1,000 shares of common stock (the "Acquisition Corp. Common
Stock"), of which 100 shares are issued and outstanding and owned by CMI; and
WHEREAS, the respective Boards of Directors of the Company, CMI and
Acquisition Corp. have determined that it is advisable and to the advantage of
such corporations and their shareholders that Acquisition Corp. merge with and
into the Company (the "Merger") upon the terms and conditions herein provided;
and
WHEREAS, the Boards of Directors of the Company, CMI and Acquisition Corp.
have approved this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, it is agreed as follows:
1. Merger. Acquisition Corp. shall be merged with and into the Company on
the terms and conditions hereinafter expressed (the "Merger"). At the Effective
Time (as defined hereinafter), the separate existence of Acquisition Corp. shall
cease and the Company shall be the surviving entity (the "Surviving Entity").
The Merger shall be effective upon the filing of Articles of Merger, together
with a copy of this Merger Agreement, with the Secretary of State of the State
of Texas in the manner required by Article 5.01 et. seq. of the Texas Business
Corporation Act ("TBCA") and upon the issuance of the Certificate of Merger by
the Secretary of State (the "Effective Time").
2. Directors and Officers and Governing Documents. The Articles of
Incorporation of the Company, as in effect at the Effective Time, shall continue
to be the Articles of Incorporation of the Surviving Entity as the surviving
corporation without change or amendment. The Bylaws of the Company as amended
and in effect at the Effective Time, shall continue to be the Bylaws of the
Surviving Entity as the surviving corporation
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<PAGE> 42
without change or amendment. The directors and officers of the Surviving Entity
shall be the same upon the Effective Time as they are immediately prior thereto
until their successors have been duly appointed or elected in accordance with
the Articles of Incorporation and Bylaws of the Surviving Entity.
3. Succession. At the Effective Time, the Surviving Entity shall succeed
to Acquisition Corp. in the manner of and as more fully set forth in Article
5.06 of the Texas Business Corporation Act. All rights, title and interests to
all real estate and other property owned by Acquisition Corp. shall be allocated
to and vested in the Surviving Entity without reversion or impairment, without
further act or deed, and without any transfer or assignment having occurred, but
subject to any existing liens or other encumbrances thereon. All liabilities and
obligations of Acquisition Corp. shall be allocated to the Surviving Entity and
the Surviving Entity shall be the primary obligor therefor and, except as
otherwise provided by law or contract, no other party to the Merger shall be
liable therefor.
4. Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action by the holders thereof:
(a) each share of Acquisition Corp. Common Stock issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be
converted at and as of the Effective Time into one share of Common Stock of
the Company;
(b) each share of Common Stock and Preferred Stock of the Company
issued and outstanding immediately prior to the Effective Time, except
those shares which are "dissenting shares" (as defined below), shall, by
virtue of the Merger and without any action on the part of the holders
thereof, be converted at and as of the Effective Time into of a share
of CMI Common Stock. Only whole shares of CMI Common Stock shall be issued;
in lieu of any fractional share of CMI Common Stock, each such holder shall
receive in cash the fair market value of such fractional share, valuing CMI
Common Stock at the closing price for such stock on the Nasdaq National
Market on the trading day immediately preceding the day on which the Merger
becomes effective, as reported by Nasdaq.
5. Escrow. In order to provide indemnification in accordance with Article
IX of the Agreement and Plan of Reorganization and Merger among CMI, Acquisition
Corp. and the Company, dated as of January 31, 1995 (the "Agreement") and with
the Escrow Agreement (as defined in the Agreement), at the Effective Time or as
soon thereafter as possible, a stock certificate representing 10% of the whole
shares of CMI Common Stock (rounded down to the nearest whole share) into which
the shares of capital stock of the Company were converted pursuant to Section
4(b) of this Merger Agreement shall be delivered to the Escrow Holder (as
defined in the Escrow Agreement) (which shares shall be withheld from the former
holders of Common Stock and Preferred Stock of the Company ratably based on the
number of shares of stock of the Company held by such holder immediately prior
to the Effective Time).
6. Company Options. At the Effective Time and pursuant to the terms of the
Agreement, each of the outstanding options to purchase Common Stock of the
Company under the Nonemployee Option Plan and the Employee Option Plan shall
thereafter entitle the holder thereof to receive for each share of Common Stock
of the Company subject to such option, upon exercise thereof, of a share of
CMI Common Stock, at an exercise price for each full share of CMI Common Stock
equal to the quotient obtained by dividing (a) the exercise price per share of
Common Stock of the Company with respect to such option by (b) , which
exercise price per share shall be rounded down to the nearest whole cent. The
number of shares of CMI Common Stock that may be purchased by a holder under any
option assumed by CMI hereunder shall not include any fractional share of CMI
Common Stock, but shall be rounded up to the next higher whole share of CMI
Common Stock.
7. Dissenting Shares. Notwithstanding the provisions of Section 4 hereof,
if a holder of shares of capital stock of the Company files a written objection
to the Merger with the Company prior to the vote of the shareholders of the
Company on the Merger and if the shares of stock of the Company held by such
holder were not voted in favor of the Merger and are not tendered by such holder
for payment pursuant to Section 8 below (such shares being the "Potentially
Dissenting Shares"), the Company shall mail to the record owners of such shares
the notice relating to dissenters' rights required by Article 5.12 of the TBCA,
accompanied by
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<PAGE> 43
copies of Articles 5.12 and 5.13 of the TBCA. The Potentially Dissenting Shares
shall not be converted into the right to receive the per share payment specified
in Section 4(b) hereof, except as provided hereinafter. Potentially Dissenting
Shares which do not become "dissenting shares" pursuant to Article 5.12 of the
TBCA within the statutory notice period shall be converted in accordance with
Section 4(b) hereof. Holders of Potentially Dissenting Shares that become
"dissenting shareholders" within the statutory notice period shall be entitled
to the rights provided in Articles 5.12 and 5.13 of the TBCA. The Company shall
be the entity obligated for the payment of the fair value of any shares held by
a shareholder who has complied with the requirements of Article 5.12 of the TBCA
for the recovery of the fair value of his shares.
