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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
AMENDMENT NO. 1
DYNATECH CORPORATION
_____________________________________________
(Name of the Issuer)
DYNATECH CORPORATION, JOHN F. RENO,
ALLAN M. KLINE, JOHN R. PEELER, CDRD MERGER CORPORATION AND CLAYTON, DUBILIER &
RICE FUND V LIMITED PARTNERSHIP
______________________________________________
(Names of Person(s) Filing Statement)
COMMON STOCK, $.20 PAR VALUE
______________________________________________
(Title of Class of Securities)
268138104
______________________________________________
(CUSIP Number of Class of Securities)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
John F. Reno Franci J. Blassberg Dwight W. Quayle Peter B. Tarr
Chairman, President and Chief Debevoise & Plimpton Ropes & Gray Hale and Dorr LLP
Executive Officer 875 Third Avenue One International Place 60 State Street
Dynatech Corporation New York, NY 10022 Boston, MA 02110 Boston, MA 02109
3 New England Executive Park (212) 909-6000 (617) 951-7000 (617) 526-6000
Burlington, MA 01803
(781) 272-6100
</TABLE>
_______________________________________________
(Name, Address and Telephone Number of Persons
Authorized to Receive Notices and Communications
on Behalf of Person(s) Filing Statement)
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This statement is filed in connection with (check the appropriate box):
/ / a. The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Exchange Act of 1934.
[X] b. The filing of a registration statement under the Securities Act of
1933.
/ / c. A tender offer.
/ / d. None of the above.
/ / Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies:
CALCULATION OF FILING FEE
- --------------------------------------------------------------------
| Transaction Value* | Amount of Filing Fee |
| $785,168,258.13 | $157,034.00 |
- --------------------------------------------------------------------
* The amount of the Transaction Value calculated in accordance with Rule
0-11(b)(2) under the Securities Exchange Act of 1934, as amended, equals
the aggregate market value of the shares of Common Stock being acquired.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $6,202.00
Form or Registration No.: Registration Statement on Form S-4
Filing Party: Dynatech Corporation
Date Filed: January 27, 1998
Amount Previously Paid: $150,832.00
Form or Registration No.: Transaction Statement on Schedule 13E-3
Filing Party: Dynatech Corporation, John F. Reno,
Allan M. Kline, John R. Peeler, CDRD
Merger Corporation and Clayton, Dubilier
& Rice Fund V Limited Partnership
Date Filed: January 27, 1998
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INTRODUCTION
This Rule 13e-3 Transaction Statement (the "Statement") relates to the
Agreement and Plan of Merger dated as of December 20, 1997 (the "Merger
Agreement") between Dynatech Corporation, a Massachusetts corporation
("Dynatech" or the "Company") and CDRD Merger Corporation, a Delaware
corporation ("MergerCo"). A copy of the Merger Agreement is attached as Appendix
A to the Proxy Statement/Prospectus filed by the Company (the "Proxy Statement")
and is attached hereto as Exhibit (c)(1).
The Merger Agreement provides, among other things, for the merger of
MergerCo into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). In the Merger, (i) each
outstanding share of common stock, par value $0.20 per share (the "Common
Stock"), of the Company will be converted into the right to receive $47.75 in
cash and 0.5 shares of common stock, no par value, of the Surviving Corporation
(the "Recapitalized Common Stock") (except that any shares held by MergerCo or
held in the Company's treasury will be canceled and any Stockholder who
properly dissents from the Merger will be entitled to appraisal rights under
Massachusetts law); and (ii) each outstanding share of common stock, $.01 par
value per share, of MergerCo ("MergerCo Common Stock") will be converted into
one share of Recapitalized Common Stock.
Immediately prior to the Merger, (a) John F. Reno, Chairman, President and
Chief Executive Officer, together with two family trusts established by Mr.
Reno, will contribute 40,804 shares of Common Stock to MergerCo in exchange for
799,758 shares of MergerCo Common Stock and (b ) Clayton, Dubilier & Rice Fund V
Limited Partnership ("CDR Fund V") will purchase 110,790,770 shares of MergerCo
Common Stock for approximately $277 million. In the Merger, all such shares of
MergerCo Common Stock will be converted into Recapitalized Common Stock as
described above. As a result of the Merger and these related transactions,
immediately following the Merger, (x) CDR Fund V will own approximately 92.3% of
the outstanding Recapitalized Common Stock, (y) the stockholders of the Company
prior to the Merger other than Mr. Reno and his family trusts, will own
approximately 7% of the outstanding Recapitalized Common Stock and (z) Mr. Reno
(together with his family trusts) will own approximately 0.7% of the outstanding
Recapitalized Common Stock.
The following cross reference sheet shows the location of certain
information in the Proxy Statement/Registration Statement (the "Proxy
Statement") relating to the Merger filed by the Company with the Securities and
Exchange Commission. The information in the Proxy Statement, including all
appendices thereto, is hereby expressly incorporated herein by reference and the
responses to each item of this Statement are qualified in their entirety by the
provisions of the Proxy Statement. The Proxy Statement will be completed and, if
appropriate, amended prior to the time it is first sent or given to
stockholders. This Statement will be amended to reflect such completion or
amendment of the Proxy Statement.
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<PAGE>
Cross Reference Sheet
(Pursuant to General Instruction F to Schedule 13E-3)
Schedule 13E-3
Item Number and Caption Location in the Proxy Statement
- ----------------------- -------------------------------
Item 1. Issuer and Class of Security
Subject to the Transaction.
(a) Front page of Proxy Statement and
"The Company"
(b) Front page of Proxy Statement,
"Market Prices of Common Stock" and
"The Special Meeting -- Record Date
and Voting."
(c), (d) and (f) "Market Prices of Common Stock."
(e) Not applicable.
Item 2. Identity and Background.
(a) - (d) and (g) "Additional Information," "The
Company," "Management" and
"MergerCo, CDR Fund V and CDR."
(e) and (f) Not applicable.
Item 3. Past Contracts, Transactions
or Negotiations.
(a) and (b) "Special Factors -- Background of the
Merger," "-- Opinion of Financial
Advisor," and " -- Interests of
Certain Persons in the Merger."
Item 4. Terms of the Transaction.
(a) and (b) "Special Factors -- Interests of
Certain Persons in the Merger," "The
Merger and the Merger Agreement,"
"Certain Relationships and Related
Transactions" and "Merger Financings."
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Item 5. Plans or Proposals of the
Issuer or Affiliate.
(a) and (b) Not applicable.
(c) "Recapitalized Common Stock Following
the Merger," "Special Factors --
Interests of Certain Persons in the
Merger," "Risk Factors -- Control by
CDR Fund V," "Certain Relationships
and Related Transactions" and
"Management"
(d) "Management Discussion & Analysis--
Capital Resources and Liquidity,"
"Risk Factors -- Substantial Leverage;
Liquidity," "Pro Forma
Capitalization," "Ratio of Earnings to
Fixed Charges," "Merger Financings"
and "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
(e) "Merger Financings"
(f) and (g) "Risk Factors -- Delisting of Common
Stock on the New York Stock
Exchange" and " --Termination of
Exchange Act Reporting."
Item 6. Source and Amount of Funds
or Other Consideration.
(a) and (c) "Management Discussion & Analysis
--Capital Resources and Liquidity,"
"Fees and Expenses" and "Merger
Financings"
(b) "Fees and Expenses"
(d) Not applicable.
Item 7. Purpose(s), Alternatives,
Reasons and Effects.
(a), (b) and (c) "Summary -- Special Factors," "Special
Factors -- Background of the Merger,"
"-- Recommendation of Board; Reasons
for the Merger" and "-- Opinion of
Financial Advisor."
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(d) "Special Factors -- Certain Effects of
the Merger," "-- Material Federal
Income Tax Consequences," "--Interests
of Certain Persons in the Merger"
"Unaudited Pro Forma Condensed
Consolidated Financial Statements" and
"Certain Relationships and Related
Transactions."
Item 8. Fairness of the Transaction
(a), (b), (d) and (e) "Special Factors -- Background of the
Merger," "-- Recommendation of Board;
Reasons for the Merger" and
"-- Opinion of Financial Advisor."
(c) "Special Factors -- Recommendation of
Board; Reasons for the Merger" and
"The Special Meeting -- Vote
Required; Revocability of Proxies"
(f) Not applicable.
Item 9. Reports, Opinions,
Appraisals and Certain
Negotiations.
(a) and (b) "Special Factors -- Background of the
Merger" and "-- Opinion of Financial
Advisor" and "Appendix B -- Merrill
Lynch Opinion."
(c) Not applicable.
Item 10. Interest in Securities of
the Issuer.
(a) "Security Ownership of Certain
Beneficial Owners and Management."
(b) "Market Prices of Common Stock."
Item 11. Contracts, Arrangements or "Special Meeting -- Vote Required;
Understandings with Respect Revocability of Proxies," "Special
to the Issuer's Securities Factors --Interests of Certain
Persons in the Merger;" "Certain
Relationships and Related
Transactions" and "The Merger and the
Merger Agreement -- Effect on Stock
Options and Employee Benefit Matters."
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Item 12. Present Intention and
Recommendation of Certain
Persons with Regard to the
Transaction.
(a) and (b) "Special Meeting -- Vote Required;
Revocability of Proxies," "Special
Factors --Recommendation of Board;
Reasons for the Merger" and
"--Interests of Certain Persons in the
Merger."
Item 13. Other Provisions of the
Transaction.
(a) "Appraisal Rights."
(b) and (c) Not applicable.
Item 14. Financial Information.
(a) "Financial Statements," "Selected
Historical Consolidated Financial
Data," "Ratio of Earnings to Fixed
Charges, "Income (Earnings) Per Share"
and "Book Value Per Share."
(b) "Unaudited Pro Forma Condensed
Consolidated Financial Statements,"
"Ratio of Earnings to Fixed Charges,"
"Income (Earnings) Per Share" and
"Book Value Per Share."
Item 15. Persons and Assets
Employed, Retained or
Utilized.
(a) "Certain Relationships and Related
Transactions," "Special Factors --
Interests of Certain Persons in the
Merger" and "Management."
(b) "The Special Meeting - Solicitation
of Proxies."
Item 16. Additional Information Not applicable.
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<PAGE>
SCHEDULE 13E
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The issuer of the class of equity securities which is the subject of
this Statement is Dynatech Corporation, whose principal executive office is
located at 3 New England Executive Park, Burlington, MA 01803-5087. The
information set forth in the Section "The Company" of the Proxy Statement is
incorporated herein by reference.
(b) The title of the equity securities which are the subject of the Rule
13e-3 transaction is common stock, par value $0.20 per share ("Common Stock"),
and approximately 16,862,874 shares of such Common Stock were outstanding as of
March 4, 1998. Dynatech had approximately 937 stockholders of record as of
March 4, 1998. The information set forth in the Section "Market Prices of
Common Stock" and "The Special Meeting --Record Date and Voting" of the Proxy
Statement is incorporated herein by reference.
(c), (d) and (f). The information set forth in the Section "Market Prices
of Common Stock" of the Proxy Statement is incorporated herein by reference.
Neither MergerCo nor CDR Fund V have purchased any shares of Common Stock since
the commencement of Dynatech's second full fiscal year preceding the date
hereof.
(e). Not applicable.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(d) and (g). This Statement is being filed jointly by (i) Dynatech
Corporation, the issuer of the class of equity securities which is the subject
of this Rule 13e-3 transaction, (ii) John F. Reno, Allan M. Kline and John R.
Peeler (iii) MergerCo and (iv) CDR Fund V. The information set forth in the
Sections "Additional Information," "The Company," "Management" and "MergerCo,
CDR Fund V and CDR" of the Proxy Statement is incorporated herein by reference.
(e) and (f). None of the persons or entities with respect to whom
information is required by this item was, during the last five years, convicted
in a criminal proceeding (excluding traffic violations or similar misdemeanors)
or was party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was or is subject to
a judgment, decree or final order enjoining further violations of, or
prohibiting activities, subject to, federal or state securities laws or finding
of any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) and (b). The information set forth in the Sections "Special Factors --
Background of the Merger," "--Opinion of Financial Advisor" and "-- Interests of
Certain Persons in the Merger," of the Proxy Statement is incorporated herein by
reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) and (b). The information set forth in the Sections "Special Factors --
Interests of Certain Persons in the Merger," "The Merger and the Merger
Agreement," "Certain Relationships and Related Transactions" and "Merger
Financings" of the Proxy Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a) and (b). Not applicable.
-8-
<PAGE>
(c). The information set forth in the Sections "Recapitalized Common Stock
Following the Merger," "Special Factors -- Interests of Certain Persons in the
Merger," "Risk Factors -- Control by CDR Fund V," "Certain Relationships and
Related Transactions" and "Management" of the Proxy Statement is incorporated
herein by reference.
(d). The information set forth in the Sections "Management Discussion &
Analysis -- Capital Resources and Liquidity," "Risk Factors -- Substantial
Leverage; Liquidity," "Pro Forma Capitalization," "Ratio of Earnings to Fixed
Charges," "Merger Financings" and "Unaudited Proforma Consolidated Financial
Statements" of the Proxy Statement is incorporated herein by reference.
(e). The information set forth in the Section "Merger Financings" of the
Proxy Statement is incorporated herein by reference.
(f) and (g) The information set forth in the Sections "Risk Factors --
Delisting of Common Stock on the New York Stock Exchange," and "-- Termination
of Exchange Act Reporting" of the Proxy Statement is incorporated herein by
reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATIONS.
(a) and (c). The information set forth in the Sections "Management
Discussion & Analysis -- Capital Resources and Liquidity" and "Merger
Financings" of the Proxy Statement is incorporated herein by reference. No
plans or arrangements to finance or repay any borrowings used in connection with
the Merger have been made.
(b). The information set forth in the Section "Fees and Expenses" of the
Proxy Statement is incorporated herein by reference.
(d). Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a), (b) and (c). The information set forth in Sections "Summary --Special
Factors," "Special Factors -- Background of the Merger," "--Recommendation of
Board; Reasons for the Merger" and ""-- Opinion of Financial Adviser" of the
Proxy Statement is incorporated herein by reference.
(d). The information set forth in Sections "Special Factors -- Certain
Effects of the Merger," "-- Material Federal Income Tax Consequences," "--
Interests of Certain Persons in the Merger," "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and "Certain Relationships and Related
Transactions" of the Proxy Statement is incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a), (b), (d) and (e). The information set forth in Sections "Special
Factors -- Background of the Merger, " "-- Recommendation of Board; Reasons for
the Merger" and "-- Opinion of Financial Advisor" of the Proxy Statement is
incorporated herein by reference. John F. Reno, Chairman of the Board of
Directors of Dynatech, did not attend or vote at the meeting of the Board of
Directors at which the Merger was approved due to his participation with CDR
Fund V in the proposed merger transaction.
(c). The information set forth in the Section "Special Factors --
Recommendation of the Board of Directors; Reasons for the Merger" and "The
Special Meeting --Vote Required; Revocability of Proxies" of the Proxy Statement
is incorporated herein by reference.
(f). No such offer has been received.
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ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a) and (b). The information set forth in the Sections "Special Factors -
- - Background of the Merger," "--Opinion of Financial Advisor," and "Appendix B -
Merrill Lynch Opinion" of the Proxy Statement is incorporated herein by
reference.
(c). The Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
dated December 20, 1997, is included in the information to be circulated to
Stockholders and shall also be made available for inspection and copying at the
principal executive offices of the Company during its regular business hours by
any interested Stockholder of the Company or his or its representative who has
been designated in writing. At the written request of such Stockholder, a copy
of such opinion will be sent, at the Stockholder's expense, to such Stockholder
or his or its representative. The information set forth in Exhibit (b)(2) and
(b)(3) to this Statement will be made available for inspection and copying at
the principal executive offices of the Company by any interested Stockholder of
the Company or his or its representative who has been designated in writing. At
the written request of such a Stockholder, a copy of that Exhibit will be sent,
at the Stockholder's expense, to such Stockholder or his or its representatives.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a). The information set forth in the Section "Summary - Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement is
incorporated herein by reference.
(b). The information set forth in the Section "Market Prices of Common
Stock" of the Proxy Statement is incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES.
The information set forth in the Sections "Special Meeting -- Vote
Required; Revocability of Proxies," "Special Factors -- Interests of Certain
Persons in the Merger," "Certain Relationships and Related Transactions" and
"The Merger and the Merger Agreement -- Effect on Stock Options and Employee
Benefit Matters" of the Proxy Statement is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH
REGARD TO THE TRANSACTION
(a) and (b). The information set forth in the Sections "Special Meeting --
Vote Required; Revocability of Proxies," "Special Factors -- Recommendation of
Board; Reasons for the Merger" and "-- Interests of Certain Persons in the
Merger" of the Proxy Statement is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a). The information set forth in the Section "Appraisal Rights" of the
Proxy Statement is incorporated herein by reference.
(b) and (c). Not applicable.
ITEM 14. FINANCIAL INFORMATION
(a). The information set forth in the Sections "Financial Statements,"
"Selected Historical Consolidated Financial Data," "Ratio of Earnings to Fixed
Charges," "Income (Earnings) Per Share" and "Book Value Per Share" of the Proxy
Statement is incorporated herein by reference.
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<PAGE>
(b). The information set forth in the Section "Unaudited Pro Forma
Condensed Consolidated Financial Statements," "Ratio of Earnings to Fixed
Charges," "Income (Earnings) Per Share" and "Book Value Per Share" of the Proxy
Statement is incorporated herein by reference.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a). The information set forth in the Sections "Certain Relationships and
Related Transactions," "Special Factors -- Interests of Certain Persons in the
Merger" and "Management" of the Proxy Statement is incorporated herein by
reference.
(b). The information set forth in the Section "The Special Meeting --
Solicitation of Proxies" of the Proxy Statement is incorporated herein by
reference.
ITEM 16. ADDITIONAL INFORMATION
None.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS
Exhibit Description
(b)(1) Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
dated December 20, 1997 is attached as Appendix B to Proxy Statement
(Exhibit (d)).
(b)(2) Materials presented to the Board on December 12, 1997 by Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as advisor to the Special Committee
(excluding Appendix).
(b)(3) Materials presented to the Board on December 20, 1997 by Merrill Lynch,
Pierre, Fenner & Smith Incorporated, as advisor to the Special
Committee.
(c)(1) Agreement and Plan of Merger dated as of December 20, 1997 by and between
Dynatech and MergerCo is attached as Appendix A to Proxy Statement
(Exhibit (d)).
(d) Proxy Statement.
(e) Sections 85 through 98 of the Massachusetts Business Corporation Law
relating to appraisal rights is attached as Appendix D to Proxy Statement
(Exhibit (d)).
- ------------
* Previously filed
+ Certain confidential material contained in the document has been omitted and
filed separately with the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934, as amended.
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<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this Statement is true, complete and correct as
of March 13, 1998.
DYNATECH CORPORATION
By: /s/ John F. Reno
---------------------------------
Name : John F. Reno
Title: Chairman, President and
Chief Executive Officer
/s/ John F. Reno
---------------------------------
John F. Reno
/s/ Allan M. Kline
---------------------------------
Allan M. Kline
/s/ John R. Peeler
---------------------------------
John R. Peeler
CDRD MERGER CORPORATION
By: /s/ Joseph L. Rice, III
---------------------------------
Name : Joseph L. Rice, III
Title: Vice President and
Treasurer
CLAYTON, DUBILIER & RICE
FUND V LIMITED PARTNERSHIP
By: CD&R Associates V Limited
Partnership, the General Partner
By: CD&R Investment Associates, Inc.,
its managing general partner.
By: /s/ Joseph L. Rice, III
----------------------------------
Name: Joseph L. Rice, III
Title: President
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<PAGE>
DYNATECH CORPORATION
3 NEW ENGLAND EXECUTIVE PARK
BURLINGTON, MASSACHUSETTS 01803
, 1998
Dear Stockholders:
You are cordially invited to attend a Special Meeting of the Stockholders of
Dynatech Corporation (the "Company" or "Dynatech"), to be held on , 1998 at
a.m at the offices of Ropes & Gray, 27th Floor, 885 Third Avenue, New
York, New York.
As described in the enclosed Proxy Statement/Prospectus (the "Proxy
Statement"), at the Special Meeting you will be asked to approve and adopt an
Agreement and Plan of Merger dated as of December 20, 1997 (the "Merger
Agreement") between Dynatech and CDRD Merger Corporation, a Delaware
corporation ("MergerCo"), which was organized at the direction of Clayton,
Dubilier & Rice, Inc. ("CDR"), a private investment firm, and the Merger (as
defined below) contemplated thereby.
The Merger Agreement provides, among other things, for the merger of
MergerCo into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). In the Merger, (i) each
outstanding share of common stock, par value $0.20 per share, of the Company
(the "Common Stock") will be converted into the right to receive $47.75 in
cash and 0.5 shares of common stock, no par value, of the Surviving
Corporation (the "Recapitalized Common Stock") (except that any shares held by
MergerCo or held in the Company's treasury will be canceled and any
Stockholder who properly dissents from the Merger will be entitled to
appraisal rights under Massachusetts law); and (ii) each outstanding share of
common stock, $.01 par value per share, of MergerCo ("MergerCo Common Stock")
will be converted into one share of Recapitalized Common Stock.
Immediately prior to the Merger, (a) John F. Reno, Chairman, President and
Chief Executive Officer, together with two family trusts established by Mr.