8. Surrender of Stock Certificates; Payment.
On and after the Effective Time, all of the outstanding certificates which
prior to that time represented Common or Preferred Stock of the Company, except
for certificates representing dissenting shares, shall be deemed for all
purposes to evidence ownership of and the right to receive the CMI Common Stock
into which the stock represented by such certificates has been converted as
provided herein. At or as soon as practicable after the Effective Time, each
holder of record of a certificate or certificates that immediately prior to the
Effective Time represented Common or Preferred Stock of the Company, except for
dissenting shares, shall surrender such certificates to the First National Bank
of Boston as the Exchange Agent of CMI in accordance with the provisions
contained in the Agreement and the Exchange Agent, in exchange for the surrender
of such certificates, shall deliver to such holder the consideration which such
holder is entitled to receive pursuant to Section 4(b) above, subject to the
provisions of Section 5 above.
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<PAGE> 44
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolutions of the Boards of Directors and shareholders of the Company, CMI
and Acquisition Corp., is hereby executed on behalf of each of said corporations
by their respective officers thereunto duly authorized.
<TABLE>
<S> <C>
MICROWAVE NETWORKS INCORPORATED
A Texas corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
CALIFORNIA MICROWAVE, INC.
A Delaware corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
CMI ACQUISITION CORPORATION
A Texas corporation
By
---------------------------------------------
President
ATTEST:
By
- ---------------------------------------------
Secretary
</TABLE>
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<PAGE> 45
EXHIBIT C
MICROWAVE NETWORKS INCORPORATED
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
January 31, 1995 between California Microwave, Inc., a Delaware corporation
("CMI") and the undersigned stockholder ("Stockholder") of Microwave Networks
Incorporated, a Texas corporation ("MNI").
RECITALS
A. Concurrently with the execution of this Agreement, CMI, CMI Acquisition
Corporation, a Texas corporation and wholly owned subsidiary of CMI
("Acquisition Corp."), and MNI have entered into an Agreement and Plan of
Reorganization and Merger (the "Reorganization Agreement"), which together with
a related Agreement of Merger (collectively, the "Merger Agreement") provide for
the merger (the "Merger") of Acquisition Corp. with and into MNI. Pursuant to
the Merger, all outstanding capital stock of MNI will be converted into CMI
common stock.
B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number
of shares of the outstanding Common Stock, $.01 par value per share, and such
number of shares of the outstanding Preferred Stock, $.01 par value per share,
of MNI as is indicated on the final page of this Agreement (the "Shares").
C. The agreements of the Stockholder contained herein are in consideration
of the execution of the Reorganization Agreement by CMI.
NOW, THEREFORE, in consideration of the foregoing and subject to the terms
and conditions of the Reorganization Agreement (including without limitation the
provisions of Section 5.4(a) thereof) the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. Stockholder agrees not to transfer,
sell, exchange, pledge (except in connection with a bona fide loan
transaction, provided that any pledgee agrees not to transfer, sell,
exchange, pledge or otherwise dispose or encumber the Shares or any New
Shares (as defined in Section 1.2 below) prior to the Expiration Date (as
defined below)) or otherwise dispose of or encumber the Shares or any New
Shares or to make any offer or agreement relating thereto, at any time
prior to the Expiration Date. As used herein, the term "Expiration Date"
shall mean the earlier to occur of (i) such date and time as the Merger
shall become effective in accordance with the terms and provisions of the
Merger Agreement or (ii) the termination of the Reorganization Agreement in
accordance with its terms.
1.2 New Shares. Stockholder agrees that any shares of capital stock
of MNI that Stockholder purchases or with respect to which Stockholder
otherwise acquires beneficial ownership after the date of this Agreement
and prior to the Expiration Date ("New Shares") shall be subject to the
terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. Agreement to Vote Shares. Unless the Reorganization Agreement is
terminated pursuant to the provisions of Sections 5.4(a) and 10.3 thereof,
at every meeting of the stockholders of MNI held prior to the Effective
Time called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the
stockholders of MNI with respect to any of the following, Stockholder shall
vote the Shares and any New Shares: (i) in favor of approval of the Merger
Agreement and the Merger and any matter that could reasonably be expected
to facilitate the Merger; and (ii) against approval of any proposal made in
opposition to the consummation of the Merger and the Merger Agreement,
against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than CMI and its affiliates and
against any liquidation or winding up of MNI (each of the foregoing is
referred to as an "Opposing Proposal"). Stockholder agrees not, directly or
indirectly,
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<PAGE> 46
to solicit or encourage any offer from any party concerning the possible
disposition of all or any substantial portion of MNI's business assets or a
controlling equity interest in MNI.
3. Affiliate Agreement. Stockholder agrees to execute and deliver to CMI
prior to the Merger the "pooling letter" and the Affiliate Agreement required
under the terms of Sections 6.7 and 6.8 of the Reorganization Agreement.
4. Representations, Warranties and Covenants of Stockholder. Stockholder
represents, warrants and covenants to CMI as follows:
4.1 Ownership of Shares. Stockholder: (i) is the beneficial owner of
the Shares, which at the date of this Agreement and at all times up until
the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (ii) does not beneficially own any shares of
capital stock of MNI other than the Shares (excluding shares as to which
Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into
and carry out the terms of this Agreement.