Reno, will contribute 40,804 shares of Common Stock to MergerCo in exchange
for 799,758 shares of MergerCo Common Stock and (b) Clayton, Dubilier & Rice
Fund V Limited Partnership ("CDR Fund V"), which is managed by CDR, will
purchase 110,790,770 shares of MergerCo Common Stock for approximately $277
million. In the Merger, all such shares of MergerCo Common Stock will be
converted into Recapitalized Common Stock as described above. As a result of
the Merger and these related transactions, immediately following the Merger,
(x) CDR Fund V will own approximately 92.3% of the outstanding Recapitalized
Common Stock, (y) the stockholders of the Company prior to the Merger, other
than Mr. Reno and his family trusts, will own approximately 7% of the
outstanding Recapitalized Common Stock and (z) Mr. Reno (together with his
family trusts) will own approximately 0.7% of the outstanding Recapitalized
Common Stock.
It is the Company's belief that it can delist the Common Stock from the New
York Stock Exchange upon or following the Merger and it is the Company's
intention not to list the Recapitalized Common Stock on any national
securities exchange or automated quotation system. Such delisting is likely to
have a material adverse effect on the trading market for and liquidity of, and
may have a material adverse effect on the market value of, shares of
Recapitalized Common Stock.
At a meeting on December 20, 1997, a Special Committee (the "Special
Committee") of the Board of Directors of the Company (the "Board"),
recommended that the Board approve the Merger Agreement and the Merger, and
the Board (other than Mr. Reno, who did not attend or vote at such meeting due
to his participation with CDR and CDR Fund V in the proposed Merger)
unanimously approved the Merger Agreement and the transactions contemplated
thereby, including the Merger. The Board has determined that the Merger is
fair to and in the best interests of the stockholders of the Company (the
"Stockholders"). The recommendation of the Special Committee and the approval
and determination of the Board were based on a number of factors described in
the Proxy Statement, including the written opinion dated as of December 20,
1997 of Merrill Lynch,
<PAGE>
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), the financial adviser
engaged by the Board, to the effect that, based upon and subject to certain
factors and assumptions stated therein, as of such date, the proposed
consideration to be received in the Merger by the Stockholders (other than
MergerCo, and the Company with respect to treasury stock) is fair from a
financial point of view to such Stockholders. The full text of the written
opinion of Merrill Lynch, which sets forth a description of the assumptions
made, factors considered, and limitations on the review undertaken is attached
as Appendix B to the enclosed Proxy Statement and the Stockholders are urged
to read such opinion carefully in its entirety.
Stockholders are encouraged to review the "Risk Factors" section in the
enclosed Proxy Statement for a discussion of certain factors that should be
considered in connection with your consideration of the Merger.
The Board recommends that Stockholders vote FOR the approval and adoption of
the Merger Agreement and the Merger.
Approval and adoption of the Merger Agreement and the Merger require the
affirmative vote of the holders of two-thirds of the shares of Common Stock
outstanding on March 4, 1998.
You are urged to read the accompanying Proxy Statement, which describes the
terms of the Merger Agreement and the Merger. A copy of the Merger Agreement
is included as Appendix A to the enclosed Proxy Statement.
It is very important that your shares be represented at the Special Meeting.
We invite all Stockholders to attend the Special Meeting. Whether or not you
plan to attend the Special Meeting, you are requested to complete, date, sign
and return the proxy card in the enclosed postage-paid envelope. Failure to
return a properly executed proxy card or vote at the Special Meeting will have
the same effect as a vote against approval of the Merger Agreement and the
Merger. Executed proxies with no instructions indicated thereon will be voted
for approval and adoption of the Merger Agreement and the Merger. If you
attend the Special Meeting, you may vote in person even though you have sent
in your proxy.
Please do not send in your stock certificates at this time. In the event the
Merger Agreement is approved by the Stockholders and the Merger is
consummated, you will be sent a letter of transmittal for that purpose as soon
as reasonably practicable thereafter.
Sincerely,
-----------------------------------
John F. Reno
Chairman, President and Chief
Executive Officer
2
<PAGE>
DYNATECH CORPORATION
3 NEW ENGLAND EXECUTIVE PARK
BURLINGTON, MASSACHUSETTS 01803
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders (including
any adjournments or postponements thereof, the "Special Meeting") of Dynatech
Corporation ("Dynatech" or the "Company") will be held on , 1998 at
a.m. at the offices of Ropes & Gray, 27th Floor, 885 Third Avenue, New York,
New York, for the following purposes, all of which are more fully described in
the accompanying Proxy Statement/Prospectus (the "Proxy Statement"):
(i) To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated as of December 20, 1997 (the "Merger
Agreement") between Dynatech and CDRD Merger Corporation, a Delaware
corporation ("MergerCo"), which was organized at the direction of Clayton,
Dubilier & Rice, Inc. ("CDR"), a private investment firm, and to approve
the Merger (as defined below) contemplated thereby.
The Merger Agreement provides, among other things, for the merger of
MergerCo into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). In the Merger, (i)
each outstanding share of common stock, par value $0.20 per share (the
"Common Stock"), of the Company will be converted into the right to receive
$47.75 in cash and 0.5 shares of common stock, no par value, of the
Surviving Corporation (the "Recapitalized Common Stock") (except that any
shares held by MergerCo or held in the Company's treasury will be canceled
and any Stockholder who properly dissents from the Merger will be entitled
to appraisal rights under Massachusetts law); and (ii) each outstanding
share of common stock, $.01 par value per share of MergerCo ("MergerCo
Common Stock") will be converted into one share of Recapitalized Common
Stock.
Immediately prior to the Merger, (a) John F. Reno, Chairman, President
and Chief Executive Officer, together with two family trusts established by
Mr. Reno, will contribute 40,804 shares of Common Stock to MergerCo in
exchange for 799,758 shares of MergerCo Common Stock and (b) Clayton,
Dubilier & Rice Fund V Limited Partnership ("CDR Fund V"), which is managed
by CDR, will purchase 110,790,770 shares of MergerCo Common Stock for
approximately $277 million. In the Merger, all such shares of MergerCo
Common Stock will be converted into Recapitalized Common Stock as described
above. As a result of the Merger and these related transactions,
immediately following the Merger, (x) CDR Fund V will own approximately
92.3% of the outstanding Recapitalized Common Stock, (y) stockholders of
the Company prior to the Merger, other than Mr. Reno and his family trusts,
will own approximately 7% of the outstanding Recapitalized Common Stock and
(z) Mr. Reno (together with his family trusts) will own approximately 0.7%
of the outstanding Recapitalized Common Stock.
It is the Company's belief that it can delist the Common Stock from the
New York Stock Exchange upon or following the Merger and it is the
Company's intention not to list the Recapitalized Common Stock on any
national securities exchange or automated quotation system. Such delisting
is likely to have a material adverse effect on the trading market for and
liquidity of, and may have a material adverse effect on the market value
of, shares of Recapitalized Common Stock.
(ii) To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on March 4, 1998 (the
"Record Date") as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only holders of
Common Stock ("Stockholders") of record at the close of business on the Record
Date will be entitled to notice of and to vote at the Special Meeting.
<PAGE>
The accompanying Proxy Statement describes the Merger Agreement, the Merger
and the actions to be taken in connection with the Merger. To ensure that your
vote will be counted, please complete, date and sign the enclosed proxy card
and return it promptly in the enclosed postage-page envelope, whether or not
you plan to attend the Special Meeting. Executed proxies with no instructions
indicated thereon will be voted for approval and adoption of the Merger
Agreement and the Merger. You may revoke your proxy in the manner described in
the accompanying Proxy Statement at any time before it is voted at the Special
Meeting.
Approval and adoption of the Merger Agreement and the Merger require the
affirmative vote of the holders of two-thirds of the shares of Common Stock
outstanding on the Record Date.
In the event that there are not sufficient votes to approve and adopt the
Merger Agreement and the Merger, it is expected that the Special Meeting will
be postponed or adjourned in order to permit further solicitation of proxies
by the Company.
In accordance with Section 87, Chapter 156B of the General Laws of
Massachusetts, holders of Common Stock are advised as follows with respect to
the proposal to approve the Merger Agreement and the Merger:
If the action proposed in item (i) is approved by the Stockholders at the
meeting and effected by the Company, any stockholder (1) who, before the
taking of the vote on the approval of such action, files with the Company
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in writing
from the Company, within twenty days after the date of mailing to the
stockholder of notice in writing that the corporate action has become
effective, payment for his shares and an appraisal of the value thereof. The
Company and any such stockholder shall in such case have the rights and duties
and shall follow the procedure set forth in Sections 88 to 98, inclusive, of
Chapter 156B of the General Laws of Massachusetts.
Reference is made to "Appraisal Rights" in the Proxy Statement and to
Sections 85 through 98 of Chapter 156B of the General Laws of Massachusetts,
copies of which are attached to the Proxy Statement as Appendix D.
By Order of the Board of Directors
_____________________________________
Peter B. Tarr
Clerk
THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES
OF COMMON STOCK ENTITLED TO VOTE THEREON IS REQUIRED TO APPROVE AND ADOPT THE
MERGER AGREEMENT AND THE MERGER. THE BOARD OF DIRECTORS URGES YOU TO SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON. YOU MAY REVOKE THE PROXY AT ANY TIME PRIOR TO
ITS EXERCISE IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT. ANY
STOCKHOLDER PRESENT AT THE SPECIAL MEETING, INCLUDING ANY ADJOURNMENT OR
POSTPONEMENT THEREOF, MAY REVOKE SUCH HOLDER'S PROXY AND VOTE PERSONALLY ON
THE MERGER AGREEMENT AND THE MERGER.
STOCK CERTIFICATES SHOULD BE RETAINED UNTIL LETTERS OF TRANSMITTAL ARE
RECEIVED AFTER THE EFFECTIVE TIME OF THE MERGER. SEE "THE MERGER AND THE
MERGER AGREEMENT--CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF
CERTIFICATES."
2
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
This Proxy Statement/Prospectus (the "Proxy Statement") is being furnished
to the holders of common stock, par value $0.20 per share (the "Common
Stock"), of Dynatech Corporation, a Massachusetts corporation (the "Company"
or "Dynatech"), in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board of Directors" or the "Board") for use at
the Special Meeting of Stockholders to be held on , 1998 at a.m. at
the offices of Ropes & Gray, 27th Floor, 885 Third Avenue, New York, New York,
and at any adjournments or postponements thereof (the "Special Meeting"). The
Board of Directors has fixed the close of business on March 4, 1998 as the
record date (the "Record Date") for the Special Meeting with respect to this
solicitation.
At the Special Meeting, the holders of Common Stock ("Stockholders") will
consider and vote upon a proposal to approve and adopt an Agreement and Plan
of Merger dated as of December 20, 1997 (the "Merger Agreement") between the
Company and CDRD Merger Corporation, a Delaware corporation ("MergerCo"),
which was organized at the direction of Clayton, Dubilier & Rice, Inc.
("CDR"), a private investment firm, and approve the Merger (as defined below)
contemplated thereby. A copy of the Merger Agreement is attached to this Proxy
Statement as Appendix A.
The Merger Agreement provides, among other things, for the merger of
MergerCo into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). In the Merger, (i) each
outstanding share of Common Stock will be converted into the right to receive
$47.75 in cash and 0.5 shares of common stock, no par value, of the Surviving
Corporation (the "Recapitalized Common Stock") (such cash and stock
collectively to be known as the "Merger Consideration") except that any shares
held by MergerCo or held in the Company's treasury will be canceled and any
Stockholder who properly dissents from the Merger (the "Dissenting
Stockholders") will be entitled to appraisal rights under Sections 85 to 98 of
Chapter 156B of the General Laws of Massachusetts (the "MBCL"); and (ii) each
outstanding share of common stock, $.01 par value per share, of MergerCo
("MergerCo Common Stock") will be converted into one share of Recapitalized
Common Stock.
Immediately prior to the Merger, (a) John F. Reno, Chairman, President and
Chief Executive Officer, together with two family trusts established by Mr.
Reno, will contribute 40,804 shares of Common Stock to MergerCo in exchange
for 799,758 shares of MergerCo Common Stock and (b) Clayton, Dubilier & Rice
Fund V Limited Partnership ("CDR Fund V"), which is managed by CDR, will
purchase 110,790,770 shares of MergerCo Common Stock for approximately $277
million. In the Merger, such shares of MergerCo Common Stock will be converted
into Recapitalized Common Stock as described above. As a result of the Merger
and these related transactions, immediately following the Merger, (x) CDR Fund
V will own approximately 92.3% of the outstanding Recapitalized Common Stock,
(y) Stockholders, other than Mr. Reno and his family trusts will own
approximately 7% of the outstanding Recapitalized Common Stock and (z) Mr.
Reno (together with his family trusts) will own approximately 0.7% of the
outstanding Recapitalized Common Stock.
It is the Company's belief that it can delist the Common Stock from the New
York Stock Exchange upon or following the Merger and it is the Company's
intention not to list the Recapitalized Common Stock on any national
securities exchange or automated quotation system. Such delisting is likely to
have a material adverse effect on the trading market for and liquidity of, and
may have a material adverse effect on the market value of shares of
Recapitalized Common Stock. See "Risk Factors--Delisting of Common Stock on
the New York Stock Exchange."
<PAGE>
This Proxy Statement constitutes a prospectus of the Company with respect to
up to 8,409,473 shares of Recapitalized Common Stock to be issued in the
Merger to Stockholders other than Dissenting Stockholders.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT AND MERGER.
Approval and adoption of the Merger Agreement and the Merger require the
affirmative vote of the holders of two-thirds of the shares of Common Stock
outstanding on the Record Date.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement and to consult with their personal legal,
financial and tax advisers.
This Proxy Statement, the accompanying Notice of Special Meeting and the
accompanying form of proxy are first being mailed to Stockholders on or about
, 1998.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
SEE "RISK FACTORS" BEGINNING ON PAGE 37 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF COMMON STOCK IN CONNECTION WITH THEIR
CONSIDERATION OF THE MERGER.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE
FAIRNESS OR MERITS OF THIS TRANSACTION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR MERGERCO. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational 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 "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549, and at the following Regional
Offices of the Commission: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048; and Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such reports
and other information may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, DC 20549, on payment of
prescribed charges. In addition, such reports, proxy statements and other
information may be electronically accessed at the Commission's site on the
World Wide Web located at http://www.sec.gov. Such reports, proxy statements
and other information concerning the Company may also be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
Pursuant to the Merger Agreement, the Company is required to continue to
comply with the reporting requirements under the Exchange Act and will
continue to file periodic reports (including annual and quarterly reports)
with the Commission for at least five years after the consummation of the
Merger. Notwithstanding this requirement, in certain circumstances provided
for in the Merger Agreement, the Company has the right to terminate the
registration of Recapitalized Common Stock under Section 12 of the Exchange
Act prior to the end of such five-year period. If the Company ceases to be
subject to the reporting requirements of the Exchange Act, the Company does
not plan to provide any reports or information to the Stockholders other than
as may be required by law.
All information contained in this Proxy Statement concerning MergerCo, CDR
and CDR Fund V has been supplied by MergerCo and has not been independently
verified by the Company. Except as otherwise indicated, all other information
contained in this Proxy Statement has been supplied by the Company.
This Proxy Statement also constitutes a prospectus of the Company filed as
part of a Registration Statement on Form S-4 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"). This
Proxy Statement omits certain information contained in the Registration
Statement and the exhibits thereto. Reference is made to the Registration
Statement and related exhibits for further information with respect to the
Company and the Recapitalized Common Stock. Statements contained herein
concerning the contents of any document referred to herein are qualified by
reference to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission.
ADDITIONAL INFORMATION
This Proxy Statement includes information to be disclosed pursuant to Rule
13e-3 under the Exchange Act, which governs so-called "going private"
transactions by certain issuers or their affiliates. The Company, certain
executives of the Company, MergerCo and CDR Fund V are filing a Rule 13e-3
Transaction Statement (the "Schedule 13E-3") to furnish information with
respect to the transactions described herein. This Proxy Statement does not
contain all the information set forth in the Schedule 13E-3, parts of which
are omitted in accordance with the regulations of the Commission. The Schedule
13E-3, and any amendments and exhibits thereto, including exhibits filed as a
part thereof, will be available for inspection at the offices of the
Commission as set forth above, as well as at the offices of the Company at: 3
New England Executive Park, Burlington, MA 01803. A copy of the Schedule 13E-
3, and any amendments and exhibits thereto, will be transmitted to any
Stockholder of the Company upon written request at the expense of such
Stockholder.
The date of this Proxy Statement is , 1998.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 3
ADDITIONAL INFORMATION.................................................... 3
SUMMARY................................................................... 7
SPECIAL FACTORS........................................................... 16
Background of the Merger................................................ 16
Certain Effects of the Merger........................................... 20
Recommendation of Board; Reasons for the Merger......................... 20
Opinion of Financial Adviser............................................ 21
Certain Projections..................................................... 27
Material Federal Income Tax Consequences................................ 27
Interests of Certain Persons in the Merger.............................. 32
RISK FACTORS.............................................................. 35
Control by CDR Fund V................................................... 35
Delisting of Common Stock on the New York Stock Exchange................ 35
Termination of Exchange Act Reporting................................... 36
Potential Dilution of Stockholders...................................... 36
Substantial Leverage; Liquidity......................................... 36
Fraudulent Transfer Considerations...................................... 37
Dependence on Communications Industry................................... 38
Highly Competitive Market............................................... 38
Rapid Technological Change; Challenges of New Product Introductions..... 39
Product Certifications and Evolving Industry Standards.................. 39
Dependence on Sole Source Suppliers and Licensors....................... 40
Risks Relating to Business and Growth Strategy, Including Acquisitions.. 40
Risks Relating to Itronix............................................... 40
Reliance on Key Personnel............................................... 41
Restrictive Financing Covenants......................................... 41
Year 2000 Compliance.................................................... 42
Forecasts; Limits of Reliability ....................................... 42
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA........................... 43
MANAGEMENT DISCUSSION & ANALYSIS.......................................... 45
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 45
Overview................................................................ 45
Supplementary Pro Forma Financial Information for the Nine Months Ended
December 31, 1997 Compared to the Nine Months Ended December 31, 1996.. 47
Historical Results...................................................... 49
Nine Months Ended December 31, 1997 Compared to Nine Months Ended
December 31, 1996 on an Historical Basis............................... 49
Fiscal 1997 Compared to Fiscal 1996--Historical Results................. 49
Fiscal 1996 Compared to Fiscal 1995--Historical Results................. 50
Capital Resources and Liquidity......................................... 51
New Pronouncements...................................................... 53
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA................. 54
PRO FORMA CAPITALIZATION.................................................. 60
RATIO OF EARNINGS TO FIXED CHARGES........................................ 61
INCOME (EARNINGS) PER SHARE............................................... 62
BOOK VALUE PER SHARE...................................................... 62
MARKET PRICES OF COMMON STOCK............................................. 63
THE COMPANY............................................................... 65
Competitive Strengths................................................... 65
Business Strategy....................................................... 66
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Industry Overview....................................................... 67
Products and Services................................................... 69
Product Development..................................................... 72
Customers and Marketing................................................. 72
Product Assembly........................................................ 73
Competition............................................................. 73
International........................................................... 73
Discontinued Operations and Divested Businesses......................... 73
Backlog................................................................. 73
Employees............................................................... 73
Litigation.............................................................. 74
Intellectual Property................................................... 74
Suppliers............................................................... 74
Environmental Matters................................................... 74
Properties.............................................................. 75
Year 2000............................................................... 75
THE SPECIAL MEETING....................................................... 76
Matters to be Considered at the Special Meeting......................... 76
Record Date and Voting.................................................. 76
Vote Required; Revocability of Proxies.................................. 77
Solicitation of Proxies................................................. 78
THE MERGER AND THE MERGER AGREEMENT....................................... 79
Merger Consideration.................................................... 79
Effective Time of the Merger............................................ 79
Conversion of Shares; Procedures for Exchange of Certificates........... 79
Fractional Shares....................................................... 80
Accounting Treatment.................................................... 80
Effect on Stock Options and Employee Benefit Matters.................... 80
Representations and Warranties.......................................... 81
No Solicitation......................................................... 81
Cooperation and Best Efforts............................................ 82
Conduct of Business Pending the Merger.................................. 82
Indemnification and Insurance........................................... 83
Conditions to the Merger................................................ 83
Termination; Termination Fees........................................... 84
Amendment; Waiver....................................................... 84
DESCRIPTION OF DYNATECH CAPITAL STOCK..................................... 85
Common Stock............................................................ 85
Series A Junior Participating Cumulative Preferred Stock................ 85
RECAPITALIZED COMMON STOCK FOLLOWING THE MERGER........................... 87
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 88
REGULATORY APPROVALS...................................................... 88
MANAGEMENT................................................................ 89
EXECUTIVE COMPENSATION.................................................... 92
Summary Compensation Table.............................................. 92
Option Grants in Last Fiscal Year....................................... 93
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values.......................................................... 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 95
Special Termination Agreements.......................................... 95
Employment and Other Agreements......................................... 95
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION................... 97
REPORTS UNDER SECTION 16(a) OF THE EXCHANGE ACT........................... 98
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN FOR THE YEAR ENDED MARCH
31, 1997................................................................ 99
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 100
Pre-Merger Beneficial Ownership........................................ 100
Post-Merger Ownership of Outstanding Recapitalized Common Stock........ 101
FEES AND EXPENSES........................................................ 102
MERGER FINANCINGS........................................................ 103
Source and Amount of Funds ............................................ 103
Senior Secured Credit Facilities....................................... 103
Structure............................................................. 104
Availability.......................................................... 104
Security; Guaranty.................................................... 104
Interest.............................................................. 105
Fees.................................................................. 105
Covenants............................................................. 105
Events of Default..................................................... 105
Senior Subordinated Notes.............................................. 105
Sale of MergerCo Common Stock.......................................... 106
MERGERCO, CDR FUND V and CDR............................................. 107
MergerCo............................................................... 107
CDR Fund V............................................................. 107
CDR.................................................................... 108
APPRAISAL RIGHTS......................................................... 109
OTHER INFORMATION AND STOCKHOLDER PROPOSALS.............................. 110
EXPERTS.................................................................. 110
LEGAL COUNSEL............................................................ 110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... F-1
REPORT OF INDEPENDENT ACCOUNTANTS........................................ F-2
FINANCIAL STATEMENTS..................................................... F-3
Appendix A--Merger Agreement............................................. A-1
Appendix B--Merrill Lynch Opinion........................................ B-1
Appendix C--Amended and Restated Articles of Organization of the
Company................................................................. C-1
Appendix D--Sections 85-98 of Chapter 156B of the General Laws of
Massachusetts........................................................... D-1
</TABLE>
6
<PAGE>
SUMMARY
The following is a summary of material information contained elsewhere in
this Proxy Statement. This summary is not intended to be a complete description
and is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement or in the documents attached as Appendices
hereto. Each Stockholder is urged to give careful consideration to all the
information contained in this Proxy Statement and the Appendices before voting.
FOR A DISCUSSION OF CERTAIN IMPORTANT FACTORS THAT SHOULD BE CONSIDERED BY
HOLDERS OF COMMON STOCK IN CONNECTION WITH THEIR CONSIDERATION OF THE MERGER,
INCLUDING CERTAIN RISKS RELATED TO THE RECAPITALIZED COMMON STOCK, SEE "RISK
FACTORS."
SPECIAL FACTORS
BACKGROUND OF THE MERGER
For a description of the events leading to the approval and adoption of the
Merger and the Merger Agreement by the Board of Directors, see "Special
Factors--Background of the Merger."
Purpose and Structure of the Merger
The purpose of the Merger and related transactions is to enable CDR Fund V,
through MergerCo, to acquire a controlling interest in the Company, and to
provide Stockholders with the opportunity to receive, for each share of Common
Stock held by them, $47.75 in cash and 0.5 fully paid and nonassessable shares
of the Recapitalized Common Stock. See "The Merger and the Merger Agreement."
Certain Effects of the Merger
On March 4, 1998, Stockholders (other than the directors and executive
officers of the Company) owned 16,745,338 shares of Common Stock which
represent approximately 99.3% of the outstanding Common Stock. Upon
consummation of the Merger, (a) Mr. Reno and his family trusts will own
approximately 0.7% of the outstanding Recapitalized Common Stock and (b) shares
of Recapitalized Common Stock received by Stockholders (other than Mr. Reno and
his family trusts) in the Merger will represent approximately 7% of the
outstanding Recapitalized Common Stock. Because the Merger will be accounted
for as a recapitalization, it will have no impact on the historical basis of
the Company's operating assets and liabilities. As a result of the Merger,
there will be a deficit in stockholders' equity of the Company of approximately
$355,018,000 on a pro forma basis as of December 31, 1997. See "Risk Factors--
Substantial Leverage; Liquidity" and "Pro Forma Capitalization."
RECOMMENDATION OF BOARD; REASONS FOR THE MERGER
At a meeting on December 20, 1997, a Special Committee of the Board (the
"Special Committee"), comprised of three independent directors, recommended
that the Board approve the Merger Agreement and the Merger and the Board (other
than John F. Reno, who did not attend or vote at such meeting due to his
participation with CDR and CDR Fund V in the Merger) unanimously approved the
Merger Agreement and the transactions contemplated thereby, including the
Merger. The Board has determined that the Merger Agreement is fair to and in
the best interests of the Stockholders and recommends that the Stockholders
vote FOR the approval and adoption of the Merger Agreement and the Merger.
Management has not made a determination as to the fairness of the Merger to the
unaffiliated Stockholders.
For a discussion of the factors considered by the Special Committee and the
Board in reaching their recommendations and determination, see "Special
Factors--Background of the Merger" and "--Recommendation of Board; Reasons for
the Merger."
7
<PAGE>
OPINION OF FINANCIAL ADVISER
On December 20, 1997, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), financial adviser to the Board, delivered its oral opinion
to the Special Committee and the Board, which was confirmed by its written
opinion to the Board, dated as of December 20, 1997, to the effect that, based
upon and subject to certain factors and assumptions stated therein, as of such
date, the Merger Consideration to be received in the Merger by the Stockholders
(other than MergerCo and the Company, with respect to treasury stock) is fair
from a financial point of view to such Stockholders. The full text of the
written opinion of Merrill Lynch, which sets forth a description of the
assumptions made, factors considered and limitations on the review undertaken,
is attached hereto as Appendix B. Stockholders are urged to read such opinion
carefully in its entirety. See "Special Factors--Opinion of Financial Adviser."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In general, Stockholders who realize a gain in connection with the Merger
should be taxed in the same manner as if they had sold their Common Stock for a
price per share equal to the sum of $47.75 and an amount of cash equal to the
fair market value of 0.5 shares of Recapitalized Common Stock. However, the tax
consequences to each Stockholder are unclear in certain respects and in any
event will depend on each Stockholder's particular circumstances and tax
position. Stockholders should read carefully the discussion in "Special
Factors--Material Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers of the Company have interests, described herein,
that may present them with potential conflicts of interest in connection with
the Merger. The Board of Directors is aware of the conflicts described below
and considered them in addition to other matters described under "Special
Factors--Recommendation of Board; Reasons for the Merger."
Pursuant to the Merger Agreement, except as provided in the following
paragraphs, (i) each outstanding option to purchase Common Stock ("Company
Stock Option") will become fully vested and exercisable immediately prior to
the Merger, (ii) any Company Stock Option that is outstanding immediately prior
to the Effective Time will be cancelled, and (iii) each holder of any such
cancelled Company Stock Option will receive an amount in cash (subject to any
applicable withholding taxes) equal to the product of (x) the number of shares
of Common Stock subject to such Company Stock Option multiplied by (y) the
excess, if any, of $49.00 over the per share exercise price for such share of
Common Stock ("Option Cancellation Payments"). On December 31, 1997 there were
2,142,279 Company Stock Options outstanding.
In connection with the Merger, the Company entered into employment agreements
with Messrs. Reno, Kline and Peeler that become effective at the Effective Time
(as defined herein) and supersede the special termination agreements currently
in effect for each such employee. The employment agreements generally provide
for (i) an initial term of five years, commencing at the Effective Time, (ii)
compensation and benefit arrangements that are consistent with the current
compensation and benefit arrangements for such officers, (iii) the payment of
severance compensation and benefits in the event of certain qualifying
terminations of employment following the Merger and (iv) the election of such
officers to serve as directors of the Company during their employment with the
Company. Pursuant to his employment agreement, Mr. Reno and his family trusts
will contribute 40,804 shares of Common Stock to MergerCo in exchange for
799,758 shares of MergerCo Common Stock, which shares of MergerCo Common Stock
will be converted into Recapitalized Common Stock in the Merger. Messrs. Reno,
Kline and Peeler currently own options to purchase 413,000 shares, 66,000
shares and 166,400 shares, respectively, of Common Stock. The agreements also
provide for the conversion of an aggregate of 616,600 Company Stock Options
currently held by Messrs. Reno, Kline and Peeler into equivalent options to
purchase shares of Recapitalized Common Stock (the exercise prices of which
preserve the economic value of their Company Stock Options), all of which,
other than 48,439 Company
8
<PAGE>
Stock Options held by Mr. Reno, will be fully vested and exercisable. For a
description of the material terms of such new employment agreements, see
"Certain Relationships and Related Transactions--Employment and Other
Agreements." In addition, an aggregate of approximately 483,000 Company Stock
Options held by certain other members of the Company's management will be
converted into equivalent options to purchase shares of Recapitalized Stock
(the exercise prices of which preserve the economic value of their Company
Stock Options), all of which will be fully vested and exercisable, in lieu of
such members of management receiving an Option Cancellation Payment for such
options.
Also following the Effective Time, the Company expects to authorize the grant
of options to purchase approximately 15,680,000 shares of Recapitalized Common
Stock to certain officers and key employees pursuant to one of the Company
Stock Plans.
Prior to the Merger, assuming the vesting and exercise of all Company Stock
Options, Messrs. Reno, Kline and Peeler would own shares representing 2.39%,
0.36% and 0.99%, respectively, of the outstanding Common Stock. Following the
Merger, assuming no Stockholders exercise their appraisal rights, the
conversion of Company Stock Options as described above, the issuance of the
options described in the immediately preceding paragraph above and the vesting
and exercise of all outstanding options, Messrs. Reno, Kline and Peeler would
own shares representing %, % and %, respectively, of the outstanding
Recapitalized Common Stock on a fully diluted basis.
For a list of the names of the persons expected to be directors or executive
officers of the Surviving Corporation (together with such persons'
biographies), see "Management."
Pursuant to the Merger Agreement, for a period of six years after the
Effective Time, the Surviving Corporation has agreed to indemnify officers,
directors, employees and agents of the Company and its subsidiaries against
losses, claims, damages, expenses or liabilities arising out of actions or
omissions or alleged actions or omissions occurring at or prior to the
Effective Time to the same extent provided for in the Company's Restated
Articles of Organization and By-Laws, as amended (to the extent consistent with
applicable law). Further, the Company will maintain during such six-year period
directors' and officers' liability insurance covering the persons who are
currently covered by the Company's existing directors' and officers' liability
insurance with respect to claims arising from facts or events which occurred at
or prior to the Effective Time, on terms and conditions no less favorable to
such directors and officers than those in effect as of December 20, 1997.
Upon or following the Merger, the Company expects to enter into a consulting
agreement with CDR which will provide for (i) an annual fee, initially of
$500,000, for providing management and financial consulting services to the
Company and its subsidiaries and (ii) reimbursement of out-of-pocket expenses
it incurs after the Merger, for so long as CDR Fund V has an investment in the
Company and its subsidiaries. Upon or following the Merger, it is expected that
the Company will pay CDR a transaction fee of approximately $9.2 million, plus
reimbursement of out-of-pocket expenses incurred by CDR in consideration for
services provided by CDR in arranging the Merger, arranging and negotiating the
financing for the Merger, and related services. In addition, it is expected
that, upon and following the Merger, the Company will agree to indemnify CDR
and CDR Fund V and certain related parties, subject to certain limitations,
against all claims and liabilities arising out of or in connection with the
Securities Act, the Exchange Act, or any other applicable securities or other
laws, in connection with the Merger and related transactions and the operation
of the business following the Merger. It is also expected that, upon and
following the Merger, the Company will enter into a registration rights
agreement with the shareholders of MergerCo which will provide that such
shareholders may require the Company to register their shares of Recapitalized
Common Stock under the Securities Act. See "Special Factors--Interests of
Certain Persons."
9
<PAGE>
THE COMPANY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and consolidated
financial statements and notes thereto appearing elsewhere in this Proxy
Statement. References herein to a "fiscal" year refer to the Company's fiscal
year ended March 31 in the calendar year indicated (e.g., references to fiscal
1997 are references to the Company's fiscal year ended March 31, 1997). See
"Selected Historical Consolidated Financial Data" and "Unaudited Pro Forma
Condensed Consolidated Financial Data". The market share and competitive
position data contained in this Proxy Statement are approximations derived from
industry sources, which the Company has not independently verified, or from
Company estimates, which the Company believes to be reasonable but which have
not been independently verified. The Company believes that such data are
inherently imprecise, but are generally indicative of its relative market share
and competitive position.
The Company develops, manufactures and sells market-leading test, analysis,
communications and computing equipment in three product categories:
. Communications Test. The Company believes that its subsidiary,
Telecommunications Techniques Corporation ("TTC"), is the second largest
U.S. provider of communications test instruments (by sales). TTC provides
products to communications service providers (such as the Regional Bell
Operating Companies ("RBOCs"), long-distance companies and competitive
access providers), service users (such as large corporate and government
network operators), and manufacturers of communications equipment and
systems. TTC's broad test and analysis product line ranges from portable
units (used by field service technicians to test telephone and data
communications lines and services) to centralized test and monitoring
systems installed in telephone company central offices. TTC's
communications test business accounted for 52% of the Company's sales (or
approximately $184.9 million) for the nine months ended December 31,
1997.
. Industrial Computing and Communications. The Company addresses two
distinct segments of the North American ruggedized computer market. The
Company's Industrial Computer Source subsidiary ("ICS") is the only
significant direct marketer of computer products and systems designed to
withstand excessive temperatures, dust, moisture and vibration in harsh
operating environments such as production facilities. ICS markets to
engineers, scientists and production managers through its widely
recognized Source-Book catalogs. The Company's Itronix Corporation
subsidiary ("Itronix") sells ruggedized portable communications and
computing devices used by field-service workers for telephone companies,
utilities, insurance companies and other organizations with large field-
service workforces. The Company's industrial computing and communications
business accounted for 31% of the Company's sales (or approximately
$111.0 million) for the nine months ended December 31, 1997.
. Visual Communications. The Company's visual communications business
consists principally of two market-leading niche-focused subsidiaries:
(i) AIRSHOW is the world leader in passenger cabin video information
display systems and information services for the general and commercial
aviation markets; and (ii) da Vinci Systems is the world leader in
digital color enhancement systems used in the process of transferring
film images into electronic signals--a process commonly used to transfer
film images to video for use in the production of television commercials
and programming. The Company's visual communications business accounted
for 16% of the Company's sales (or approximately $57.5 million) for the
nine months ended December 31, 1997.
For the nine months ended December 31, 1997, the Company generated sales of
$353.3 million.
10
<PAGE>
THE SPECIAL MEETING
TIME AND PLACE; MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The Special Meeting will be held at a.m. on , 1998, at the offices of
Ropes & Gray, 27th Floor, 885 Third Avenue, New York, New York. At the Special
Meeting, Stockholders will consider and vote upon (i) a proposal to approve and
adopt the Merger Agreement and the Merger; and (ii) such other matters as may
properly be brought before the Special Meeting. See "The Special Meeting--
Matters To Be Considered at the Special Meeting" and "Other Information and
Stockholder Proposals."
RECORD DATE AND VOTING
The Record Date for the Special Meeting is the close of business on March 4,
1998. At the close of business on the Record Date, there were 16,862,874 shares
of Common Stock outstanding and entitled to vote, held by approximately 937
Stockholders of record. Each holder of Common Stock on the Record Date will be
entitled to one vote for each share held of record. The presence, either in
person or by proxy, of the holders of a majority of the outstanding shares of
Common Stock entitled to be voted is necessary to constitute a quorum at the
Special Meeting. Abstentions (including broker non-votes) are included in the
calculation of the number of votes represented at a meeting for purposes of
determining whether a quorum has been achieved. See "The Special Meeting--
Record Date and Voting."
VOTE REQUIRED; REVOCABILITY OF PROXIES
Approval and adoption of the Merger Agreement and the Merger requires the
affirmative vote of the holders of two-thirds of the outstanding shares of
Common Stock entitled to vote thereon. At the close of business on March 4,
1998, there were 16,862,874 shares of Common Stock outstanding and entitled to
vote, held by approximately 937 Stockholders of record. Messrs. Reno, Kline and
Peeler intend to vote their shares of Common Stock, which represent in the
aggregate approximately % of the outstanding Common Stock, in favor of the
approval and adoption of the Merger Agreement and the Merger. The members of
the Board (other than Mr. Reno) intend to vote their shares of Common Stock,
which, as of the close of business on March 4, 1998, represented in the
aggregate % of the outstanding Common Stock, in favor of the approval and
adoption of the Merger Agreement and the Merger.
The required vote of Stockholders to approve and adopt the Merger Agreement
and the Merger is based upon the total number of outstanding shares of Common
Stock on the Record Date. The failure to submit a proxy card (or vote in person
at the Special Meeting) or the abstention from voting by a Stockholder
(including broker non-votes) will have the same effect as an "against" vote
with respect to the adoption and approval of the Merger Agreement and the
Merger. Proxies that do not contain any instruction to vote for or against a
particular matter will be voted in favor of such matter. See "The Special
Meeting--Vote Required; Revocability of Proxies" and "The Merger and the Merger
Agreement--Conditions to the Merger."
The presence of a Stockholder at the Special Meeting will not automatically
revoke such Stockholder's proxy. However, a Stockholder may revoke a proxy at
any time prior to its exercise by (i) delivering to the Clerk of the Company, 3
New England Executive Park, Burlington, Massachusetts 01803, a written notice
of revocation prior to the Special Meeting, (ii) delivering prior to the
Special Meeting a duly executed proxy bearing a later date or (iii) attending
the Special Meeting and voting in person. Unless revoked in one of the manners
set forth above, proxies in the form enclosed will be voted at the Special
Meeting in accordance with Stockholders' instructions.
SOLICITATION OF PROXIES
The Company will bear the cost of soliciting proxies from Stockholders. The
Company has retained McKenzie Partners, Inc. to aid in the solicitation of
proxies from Stockholders. The fees of McKenzie Partners,
11
<PAGE>
Inc. are to be paid by the Company and are not expected to exceed $10,000 plus
reimbursement of out-of-pocket expenses. In addition to soliciting proxies by
mail, the directors, officers and employees of the Company may solicit proxies
by telephone, by telegram or in person. Such directors, officers and employees
will not be additionally compensated for any such solicitation but may be
reimbursed for reasonable out-of-pocket expenses incurred in connection
therewith. Arrangements will also be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of shares held of record by such persons, and the Company
will reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 4, 1998, the directors and executive officers of the Company
beneficially owned, in the aggregate, shares of Common Stock, representing
approximately % of such shares outstanding. See "Security Ownership of
Certain Beneficial Owners and Management."
12
<PAGE>
THE MERGER
GENERAL
Upon the consummation of the Merger, MergerCo will be merged with and into
the Company and the Company will continue as the Surviving Corporation. The
Surviving Corporation will succeed to all the rights and obligations of the
Company and MergerCo.
EFFECTIVE TIME OF MERGER
Pursuant to the Merger Agreement, the "Effective Time" will occur upon filing
the Articles of Merger with the Massachusetts Secretary of State and the
Certificate of Merger with the Delaware Secretary of State.
EFFECT OF THE MERGER
At the Effective Time, (i) each share of Common Stock outstanding immediately
prior to the Effective Time will be converted into the right to receive $47.75
in cash and 0.5 fully paid and nonassessable shares of Recapitalized Common
Stock (except that any shares held by MergerCo or held in the Company's
treasury will be canceled, and any stockholder that properly dissents from the
Merger will be entitled to appraisal rights under the MBCL); and (ii) each
share of MergerCo Common Stock will be converted into one share of
Recapitalized Common Stock. The Company expects to treat the Merger as a
recapitalization for financial reporting purposes. Accordingly, the historical
basis of the Company's assets and liabilities will not be affected by the
transaction.
FRACTIONAL SHARES
Fractional shares of Recapitalized Common Stock will not be issued in the
Merger. Stockholders otherwise entitled to a fractional share of Recapitalized
Common Stock following the Merger will be paid cash in lieu of such fractional
share as described in "The Merger and the Merger Agreement--Fractional Shares."
CONDITIONS TO THE MERGER
The obligations of the Company and MergerCo to consummate the Merger are
subject to various conditions, including the approval and adoption of the
Merger Agreement and the Merger by the requisite vote of Stockholders, the
absence of any injunction or other legal restraint preventing consummation of
the Merger and the expiration of the applicable waiting period imposed by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). On February 23, 1998, the waiting period under the HSR Act was
terminated.
In addition, MergerCo's obligations to effect the Merger are subject to,
among other things, (i) holders of no more than 5% of the outstanding shares of
Common Stock having perfected their appraisal rights in accordance with the
requirements of the MBCL; (ii) there being no material adverse effect on the
business, assets, liabilities, condition (financial or other) or results of
operations of the Company since September 30, 1997; and (iii) the Company
having obtained sufficient funds pursuant to the Financing (as hereinafter
defined) to pay the Merger Consideration and to meet other capital needs as
provided in the Merger Agreement. See "The Merger and the Merger Agreement--
Conditions to the Merger" and "Merger Financings."
MERGER FINANCINGS
The Company expects that approximately $865.3 million will be required to (i)
finance the payment of the Merger Consideration, (ii) pay Option Cancellation
Payments and (iii) pay the fees and expenses expected to be incurred in
connection with the Merger. It is contemplated that at the Effective Time, (a)
$292.9 million of bank financing will be borrowed pursuant to senior secured
credit facilities, including $260 million pursuant to a Term Loan Facility (as
defined herein) and $32.9 million under a Revolving Credit Facility (as defined
herein) (the "Senior Secured Credit Facilities"), with a group of banks led by
Morgan Guaranty Trust Company ("Morgan") and Credit Suisse First Boston
Corporation ("CSFB") and (b) $275 million in gross proceeds will be provided
13
<PAGE>
through the sale of Senior Subordinated Notes (the "Senior Subordinated Notes")
(collectively, the "Financing"). At the Effective Time, the Company will also
have at least $20 million of cash on-hand to use in connection with the Merger
and approximately $277 million of proceeds from the sale of MergerCo Common
Stock to CDR Fund V, which proceeds will become an asset of the Company upon
effectiveness of the Merger. The following table illustrates the estimated
sources and uses of funds necessary to consummate the Merger:
<TABLE>
<CAPTION>
SOURCES
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Senior Secured Credit Facilities:
Revolving Credit Facility...... $ 32.9
Tranche A Term Loan............ 50.0
Tranche B Term Loan............ 70.0
Tranche C Term Loan............ 70.0
Tranche D Term Loan............ 70.0
Senior Subordinated Notes........ 275.0
Shareholders' Equity............. 277.0
Cash............................. 20.4
------
Total Sources.................. $865.3
======
</TABLE>
<TABLE>
<CAPTION>
USES
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Purchase of Common Stock...... $803.1
Option Cancellation Payments.. 22.7
Estimated Fees and Expenses... 39.5
------
Total Uses.................. $865.3
======
</TABLE>
TREATMENT OF COMPANY STOCK OPTIONS
Pursuant to the Merger Agreement, except as provided in the following
paragraph, (i) each Company Stock Option will become fully vested and
exercisable immediately prior to the Merger, (ii) any Company Stock Option that
is outstanding immediately prior to the Effective Time will be cancelled and
(iii) each holder of any such cancelled Company Stock Option will receive, in
consideration of such cancellation, an Option Cancellation Payment. The Option
Cancellation Payment will be paid in cash as of or as soon as practicable after
the Effective Time. See "Special Factors--Interests of Certain Persons in the
Merger."