4.2 No Proxy Solicitations. Unless the Reorganization Agreement is
terminated pursuant to the provisions of Sections 5.4(a) and 10.3 thereof,
Stockholder will not, and will not permit any entity under Stockholder's
control, to: (i) solicit proxies or become a "participant" in a
"solicitation" (as such terms are defined in Regulation 14A under the
Exchange Act) with respect to an Opposing Proposal or otherwise encourage
or assist any party in taking or planning any action that would compete
with, restrain or otherwise serve to interfere with or inhibit the timely
consummation of the Merger in accordance with the terms of the Merger
Agreement; (ii) initiate a stockholders' vote or action by written consent
of MNI stockholders with respect to an Opposing Proposal; or (iii) become a
member of a "group" (as such term is used in Section 13(d) of the Exchange
Act) with respect to any voting securities of MNI with respect to an
Opposing Proposal.
5. Termination. This Agreement shall terminate and shall have no further
force or effect as of the Expiration Date.
6. Miscellaneous.
6.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
6.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without the prior written consent of
the other.
6.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
6.4 Specific Performance; Injunctive Relief. The parties acknowledge
that CMI will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to CMI upon any such violation,
CMI shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to
CMI at law or in equity.
6.5 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed to have been duly
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<PAGE> 47
given on the date of delivery if delivered by hand delivery or by facsimile
to the persons identified below or two days after mailing by air courier
addressed as follows:
If to CMI:
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, Ca 94086
Attn: Philip F. Otto
With a copy to:
Howard, Rice, Nemerovski, Canady, Robertson, Falk & Rabkin
A Professional Corporation
3 Embarcadero Center
San Francisco, CA 94111-4065
Attn: Richard W. Canady, Esq.
If to Stockholder:
To the address for notice set forth on the last page hereof.
Such addresses may be changed from time to time by means of a notice given
in the manner provided in this section.
With a copy to:
Microwave Networks Incorporated
10795 Rockley Road
Houston, TX 77099-3571
Attn: Chief Executive Officer
With a copy to:
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
600 Travis Street
Houston, TX 77002
Attn: Dexter Peacock, Esq.
6.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Texas.
6.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties
with respect to such subject matter.
6.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
6.9 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
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<PAGE> 48
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
CALIFORNIA MICROWAVE, INC. STOCKHOLDER
By: By:
- ----------------------------------- -----------------------------------
Philip F. Otto
Chief Executive Officer
Stockholder's Address for Notice:
-----------------------------------
-----------------------------------
-----------------------------------
Shares beneficially owned
(including shares issuable pursuant
to any rights, options and
warrants):
shares of Microwave
Networks Incorporated Common Stock
shares of Microwave
Networks Incorporated Preferred
Stock
4
<PAGE> 49
EXHIBIT D
OPINION OF ANDREWS & KURTH
(COUNSEL TO THE COMPANY)
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Texas, with requisite corporate
power to own and lease its assets and properties and to conduct its business as
it is presently being conducted.
2. The authorized capitalization of the Company is as set forth in Section
3.2 to the Agreement. Based upon a review of the Company's corporate books and
records made available to us and on statements and representations made to us by
officers or directors of the Company, which to our knowledge are not inaccurate:
(a) the issued and outstanding capital stock of the Company consists solely of
that number of shares of capital stock which are specified in Section 3.2 of the
Agreement; (b) all of such capital stock is duly and validly issued, fully paid
and nonassessable; (c) there are no outstanding options, rights or subscriptions
to acquire capital stock of the Company or securities which are convertible
into, or exchangeable for, capital stock of the Company, other than as specified
in Section 3.2 of the Agreement; (d) the Company has taken all action necessary
under the option plans of the Company to comply with the provisions of Section
5.5 of the Agreement; and (e) the Company does not own any interest in any
corporate subsidiary, partnership or other business entity except as specified
in Section 3.3 of the Agreement.
3. The Company has all requisite corporate power and corporate authority to
execute, deliver and perform its obligations under the Agreement and the Merger
Agreement. The execution and delivery of the Agreement and the Merger Agreement
by the Company and the performance by the Company of its obligations under the
Agreement and the Merger Agreement have been duly authorized by all requisite
corporate action on the part of the Company.
4. Upon the effectiveness of the Merger, the Agreement and the Merger
Agreement will have been duly executed and delivered by the Company and will
constitute valid and binding obligations of the Company, enforceable against it
in accordance with their respective terms, except as such enforceability may be
limited by: (a) bankruptcy, insolvency, reorganization, moratorium, receivership
and/or other laws relating to or affecting the rights of creditors generally
(including, without limitation, fraudulent transfer laws); (b) equitable
principles of general applicability (including, without limitation, equitable
subordination, good faith, commercial reasonableness and the possible
unavailability of specific performance or injunctive relief), regardless of
whether considered in a proceeding in equity or at law or whether codified by
statute; or (c) the invalidity or unenforceability, under certain circumstances,
under California or federal law or court decisions, of provisions indemnifying a
party against liability for its own wrongful or negligent acts or where much
indemnification is contrary to public policy. Upon consummation of the Merger,
the Merger Agreement will be effective to convert the capital stock of the
Company into the right to receive the common stock of CMI described therein. No
stockholder of the Company has exercised or is entitled to exercise dissenters
rights under Article 5.12 of the Texas Business Corporation Act.
5. The execution and delivery of the Agreement and the Merger Agreement by
the Company, and the performance by the Company of its obligations thereunder in
accordance with the terms thereof, do not: (a) contravene the Articles of
Incorporation or Bylaws of the Company; or (b) to our knowledge, result in a
violation of any judgment, order or decree of any arbitrator to which the
Company is named as a party; (c) result in a breach of or constitute a default
under any contract or agreement described on the attached schedule certified by
the Company to be a list of its material contracts and agreements; or (d) to our
knowledge, result in the creation of any mortgage, lien, pledge, charge,
security interest, claim or other encumbrance upon the capital stock or any
material asset of the Company.