Pursuant to the terms of new employment agreements entered into with each of
Messrs. Reno, Kline and Peeler, in lieu of receiving an Option Cancellation
Payment in respect of their outstanding Company Stock Options (or in Mr.
Peeler's case, in respect of 137,600 options), such Company Stock Options will
be converted as of the Effective Time into equivalent options to purchase
shares of Recapitalized Common Stock (with exercise prices which preserve the
economic value of their current Company Stock Options), all of which, other
than 48,439 Company Stock Options held by Mr. Reno, will be fully vested and
exercisable. In addition, an aggregate of approximately 483,000 Company Stock
Options held by certain other members of the Company's management (together
with Messrs. Reno, Kline and Peeler, the "Management Stockholders") will be
converted into equivalent options to purchase shares of Recapitalized Common
Stock in lieu of such Management Stockholders receiving an Option Cancellation
Payment in respect of such options. Following the Merger, it is expected that
certain officers and key employees will receive new options to acquire shares
of Recapitalized Common Stock after the Merger. See "Special Factors--Interests
of Certain Persons in the Merger."
TERMINATION; TERMINATION FEES
The Merger Agreement may be terminated and the Merger abandoned prior to the
Effective Time: (i) upon the mutual written consent of the Company and
MergerCo; (ii) by either the Company or MergerCo, if the Merger is not
completed by June 30, 1998 (provided that this right to terminate shall not be
available to a party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of such delay); (iii) by either the Company or
MergerCo if a court or other governmental body has issued a nonappealable final
statute, order, decree or regulation permanently restraining, enjoining or
otherwise legally prohibiting the Merger; (iv) by either the Company or
MergerCo, if (A) the holders of at least two-thirds of the shares of Common
Stock entitled to vote fail to approve and adopt the Merger Agreement and the
Merger or (B) the Board of Directors withdraws or modifies its approval or
recommendation of the Merger Agreement and the transactions contemplated
thereunder in a
14
<PAGE>
manner adverse to MergerCo or recommends a Company Takeover Proposal (as
defined in "The Merger and the Merger Agreement--No Solicitation"); (v) by
MergerCo, if a tender offer or exchange offer for 20% or more of the
outstanding Common Stock is commenced by a third party and the Board of
Directors fails to recommend that the Stockholders not tender their shares in
such tender or exchange offer; or (vi) by either the Company or MergerCo, upon
15 days' prior written notice, if the other party breaches or fails to comply
with any of its material representations or warranties or obligations under the
Merger Agreement such that the conditions to the obligations of the terminating
party would be incapable of being satisfied by the Effective Time.
The Company will be obligated to pay CDR a fee of $24,500,000 in the event
the Merger Agreement is terminated in any of the following manners: (a) by
either the Company or MergerCo if holders of two-thirds of the outstanding
Common Stock fail to approve the Merger, (b) by MergerCo if the Company
materially breaches a representation or a covenant, or (c) by MergerCo if a
tender offer for 20% or more of the outstanding Common Stock is commenced and
the Board of Directors fails to recommend that Stockholders not tender their
shares in such offer, provided, that in the case of the foregoing (a), (b) or
(c), a Company Takeover Proposal shall have been previously made public and a
Company Takeover Event (as defined under "The Merger and the Merger Agreement--
Termination; No-Solicitation") shall have occurred within twelve months of the
termination of the Merger Agreement. Such fee shall also be payable if the
Merger Agreement is terminated by either the Company or MergerCo if the Board
of Directors or the Special Committee withdraws or modifies its recommendation
in a manner adverse to MergerCo. In addition, if the Merger Agreement is
terminated, the Company will be obligated to reimburse MergerCo for its
documented expenses up to $5,000,000. No fees or expenses are payable if the
Merger Agreement is terminated due to the failure of MergerCo to fulfill any of
its material obligations or because recapitalization accounting is not
applicable to this transaction.
MERGERCO
MergerCo is a newly formed Delaware corporation which was organized at the
direction of CDR in connection with the transactions contemplated by the Merger
Agreement. MergerCo is a nonsubstantive transitory merger vehicle which will be
merged out of existence at the Effective Time. Accordingly, it is not expected
to have significant assets or liabilities (other than those arising under the
Merger Agreement) or to engage in any activities (other than those incident to
its formation and the Merger). The authorized capital stock of MergerCo
consists of 125,000,000 shares of common stock, par value $0.01, of which no
shares are currently outstanding.
APPRAISAL RIGHTS
Holders of Common Stock have the right to dissent from approval and adoption
of the Merger Agreement and the transactions contemplated thereby, and, subject
to strict compliance with certain requirements of the MBCL, to receive payment
for the "fair value," as defined in the MBCL, of their Common Stock. These
requirements are described under "Appraisal Rights" and in the provisions of
Sections 85 through 98 of the MBCL, which are attached as Appendix D to this
Proxy Statement.
RISK FACTORS
Holders of Common Stock should carefully consider certain risk factors
discussed in more detail elsewhere in this Proxy Statement in connection with
their consideration of the Merger. See "Risk Factors."
MARKET PRICES OF COMMON STOCK
The Common Stock is listed on the New York Stock Exchange under the symbol
"DYT." On December 19, 1997, the last trading day before the public
announcement that the Company executed the Merger Agreement,
the reported closing sale price per share of Common Stock was $36.75. On ,
the last full trading day prior to the date of this Proxy Statement, the
reported closing sale price per share was $ . For additional information
concerning historical market prices of the Common Stock, see "Market Prices of
Common Stock."
15
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
In early July 1997, the Company's stock was trading in the range of $36 to
$37 per share. John F. Reno believed that the market price of the Company's
stock was subject to significant volatility based upon minor discrepancies
between analysts' projected earnings and actual earnings. Mr. Reno further
believed the Company's announced plan of selective acquisitions was hampered
by the short-term perspective of many investors whose desires often conflict
with the long-term strategic steps taken in the best interests of the Company.
On July 10, 1997, at Mr. Reno's suggestion, representatives of a private
equity firm (the "Equity Firm") that had acquired a firm which, since 1994,
had provided financial advisory services to the Company in connection with its
divestiture program, met with him. They discussed various methods to increase
shareholder value. In addition to a recapitalization of the Company, they
discussed generally such generic strategies as divestiture of certain
businesses, add-on acquisitions and strategic alliances, and strategic sales
or mergers.
At a meeting of the Board held on July 30, 1997, Mr. Reno advised the
directors that he believed that a strategic transaction might be possible.
Management's reason for pursuing such a transaction, he explained, would be
(a) to provide public shareholders with a premium price for their shares, in
cash, (b) to enable the Company to make acquisitions using the purchase method
of accounting without concern for the near-term stock price impacts of such
accounting, which frequently reduces reported earnings, as currently required
by the generally accepted accounting policies and (c) to enable the Company to
provide employees with a significant potential equity stake in the Surviving
Corporation.
On August 21, 1997, Mr. Reno, together with Messrs. Kline and Peeler, met
with representatives of the Equity Firm to discuss the feasibility of a
recapitalization of the Company. The other options previously discussed were
not pursued because management did not believe they would maximize shareholder
value. Discussions regarding a recapitalization of the Company continued at a
meeting with the Equity Firm on September 4, 1997 which was attended by
Messrs. Kline and Peeler, and at another on October 3, 1997 attended by
Messrs. Reno, Kline and Peeler.
At a meeting of the Board held on October 14, 1997, Mr. Reno advised the
directors that management was engaged in discussions with the Equity Firm and
that he believed a strategic transaction might be feasible but would require
further investigation with potential partners. He asked Mr. Lochridge if the
Board would object to Hale and Dorr LLP, which for all other purposes had
acted as counsel to the Company, acting as counsel to management in connection
with such a transaction. At the end of that meeting, the directors conferred
without Mr. Reno, and agreed that they should engage counsel to assist them in
carrying out their duties if an offer for such a strategic transaction should
be made. The six independent directors requested that Messrs. Lochridge and
Kozlowski take responsibility for making an appropriate choice of an
independent legal adviser.
On October 17, 1997, Mr. Kline spoke once again with representatives of the
Equity Firm. Management later determined that, due in part to uncertainties
related to the proposed transaction, it was not prepared to pursue a
transaction with the Equity Firm. For the Equity Firm's efforts and
assistance, the Company agreed to pay the Equity Firm the sum of $500,000 and
reimburse the Equity Firm for its out-of-pocket expenses in the amount of
$175,000.
On November 5, 1997, based in part on a recommendation of a director of the
Company who had had previous business dealings with CDR, Messrs. Reno, Kline
and Peeler met with principals of CDR and discussed a potential transaction.
The Company and CDR entered into a confidentiality agreement. During the week
of November 10, 1997, Mr. Kline accompanied representatives of CDR on due
diligence visits to certain of the Company's operating subsidiaries.
Management later determined that it was interested in working with CDR to
prepare a proposal for the recapitalization of the Company based, in part, on
CDR's expertise in structuring, negotiating, securing financing for and
effectuating similar transactions. In addition, management was convinced of
the unique value to be gained from CDR's partners with operating industry
experience who would be available to advise the Company in the future.
At a meeting held on November 13, 1997, Mr. Lochridge and Mr. Kozlowski met
with a representative of the firm of Ropes & Gray and engaged that firm as
counsel to the Company's independent directors.
16
<PAGE>
On November 20, 1997 Messrs. Reno, Kline and Peeler met again with CDR to
discuss various aspects of a potential transaction. At that meeting, Mr. Reno
advised CDR that Company management was interested in working with CDR to
prepare a proposal for recapitalizing the Company. At this November 20
meeting, and over the course of the next week, representatives of CDR, members
of management and their advisors discussed transaction alternatives with a
view to identifying a structure that would permit the payment of an all-cash
purchase price to the unaffiliated shareholders. However, the parties
concluded that these alternatives would not result in an acceptable
recapitalization.
On November 21, 1997, Mr. Reno reached Mr. Lochridge and Mr. Kozlowski by
telephone and informed them that there was a high probability that a proposal
would be forthcoming from members of management, together with a fund managed
by CDR. Mr. Reno informed them of the general timetable for submitting such
proposal. Messrs. Reno, Lochridge and Kozlowski did not discuss the type or
amount of consideration of any such proposal.
Mr. Lochridge and Mr. Kozlowski contacted Ropes & Gray and arranged to hold
a special meeting of the Board without Mr. Reno. This meeting of all directors
(other than Mr. Reno) and a representative of Ropes & Gray was held on
November 24, 1997. At the meeting, Mr. Lochridge informed the Board that,
based on recent conversations with Mr. Reno, he believed that management,
together with CDR, would soon propose an offer for a strategic transaction
that would enable shareholders to realize value for their shares at a
substantial premium over recent trading values. The Board discussed and agreed
that Hale and Dorr LLP should be permitted to act as counsel to the management
employees who were participating in the proposed transaction (together with
CDR, the "CDR/Management Group"). The discussion also included the contours of
a possible offer, the members of management who would be involved in the
transaction, the risk to the Company if the transaction were attempted but not
completed, and the responsibilities of the Board and of the independent
directors in relation to the subject matter. The directors voted unanimously
to establish a Special Committee comprised of three independent directors: Mr.
Lochridge (Chairman), Mr. Kozlowski and Mr. Gabbard. They delegated to the
Special Committee the power to consider and negotiate such a transaction if
the offer were made and to engage independent investment bankers to act as
financial advisers to the independent directors. They specified that any
definitive action in relation to the matter should be reported to and
considered by all of the independent directors (i.e. the full board absent Mr.
Reno). There was discussion of the fact that a Merrill Lynch equity research
analyst followed the Company and therefore, Merrill Lynch was a likely choice
of independent financial advisor if it was free of conflict.
Following the meeting, the Special Committee determined to retain Merrill
Lynch as the financial adviser to the independent directors on the basis of
its familiarity with the Company and its business and its experience and
expertise and asked Merrill Lynch to begin its analysis of the Company.
On December 3, 1997, a meeting was held at the offices of Debevoise &
Plimpton, counsel to CDR, at which Messrs. Reno, Kline and Peeler made
presentations to representatives of CDR, CSFB and J.P. Morgan Securities,
Inc., as potential sources of financing for the possible recapitalization of
the Company, Merrill Lynch and Ropes & Gray. During the meeting, management
presented an overview of the Company's business and provided projections for
the business (the "Management Projections"). Mr. Kozlowski and Mr. Paul,
independent directors of the Company, attended this meeting.
From December 3, 1997 until December 10, 1997, representatives of CDR
negotiated with Messrs. Reno, Peeler and Kline the terms of their employment
with the Surviving Corporation. See "Certain Relationships and Related
Transactions--Employment and Other Agreements."
A meeting of the full Board (except for Mr. Reno) was held on December 9,
1997, at which representatives of Ropes & Gray were present. Mr. Kozlowski
reported that the Special Committee had retained Merrill Lynch to act as
financial advisers to the Company's independent directors. Representatives of
Merrill Lynch were thereupon invited to join the meeting.
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At the December 9 meeting, the directors considered whether or not the
Company should entertain a possible offer along the lines discussed at the
November 24 meeting. With legal advice from Ropes & Gray and financial advice
from Merrill Lynch, the Board concluded that it was appropriate to continue
discussions with CDR. The Board also determined not to openly solicit third-
party bids as a public auction might result in a loss of key personnel,
possibly reducing the value of the Company. Representatives of Merrill Lynch
discussed with the directors their recent contact with the CDR/Management
Group and the management presentations made at the December 3, 1997 due
diligence meeting. The Merrill Lynch representatives informed the Board that
the CDR/Management Group had communicated a preliminary offer to recapitalize
the Company in a transaction that would represent a value of between $43 and
$45 per public share (the "Initial Offer") consisting principally of cash but
also involving retention by the Stockholders of an ongoing equity interest of
approximately 6% in the Surviving Corporation. Such proposed recapitalization
would be financed through a combination of bank and subordinated debt and an
equity investment by CDR of approximately $240 million. The Board discussed
various issues with the Merrill Lynch representatives regarding the Initial
Offer including the availability of a period of time during which other
interested parties could express an interest in acquiring the Company. The
Board concluded that any transaction with the CDR/Management Group must be
structured so that the Company would have the flexibility to accept an
acquisition proposal from a third party and to terminate the transaction with
the CDR/Management Group.
On December 12, 1997, at a meeting of the Board, the CDR/Management Group,
their legal counsel and their proposed lenders, presented the Initial Offer
including the form of the proposed transaction, the price range, the proposed
financing and the expected timing. A representative of CDR stated that they
expected approximately 94% of the Merger Consideration to be paid in cash and
the remainder to be paid in common stock of the recapitalized entity. Members
of the CDR/Management Group and their proposed lenders responded to questions
from the directors and from Merrill Lynch. The meeting was continued without
the CDR/Management Group, their counsel or proposed lenders, at which time the
Board discussed the Initial Offer with Ropes & Gray and Merrill Lynch. During
this meeting Merrill Lynch summarized the analyses of the Company it performed
in connection with their review of the Initial Offer, which are more fully
described under "--Opinion of Financial Advisor." Copies of the written
reports of Merrill Lynch to the Board have been filed as exhibits to the
Schedule 13E-3 described under "Additional Information." Merrill Lynch noted
the differences between the Company's strategic business plan presented in May
1997 for its subsidiary TTC and reviewed by Merrill Lynch in the course of its
due diligence review of the Management Projections.
At the request of the Board, Merrill Lynch contacted members of the
CDR/Management Group to discuss the Initial Offer. Merrill Lynch informed the
CDR/Management Group that the Board requested that Merrill Lynch discuss with
management the differences between the Company's strategic business plan
presented in May 1997 for TTC and what is reflected in the Management
Projections, which reflected a lower projected rate of revenue growth in TTC
and in TTC's projected operating profit margin. Merrill Lynch had discussions
with members of the CDR/Management Group between December 12 and 15, 1997 to
review the Management Projections.
As a result of Merrill Lynch's discussions with management and its due
diligence investigation, Merrill Lynch formulated a set of adjustments to the
Management Projections (the Management Projections as adjusted, the "Adjusted
Projections") which reflected an increase in the projected rate of growth and
in the projected operating profit margin above the levels set forth in the
Management Projections. See "Special Factors--Certain Projections."
On December 15, 1997, at another meeting of the Board at which all members
other than John Reno were present, the Board discussed the Initial Offer with
its financial and legal advisers. Merrill Lynch reported the results of its
analysis of the Management Projections, noting differences between those
projections and the Adjusted Projections with respect to TTC's revenue growth
and operating profit margin. The Board instructed Merrill Lynch to inform the
CDR/Management Group that the Initial Offer was not acceptable. Later that
day, Merrill Lynch met with representatives of CDR to convey this message and
suggested that representatives of the CDR/Management Group, Merrill Lynch and
Messrs. Lochridge and Kozlowski meet the following day to discuss the Initial
Offer.
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On December 16, 1997, Messrs. Lochridge and Kozlowski and representatives of
Merrill Lynch met with principals of CDR. After discussing the proposed
transaction and the Initial Offer, the CDR representatives stated that they
were prepared to raise the Initial Offer substantially to $48.00 per share,
consisting of cash and shares of Recapitalized Common Stock, (the "Revised
Offer") and that they believed that the Revised Offer was the best offer they
would be able to make. Messrs. Lochridge and Kozlowski and representatives of
Merrill Lynch conferred privately and concluded that the Revised Offer was
insufficient in light of the Adjusted Projections. See "--Certain
Projections." They informed the CDR representatives that the Revised Offer was
still too low but that they would be willing to take an offer of $49.00-$50.00
to the Board for discussion. After conferring, the CDR representatives stated
that they could offer $49.00 per share, $47.75 to be paid in cash and the
remainder to be paid in shares of Recapitalized Common Stock (the "Final
Offer"). Later that day, at a meeting of the Board of Directors, at which all
directors, other than Mr. Reno, were present, Mr. Kozlowski reported the
results of their discussions to the directors. After discussion, it was agreed
that the Final Offer merited consideration. The Board instructed Merrill Lynch
to analyze the Final Offer and Ropes & Gray to negotiate the terms of the
proposed Agreement and Plan of Merger with the CDR/Management Group
representatives.
From December 16 through December 19, 1997, Ropes & Gray negotiated the
terms of the Agreement and Plan of Merger with representatives of the
CDR/Management Group.
On December 20, 1997, at a meeting of the Board at which all directors
(other than Mr. Reno) were present, the directors discussed the
recapitalization structure of the proposed transaction, the Final Offer and
the terms of the Agreement and Plan of Merger, among other issues, with its
accountants and financial and legal advisers. Representatives of Coopers &
Lybrand L.L.P. from the Boston office, the Company's independent accountants,
reviewed for the Board the accounting principles and judgments related to the
closing requirement that the Merger receive recapitalization accounting
treatment. The Coopers & Lybrand L.L.P. representatives informed the Board
that they believed that the Merger should be accounted for as a
recapitalization. Ropes & Gray reviewed the material terms of the Merger
Agreement and Merrill Lynch reviewed the process it had conducted to review
the financial aspects of the Merger and the Merger Agreement, updated its
report to the Board given on December 12, 1997 to further refine the Adjusted
Projections based on additional information obtained in the interim and
delivered its oral opinion to the Special Committee and the Board, which was
confirmed by its written opinion to the Board, dated as of December 20, 1997,
to the effect that, based upon and subject to certain factors and assumptions
stated therein, as of such date, the Merger Consideration to be received in
the Merger by Stockholders (other than MergerCo and the Company, with respect
to treasury stock) is fair, from a financial point of view, to such
Stockholders. The information presented under "Special Factors--Certain
Projections" reflects Merrill Lynch's updated report of December 20, 1997. In
addition, Merrill Lynch discussed strategic alternatives other than the
transactions contemplated by the Merger Agreement, including the separate sale
or spin-off of certain of the Company's subsidiaries. Merrill Lynch expressed
its view that the Merger would likely result in a more favorable financial
outcome to the Stockholders than potential alternatives in light of the size
and low tax basis in the stock and assets of those subsidiaries. Merrill Lynch
concluded that the Final Offer, expressed as a multiple of EBITDA of the last
twelve months, compared favorably to the expected terms of a sale of those
subsidiaries on an after-tax basis. After further discussion and
consideration, believing they had negotiated the highest consideration on the
best terms reasonably attainable for the Stockholders and with the
recommendation of the Special Committee, the members of the Board present
unanimously agreed that the Merger was fair to the Stockholders, approved the
Merger Agreement and the transactions contemplated thereby and authorized
execution of the Merger Agreement, subject to the requirement that the Merger
Agreement be revised to provide that the Company not pay any of MergerCo's
fees or expenses in the event the Merger Agreement is terminated because the
Merger cannot be accounted for as a recapitalization. In determining that the
Merger was fair to the Company and its Stockholders, the Board considered a
number of factors including those described below in "--Recommendation of the
Board; Reasons for the Merger." The Special Committee did not make an
independent determination that the Merger was fair to and in the best
interests of the unaffiliated Stockholders.
The Merger Agreement was executed on Saturday, December 20, 1997 and
announced prior to the opening of trading markets on Monday, December 22,
1997.
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CERTAIN EFFECTS OF THE MERGER
The Merger Agreement provides, among other things, that at the Effective
Time each issued and outstanding share of Common Stock will be converted into
the right to receive $47.75 in cash and 0.5 shares of Recapitalized Common
Stock.
On March 4, 1998 Stockholders (other than directors and executive officers
of the Company) owned 16,745,338 shares of Common Stock which represent
approximately 99.3% of the outstanding Common Stock. If the Merger is
consummated, Stockholders will share in the future results of the Company and
any increase in value resulting therefrom by their receipt of approximately 7%
of the Recapitalized Common Stock. However, the Stockholders will also be
subject to the risks of investing in capital stock for which there is not an
active trading market. There can be no assurance that the value of the
Recapitalized Common Stock will not decrease. Holders of Recapitalized Common
Stock will be subject to substantial risks, including risks to which the
Stockholders are not currently subject as holders of Common Stock. See "Risk
Factors."
Upon or following the Merger, it is the Company's intention to delist the
Common Stock from the New York Stock Exchange and not to list the
Recapitalized Common Stock on any national securities exchange or automated
quotation system. Such delisting is likely to have a material adverse effect
on the trading market for and liquidity of, and may have an adverse effect on
the market value of, shares of Recapitalized Common Stock. In addition, if the
Company deregisters its securities under the Exchange Act, which it may do
after the fifth anniversary of the Merger or, under certain circumstances as
provided in the Merger Agreement, prior to such fifth anniversary; it will no
longer be required to file periodic reports with the Commission or be
obligated to comply with the proxy rules of Regulation 14A of the Exchange
Act.
Holders of Common Stock should carefully consider certain risk factors
discussed in more detail elsewhere in this Proxy Statement in connection with
their consideration of the Merger. See "Risk Factors."
RECOMMENDATION OF BOARD; REASONS FOR THE MERGER
THE BOARD BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY AND THE UNAFFILIATED STOCKHOLDERS. THE BOARD APPROVED THE MERGER
AGREEMENT AND THE MERGER AND RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE MERGER AGREEMENT AND THE MERGER. MANAGEMENT HAS NOT MADE A DETERMINATION
AS TO THE FAIRNESS OF THE MERGER TO THE UNAFFILIATED STOCKHOLDERS.
In reaching its determination that the Merger Agreement and the Merger are
in the best interests of the Company and the unaffiliated Stockholders, the
Board drew on its knowledge of the business, operations, properties, assets,
financial condition, operating results, historical market prices and prospects
of the Company and considered the following factors (both positive and
negative):
(i) the oral opinion of Merrill Lynch delivered to the Special Committee
and the Board, which was confirmed by its written opinion to the Board,
dated as of December 20, 1997, which opinion has been adopted by the Board,
to the effect that, based upon and subject to certain factors and
assumptions stated therein, as of such date, the Merger Consideration to be
received in the Merger by the Stockholders is fair, from a financial point
of view to such Stockholders (a copy of which is attached hereto as
Appendix B to this Proxy Statement). (see "--Opinion of Financial
Adviser");
(ii) the relationship of the Merger Consideration to the historical
market prices for the Common Stock (see "Market Prices Of Common Stock")
and to the going concern value of the Company, as analyzed by Merrill Lynch
(See "--Opinion of Financial Advisor");
(iii) the Board's view that the terms of the Merger Agreement, as
reviewed by the Board with the legal advice of Ropes & Gray and the
financial advice of Merrill Lynch (to the effect that, in Merrill Lynch's
view, the size of the break-up fee was not so large as to materially deter
potential third parties from making acquisition proposals), are advisable
and fair to the Company and the Stockholders because they provide the
Company and the Stockholders with the flexibility to accept, under certain
circumstances, a third party proposal for a Company Takeover Proposal and
to terminate the Merger Agreement (see "The Merger and the Merger
Agreement--No Solicitation" and "--Termination; Termination Fees");
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(iv) the Board's familiarity with and knowledge of the financial
condition and results of operations of the Company (see "Selected
Historical Consolidated Financial Data") and the Company's financial
projections (see "Special Factors--Opinion of Financial Adviser") which, in
the Board's view, support a determination that the Merger Consideration is
fair to the Company and the unaffiliated Stockholders;
(v) the Board's desire to enable the Stockholders to achieve liquidity
with respect to substantially all of their investment in the Company at a
fair price and the Board's conclusion that the recapitalization of the
Company was the best way to achieve such liquidity in the foreseeable
future; and
(vi) the fact that the Merger Agreement requires the Merger to be
submitted to the Stockholders for approval, which allows for an informed
vote of the Stockholders on the merits of the transaction without requiring
a tender of shares or other potentially coercive transaction structure, and
the fact that the Merger Agreement provides that it may be terminated by
the Company if approval of the holders of two-thirds of the outstanding
Common Stock is not received.
In addition to the foregoing, the Board considered certain negative factors
of the Merger to the Company and its Stockholders, including (i) that at
certain times, the Common Stock has traded above the amount of the Merger
Consideration (see "Market Prices of Common Stock"), (ii) the reduced
liquidity of the Recapitalized Common Stock retained by the Stockholders
following the Merger and (iii) the various transaction-related risks that are
more fully described under "Risk Factors." The Board did not consider the
fairness of the Merger Consideration in relation to the net book value or
liquidation value of the Company because it did not view such valuations as
reliable indicators of the value of the Company.
The foregoing discussion of the information and factors discussed by the
Board of Directors is not meant to be exhaustive but includes all material
factors considered by the Board. The Board of Directors did not quantify or
attach any particular weight to the various factors that it considered in
reaching its determination that the Merger is in the best interest of the
Stockholders, but rather made qualitative judgments as to the significance and
relevance of each factor. The Board believes the Merger achieves enhanced
value in light of the fact that, among other things, except during a few
isolated periods, the Common Stock has historically traded below $49 per
share.
The Board was aware that certain members of the Company's management have
certain interests in the Merger that are in addition to their interests as
Stockholders generally and it considered these interests in approving the
Merger. Such interests did not weigh either in favor of or against approving
the Merger. See "Special Factors--Interests of Certain Persons in the Merger."
If the holders of Common Stock do not approve and adopt the Merger
Agreement, or if the Merger is not consummated for any other reason, the Board
expects to continue to operate the Company as an ongoing business.
The Special Committee and the Board have determined that the Merger
Agreement and the Merger are advisable and fair to and in the best interests
of the Company and the unaffiliated Stockholders and have approved the Merger
Agreement and the Merger. Accordingly, the Board recommends that Stockholders
vote "FOR" approval and adoption of the Merger Agreement and the Merger. See
"--Background of the Merger" and "--Opinion of Financial Adviser."
OPINION OF FINANCIAL ADVISER
The Special Committee retained Merrill Lynch to act as financial adviser to
the independent directors in connection with the Merger. On December 20, 1997,
Merrill Lynch delivered to the Board its oral opinion, later confirmed in
writing (the "Merrill Lynch Opinion") to the effect that, based upon and
subject to certain factors and assumptions stated therein, as of such date,
the proposed Merger Consideration to be received in the Merger by the
Stockholders (other than the Company, with respect to treasury stock, and
MergerCo) is fair from a financial point of view to such Stockholders.
The full text of the Merrill Lynch Opinion, which sets forth a description
of the assumptions made, general procedures followed, factors considered and
limitations on the review undertaken, is attached hereto as Appendix
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B and is incorporated herein by reference. The Merrill Lynch Opinion was
provided to the Board for its information and is directed only to the fairness
from a financial point of view of the Merger Consideration to be received in
the Merger by the Stockholders, does not address the merits of the underlying
decision by the Board to engage in the Merger and does not constitute a
recommendation to any Stockholder as to how they should vote on the Merger or
any transaction related thereto. The Stockholders are urged to read the
Merrill Lynch Opinion carefully in its entirety, especially with regard to the
assumptions made and factors considered by Merrill Lynch. The summary of the
Merrill Lynch Opinion set forth in this Proxy Statement is qualified in its
entirety by reference to the full text of such opinion.
The Merger Consideration to be received by the Stockholders was determined
through negotiations between CDR/Management Group, on the one hand, and the
Special Committee, on the other hand, and was approved by the Board.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Merrill Lynch Opinion or the presentation made by
Merrill Lynch to the Board. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analysis and the applications of those
methods to the particular circumstances and, therefore, such an opinion is not
readily susceptible to partial analysis or summary description. In arriving at
its opinion, Merrill Lynch did not attribute any particular weight to any
analysis or factor considered by it, including, without limitation, the fact
that the Merger Consideration fell at any end of or outside of any range
calculated under any of the following analyses, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all of
its analyses, would create an incomplete view of the process underlying the
Merrill Lynch Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, management, CDR, the Company and the Board. Any estimates contained in
the analyses performed by Merrill Lynch are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, estimates of the
value of businesses or securities do not purport to be appraisals or to
reflect the prices at which such businesses or securities might actually be
sold. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. In addition, as described above, the Merrill Lynch
Opinion and Merrill Lynch's presentation to the Board were among several
factors taken into consideration by the Board in making its determination to
approve and adopt the Merger Agreement. Consequently, the Merrill Lynch
analyses described below should not be viewed as determinative of the decision
of the Board with respect to the fairness of the Merger Consideration to be
received by the Stockholders (other than the Company, with respect to treasury
stock, and MergerCo).
In arriving at its opinion, Merrill Lynch, among other things: (i) reviewed
certain publicly available business and financial information relating to the
Company that Merrill Lynch deemed to be relevant; (ii) reviewed certain
information, including financial forecasts, relating to the business,
earnings, cash flow, assets, liabilities and prospects of the Company and
information relating to certain pro forma effects on the Company's capital
structure after giving effect to the Merger furnished to Merrill Lynch by the
Company and representatives of CDR; (iii) conducted discussions with members
of senior management of the Company and of CDR concerning the matters
described in clauses (i) and (ii) above; (iv) reviewed the market prices and
valuation multiples for the Common Stock and compared them with those of
certain publicly traded companies that Merrill Lynch deemed to be relevant;
(v) reviewed the results of operations of the Company and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to be
relevant; (vi) compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that Merrill Lynch deemed to be
relevant; (vii) participated in certain discussions and negotiations among
representatives of the Company and CDR; (viii) reviewed a draft dated December
19, 1997 of the Merger Agreement; and (ix) reviewed such other financial
studies and analyses and took into account such other matters as Merrill Lynch
deemed necessary, including Merrill Lynch's assessment of general economic,
market and monetary conditions.
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In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or publicly
available, and Merrill Lynch did not assume any responsibility for
independently verifying such information, or undertake an independent
evaluation or appraisal of any of the assets or liabilities, contingent or
otherwise, of the Company, and was not furnished with any such evaluation or
appraisal. In addition, Merrill Lynch did not assume any obligation to conduct
any physical inspection of the properties or facilities of the Company. With
respect to the financial forecast information furnished to or discussed with
Merrill Lynch by the Company and the information regarding certain pro forma
effects on the Company's capital structure after giving effect to the Merger,
Merrill Lynch assumed that they were reasonably prepared and reflected the
best currently available estimates and judgment of management as to the
expected future financial performance of the Company and, subsequent to the
Merger, the Surviving Corporation, and as to such pro forma effects on the
Company's capital structure, respectively. Merrill Lynch also assumed that the
Merger will be accounted for as a recapitalization under generally accepted
accounting principles. Merrill Lynch further assumed that the final form of
the Merger Agreement would be substantially similar to the last draft reviewed
by Merrill Lynch.
The Merrill Lynch Opinion is necessarily based upon market, economic, and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of such opinion.
Additionally, for the purposes of rendering its opinion, Merrill Lynch assumed
in all respects material to its analysis that the representations and
warranties of each party in the Merger Agreement are true and correct, that
each party to the Merger Agreement will perform all of the covenants and
agreements required to be performed by such party under the Merger Agreement,
and that all conditions to the consummation of the Merger will be satisfied
without waiver thereof.
In connection with the preparation of its opinion, Merrill Lynch was not
authorized by the Company or the Board to solicit, nor did Merrill Lynch
solicit, third-party indications of interest for the acquisition of all or any
part of the Company. In connection with the preparation of its opinion,
Merrill Lynch was also not asked to consider, and the Merrill Lynch Opinion
does not in any manner address, the value of the Recapitalized Common Stock or
the prices at which shares of the Recapitalized Common Stock will actually
trade following the consummation of the Merger.
The following is a brief summary of the material analyses performed by
Merrill Lynch in connection with its preparation of the Merrill Lynch Opinion.
Historical Trading Analysis
Merrill Lynch reviewed the recent historical stock market performance of the
Common Stock. This analysis indicated that for the three-year period through
December 18, 1997, the price of a share of Common Stock ranged between $14.00
and $58.00 and averaged $29.32. Merrill Lynch also noted that such price
ranged between $28.00 and $54.50 and averaged $37.16 for the one-year period
through December 18, 1997, such price ranged between $34.00 and $47.31 and
averaged $38.08 for the six-month period through December 18, 1997, such price
ranged between $34.00 and $47.31 and averaged $38.22 for the three-month
period through December 18, 1997, and the closing price of a share of Common
Stock was $35.50 on December 18, 1997. Merrill Lynch noted that the Merger
Consideration was lower than the high for the 3-year period, lower than the
high for the 1-year period, above the high for the 6-month period, above the
high for the 3-month period, above the closing price on December 18, 1997 and
above the averages for each of the 3-year, 1-year, 6-month and 3-month
periods.
Premium Analysis
Using publicly available information regarding 263 announced, but not
withdrawn, and completed transactions between January 1, 1997 and December 18,
1997 greater than $250 million in value as of the announcement dates, Merrill
Lynch calculated the average premiums as of the announcement dates in such
transactions over the stock prices one day, one week and four weeks,
respectively, prior to the announcement dates. Merrill Lynch noted that in all
such transactions, such premiums were 25.4%, 29.7% and 35.9%, respectively.
Merrill Lynch also noted that in transactions in which cash was the
consideration, such premiums were 22.4%, 25.1% and 28.3%, respectively.
Merrill Lynch also noted that in transactions in which stock was the
consideration, such premiums were 27.0%, 32.2% and 37.8%, respectively.
Merrill Lynch noted that in
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transactions in which the consideration consisted of both cash and stock, such
premiums were 24.2%, 28.7% and 38.7%, respectively. Merrill Lynch noted that
the Merger Consideration implied premiums of 38.0% over the closing price on
December 18, 1997, 39.5% over the closing price on December 12, 1997, and
28.3% over the closing price on November 21, 1997.
Merrill Lynch also noted that the Merger Consideration implied premium of
38% over the closing price on December 18, 1997 was above the one-day average
premium for all such transactions, above the one-day average premium for
transactions in which cash was the consideration, above the one-day average
premium for transactions in which stock was the consideration and above the
one-day average premium for transactions in which the consideration consisted
of both cash and stock.
Merrill Lynch further noted that the Merger Consideration implied premium of
39.5% over the closing price on December 12, 1997 was above the one-week
average premium for all such transactions, above the one-week average premium
for transactions in which cash was the consideration, above the one-week
average premium for transactions in which stock was the consideration and
above the one-week average premium for transactions in which the consideration
consisted of both cash and stock.
Merrill Lynch further noted that the Merger Consideration implied premium of
28.3% over the closing price on November 21, 1997 was below the four-week
average premium for all such transactions, equal to the four-week average
premium for transactions in which cash was the consideration, below the four-
week average premium for transactions in which stock was the consideration and
below the four-week average premium for transactions in which the
consideration consisted of both cash and stock.
Selected Publicly Traded Comparable Companies Analysis
Using publicly available information, Merrill Lynch reviewed the stock
prices (as of December 18, 1997) and market multiples of common stocks of the
following companies: Teradyne, Inc.; Tektronix, Inc.; Tekelec; GenRad, Inc.;
Digital Lightwave, Inc.; Fluke Corporation; Telxon Corporation; LeCroy
Corporation; Zygo Corporation; IFR Systems; Thermospectra Corporation;
Integrated Measurement Systems; and Applied Digital Access, Inc. Merrill Lynch
believes these companies are engaged in lines of business that are generally
comparable to those of the Company. Merrill Lynch determined the equity value
(defined as common shares outstanding multiplied by the stock price) and
derived the enterprise value (defined as equity value plus the book value of
debt less the cash and cash equivalents) for these comparable companies.
Merrill Lynch calculated a range of such enterprise values as a multiple of
the latest 12 months earnings before interest, taxes, depreciation and
amortization ("EBITDA"), and earnings before interest and taxes ("EBIT").
Enterprise value as a multiple of the latest 12 months EBITDA ranged from 7.0x
to 8.0x, compared to an implied transaction multiple of 9.8x for the Company.
Enterprise value as a multiple of the latest 12 months EBIT ranged from 8.5x
to 10.5x, compared to an implied transaction multiple of 12.4x for the
Company. Merrill Lynch also determined the prices of the comparable companies
as a multiple of estimated calendar year 1997 earnings per share ("EPS") and
estimated calendar year 1998 EPS as estimated by First Call Research Network.
For estimated calendar year 1997 EPS, the multiples ranged from 15.5x to
17.5x, compared to an implied transaction multiple of 20.9x for the Company.
For estimated calendar year 1998 EPS, the multiples ranged from 12.0x to
14.0x, compared to an implied transaction multiple of 17.3x for the Company.
Merrill Lynch also compared the prices of the comparable companies as a
multiple of estimated calendar year 1998 EPS to their respective five year
estimated future EPS growth rates, as estimated by I/B/E/S International Inc.
The multiples ranged from 0.75x to 0.85x, compared to an implied transaction
multiple of 0.96x for the Company. Merrill Lynch noted that all of the implied
transaction multiples were above the ranges for the comparable companies
considered for each of the selected statistics.
Selected Acquisition Transactions Analysis
Using publicly available information, Merrill Lynch reviewed the purchase
prices and multiples paid in selected mergers and acquisitions involving
companies which Merrill Lynch deemed relevant in evaluating the
24
<PAGE>
Merger. Merrill Lynch reviewed the acquisition of Network General Corporation
by McAfee Associates, Inc.; the acquisition of Wavetek Corporation by DLJ
Merchant Banking Partners II L.P., and Green Equity Investors II, L.P.; the
acquisition of Itronix Corporation by the Company; the acquisition of Megatest
Corporation by Teradyne, Inc.; the acquisition of Keptel, Inc. by Antec
Corporation; and the acquisition of Wiltron Corporation by Anritsu
Corporation.
Multiples of enterprise value of the transactions (consideration offered for
the equity plus the book value of debt less the cash and cash equivalents) to
the EBITDA of the acquired businesses for the 12 months preceding the
acquisition announcements ranged from 9.0x to 11.0x, compared to an implied
transaction multiple of 10.0x for the Company. The multiples of EBIT for the
12 months preceding the acquisition announcements ranged from 12.0x to 14.0x,
compared to an implied transaction multiple of 12.5x for the Company.
Multiples of equity value of the transactions to the net income for the 12
months preceding the acquisition announcements ranged from 20.5x to 22.5x,
compared to an implied transaction multiple of 21.1x for the Company.
No company, transaction or business used in the analyses described under "--
Selected Publicly Traded Comparable Companies Analysis" and "--Selected
Acquisition Transactions Analysis" is identical to the Company or the Merger.
Accordingly, an analysis of the results thereof necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the transaction or the
public trading or other values of the company or companies to which they are
being compared. Mathematical analysis (such as determining the average or
median) is not in itself a meaningful method of using comparable acquisition
or company data.
Discounted Cash Flow Analysis
Merrill Lynch performed a discounted cash flow analysis of the Company using
the Management Projections and the Adjusted Projections. The Adjusted
Projections reflect an increase in the projected rate of growth and an
increase in the projected operating profit margin above the levels set forth
in the Management Projections commencing in the fiscal year ending March 31,
1999. See "--Certain Projections." Utilizing these two versions of the
projections, Merrill Lynch calculated the theoretical unlevered discounted
present value for the Company by adding together the present value of (i) the
projected stream of unlevered free cash flow through the fiscal year 2002 for
the Company and (ii) the projected value of the Company at the end of the
fiscal year 2002 (the "Dynatech Terminal Value"). Each Dynatech Terminal Value
was calculated based upon EBITDA multiples ranging from 7.0x to 9.0x. The
unlevered after-tax discount rates used in the discounted cash flow analyses
ranged from 11.5% to 13.5% and were based upon a weighted-average cost of
capital analysis of the companies identified in the section "--Selected
Publicly Traded Comparable Companies Analysis" above. The theoretical value of
the Company based on the Management Projections produced a range of value per
share of Common Stock of $40.59 to $51.59. Merrill Lynch noted that the Merger
Consideration was within the range of the theoretical value based on
Management Projections. The theoretical value of the Company based on the
Adjusted Projections produced a range of value per share of Common Stock of
$48.52 to $62.04. Merrill Lynch noted that the Merger Consideration was also
within the range of the theoretical value based on the Adjusted Projections.
Leveraged Buyout Analysis
Merrill Lynch performed an analysis of the internal rates of return ("IRR")
to CDR Fund V based on the Management Projections and the Adjusted Projections
and on market and economic conditions as of the date of the Merrill Lynch
Opinion, considering the proposed capital structure for the Company following
the consummation of the Merger. The IRRs to CDR Fund V were calculated based
upon projected equity values of the Company after periods of two, three and
four years. Such projected equity values were calculated based upon net income
multiples of 15.0x to 18.0x and EBITDA multiples of 8.0x to 9.0x.
Based on the Management Projections, the two year IRRs using net income
multiples ranged from 11.1% to 20.1%, and the two year IRRs using EBITDA
multiples ranged from -3.1% to 9.0%; the three year IRRs
25
<PAGE>
using the net income multiples ranged from 16.1% to 22.5%, and the three year
IRRs using the EBITDA multiples ranged from 7.2% to 14.7%; the four year IRRs
using the net income multiples ranged from 17.4% to 22.2%, and the four year
IRRs using the EBITDA multiples ranged from 11.3% to 16.5%.