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<PAGE> 50
6. To our knowledge, there is no action, suit, claim, proceeding or
investigation pending or threatened against or involving the Company before any
court, governmental or regulatory authority, agency, commission, or board of
arbitration, the adverse determination of which would have a material adverse
effect on the properties, business, operations or financial condition of the
Company or which would prohibit or restrain the consummation of the transactions
contemplated by the Agreement and the Merger Agreement.
7. To our knowledge, no consent, approval, authorization, or order of any
governmental agency or body or any court not obtained and in effect on the date
hereof is required on behalf of the Company for the lawful consummation by them
of the transactions contemplated by the Agreement and the Merger Agreement.
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<PAGE> 51
EXHIBIT E
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") made this day of
, 1995, by and between Microwave Networks Incorporated, a Texas
corporation ("Company"), and
("Employee").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company to enter into this Agreement with Employee;
and
WHEREAS, Employee is willing, in consideration of the inducements herein
provided, to enter into this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, it is hereby agreed as follows:
1. Employment. The Company hereby employs Employee and Employee agrees to
accept such employment on the following terms and conditions.
2. Term. The period of employment covered by this Agreement shall commence
on , 1995 and shall terminate on June 30, 1997, unless
sooner terminated under Paragraph 5 below; provided, however, that the
provisions of Section 18 shall survive termination of this Agreement.
3. Duties. During the term of this Agreement, Employee shall be the
of the Company. Employee agrees to perform
competently and diligently the duties of such position and such other duties as
may be reasonably required from time to time by the Board of Directors of the
Company and which are commensurate with such position. Employee shall devote his
full time and attention and best efforts to the performance of such duties.
"Full time" shall mean the time commitment that is typical of an executive
holding a similar position in the industry.
During the term of this Agreement, the Employee shall not be required to
perform his duties hereunder other than in the
area, except for any required travel on the Company's business to the extent
substantially consistent with the Employee's past business travel obligations to
the Company.
Employee shall not engage in any other business duties or pursuits
whatsoever, or directly or indirectly render any services of a business,
commercial, or professional nature to any other person or organization, whether
for compensation or otherwise, without the prior written consent of the
Company's Board of Directors. However, the expenditure of reasonable amounts of
time for educational, charitable, or professional activities and service on any
board of directors on which Employee currently serves shall not be deemed a
breach of this Agreement if those activities do not materially interfere with
the services required under this Agreement and shall not require the prior
written approval of the Company's Board of Directors.
4. Compensation. The Employee shall be paid a salary at his existing
salary rate until June 30, 1995 and, thereafter at the rate of $ per
year [which shall not be less than his existing salary rate] during the period
of employment covered by this Agreement, payable pro rata on the Company's
regular pay days for its employees.
The Company shall continue its existing bonus plans through June 30, 1995
and adopt a performanceoriented incentive bonus plan for fiscal year 1996 in
which the Employee will participate. The Employee's participation therein shall
be on a basis at least as favorable as comparable executives of California
Microwave, Inc. ("CMI"). In addition, the Employee shall receive all perquisites
provided by CMI to comparable executives of CMI and its subsidiaries.
The Company shall have the right to deduct or withhold from the
compensation due to Employee hereunder any and all sums required for federal
income and Social Security taxes and all state or local taxes now applicable or
that may be enacted and become applicable in the future.
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<PAGE> 52
5. Termination of Employment. Employee's employment hereunder shall
terminate upon the occurrence of any of the following events:
(a) The death of Employee.
(b) The resignation of Employee.
(c) The permanent disability of Employee. Employee shall be
permanently disabled, for the purpose of this Agreement, if he shall become
entitled to receive benefits under a long term disability plan of the
Company or CMI maintained for comparable executives.
(d) His discharge for cause. The term "cause," as used in this
Agreement, shall include (i) the continued and willful neglect (other than
due to a physical or mental incapacity) by the Employee of his duties,
obligations, and responsibilities under this Agreement, (ii) the Employee's
continued and willful disobedience of orders and directives of the Board of
Directors of the Company that are consistent with Section 3, (iii) the
commission of any fraud, felony or act of dishonesty by the Employee
related to the business of the Company, and (iv) the Employee's being
frequently under the influence of alcoholic beverages or drugs to such
extent that he is unable to perform his duties for the Company. For
purposes of this Section 5(d), an act or failure to act on the Employee's
part shall be considered "willful" if done or omitted to be done by
Employee otherwise than in good faith and without reasonable belief that
Employee's action or omission was in the best interest of the Company.
Employee shall not be deemed to have been terminated by the Company for
cause unless the Company shall have delivered to Employee written notice of
the nature of such neglect, disobedience, commission or inability
("Violation") and of its intent to terminate the Employee for cause at
least 30 days prior to such termination date, and Employee shall fail
within such time to cure such Violation. In the event the Employee disputes
such proposed termination pursuant to Section 18, during the pendency of
such dispute but not beyond the term of this Agreement, as defined below,
the Company shall continue the Employee as an employee of the Company for
all purposes, including the payment of his compensation and other employee
benefits..
Upon termination of the Employee's employment upon occurrence of any of the
above events, he shall be entitled under this Agreement to only the compensation
provided for in Paragraph 4 hereof for the period of time ending with the date
of termination, and to reimbursement for such expenses as he may have incurred
on behalf of the Company prior to the date of termination. These payments shall
fully discharge all responsibilities of the Company to the Employee under this
Agreement.
If the Company terminates Employee's employment prior to the expiration of
the term of this Agreement, other than pursuant to paragraph 5(d) above, the
Employee shall be entitled only to the payments provided for in the preceding
paragraph, plus continuation of the Employee's salary at the salary rate in
effect at the time of termination for a period of six (6) months following such
termination, or, if longer, until March 31, 1996 (the "Severance Period"). In
addition, the Company shall continue, without cost to the Employee, Employee's
coverage under the Company's group health plan for the Severance Period.