Based on the Adjusted Projections, the two year IRRs using net income
multiples ranged from 31.8% to 43.0%, and the two year IRRs using EBITDA
multiples ranged from 13.5% to 25.6%; the three year IRRs using the net income
multiples ranged from 31.1% to 38.6%, and the three year IRRs using the EBITDA
multiples ranged from 19.7% to 27.0%; the four year IRRs using the net income
multiples ranged from 28.7% to 34.3%, and the four year IRRs using the EBITDA
multiples ranged from 21.8% to 26.8%.
Merrill Lynch noted that the above projected IRRs to CDR Fund V were not
unusual in the context of an acquisition by a financial buyer.
The Board retained Merrill Lynch on the basis of its experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm which, as a part of its investment banking business,
regularly is engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Merrill Lynch is currently providing and, in the past, has provided
financial advisory and financing services to CDR and/or its affiliates and may
continue to do so, and has received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of its business, Merrill
Lynch may actively trade the equity securities of the Company for its own
account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
Pursuant to the engagement letter, dated as of December 9, 1997, between the
Company and Merrill Lynch, the Company has agreed to pay Merrill Lynch a fee
of $5,000,000 for services rendered in connection with the Merger. Of this
amount, $250,000 was payable on the date of the engagement letter, $2,250,000
was payable upon the execution of the Merger Agreement, and $2,500,000 will be
payable upon consummation of the Merger. The Company has also agreed to
reimburse Merrill Lynch for the expenses reasonably incurred by it in
connection with its engagement (including reasonable counsel fees and
disbursements) and to indemnify Merrill Lynch and its affiliates from and
against certain liabilities, including liabilities under the federal
securities laws, arising out of its engagement.
26
<PAGE>
CERTAIN PROJECTIONS
The Company does not as a matter of course make public forecasts or
projections as to future revenues or results of operations. As discussed above
in "Special Factors--Background of the Merger" and "--Opinion of Financial
Advisor," however, during a December 3, 1997 meeting with representatives of
CDR, CFSB, J.P. Morgan Securities, Inc., Merrill Lynch and certain independent
directors, management presented the Management Projections, an overview of
management's estimates of the Company's future financial performance.
Subsequently, after meetings with the Company's management and after
conducting its due diligence investigation of the Company, Merrill Lynch
formulated a set of adjustments to the Management Projections which are
reflected in the Adjusted Projections. The adjustments generally reflect
Merrill Lynch's view that, based on its historical financial performance, the
Company plausibly could have higher sales and lower operating expenses in the
future. The Management Projections present a more conservative projected rate
of revenue growth and projected operating profit margin than the Adjusted
Projections.
While presented with numerical specificity, the projections and the
adjustments thereto are based upon numerous estimates and assumptions that are
inherently subject to significant business, economic, industry and competitive
uncertainties and contingencies, all of which are difficult to predict and
many of which are beyond the Company's control. Certain assumptions on which
the projections were based related to the achievement of strategic goals,
objectives and targets over the applicable periods that are more favorable
than recent historical results. Accordingly, there can be no assurance that
the projected results would be realized or that actual results would not be
significantly higher or lower than those predicted.
While the projections were prepared in good faith no assurance can be made
regarding future events. Therefore, such projections cannot be considered a
reliable predictor of future operating results, and this information should
not be relied upon as such. Additionally, the financial projections do not
reflect revised prospects for the Company, changes in general business and
economic conditions, or any other transaction or event that has occurred or
may occur and that was not anticipated at the time such information was
prepared. The projections were not prepared with a view toward public
disclosure or complying with either the published guidelines of the Commission
regarding projections or forecasts or the American Institute of Certified
Public Accountants' Guide for Prospective Financial Statements. The
projections do not purport to present operations in accordance with generally
accepted accounting principles, and the Company's independent auditors have
not examined, compiled or performed any procedures regarding these
projections, and accordingly, assume no responsibility for them. Stockholders
are cautioned not to place undue reliance on the projections. See "Risk
Factors--Forecasts; Limits of Reliability."
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED MARCH
31,
----------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SALES
Management Projections..................... $472.7 $531.0 $568.8 $642.8 $726.1
Adjusted Projections....................... $472.7 $533.8 $574.3 $653.7 $744.4
Differential............................... 0.0 2.8 5.5 10.9 18.3
EBITA
Management Projections..................... $ 78.9 $ 82.5 $ 88.7 $100.0 $112.8
Adjusted Projections....................... $ 78.9 $ 91.3 $104.5 $121.3 $141.7
Differential............................... 0.0 8.8 15.8 21.3 28.9
</TABLE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Ropes & Gray, the following are the material United States
federal income tax considerations generally applicable to Stockholders in
connection with the Merger. The tax treatment described herein may vary
depending upon each Stockholder's particular circumstances and tax position.
Certain holders of Common Stock (including MergerCo, John F. Reno and his
family trusts, insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations, persons who are not
citizens or
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<PAGE>
residents of the United States, holders who do not hold their shares as
capital assets and holders who have acquired their Common Stock upon the
exercise of options or otherwise as compensation) may be subject to special
rules not discussed below. No ruling from the Internal Revenue Service ("IRS")
will be applied for with respect to the federal income tax consequences
discussed herein. The discussion below is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified so as to result in federal
income tax consequences different from those discussed below. Furthermore,
certain conclusions as to the tax effect on Stockholders are not free from
doubt. This discussion does not consider the effect of any applicable foreign,
state, local or other tax laws.
In general, a Stockholder who realizes a gain in connection with the Merger
should be taxed in the same manner as if he had sold his Common Stock for a
price per share equal to the sum of $47.75 plus an amount of cash equal to the
fair market value of 0.5 shares of Recapitalized Common Stock. For this
purpose, a Stockholder will determine whether he has realized a gain in the
Merger by comparing his total adjusted tax basis in his shares of Common Stock
with the total cash and the fair market value of the Recapitalized Common
Stock he receives in the Merger, and will determine the fair market value of
the Recapitalized Common Stock based primarily on the trading market that
exists following consummation of the Merger. A Stockholder who realizes a loss
in the Merger will not be permitted to recognize the loss in full for tax
purposes unless he sells the Recapitalized Common Stock received in the
Merger.
As described below, the IRS may not concur with the description of tax
consequences set forth in the preceding paragraph. In addition, as described
below, Stockholders who have an adjusted tax basis in their Common Stock that
is less than the fair market value of the Recapitalized Common Stock received
in the Merger, who purchase or otherwise acquire Recapitalized Common Stock
after the Merger, who are treated as owning Recapitalized Common Stock under
certain constructive ownership rules, or who are Dissenting Stockholders may
be subject to tax consequences different from those set forth in the preceding
paragraph. Accordingly, all Stockholders are urged to read carefully the
discussion below.
EACH STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISER AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, FOREIGN, STATE, LOCAL OR OTHER TAX
LAWS.
Characterization of the Merger for Federal Income Tax Purposes
For federal income tax purposes, MergerCo should be disregarded as a
transitory entity, and the Merger of MergerCo with and into the Company should
be treated as consisting of two transactions: a sale for cash of a portion of
each Stockholder's Common Stock to CDR Fund V, and a recapitalization in which
the remaining portion of each Stockholder's Common Stock is exchanged for
Recapitalized Common Stock and cash. These two transactions are referred to
below respectively as the "Deemed Sale" and the "Recapitalization."
It is unclear how the total cash proceeds received by each Stockholder
should be allocated between the Deemed Sale and the Recapitalization. It is
also unclear how each Stockholder's basis in the Common Stock exchanged in the
Merger should be allocated between the Deemed Sale and the Recapitalization.
The Company intends to take the position for its own tax purposes that the
amount of the total cash proceeds allocable to the Deemed Sale is equal to the
total amount of cash contributed to MergerCo by CDR Fund V in exchange for
MergerCo stock, and that the amount of the total cash proceeds allocable to
the Recapitalization is equal to the balance of the cash proceeds received in
the Merger. The IRS could, however, adopt a different approach in determining
the allocation of proceeds between the Deemed Sale and the Recapitalization.
Federal Income Tax Consequences to Stockholders
Deemed Sale to CDR Fund V. To the extent that a Stockholder is considered to
have sold Common Stock to CDR Fund V in the Deemed Sale, the Stockholder will
recognize either capital gain or loss equal to the
28
<PAGE>
difference between the cash proceeds received by the Stockholder that are
allocable to the Deemed Sale and the Stockholder's adjusted tax basis in such
Common Stock. Such gain or loss will be long-term capital gain or loss if the
Common Stock was held by the Stockholder for more than one year. Individuals
will be subject to tax at a maximum rate of 28 percent on net capital gains if
the Common Stock was held for more than one year but not more than 18 months,
and at a maximum rate of 20 percent on net capital gains if the Common Stock
was held for more than 18 months.
Recapitalization. To the extent that a Stockholder is considered to have
exchanged Common Stock in the Recapitalization, the federal income tax
consequences to the Stockholder will depend on whether the Recapitalization is
treated for tax purposes as an integrated transaction or as an exchange of
Common Stock for Recapitalized Common Stock and a separate unrelated cash
distribution. The Recapitalization should be treated as an integrated
transaction, and the Company intends to take the position that it is an
integrated transaction. However, it is possible that the IRS may take the
position that the Recapitalization should be treated as an exchange of Common
Stock for Recapitalized Common Stock and a separate unrelated cash
distribution. Certain tax consequences to Stockholders if such a position were
to prevail are described below under the caption "Possible Treatment of the
Recapitalization as a Bifurcated Transaction."
Treatment of the Recapitalization as an Integrated Transaction. If the
Recapitalization is treated as an integrated transaction, a Stockholder whose
Common Stock is exchanged for Recapitalized Common Stock and cash (including
cash received in lieu of fractional shares of Recapitalized Common Stock) will
realize gain or loss measured by the difference, if any, between (i) the sum
of the fair market value of the Recapitalized Common Stock and the amount of
cash received by the Stockholder in the Recapitalization and (ii) the
Stockholder's adjusted tax basis in the Common Stock surrendered in the
Recapitalization. Gain realized by a Stockholder will be recognized, but only
to the extent it does not exceed the amount of cash received by the
Stockholder in the Recapitalization. Any excess gain and any loss realized by
a Stockholder in the Recapitalization will not be recognized unless the
Stockholder sells the Recapitalized Common Stock. Each Stockholder's tax basis
in the Recapitalized Common Stock immediately following the Recapitalization
will equal such Stockholder's adjusted tax basis in the Common Stock
surrendered in the Recapitalization, decreased by the amount of cash received
by such Stockholder in the Recapitalization and increased by the amount of
gain recognized by such Stockholder in the Recapitalization. The holding
period of the Recapitalized Common Stock will include the holding period of
the Common Stock surrendered in the Recapitalization.
The character of any gain recognized by a Stockholder with respect to the
Recapitalization as capital gain or ordinary income will depend on whether the
exchange of Common Stock in the Recapitalization has the effect of a dividend
distribution with respect to such a Stockholder. If the exchange has such an
effect, any gain recognized by the Stockholder will be treated as a dividend
taxable as ordinary income to the extent of such Stockholder's ratable share
of the Company's undistributed accumulated earnings and profits, with the
remainder, if any, of the recognized gain being taxable as capital gain. If
the exchange does not have the effect of a dividend distribution, any gain
recognized by a Stockholder will be treated as gain from a sale or exchange of
Common Stock, and will be taxable as capital gain in accordance with the
holding period principles described above under the caption "Deemed Sale to
CDR Fund V."
In the case of a Stockholder that is a corporation, the amount of recognized
gain treated as a dividend may be eligible for the 70% dividends-received
deduction. The dividends-received deduction is subject to certain limitations,
and may not be available if the corporate Stockholder does not satisfy certain
holding period requirements with respect to the Common Stock or if the Common
Stock is treated as "debt-financed portfolio stock." Additionally, if a
dividends-received deduction is available, the dividend may be treated as an
"extraordinary dividend," in which case a corporate Stockholder's adjusted tax
basis in the Common Stock would be reduced, but not below zero, by the amount
of the nontaxed portion of such dividend. Any amount of the nontaxed portion
of the dividend in excess of the corporate Stockholder's adjusted tax basis in
the Common Stock generally will be treated as gain from the sale or exchange
of the Common Stock for the taxable year in which the extraordinary dividend
is received. Corporate Stockholders are urged to consult their own tax
advisers as to the effect of the "extraordinary dividend" rules on the
adjusted tax basis of their Common Stock.
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<PAGE>
An exchange of Common Stock pursuant to the Recapitalization should not have
the effect of a dividend distribution if such exchange (i) is "substantially
disproportionate" with respect to the Stockholder, (ii) is "not essentially
equivalent to a dividend" with respect to the Stockholder, or (iii) results in
a complete termination of the Stockholder's interest in the Company. In
determining whether any of these tests is satisfied, a Stockholder must take
into account not only the Common Stock or Recapitalized Common Stock such
Stockholder actually owns, but also any Common Stock or Recapitalized Common
Stock such Stockholder is deemed to own under certain constructive ownership
rules. Pursuant to these constructive ownership rules, a Stockholder is deemed
to constructively own any stock that is owned by certain related individuals
or entities and any stock that the Stockholder has the right to acquire by
exercise of an option or by conversion or exchange of a security. Stockholders
who are holders of Company Stock Options and whose Company Stock Options are
converted into equivalent options to purchase shares of Recapitalized Common
Stock in lieu of receiving Option Cancellation Payments, or Stockholders who
are otherwise issued options to purchase Recapitalized Common Stock, will be
treated as constructively owning the shares of Recapitalized Common Stock that
are issuable upon the exercise of such options.
The exchange of a Stockholder's Common Stock will be "substantially
disproportionate" with respect to such Stockholder if, among other things, the
percentage of the outstanding Recapitalized Common Stock actually and
constructively owned by such Stockholder immediately following the Merger is
less than 80% of the percentage of the outstanding Common Stock actually and
constructively owned by such Stockholder immediately prior to the Merger.
The exchange of a Stockholder's Common Stock will satisfy the "not
essentially equivalent to a dividend" test if the Stockholder's exchange of
Common Stock pursuant to the Merger results in a "meaningful reduction" in
such Stockholder's proportionate interest in the Company. Whether the receipt
of cash by a Stockholder will be considered "not essentially equivalent to a
dividend" will depend upon such Stockholder's facts and circumstances. In
certain circumstances, even a small reduction in a Stockholder's proportionate
equity interest may satisfy this test. For example, the IRS has indicated in a
published ruling that a 3.3% reduction in the proportionate equity interest of
a small (substantially less than 1%) stockholder in a publicly held
corporation who exercises no control over corporate affairs constitutes such a
"meaningful reduction." Stockholders should consult with their own tax
advisers as to the application of this test in their particular situations.
The exchange of a Stockholder's Common Stock in the Merger may result in the
complete termination of such Stockholder's interest in the Company if, shortly
after the Merger, the Stockholder sells all of the Recapitalized Common Stock
received by such Stockholder in the Merger. For purposes of determining
whether a Stockholder's interest in the Company has been completely
terminated, a Stockholder may be eligible to waive the application of certain
constructive ownership rules. Stockholders should consult with their own tax
advisers as to the application of this test in their particular situations.
A Stockholder may not be able to satisfy any of the above tests because of
contemporaneous acquisitions of Recapitalized Common Stock by such Stockholder
or by a related party whose Recapitalized Common Stock would be attributed to
such Stockholder under the Code, because of the conversion of Company Stock
Options into equivalent options to purchase shares of Recapitalized Common
Stock, or because of the issuance to such Stockholder of options to purchase
Recapitalized Common Stock. Stockholders should consult their own tax advisers
regarding the tax consequences of any such contemporaneous acquisitions,
conversion of Company Stock Options or issuance of options to purchase shares
of Recapitalized Common Stock.
Possible Treatment of the Recapitalization as a Bifurcated Transaction. If
the Recapitalization were characterized as an exchange of Common Stock for
Recapitalized Common Stock and a separate unrelated cash distribution, the
cash received by the Stockholders (other than cash received in lieu of
fractional shares of Recapitalized Common Stock) would be treated as a
dividend taxable as ordinary income to the extent of the Company's current and
accumulated earnings and profits allocable to such distribution, without
regard to any Stockholder's gain or loss with respect to the Recapitalization.
Cash received by the Stockholders in excess of
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<PAGE>
the Company's current and accumulated earnings and profits allocable to the
distribution (other than cash received in lieu of fractional shares of
Recapitalized Common Stock) would be treated first as a tax-free return of
capital and then as capital gain.
As a result of this treatment of the Recapitalization as a bifurcated
transaction, Stockholders could be required to recognize ordinary income in
circumstances in which they would not have been required to recognize ordinary
income if the Recapitalization had been treated as an integrated transaction.
Stockholders that are corporations would in certain circumstances be eligible
for the 70% dividends-received deduction with respect to the dividend
distribution as described above under the caption "Treatment of the
Recapitalization as an Integrated Transaction."
If the Recapitalization were treated as a bifurcated transaction,
Stockholders would not recognize gain or loss on the exchange of Common Stock
for Recapitalized Common Stock. The basis of each Stockholder's Recapitalized
Common Stock would equal the basis such Stockholder had in the Common Stock.
The receipt of cash by a Stockholder in lieu of fractional shares of
Recapitalized Common Stock would be treated as a redemption and any gain would
be taxed as capital gain if the receipt of cash were "substantially
disproportionate" with respect to the Stockholder, if the receipt of cash were
"not essentially equivalent to a dividend," or if the receipt of cash resulted
in a complete termination of the Stockholder's interest in the Company, as
described above under the caption "Treatment of the Recapitalization as an
Integrated Transaction." Any capital gain would be taxed in accordance with
the holding period principles described above under the caption "Deemed Sale
to CDR Fund V." If none of the three above-mentioned tests were met, any cash
received in lieu of fractional shares of Recapitalized Common Stock would be
treated as a dividend and taxed in the same manner as a separate unrelated
cash distribution, as described above.
Treatment of Dissenting Stockholders. If the Recapitalization is treated as
an integrated transaction, any cash received by a Dissenting Stockholder
should be treated as proceeds from a sale or exchange of such Dissenting
Stockholder's Common Stock if the receipt of cash is "substantially
disproportionate" with respect to such Dissenting Stockholder, if the receipt
of cash is "not essentially equivalent to a dividend," or if the receipt of
cash results in a complete termination of such Dissenting Stockholder's
interest in the Company, as described above under the caption "Treatment of
the Recapitalization as an Integrated Transaction." Dissenting Stockholders
should consult with their own tax advisers as to the application of the above
tests in their particular circumstances. If the cash received by a Dissenting
Stockholder is treated as proceeds from a sale or exchange, any gain
recognized will be taxable as capital gain in accordance with the holding
period principles described above under the caption "Deemed Sale to CDR Fund
V," and any loss recognized will be capital loss. Otherwise, the cash received
will be treated as a dividend and taxed as described above under the caption
"Possible Treatment of the Recapitalization as a Bifurcated Transaction."
Although the matter is not free from doubt, it is more likely than not that
if the Recapitalization were treated as a bifurcated transaction, any cash
received by Dissenting Stockholders would be treated in the manner described
in this section rather than as described above under the caption "Possible
Treatment of the Recapitalization as a Bifurcated Transaction."
Foreign Stockholders--Withholding
The following is a general discussion of certain federal income tax
consequences of the Merger to foreign Stockholders. For this purpose, a
foreign Stockholder is any person who is, for federal income tax purposes, a
foreign corporation, a non-resident alien individual, a foreign partnership or
a foreign estate or trust.
In the case of any foreign Stockholder, the Exchange Agent will withhold 30%
of the amount of cash received by such Stockholder in the Recapitalization in
order to satisfy certain withholding requirements, unless such foreign
Stockholder proves in a manner satisfactory to the Company and the Exchange
Agent that either (i) the cash received in the Recapitalization pursuant to
the Merger will qualify for treatment as proceeds of a sale or exchange of
Common Stock, rather than as a dividend for federal income tax purposes, in
which case no
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<PAGE>
withholding will be required, (ii) the foreign Stockholder is eligible for a
reduced tax treaty rate with respect to dividend income, in which case the
Exchange Agent will withhold at the reduced treaty rate or (iii) no
withholding is otherwise required.
Foreign Stockholders should consult their own tax advisers regarding the
application of these withholding rules.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Stockholder the
amount of dividends paid to such Stockholder and the backup withholding tax,
if any, withheld with respect to such dividends. Copies of these information
returns also may be made available to the tax authorities in the country in
which a foreign Stockholder resides under the provisions of an applicable
income tax treaty. Backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid to a foreign
Stockholder at an address outside the United States (unless that payor has
knowledge that the payee is a United States person).
Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner certifies under penalties of
perjury that it is a foreign Stockholder and the payor does not have actual
knowledge that such owner is a United States person, or unless the beneficial
owner otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Common Stock by or through a foreign office of a broker. If, however, such
broker is, for United States federal income tax purposes, a United States
person, a controlled foreign corporation, or a foreign person that derives 50%
or more of its gross income for certain periods from the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless (1) such
broker has documentary evidence in its records that the beneficial owner is a
foreign holder and certain other conditions are met, or (2) the beneficial
owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's federal income tax liability provided
the required information is furnished to the IRS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain directors and executive officers of the Company may have interests,
described herein, that present them with potential conflicts of interest in
connection with the Merger. The Board of Directors is aware of the conflicts
described below and considered them in addition to the other matters described
under "Special Factors--Recommendation of Board; Reasons for the Merger."
Pursuant to the Merger Agreement, except as provided in the following
paragraphs, (i) each outstanding Company Stock Option will become fully vested
and exercisable immediately prior to the Merger, (ii) any outstanding Company
Stock Option that is not exercised prior to the Effective Time shall, subject
to the consent of the holder thereof, be canceled at the Effective Time, and
(iii) each holder of any such cancelled Company Stock Options will receive, in
consideration of such cancellation, an Option Cancellation Payment. On March
4, 1998 there were Company Stock Options outstanding.
John F. Reno, Allan M. Kline and John R. Peeler, three of the Company's most
senior executive officers, have entered into employment agreements with the
Company that become effective at the Effective Time and that provide them with
certain benefits in the event of a qualifying termination of their employment
after consummation of the Merger. See "Certain Relationships and Related
Transactions--Employment and Other Agreements."
In addition, the agreements provide for the manner in which the Common Stock
held by Mr. Reno and two family trusts established by Mr. Reno will be treated
in the Merger and the manner in which the Company Stock
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Options held by each such executive will be treated in the Merger. Pursuant to
his employment agreement, Mr. Reno, together with two family trusts
established by Mr. Reno, will contribute 40,804 shares of Common Stock to
MergerCo immediately prior to the Effective Time in exchange for 799,758
shares of MergerCo Common Stock, which shares of MergerCo Common Stock shall
be converted, pursuant to the Merger, into a like number of shares of
Recapitalized Common Stock. The value of the Recapitalized Common Stock to be
received by Mr. Reno in respect of each share of his Common Stock is equal to
the value of the Merger Consideration to be received by the unaffiliated
shareholders. Messrs. Reno, Kline and Peeler currently own options to purchase
413,000 shares, 66,000 shares and 166,400 shares, respectively, of Common
Stock. Each of the employment agreements provides that, as described under
"The Merger and the Merger Agreement--Effect on Stock Options and Employee
Benefit Matters," all of the Company Stock Options currently held by each of
Messrs. Reno, Kline and Peeler (or, in the case of Mr. Peeler, the options to
purchase 137,600 shares of Common Stock currently owned by him) will be
converted into equivalent options (the exercise prices of which preserve the
economic value (i.e. the excess of the per share Merger Consideration to be
paid to unaffiliated shareholders over the exercise price) of their current
Company Stock Options), all of which, other than 48,439 Company Stock Options
held by Mr. Reno, will be fully vested and exercisable, to purchase shares of
Recapitalized Common Stock in lieu of such executives receiving Option
Cancellation Payments. In addition, an aggregate of approximately 483,000
Company Stock Options held by the Management Stockholders will be converted
into fully vested and exercisable equivalent options (the exercise prices of
which preserve the economic value of their current Company Stock Options), all
of which will be fully vested and exercisable, to purchase shares of
Recapitalized Common Stock in lieu of such Management Stockholders receiving
an Option Cancellation Payment for such options.
Prior to the Merger, assuming the vesting and exercise of all Company Stock
Options, Messrs. Reno, Kline and Peeler own shares representing 2.39%, 0.36%
and 0.99%, respectively, of the outstanding Common Stock. Following the
Merger, assuming the conversion of Company Stock Options and the issuance of
options as described herein and the vesting and exercise of all outstanding
options, Messrs. Reno, Kline and Peeler would own shares representing %, %
and %, respectively, of the outstanding Recapitalized Common Stock.
Also, following the Effective Time, the Company expects to authorize the
grant of options to purchase approximately 15,680,000 shares of Recapitalized
Common Stock to certain officers and other key employees pursuant to one of
the Company Stock Plans. It is expected that Mr. Reno (and his family trusts),
the other Management Stockholders and members of management and key employees
who receive stock options as described in the foregoing would, assuming the
conversion of Company Stock Options described above and complete vesting and
exercise of all outstanding options, own up to % of the outstanding
Recapitalized Common Stock after the Effective Time, the remaining
Stockholders would own % of the outstanding Recapitalized Common Stock and
CDR Fund V would own % of the outstanding Recapitalized Common Stock.
Pursuant to the Merger Agreement, for a period of six years after the
Effective Time, the Surviving Corporation has agreed to indemnify officers,
directors, employees and agents of the Company and its subsidiaries against
losses, claims, damages, expenses or liabilities arising out of actions or
omissions or alleged actions or omissions occurring at or prior to the
Effective Time to the same extent provided for in the Company's Restated
Articles of Organization and By-Laws, as amended (to the extent consistent
with applicable law). Further, the Company will maintain during such six-year
period, directors' and officers' liability insurance covering the persons who
are currently covered by the Company's existing directors' and officers'
liability insurance with respect to claims arising from facts or events which
occurred at or prior to the Effective Time, on terms and conditions no less
favorable to such directors and officers than those in effect as of December
20, 1997. See "The Merger and the Merger Agreement--Indemnification and
Insurance."
Upon or following the Merger, the Company expects to enter into a consulting
agreement with CDR which will provide for (i) an annual fee, initially of
$500,000, for providing such management and financial consulting services to
the Company and its subsidiaries and (ii) reimbursement of out-of-pocket
expenses it incurs after the Merger, for so long as CDR Fund V has an
investment in the Company and its subsidiaries. At or following the Merger, it
is expected that the Company will pay CDR a transaction fee of approximately
$9.2 million in
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consideration for services provided by CDR in arranging the Merger, arranging
and negotiating the financing for the Merger, and related services, plus
reimbursement of out-of-pocket expenses incurred by CDR. In addition, it is
expected that, upon and following the Merger, the Company will agree to
indemnify CDR and CDR Fund V and certain related parties, subject to certain
limitations, against all claims and liabilities arising out of or in
connection with the Securities Act, the Exchange Act, or any other applicable
securities or other laws, in connection with the Merger and related
transactions and the operation of the business following the Merger. It is
also expected that, upon and following the Merger, the Company will enter into
a registration rights agreement with the shareholders of MergerCo which will
provide that such shareholders may require the Company to register their
shares of Recapitalized Common Stock under the Securities Act.
None of the directors of MergerCo is affiliated with the Company. After
consummation of the Merger, Messrs. Reno, Kline and Peeler are expected to be
directors of the Surviving Corporation. The current executive officers of the
Company, including Messrs. Reno, Kline and Peeler, will be officers of the
Surviving Corporation. See "Certain Relationships and Related Transactions--
Employment and Other Agreements."
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RISK FACTORS
Stockholders should carefully review and consider, among other things, the
factors set forth below, as well as the other information included in this
Proxy Statement, before casting their votes with respect to the Merger
Agreement and the Merger.
CONTROL BY CDR FUND V
Immediately following the Merger, the CDR Fund V will control approximately
92.3% of the outstanding shares of Recapitalized Common Stock of the Company.
As a result of its stock ownership, CDR Fund V will control the Company and
have the power to elect the directors of the Company, appoint new management,
and approve any action requiring approval by the stockholders of the Company,
including adopting certain amendments to the articles of organization of the
Company and approving any merger or sale of all or substantially all the
assets of the Company. The directors so elected will have the authority to
effect decisions affecting the capital structure of the Company, including the
issuance of additional classes or series of preferred stock and the
declaration of dividends. There can be no assurance that the policies of the
Company in effect prior to the Merger with respect to such matters or other
matters will continue after the Merger. Moreover, concentration of ownership
by CDR Fund V of Recapitalized Common Stock of the Company will have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from seeking to acquire, control of the Company. A
third party would be required to negotiate any such transaction with CDR Fund
V. There can be no assurance that the interests of CDR Fund V will not
conflict with the interests of Stockholders with respect to any such
transaction or otherwise. CDR Fund V has agreed, pursuant to certain
employment agreements with Messrs. Reno, Kline and Peeler, to elect them to
serve as directors of the Company so long as they are employed by the Company.
DELISTING OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE
As a result of the Merger, it is expected that the Common Stock will no
longer meet the listing requirements of the New York Stock Exchange and the
New York Stock Exchange may act unilaterally to delist the Common Stock.
However, even if the New York Stock Exchange does not take such action
unilaterally, it is the intention of the Company to delist the Common Stock at
the Effective Time, if such delisting is permitted, and thereafter not to list
the Common Stock or Recapitalized Common Stock on any other national
securities exchange or automated quotation system. Such delisting of the
Common Stock and intention not to list the Recapitalized Common Stock,
together with the substantial decrease in the percentage of shares of
outstanding common stock of the Company held by Stockholders (other than
Management Stockholders and MergerCo), is expected to result in a substantial
decrease in the liquidity of the Recapitalized Common Stock, even if the
Company continues to be a reporting company under the Exchange Act and
continues to file the periodic reports (including annual and quarterly
reports) required to be filed thereunder. Shares of Recapitalized Common Stock
are expected to trade only in the over-the-counter market. Although prices in
respect of trades may be published by the National Association of Securities
Dealers, Inc. on its electronic bulletin board and "pink sheets," quotes for
such shares would not be as readily available; accordingly, it is anticipated
that the Recapitalized Common Stock will trade much less frequently than the
Common Stock traded prior to the Merger, which may have a material adverse
effect on the market value shares of Recapitalized Common Stock.
In addition, the shares of Common Stock are currently "margin securities"
under the regulations of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), which has the effect, among other things, of
allowing brokers to extend credit on the collateral of the Common Stock. It is
possible that after the Merger (depending upon certain factors) the shares of
Recapitalized Common Stock would no longer constitute "margin securities" for
the purposes of the margin regulations of the Federal Reserve Board and
therefore could no longer be used as collateral for loans made by brokers.
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TERMINATION OF EXCHANGE ACT REPORTING
The Company is obligated by the Merger Agreement to continue to be a
reporting company under the Exchange Act and to continue to file periodic
reports (including annual and quarterly reports) for at least five years after
the Merger, unless fewer than 100 record holders of shares of Recapitalized
Common Stock are non-affiliates of the Surviving Corporation or except as
otherwise provided in the Merger Agreement. After the fifth anniversary of the
Effective Time, as provided in the Merger Agreement, the Company may
deregister the Recapitalized Common Stock under the Exchange Act if permitted
by applicable law. If the Company were to cease to be a reporting company
under the Exchange Act and to the extent not required in connection with any
other debt or equity securities of the Company registered or required to be
registered under the Exchange Act, the information now available to
Stockholders in the annual, quarterly and other reports required to be filed
by the Company with the Securities and Exchange Commission would not be
available to them as a matter of right.
POTENTIAL DILUTION OF STOCKHOLDERS
Mr. Reno and his family trusts will contribute 40,804 shares of Common Stock
to MergerCo in exchange for 799,758 shares of MergerCo Common Stock, which
will be converted into Recapitalized Common Stock in the Merger. In addition,
some or all of the Company Stock Options held by Management Stockholders will
be converted into equivalent options (the exercise prices of which preserve
the economic value of their current Company Stock Options), most of which will
be fully vested and exercisable, to purchase shares of Recapitalized Common
Stock in lieu of the Management Stockholders receiving the Option Cancellation
Payment. Following the Merger, the Company intends to grant additional options
to purchase shares of Recapitalized Common Stock to members of the Company's
management and key employees. The maximum aggregate number of shares of
Recapitalized Common Stock expected to be reserved for issuance pursuant to
the Stock Option Plans following the Merger is approximately . Any such
grant or exercise of any stock option will dilute the equity ownership
percentage of the Stockholders and CDR Fund V and may result in a decrease of
the book value per share of the Recapitalized Common Stock. It is expected
that Mr. Reno (and his family trusts), the other Management Stockholders and
members of management and key employees who receive stock options as described
in the foregoing would, assuming complete vesting and exercise of all options,
own up to % of the outstanding Recapitalized Common Stock after the
Effective Time, the remaining Stockholders would own % of the outstanding
Recapitalized Common Stock and CDR Fund V would own % of the outstanding
Recapitalized Common Stock. See "Special Factors--Recommendation of Board;
Reasons for the Merger"; and "--Interests of Certain Persons in the Merger."
SUBSTANTIAL LEVERAGE; LIQUIDITY
The Company will incur substantial indebtedness in connection with the
Merger and will thereby become highly leveraged, with indebtedness that is
very substantial in relation to its shareholders' equity. The Company did not
have substantial indebtedness prior to the Merger (approximately $280,000 at
December 31, 1997). As of December 31, 1997, after giving pro forma effect to
the Merger and the Financing and the application of the net proceeds
therefrom, the Company would have had approximately $568.2 million of
consolidated indebtedness and approximately $355.0 million of consolidated
stockholders' deficit. The Senior Secured Credit Facilities and the indenture
for the Senior Subordinated Notes will permit the Company to incur or
guarantee certain additional indebtedness, subject to certain limitations. The
Company will be required to repay the $260 million in term loans under the
Senior Secured Credit Facilities over the nine year period following the
Effective Time. In addition, the Company will be required to prepay Senior
Secured Credit Facilities borrowings using the proceeds from certain asset
sales, certain casualty insurance, condemnation or similar recoveries by the
Company and certain indebtedness by the Company other than as permitted under
the Senior Secured Credit Facilities, as well as 50% of its excess cash flow
(as defined in the Senior Secured Credit Facilities) unless a leverage ratio
test is met. All outstanding revolving credit borrowings under the Senior
Secured Credit Facilities will become due on the sixth anniversary of the
Effective Time. Because of its working capital needs, the Company expects that
it will be required at that time to enter into new revolving credit facility
arrangements. No assurance can be given that any extension, renewal,
replacement or refinancing of the Company's revolving credit facility can be
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successfully accomplished or accomplished on acceptable terms. See "Selected
Historical Consolidated Financial Data," "Management's Discussion & Analysis--
Capital Resources and Liquidity," "Merger Financings--Senior Secured Credit
Facilities" and "--Senior Subordinated Notes."
The Company's high leverage may have important consequences for the Company,
including but not limited to the following: (a) the Company's ability to
obtain additional financing for future acquisitions (if any), working capital,
capital expenditures or other purposes may be impaired or any such financing
may not be on terms favorable to the Company; (b) a substantial amount of the
Company's operating cash flow will be dedicated to the payment of principal
and interest on its indebtedness, thereby reducing funds that would otherwise
be available for the Company's operations and other purposes, including
investments in new products, research and development, capital spending and
acquisitions; (c) a substantial decrease in net operating cash flows or
increase in expenses could make it difficult for the Company to meet its debt
service requirements or force it to modify its operations or sell assets; and
(d) the Company's highly leveraged capital structure may place it at a
competitive disadvantage, hinder its ability to adjust rapidly to market
conditions or make it vulnerable to a downturn in its business or the economy
generally or changing market conditions and regulations. See "Merger
Financings."
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its future financial and operating
performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to certain financial, business, legislative,
regulatory, industry, economic and other factors, many of which are beyond the
Company's control. These factors could include general economic conditions,
operating difficulties, increased operating costs, product pricing pressures,
potential revenue instability arising from cost savings initiatives or
otherwise, labor relations, the response of competitors or customers to the
Company's business strategy or projects, delays in implementation of the
Company's business strategy, telecommunication provider consolidation or
strategy changes, and the relative success of new product introductions. The
Company's ability to meet its debt service and other obligations may depend in
significant part on the extent to which the Company can implement successfully
its business and growth strategy. There can be no assurance that the Company
will be able to implement its strategy fully or that the anticipated results
of its strategy will be realized. See "--Risks Related to Business and Growth
Strategy, Including Acquisitions" and "The Company--Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital or other expenditures, sell assets, seek to obtain additional equity
capital or refinance or restructure its debt. There can be no assurance that
the Company's cash flow and capital resources will be sufficient for payment
of principal of, premium, if any, and interest on, its indebtedness in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its scheduled debt service obligations. In
addition, because the Company's obligations under the Senior Secured Credit
Facilities will bear interest at floating rates, an increase in interest rates
could materially adversely affect, among other things, the Company's ability
to meet its debt service obligations.
FRAUDULENT TRANSFER CONSIDERATIONS
The payment of the cash portion of the Merger Consideration to the
Stockholders pursuant to the Merger, as well as any cash paid in lieu of
fractional shares to Stockholders, may be subject to review under federal or
state fraudulent transfer laws in the event the Company is the subject of a
bankruptcy filing. Under such laws, if a court in a lawsuit by a creditor or a
representative of creditors of the Company, such as a trustee in bankruptcy,
were to find that, at the time of, or after giving effect to the Merger and
the related transactions including the Financing, the Company (i) was
insolvent or rendered insolvent thereby, (ii) was engaged in a business or
transaction for which its remaining assets constituted an unreasonably small
amount of capital, (iii) intended to incur, or believed that it would incur,
debts beyond its ability to pay as they matured, or (iv) intended to hinder,
delay or defraud current or future creditors and, in the case of clauses (i),
(ii) and (iii), that the Company did not receive reasonably equivalent value
or fair consideration in the Merger, such court could void all or a part of
the
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payment of the cash received by Stockholders in the Mergers and require that
the Stockholders, including Stockholders exercising appraisal rights, return
such consideration to the Company or to a fund for the benefit of its
creditors. If a court were to find that the Company came within any of clauses
(i) through (iv) above, the Company, or its creditors or the trustee in
bankruptcy, could seek to avoid the grant of security interests to the lenders
under the Senior Secured Credit Facilities. This would result in an event of
default with respect to indebtedness incurred under such facilities which,
under the terms of such indebtedness (subject to applicable law), would allow
the lenders to terminate their obligations thereunder and to accelerate
repayment of such indebtedness. In addition, Section 45 of the MBCL provides
that a stockholder to whom a corporation makes a distribution, if the
corporation is, or is thereby rendered, insolvent shall be liable to the
corporation for the amount of such distribution made or for the amount of such
distribution which exceeds that which could have been made without rendering
the corporation insolvent. In no case shall any stockholder be liable to an
extent greater than the distribution paid to such stockholders.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, a company
would be considered insolvent for purposes of the foregoing if (i) the sum of
such company's debts including contingent liabilities is greater than all such
company's property at a fair valuation, (ii) the present fair saleable value
of such company's assets is less than the amount that will be required to pay
its probable liability on its existing debts as they become absolute and
matured or (iii) the company incurred obligations beyond its ability to pay as
such obligations become due. There can be no assurance as to what standards a
court would use to determine whether the Company was solvent at the relevant
time. It is a condition to consummation of the Merger that the Company receive
a solvency opinion, which is expected to be delivered by Houlihan, Lokey,
Howard & Zukin, Inc. Such solvency opinion would not be binding on a court and
there can be no assurance that a court would not determine that the Company
was insolvent at the time of or after giving effect to the Merger.
The Company believes that at the time the indebtedness to be incurred
pursuant to the Financing will be incurred initially by the Company, the
Company (i) will be (a) neither insolvent nor rendered insolvent thereby, (b)
in possession of sufficient capital to run its business effectively and (c)
incurring debts within its ability to pay as the same mature or become due and
(ii) will have sufficient assets to satisfy any probable money judgment
against it in any pending action. In reaching the foregoing conclusions, the
Company has relied upon its analyses of internal cash flow projections and
estimated values of assets and liabilities of the Company. There can be no
assurance, however, that a court passing on such questions would reach the
same conclusions.
DEPENDENCE ON COMMUNICATIONS INDUSTRY
The Company's principal customers are RBOCs, competitive access providers,
wireless service providers, competitive local exchange carriers, other
communications service providers, mobile work forces and industrial engineers
and other users of the Company's communications devices and ruggedized
computers. The industries of the Company's principal customers are
characterized by intense competition and consolidation. Fewer customers as a
result of such consolidation could lead to pressure on the Company to lower
prices. Competitive pressures among the Company's customers or other
communications industry developments could lead to discontinuance or
modifications of products manufactured by the Company and could have a
material adverse effect on the Company's business, financial condition and
results of operations. Regulation in the communications industry could
materially adversely affect the Company's customers or otherwise materially
limit or restrict the Company's business. Further, these industries are
evolving rapidly and it is difficult to predict their potential size or future
growth rate. There can be no assurance that the deregulation trend in the
telecommunications market that has resulted in increased competition and
escalating demand for technologies and services will continue in a manner
favorable to the Company or its business strategies.
HIGHLY COMPETITIVE MARKETS
The markets for the Company's products and services are highly competitive.
The Company competes directly or indirectly with Hewlett-Packard Company and
Panasonic Industrial Co., among others. Due to the
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rapidly evolving markets in which the Company competes, additional competitors
with significant market presence and financial resources, including large
telecommunications equipment manufacturers and computer hardware and software
companies, may enter those markets, thereby further intensifying competition.
Increased competition could result in price reductions and loss of market
share which would materially adversely affect the Company's business,
financial condition and results of operations. Certain of the Company's
current and potential competitors have greater name recognition and greater
financial, selling and marketing, technical, manufacturing and other resources
than the Company. Although the Company believes it has certain technological
and other advantages over its competitors, realizing and maintaining such
advantages will require a continued high level of investment by the Company in
research and product development, marketing and customer service and support.
The highly leveraged nature of the Company after the Merger could limit the
Company's ability to continue to make such investments or other necessary or
desirable capital expenditures, to compete effectively and respond to market
conditions. There can be no assurance that the Company will be able to compete
effectively with its existing competitors or with new competitors, or that
such competitors will not succeed in adapting more rapidly and effectively to
changes in technology or in the market or in developing or marketing products
that will be more widely accepted.