6. Company Plans and Other Allowances. Employee shall, during his
employment under this Agreement, have the right to participate in any Company
retirement, deferred compensation or profit sharing plan, any Company group
life, health or accident insurance or other employee benefit plan which is
currently in effect or may hereafter be adopted by the Company for its
executives or employees. To the extent Employee does not participate in a
comparable Company plan, the Employee shall participate in any compensation or
benefit plans of CMI in which, and on the same basis as, other comparably
situated executives of CMI or any other subsidiary of CMI participate. In
addition, the Company shall reimburse Employee for any and all travel and other
out-of-pocket expenses reasonably incurred by him in the performance of his
services hereunder, and in such amount and manner as are in accord with the
Company's policies then applicable to its executive employees. Employee also
shall be entitled to such annual leave (vacation), sick leave, and holiday
allowances as are then accorded to the Company's executive employees. In this
regard, the Employee's service with the Company prior to its acquisition by CMI
shall be credited for all purposes under the Company's and CMI's plans,
including, without limitation, the Employee's currently accrued vacation.
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<PAGE> 53
7. Special Covenants.
(a) The parties acknowledge and agree that the services of Employee to
be rendered hereunder are unique and can be rendered only by him, that it
is not feasible or possible to procure others to perform such services or
adequately compensate Company in damages for his failure so to perform, and
that, accordingly, in the event of any breach hereunder, the parties hereto
shall be entitled from a court to the extent it has jurisdiction, to such
full and complete relief as a court of equity may then afford, in addition
to all other relief and remedies, if any, available to them.
(b) The parties acknowledge and agree that during the term of this
Agreement and in the course of the discharge of his duties hereunder,
Employee shall have access to and become acquainted with information, which
is not in the public domain, concerning the operation and processes of the
Company, including, without limitation, financial, personnel, sales,
scientific, and other information that is owned by the Company and
regularly used in the operation of the Company's business, and that such
information constitutes the Company's trade secrets. Employee specifically
agrees that he shall not misuse, misappropriate, or disclose any such trade
secrets, directly or indirectly, to any other person or use them in any
way, either during the term of this Agreement or at any other time
thereafter, unless at the time such information is in the public domain,
except as is required in the course of his employment hereunder. Employee
acknowledges and agrees that the sale or unauthorized use or disclosure of
any of the Company's trade secrets obtained by Employee during the course
of his employment under this Agreement, including information concerning
the Company's current or any future and proposed work, services, or
products, the facts that any such work, services, or products are planned,
under consideration, or in production, as well as any descriptions thereof,
would constitute unfair competition, unless at the time such information is
in the public domain. Employee promises and agrees not to engage in any
unfair competition with the Company, either during the term of this
Agreement or at any other time thereafter.
8. Consolidation or Merger. In the event of any consolidation or merger of
the Company into or with another corporation, or the sale of all, or
substantially all, of the Company's assets or a majority of the Company's stock
to another corporation, or any reorganization resulting in a successor
corporation, or any liquidation and/or dissolution of the Company, the Company
shall cause such corporation as may survive said transaction to assume this
Agreement and become obligated to perform all the terms and conditions hereof,
and Employee's obligations hereunder shall continue in favor of such surviving
corporation.
9. Action by Company. Any action required or permitted to be taken by
Company hereunder shall be deemed to have been taken if taken by appropriate
corporate action of the Board of Directors of Company.
10. Non-Assignability. This Agreement is entered into in consideration of
the personal qualities of Employee and may not be, nor may any right or interest
hereunder be, assigned by him without the prior written consent of Company.
11. Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of Employee by the Company and contains all of the covenants
and agreements between the parties with respect to that employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representation,
inducements, promises, or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding on either party.
12. Modification. Any modification of this Agreement will be effective
only if it is in writing and signed by the party to be charged.
13. Effect of Waiver. The failure of either party to insist on strict
compliance with any of the terms, covenants, or conditions of this Agreement by
the other party shall not be deemed a waiver of that term, covenant or
condition, nor shall any waiver or relinquishment of any right or power at any
one time or times be deemed a waiver or relinquishment of that right or power
for all or any other times.
3
<PAGE> 54
14. Sums Due Deceased Employee. If Employee dies prior to the expiration
of the term of his employment, any sums that may be due him from the Company
under this Agreement as of the date of death shall be paid to Employee's
executors, administrators, heirs, personal representatives, successors and
assigns.
15. Notices. Any notice, correspondence or payment required or permitted
to be given or made hereunder shall be deemed to have been duly given or made
when personally delivered to Employee or to Company, or, if mailed, postage
prepaid, registered or certified mail, to Employee at
, and
to Company at
, or at such other address as
may be designated in writing by either party to the other, said notice,
correspondence and/or payment, if mailed, being deemed to have been duly given
days after the date so mailed.
16. Construction and Benefit. Except as otherwise herein expressly
provided, this Agreement is an agreement of employment only; shall not be deemed
to create a co-partnership or joint enterprise between the parties; contains the
whole understanding of the parties; is made in, and shall take effect and be
construed under the laws of the State of Texas and shall be binding upon, and
inure to the benefit of Company and its successors and assigns.
17. Severability. Any determination by a court of competent jurisdiction
that any provision herein contained is invalid or unenforceable shall not affect
the validity or the enforceability of any other provision of this Agreement.
18. Dispute Resolution.
18.1 In the event a dispute shall arise between the parties as to
whether the provisions of this Agreement have been complied with (a
"Dispute"), the parties agree to resolve such Dispute in accordance with
the following procedure:
(a) A meeting shall be held promptly between the parties, attended
by (in the case of the Company) one or more individuals with
decision-making authority regarding the Dispute, to attempt in good
faith to negotiate a resolution of the Dispute.
(b) If, within 10 days after such meeting, the parties have not
succeeded in negotiating a resolution of the Dispute, the parties agree
to submit the Dispute to mediation in accordance with the Commercial
Mediation Rules of the American Arbitration Association.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American
Arbitration Association if they have been unable to agree upon such
appointment within 10 days following the 10-day period referred to in
clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating
thereto for 15 days.
(e) If the parties are not successful in resolving the Dispute
through mediation within such 15-day period, the parties agree that the
Dispute shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association.
(f) The fees and expenses of the mediator/arbitrators, and
reasonable attorneys' fees and expenses of counsel for the parties,
shall be borne solely by the non-prevailing party or, in the event there
is no clear prevailing party, as the mediator/arbitrators deem
appropriate.
(g) All mediation/arbitration conferences and hearings will be held
in Houston, Texas.
18.2 The parties agree that judgment upon the award rendered by the
arbitrators may be entered in any court of competent jurisdiction. In the
event legal proceedings are commenced to enforce the rights awarded in an
arbitration proceeding, the party who prevails or substantially prevails in
such legal proceeding shall be entitled to recover from the other party all
costs, expenses and reasonable attorneys' fees incurred in connection with
such legal proceeding and on appeal.
4
<PAGE> 55
18.3 Except as provided above, no legal action may be brought by
either party with respect to any Dispute. All Disputes shall be determined
only in accordance with the procedures set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MICROWAVE NETWORKS INCORPORATED
By:
--------------------------------------
By:
--------------------------------------
Employee
5
<PAGE> 56
EXHIBIT F
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE ("Covenant") is entered into among
("Shareholder"), California Microwave, Inc., a Delaware
corporation ("CMI"), and Microwave Networks Incorporated, a Texas corporation
("Company"), this day of , 1995.
W I T N E S S E T H
WHEREAS, pursuant to that certain Agreement and Plan of Reorganization and
Merger (the "Agreement") among CMI, CMI Acquisition Corporation, a Texas
corporation ("Acquisition Corp."), and the Company, the parties thereto agreed
that Acquisition Corp. would be merged with and into the Company and that the
outstanding shares of capital stock of the Company would be converted into
certain shares of common stock, $.10 par value, of CMI in connection therewith;
WHEREAS, the consideration to be received by the undersigned under the
Agreement has been determined to reflect, among other things, considerable
goodwill of the Company, and that such goodwill is in substantial measure
attributable to the past, present and continuing efforts of the undersigned as
an employee of the Company;
WHEREAS, pursuant to Section 7.11 of the Agreement, it is a condition to
CMI's obligations under the Agreement that Shareholder enter into a covenant not
to compete;
NOW, THEREFORE, as a material inducement to CMI and the Company to
consummate the transactions contemplated by the Agreement, and as further
consideration therefor, the undersigned hereby covenants and agrees as follows:
1. The Shareholder will not, during the four (4) years from and after the
date hereof, directly or indirectly, own, manage, operate, join, control,
finance, assist or participate in the ownership, management, operation or
control of or otherwise engage in or become interested in or be connected in any
manner whether for the undersigned or for any other person, as principal, agent,
employer, employee, officer, director, partner, salesperson, supervisor,
consultant, independent contractor, broker, manager, shareholder, lender,
guarantor or otherwise, in any business or activity in any of the cities,
counties or other political subdivisions in the United States or foreign
countries, which business or activity is substantially the same as or
competitive with any business or activity now conducted by the Company or any of
its subsidiaries in any of such cities, counties or political subdivisions or
countries, for so long as the Company or any of its subsidiaries or affiliates
shall engage in such business or activity or in any business or activity which
was in the planning or research stage within the Company prior to the date
hereof, whether implemented or not. The foregoing shall not preclude purchases
by Shareholder of up to a 1% interest in any publicly held entity.
2. The Shareholder will not, during the four (4) years from and after the
date hereof, directly or indirectly, solicit or induce any person who is an
employee of the Company or any of its subsidiaries on this date, or who shall
become or continue as an employee of the Company or any of its subsidiaries
hereafter, to leave said employ for the purpose of competing with the Company or
any of its subsidiaries or affiliates in any matter contrary to the provisions
of Paragraph 1 above.
3. Shareholder agrees that, during the four (4) years from and after the
date hereof, Shareholder will not, directly or indirectly, solicit (either
directly or indirectly through a broker or otherwise) any person or entity that
has been at any time during the six month period preceding the date hereof, or
is contemplated to be, a customer or client of the Company or any of its
subsidiaries ("Company Customer"), to purchase or otherwise acquire or use any
similar products or services offered by any person or entity which is engaged in
a business or activity which is substantially the same as or competitive with
any business or activity now conducted by the Company or any of its
subsidiaries. A person or entity is contemplated to be a Company Customer if the
Company or any of its subsidiaries has taken steps with the direct objective of
obtaining business from such person or entity, which may, but need not, include
internal proposals or presentations, proposals or presentations to such person
or entity or negotiations with such person or entity.
1
<PAGE> 57
4. All parties hereby acknowledge that there are legitimate protectible
business interests at stake (such as protection of the Company's goodwill,
customers, employees and trade secrets and other confidential information), that
breach of this Section would harm CMI and the Company and that the restrictions
and restraints contained in this covenant are reasonable.
5. Shareholder acknowledges that the rights reserved to the Company under
Sections 1 through 3 hereof are necessarily of a special, unique and
extraordinary nature and that the loss arising from a breach or threatened
breach thereof cannot reasonably and adequately be compensated by money damages
and will cause CMI and the Company to suffer irreparable harm and that a remedy
at law for any breach thereof will be inadequate. Accordingly, Shareholder
hereby agrees that CMI and the Company shall be entitled to injunctive or other
extraordinary relief in case of any such breach or threatened breach prohibiting
such breach or attempted or threatened breach and commanding compliance with any
such Section, merely by proving the existence of such breach or threatened or
attempted breach, and without the necessity of proving irreparable harm,
inadequacy of legal remedies or damages. However, this provision shall in no way
limit any other rights or remedies, including the recovery of damages, which CMI
or the Company may have under the terms of the Agreement, this Covenant or at
law or in equity.
6. This Covenant may be assigned by the Company, or devolve upon, any
successor in interest to all or substantially all of the business and assets of
the Company.
7. This Covenant shall be construed and enforced in accordance with the
laws of the State of Texas without regard to principles of conflicts of law.
8. It is the intent of the parties hereto that in the event one or more
provisions, or any part thereof, of this Covenant shall be held unenforceable
for any reason, or in the event any provision of this Covenant shall be held
unenforceable as to any specific locality or any specific activity, this
Covenant shall be construed and enforced to the maximum extent permitted by law
in a manner consistent with the intent of the parties as herein expressed.
9. In the event of a dispute or any litigation between the parties hereto,
the prevailing party shall be entitled to recover its reasonable attorneys' fees
and costs from the unsuccessful party.
10. No failure to insist upon strict compliance with any provision hereof
shall be deemed a waiver of such provision or any other provision hereof. No
failure to exercise and no delay in exercising, on the part of CMI or the
Company, any right, power or privilege hereunder shall operate as a waiver
hereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies provided by
law or in any other agreement.
2
<PAGE> 58
IN WITNESS WHEREOF, the undersigned have executed this Covenant Not to
Compete as of the date first written above.
SHAREHOLDER:
--------------------------------------
MICROWAVE NETWORKS INCORPORATED
By: ---------------------------------
Title: ------------------------------
CALIFORNIA MICROWAVE, INC.
By: --------------------------------
Title: -----------------------------
3
<PAGE> 59
EXHIBIT G
OPINION OF HOWARD, RICE, NEMEROVSKI,
CANADY, ROBERTSON, FALK & RABKIN
1. CMI is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, with requisite corporate power
to own and lease its assets and properties and to conduct its business as it is
presently being conducted. Acquisition Corp. is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Texas, with
requisite corporate power to own and lease its assets and properties and to
conduct its business as it is presently being conducted.
2. The shares of CMI Common Stock, and related shareholder rights under
CMI's Rights Agreement, to be issued to the former shareholders of MNI as a
result of the Merger, have been duly authorized and when issued, will be validly
issued, fully paid and non-assessable.
3. Each of CMI and Acquisition Corp. has all requisite corporate power and
corporate authority to execute, deliver and perform its obligations under the
Agreement and the Merger Agreement. The execution and delivery of the Agreement
and the Merger Agreement by CMI and by Acquisition Corp. and the performance by
them of their respective obligations under the Agreement and the Merger
Agreement have been duly authorized by all requisite corporate action on the
part of CMI and Acquisition Corp.
4. Upon the effectiveness of the Merger, the Agreement and the Merger
Agreement will have been duly executed and delivered by CMI and Acquisition
Corp. and constitute valid and binding obligations of CMI and Acquisition Corp.,
enforceable against them in accordance with their respective terms, except as
such enforceability may be limited by: (a) bankruptcy, insolvency,
reorganization, moratorium, receivership and/or other laws relating to or
affecting the rights of creditors generally (including, without limitation,
fraudulent transfer laws); (b) equitable principles of general applicability
(including, without limitation, equitable subordination, good faith, commercial
reasonableness and the possible unavailability of specific performance or
injunctive relief), regardless of whether considered in a proceeding in equity
or at law or whether codified by statute; or (c) the invalidity or
unenforceability, under certain circumstances, under California or federal law
or court decisions, of provisions indemnifying a party against liability for its
own wrongful or negligent acts or where much indemnification is contrary to
public policy.
5. The execution and delivery of the Agreement and the Merger Agreement by
CMI and Acquisition Corp., and the performance by CMI and Acquisition Corp. of
their respective obligations thereunder in accordance with the terms thereof, do
not: (a) contravene the Certificate of Incorporation or Bylaws of CMI or the
Articles of Incorporation or Bylaws of Acquisition Corp.; (b) to our knowledge,
result in a violation of any judgment, order or decree of any arbitrator to
which CMI or Acquisition Corp. is named as a party; (c) result in a breach of or
constitute a default under any contract or agreement listed as an Exhibit or
incorporated by reference in CMI's 10-K Annual Report for its fiscal year ended
June 30, 1994, or (d) to our knowledge, result in the creation of any mortgage,
lien, pledge, charge, security interest, claim or other encumbrance upon the
capital stock of the Company.
6. To our knowledge, there is no action, suit, claim, proceeding or
investigation pending or threatened against or involving CMI or Acquisition
Corp. before any court, governmental or regulatory authority, agency,
commission, or board of arbitration, which would prohibit or restrain the
consummation of the transactions contemplated by the Agreement or the Merger
Agreement, or action suit, claim, proceeding or investigation pending or
threatened against or involving CMI or Acquisition Corp. being handled by our
firm, the adverse determination of which would have a material adverse effect on
the properties, business, operations or financial condition of the Company.
7. To our knowledge, no consent, approval, authorization, or order of any
governmental agency or body or any court not obtained and in effect on the date
hereof is required on behalf of CMI or Acquisition Corp. for the lawful
consummation by them of the transactions contemplated by the Agreement or the
Merger Agreement.
1
<PAGE> 1
EXHIBIT 5.1
February 3, 1995
California Microwave, Inc.
985 Almanor Avenue
Sunnyvale, California 94086
Ladies and Gentlemen:
You have requested our opinion as counsel for California Microwave, Inc., a
Delaware corporation (the "Company"), in connection with the registration under
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, and issuance of up to 3,500,000 shares (the "Shares") of
Common Stock of the Company in connection with the merger of CMI Acquisition
Corporation, a Texas corporation and a wholly owned subsidiary of the Company
("Acquisition Corp."), with and into Microwave Networks Incorporated, a Texas
corporation ("MNI").
We have examined the Company's Registration Statement on Form S-4 in the
form to be filed with the Securities and Exchange Commission on or about
February 3, 1995 (the "Registration Statement"). We further have examined the
Certificate of Incorporation of the Company as certified by the Secretary of
State of the State of Delaware, the Bylaws and the minute books of the Company,
the signed Agreement and Plan of Reorganization and Merger (the "Agreement")
dated January 31, 1995 among the Company, Acquisition Corp. and MNI, and such
other documents as we deemed pertinent as a basis for the opinion hereinafter
expressed.
Based on the foregoing examination, we are of the opinion that, upon
issuance and sale in the manner described in the Registration Statement and the
Agreement, the Shares covered by the Registration Statement will be legally and
validly issued, fully paid and nonassessable.
We are members of the bar of the State of California and, as such, are not
experts in the laws of any jurisdiction other than the State of California. We
express no opinion in respect of the laws of any jurisdiction other than the
State of California and other than the General Corporation Law of the State of
Delaware and the federal laws of the United States of America.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Prospectus/Proxy Statement which is a part thereof.
Very truly yours,
HOWARD, RICE, NEMEROVSKI, CANADY,
ROBERTSON, FALK & RABKIN
A Professional Corporation
By/s/ RICHARD W. CANADY
Richard W. Canady
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME PLACE OF INCORPORATION
----------------------
<S> <C>
Satellite Transmission Systems, Inc. New York
ViaSat Technology Corp. Delaware
EFData Corp. California
Microwave Radio Corporation Delaware
California Microwave Foreign Sales Corporation Barbados, West Indies
California Microwave--Telecom Transmission Systems, Inc. Delaware
California Microwave Navigation Systems, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts",
"Selected Historical and Pro Forma Financial Information" and "CMI Selected
Financial Data" and to the use of our report dated August 5, 1994, with respect
to the consolidated financial statements of California Microwave, Inc. included
in the Prospectus/Proxy Statement which is made part of the Registration
Statement (Form S-4) of California Microwave, Inc. for the registration of
3,350,000 shares of its common stock.
Our audits also included the financial statement schedule listed in Item
21(b) of this Registration Statement. This schedule is the responsibility of
California Microwave, Inc.'s management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
Palo Alto, California
February 2, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts",
"Selected Historical and Pro Forma Financial Information" and "MNI Selected
Financial Data" and to the use of our report dated August 5, 1994, except for
Note 9 as to which the date is February 2, 1995, with respect to the
consolidated financial statements of Microwave Networks Incorporated included in
the Prospectus/Proxy Statement which is made part of the Registration Statement
(Form S-4) of California Microwave, Inc. for the registration of 3,350,000
shares of its common stock.
ERNST & YOUNG LLP
Houston, Texas
February 2, 1995
<PAGE> 1
EXHIBIT 99.1
CALIFORNIA MICROWAVE, INC.
------------------------
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
------------------------
TO BE HELD ON MARCH , 1995
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMON STOCK
The undersigned hereby appoints Philip F. Otto and George L. Spillane,
jointly and severally, as proxies with full power of substitution to represent
and to vote, as designated below, the common stock of the undersigned at the
Special Meeting of Stockholders of California Microwave, Inc. ("CMI") to be held
on March , 1995, or any adjournment or postponement thereof, for the purpose
of considering any business that may properly come before the Special Meeting,
including:
Item No. 1. Approval of the Agreement and Plan of Reorganization and Merger and
the related Agreement of Merger.
To approve an Agreement and Plan of Reorganization and Merger, dated as of
January 31, 1995, and the related Agreement of Merger, among CMI, CMI
Acquisition Corporation, a Texas corporation and a wholly owned subsidiary of
CMI ("Acquisition Corp."), and Microwave Networks Incorporated, a Texas
corporation ("MNI"), pursuant to which (i) Acquisition Corp. will be merged into
MNI, (ii) MNI will be the surviving corporation and a wholly owned subsidiary of
CMI; (iii) each outstanding share of MNI Common Stock and MNI Preferred Stock
("MNI Capital Stock") (other than shares, if any, as to which dissenters' rights
have been exercised pursuant to Texas law) will be converted into that number of
shares of CMI Common Stock determined by dividing 3,350,000 by the total number
of shares of MNI Capital Stock outstanding immediately prior to the closing
(including for this purpose any MNI Capital Stock issuable under then
outstanding options, warrants or other convertible securities) and rounding the
quotient off to the nearest ten-thousandth (.0001) subject to possible
adjustment as described in the Prospectus/Proxy Statement; and (iv) CMI will
assume all outstanding options of MNI.
FOR ------------------ AGAINST -------------- ABSTAIN ------------------
Item No. 2. In their discretion, the proxies herein appointed are hereby
authorized to vote upon such other matters as may properly come
before the Special Meeting.
This proxy, when properly executed, will be voted in the manner directed by
the undersigned stockholder. If no direction is made, this proxy, when properly
executed, will be voted FOR the approval of the Agreement and Plan of
Reorganization and Merger and the related Agreement of Merger.
Dated: , 1995
--------------------------------------
--------------------------------------
(Please sign your name(s) exactly as
shown on your stock certificate. If
you are signing as executor,
administrator, trustee or other
representative, please give your full
title.)