RAPID TECHNOLOGICAL CHANGE; CHALLENGES OF NEW PRODUCT INTRODUCTIONS
The market for the Company's products and services is characterized by
rapidly changing technology, new and evolving industry standards and protocols
and new product and service introductions and enhancements that may render
existing offerings obsolete or unmarketable. Automation in the Company's
addressed markets for communications test instruments or a shift in customer
emphasis from communications test instruments to test and monitoring systems
could likewise render the Company's existing offerings obsolete or
unmarketable or reduce the size of the Company's addressed market. In
particular, incorporation of self-testing functions in the equipment currently
addressed by the Company's communications test instruments could render the
Company's offerings redundant and unmarketable. Failure to anticipate or
respond rapidly to advances in technology and to adapt the Company's products
appropriately could have a material adverse effect on the success of the
Company's products and thus on the Company's business, financial condition and
results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends and the expenditure of substantial development costs. From the
beginning of fiscal 1994 through December 31, 1997, the Company has expended
on average 12% of its sales (or approximately $180 million) on product
development and, although the Company expects to continue product development
spending at similar levels, there can be no assurance that the Company will
have sufficient free cash flow to do so. There can be no assurance that errors
will not be found in new products or upgrades after commencement of commercial
shipments, resulting in delays in or loss of market acceptance and sales,
diversion of development resources, injury to the Company's reputation,
increased service and warranty costs or payment of compensatory or other
damages, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
PRODUCT CERTIFICATION AND EVOLVING INDUSTRY STANDARDS
Several of the Company's products must meet significant communications
regulations, certifications, standards and protocols, some of which are
evolving as new technologies are deployed. These regulations, certifications,
and standards and protocols include those promulgated by the Federal
Communications Commission, established by Underwriters Laboratories and
imposed by various foreign countries. Compliance with such regulations,
certifications, standards and protocols may prove costly and time-consuming
for the Company, presenting barriers to entry in particular markets or
reducing the profitability of the Company's product offerings. Such
regulations, certifications, standards and protocols may also adversely affect
the communications industry, limit the number of potential customers for the
Company's products and services or otherwise have a material adverse effect on
the Company's business. The failure of the Company's products to comply, or
delays in compliance, with the various existing and evolving industry
regulations, standards and protocols could delay the introduction of the
Company's products or obsolete the Company's existing products.
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DEPENDENCE ON SOLE SOURCE SUPPLIERS AND LICENSORS
The Company purchases certain key components and licenses technology from
sole source vendors, including a semiconductor manufacturer of a component
utilized in the Company's communications test business and a component
manufacturer for the Itronix series of ruggedized laptop computers. There can
be no assurance that such components will continue to be produced or that such
licensed technology will continue to be made available or that the price for
such components and licensed technology may not significantly increase. The
inability to develop alternative sources for these components and licensed
technology or to obtain sufficient quantities of these components could result
in increased costs and delays or reductions in product shipments which could
materially adversely affect the Company's business, financial condition and
results of operations. In the event of a reduction or interruption of supply,
a significant amount of time could be required before the Company would begin
receiving adequate supplies from such alternative suppliers. In such event,
the Company's business, financial condition and results of operations would be
materially adversely affected. In addition, the manufacture of certain of
these sole source components is technologically complex, and the Company's
reliance on the suppliers of these components exposes the Company to potential
production difficulties and quality variations, which could negatively impact
cost and timely delivery of the Company's products. If supply of certain
components, including but not limited to application specific integrated
circuits, power supplies, display devices and operating system software,
should cease, the Company may be required to redesign certain of its products.
No assurance can be given that supply problems will not occur or, if such
problems do occur, that satisfactory solutions would be available.
RISKS RELATING TO BUSINESS AND GROWTH STRATEGY, INCLUDING ACQUISITIONS
The Company's future performance depends in part on the Company's success in
implementing its business and growth strategy. The components of the Company's
strategy are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to fully
implement its strategy or that the anticipated results of its strategy will be
realized.
The Company's strategy contemplates, among other things, growth through
acquisitions of complementary businesses and entry into new markets.
Management cannot predict the availability of appropriate acquisition
candidates or the likelihood of an acquisition being completed should any
negotiations commence. After the Recapitalization, the Company could have
difficulty obtaining financing to pursue acquisitions due to its substantial
debt and to the restrictive covenants in its debt instruments, among other
things. If the Company does complete any acquisitions, the Company could have
difficulties integrating acquired technology and operations, or retaining and
integrating key employees of acquired companies. Integrating any acquired
business could also divert management attention from ongoing business
concerns. In addition, the Company's future growth, whether by acquisition or
otherwise, depends in part upon its ability to enter markets in which the
Company may have limited experience, including international markets. In
conducting business in foreign jurisdictions, the Company may encounter
difficulties with, among other things, tariffs and other trade or regulatory
barriers, currency controls, hyperinflation, intellectual property protection,
potential adverse tax consequences, longer payment cycles, greater difficulty
or delay in accounts receivable collection, cultural differences and increased
political and economic instability.
The Company's planned growth, if achieved, may place significant demands on
its management, administrative and operational resources. The Company's
ability to manage growth effectively will require the Company to continue to
develop and improve its operational, financial and other internal systems, as
well as its sales capabilities, and attract, manage and retain its employees.
There can be no assurance that the Company will effectively manage any
strategic growth it may achieve.
RISKS RELATING TO ITRONIX
Itronix is currently facing significant manufacturing and marketing
challenges, including competition from "semi-rugged" products that constrains
pricing of premium, ruggedized products like Itronix's. In addition, Itronix's
results of operations have varied significantly in the past and may vary
significantly in the future, on a
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quarterly and annual basis, as a result of a variety of factors, many of which
are outside the Company's control. These factors include, without limitation:
(i) the timing and size of orders which are received and can be shipped in any
particular period; (ii) the seasonality of the placement of customer orders;
(iii) customer order deferrals in anticipation of product enhancements or new
product offerings by Itronix or its competitors; (iv) customer cancellation of
orders and the gain or loss of significant customers, including those due to
industry combinations and (v) the relative unpredictability of timing of
customer orders due to the relative concentration of organizations with large
field-service work forces. Moreover, any downturn in general economic
conditions could precipitate significant reductions in corporate spending for
telecommunications equipment, which could result in delays or cancellations of
orders for Itronix's products. Itronix's expense levels are relatively fixed
and are based, in significant part, on expectations of future revenues.
Currently, costs are much higher as a percentage of revenues for Itronix than
for the Company overall, and Itronix is not contributing to the Company's
profitability. As a result of its unpredictable revenues, costs at times can
be disproportionately high as a percentage of Itronix's business. If, as a
result of these factors, Itronix's costs exceed its revenues, Itronix's stand-
alone financial condition and results of operations would be materially
adversely affected.
RELIANCE ON KEY PERSONNEL
The Company's success depends in large part upon its senior management, as
well as its ability to attract and retain its highly-skilled technical,
managerial, sales and marketing personnel, particularly engineers skilled and
experienced with communications equipment. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
retaining its existing key personnel and in attracting and retaining the
personnel it requires. Failure to attract and retain key personnel will have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, continued labor market shortages of
technical personnel may require wage increases well in excess of the growth in
the Company's sales and margins, thereby reducing the overall profitability of
the Company.
RESTRICTIVE FINANCING COVENANTS
The Senior Secured Credit Facilities and the indenture for the Senior
Subordinated Notes will contain a number of covenants that will significantly
restrict the operations of the Company, limiting the discretion of the
Company's management with respect to certain business matters. These
covenants, among other things, will restrict the ability of the Company to
incur additional indebtedness or guarantee obligations, pay dividends and
other distributions, prepay or modify the terms of other indebtedness, create
liens, make capital expenditures, make certain investments or acquisitions,
enter into mergers or consolidations, make sales of assets, engage in certain
transactions with affiliates and otherwise restrict corporate activities. In
addition, under the Senior Secured Credit Facilities, the Company will be
required to satisfy a minimum interest expense coverage ratio and a maximum
leverage ratio. These financial tests become more restrictive in future years.
The Company's ability to comply with the covenants and restrictions
contained in the Senior Secured Credit Facilities and the indenture for the
Senior Subordinated Notes may be affected by events beyond its control,
including prevailing economic, financial and industry conditions, and there
can be no assurance that the Company will be able to comply with such
covenants or restrictions in the future. A breach of the covenants and
restrictions contained in the Senior Secured Credit Facilities or the
indenture for the Senior Subordinated Notes or in any agreements with respect
to any additional financing would result in an event of default under such
agreements, which would permit acceleration of the related debt and
acceleration of debt under other debt agreements that may contain cross-
acceleration or cross-default provisions, as well as termination of the
commitments of the lenders to make further extensions of credit under the
Senior Secured Credit Facilities. In addition, if the Company were unable to
repay its indebtedness to the lenders under the Senior Secured Credit
Facilities, such lenders could proceed against the collateral securing such
indebtedness, including substantially all of the Company's assets. See "Merger
Financings--Senior Secured Credit Facilities" and "--Senior Subordinated
Notes."
41
<PAGE>
YEAR 2000 COMPLIANCE
The Company has commenced a review of its computer systems and products in
order to assess its exposure to Year 2000 issues. The Company is currently in
the process of determining the full scope, related costs and action plan to
ensure that the Company's systems continue to meet its internal needs and
those of its customers. The Company expects to make the necessary
modifications or changes to its computer information systems to enable proper
processing of transactions relating to the Year 2000 and beyond. However,
there can be no assurance that Year 2000 costs and expenses will not have a
material effect on the Company. In addition, the Company does not currently
have any information concerning the Year 2000 compliance status of its
suppliers and customers. In the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
Finally, there can be no assurance that the Company's existing or installed
base of products are Year 2000 compliant, or that the Company's products will
not be integrated by the Company or its customers with, or otherwise interact
with, non-compliant software or other products. Any such product non-
compliance may expose the Company to claims from its customers and others, and
could impair market acceptance of the Company's products and services,
increase service and warranty costs, or result in payment of damages, which in
turn could materially adversely affect the Company.
FORECASTS; LIMITS OF RELIABILITY
The forecasts set forth under the "Special Factors--Certain Projections"
(which were provided to Merrill Lynch and the Company), while presented with
numerical specificity, are based upon a number of estimates and assumptions
which, though considered reasonable by the Company, are inherently subject to
significant business, economic and competitive uncertainties and
contingencies, including those set forth herein under "Risk Factors," all of
which are difficult to predict and many of which are beyond the control of the
Company, and upon assumptions with respect to future business strategies and
decisions which are subject to change. The forecasts were not prepared with a
view toward compliance with published guidelines of the Commission, the
American Institute of Certified Public Accountants, any regulatory or
professional agency or body or generally accepted accounting principles.
Moreover, Coopers & Lybrand L.L.P., the Company's independent public
accountants, has not compiled, examined or performed any procedures regarding
the forecasts and accordingly, does not express any opinion or any other form
of assurance with respect thereto, assumes no responsibility for and disclaims
any association with the forecasts. While the Company believes the forecasts
are based upon reasonable assumptions and estimates, actual results will vary
and such variations may be material. Forecasts are necessarily speculative in
nature, and it is usually the case that one or more of the assumptions
underlying the forecasts will not materialize. Furthermore, the Company does
not intend to update or revise the forecasts to reflect events or
circumstances after the date thereof or to reflect the occurrence of
unanticipated events. Stockholders are cautioned not to place undue reliance
on any of the forecasts included herein. See "Special Factors--Certain
Projections."
42
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated historical, financial
and other data of the Company for the five years ended March 31, 1997 which
have been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Company. The selected consolidated
data at December 31, 1997 have been derived from, and should be read in
conjunction with, the Company's unaudited condensed consolidated financial
statements, including the notes thereto, appearing elsewhere in this Proxy
Statement, and, in the opinion of the Company's management, contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations of the Company
at such date and for such periods. Data for the nine months ended December 31,
1997 are not necessarily indicative of the results to be expected for the full
year. See "Financial Statements."
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
NINE MONTHS ENDED -----------------------------------------------
DECEMBER 31, 1997 1997 1996 1995 1994 1993
----------------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Sales................... $353,314 $362,412 $293,042 $243,078 $199,612 $190,000
Cost of sales........... 151,714 137,254 111,436 91,412 72,103 65,738
-------- -------- -------- -------- -------- --------
Gross profit............ 201,600 225,158 181,606 151,666 127,509 124,262
Selling, general and
administrative
expense................ 103,549 114,479 98,487 86,329 70,719 73,704
Product development
expense................ 41,563 43,267 36,456 30,585 26,863 23,691
Nonrecurring charges.... -- 27,776 16,852 -- -- --
Amortization of
intangibles............ 4,327 6,793 5,136 5,106 5,728 5,087
-------- -------- -------- -------- -------- --------
Operating income........ 52,161 32,843 24,675 29,646 24,199 21,780
Interest expense........ (945) (828) (1,723) (3,919) (3,794) (2,229)
Interest income......... 2,250 2,785 2,181 1,518 1,244 1,592
Other income, net....... 694 634 975 850 2,198 77
-------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes........... 54,160 35,434 26,108 28,095 23,847 21,220
Provision for income
taxes.................. 21,933 17,585 10,394 11,671 9,897 9,231
-------- -------- -------- -------- -------- --------
Income from continuing
operations............. 32,227 17,849 15,714 16,424 13,950 11,989
Discontinued operations,
net of income taxes.... -- 12,000 (1,471) 3,763 (43,933) 4,446
Extraordinary charge,
net of income taxes.... -- -- -- (1,019) -- --
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ 32,227 $ 29,849 $ 14,243 $ 19,168 $(29,983) $ 16,435
======== ======== ======== ======== ======== ========
Income (loss) per common
share--basic:
Continuing
operations........... $ 1.92 $ 1.04 $ 0.87 $ 0.92 $ 0.75 $ 0.65
Discontinued
operations........... -- 0.70 (0.08) 0.21 (2.36) 0.24
Extraordinary charge.. -- -- -- (0.06) -- --
-------- -------- -------- -------- -------- --------
$ 1.92 $ 1.74 $ 0.79 $ 1.07 $ 1.61 $ 0.90
======== ======== ======== ======== ======== ========
Income (loss) per common
share--diluted:
Continuing
operations........... $ 1.85 $ 0.99 $ 0.86 $ 0.91 $ 0.75 $ 0.65
Discontinued
operations........... -- 0.67 (0.08) 0.21 (2.35) 0.24
Extraordinary charge.. -- -- -- (0.06) -- --
-------- -------- -------- -------- -------- --------
$ 1.85 $ 1.66 $ 0.78 $ 1.07 $ (1.61) $ 0.90
======== ======== ======== ======== ======== ========
Weighted average number
of shares:
Basic................. 16,826 17,200 17,969 17,846 18,579 18,348
Diluted............... 17,413 18,028 18,315 17,971 18,678 18,348
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Net working capital..... $108,983 $ 80,394 $105,861 $ 91,513 $ 91,010 $118,509
Total assets............ $263,777 $250,035 $205,189 $256,392 $280,553 $303,023
Long-term debt.......... $ 109 $ 5,226 $ 1,800 $ 7,915 $ 33,006 $ 50,873
Shareholders' equity.... $191,373 $160,686 $160,719 $154,320 $142,643 $171,904
Shares of stock
outstanding............ 16,862 16,793 17,585 17,573 18,594 18,506
Shareholders' equity per
share.................. $ 11.35 $ 9.57 $ 9.14 $ 8.78 $ 7.67 $ 9.29
</TABLE>
43
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Income per common share
The Financial Accounting Standards Board issued Statement No. 128, "Earnings
Per Share," which modifies the way in which earnings per share (EPS) data is
calculated and disclosed. The Company adopted this standard for the interim
period ending December 31, 1997, and has restated all prior period EPS data
presented. See "Management Discussion & Analysis--New Pronouncements."
Acquisitions
On December 31, 1996 the Company acquired the assets and assumed certain
liabilities of Itronix Corporation ("Itronix"), located in Spokane,
Washington, for $65.4 million in cash. On September 1, 1995, the Company
acquired substantially all of the business and assets of Tele-Path Industries,
Inc. for $23.6 million, of which approximately $12.6 million was in cash and
the remaining $11.0 million from the issuance of 688,096 shares of Common
Stock.
Non-recurring charges
During fiscal 1997 and 1996 nonrecurring charges were $27.8 million and
$16.9 million, respectively. The 1997 charges included $20.6 million for
incomplete technology which had not reached technological feasibility and had
no alternative use, purchased as part of the acquisition of Itronix. In
addition, the Company recorded a noncash charge of $7.2 million related to the
impairment of intangible assets, principally related to the effects of product
and distribution transitions. In 1996 the Company purchased incomplete
technology activities as a part of the acquisition of Tele-Path Industries,
Inc. resulting in a pretax charge of $16.9 million.
Discontinued operations
A formal plan to discontinue non-core businesses was approved by the Board
of Directors on February 7, 1996. In fiscal 1997, the Company essentially
completed its disposition of the non-core businesses which resulted in an
after tax gain of $12.0 million. See "The Company--Discontinued Operations and
Divested Businesses."
44
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion contains forward-looking statements concerning the Company's
operations, economic performance and financial condition, all of which involve
risks and uncertainties. Forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. The Company's actual results may differ
significantly from management's expectations and there can be no assurance
that the effect of future developments on the Company will be those
anticipated by management. There are certain factors that might cause such a
difference. These factors include, but are not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraints or difficulties,
availability of capital resources, general business and economic conditions,
the effect of the Company's accounting policies, and other risks detailed
herein. See "Risk Factors."
OVERVIEW
The Company develops, manufactures and sells test, analysis, communications
and computing equipment in three product categories: (i) communications test
instruments, (ii) industrial computing and communications, and (iii) visual
communications. In its communications test business, the Company, through TTC,
provides products that test and analyze communications networks and equipment.
In its industrial computing and communications business, the Company addresses
two areas of the worldwide ruggedized computer market through two of its
subsidiaries: (i) ICS, which provides computer products for use in harsh
environments, and (ii) Itronix, which provides ruggedized portable computing
and communications devices to field-service organizations such as telephone
companies. In its visual communications business, the Company sells visual
communications products principally through two of its subsidiaries: (i)
AIRSHOW, which provides passenger cabin video information display systems for
the general and commercial aviation markets, and (ii) da Vinci Systems, which
provides digital color enhancement systems used in transferring film images
into electronic signals. Since 1993, the Company has sold 24 non-core
businesses for gross proceeds of approximately $190 million pursuant to a plan
to focus on businesses that enjoy leading positions in their respective
markets, strong profitability and good growth prospects.
Current and Historical Trends. The Company believes that overall trends in
the communications industry are the most significant trends affecting the
Company's sales and results of operations. The 21.5% average annual increase
in sales of its communications test instruments products from fiscal 1995 to
1997 was principally driven by market growth and new product introductions by
the Company. The Company believes that demand for communications test
equipment during that period resulted from the combination of increased
competition among existing and new telecommunications service providers, the
proliferation of new telecommunications services and the increased usage of
technologies related to wireless and internet services. The Company believes
that these trends have driven overall communications test instrument industry
growth of approximately 10-12% annually over the last five years. Growth rates
vary widely across segments of the market and are typically higher in segments
that support the development of high growth communications services such as
ATM, frame relay and wireless services.
The Company believes the communications test and monitoring systems market
(in which the Company is now beginning to participate) has grown at
approximately 12% over the last five years, driven by the needs of service
providers to provide higher quality networks and to reduce costs through
efficiency, which may be gained by using test and monitoring systems.
The Company's other businesses similarly benefit from growth in their
customers' markets. Growth in demand for AIRSHOW's products, for example, is
driven in part by growth in the general commercial aviation market, which
management projects to grow approximately 20% in 1998.
45
<PAGE>
Operating Profit. From fiscal 1995 to 1997 the Company increased operating
profit, excluding nonrecurring charges, by a compound annual growth rate of
39.3%, driven primarily by sales growth and the Company's acquisitions during
this period. Excluding nonrecurring charges, operating profit margins also
increased from 12.2% of consolidated sales to 16.7% of consolidated sales for
the same period. The nonrecurring charges included a charge of $16.9 million
for purchased incomplete technology related to the acquisition of Tele-Path
Instruments, and $27.8 million for purchased incomplete technology and
impaired intangible asset writeoffs, in fiscal 1996 and 1997, respectively.
Itronix, as a manufacturer of ruggedized portable computing and communications
hardware, generally has lower margins than the Company's other businesses, and
Itronix currently is not contributing to the Company's profitability. As a
result, profitability of the Company's industrial computing and communications
businesses is lower than the average profitability of the Company's other
businesses. Itronix is also currently facing significant marketing challenges,
including competition from "semi-rugged" portable computers that constrains
pricing of premium ruggedized products like Itronix's. The Company is
implementing several initiatives designed to increase the profitability of
Itronix, including a program to lower costs and reposition its products. See
"Risk Factors--Risks Relating to Itronix."
Seasonality. As a result of purchasing patterns of its telecommunications
customers, which tend to place large orders periodically, typically at the end
of the Company's third fiscal quarter, the Company expects its results of
operations to vary significantly on a quarterly basis, as they have in the
past. In addition, growth rates and results of operations for Itronix also
have varied widely and are expected to continue to do so, because of the
relatively small number of potential customers with large field-service work
forces, the timing and size of whose orders are irregular.
Product Development. The market for the Company's products is characterized
by changing technology, evolving industry standards and protocols and new
products. Automation in the Company's addressed markets for communications
test instruments or a shift in customer emphasis from communications test
instruments to test and monitoring systems could render the Company's existing
offerings obsolete or unmarketable or reduce the size of the Company's
addressed market. In particular, incorporation of self-testing functions in
the equipment currently addressed by the Company's communications test
instruments could render the Company's offerings redundant and unmarketable.
The Company thus faces the challenges of anticipating and responding rapidly
to advances in technology and adapting its existing products or developing new
products. The development of new, technologically advanced products is a
complex and uncertain process requiring the accurate anticipation of
technological and market trends and the expenditure of substantial development
costs. From the beginning of fiscal 1995 through December 31, 1997, the
Company has spent an aggregate of $152 million on product development, or
approximately 12.1% of sales, and the Company expects to continue product
development spending at similar levels, as a percentage of sales, to the
extent that the Company has sufficient free cash flow to do so. See "Risk
Factors--Rapid Technological Change; Challenges of New Product Introductions"
and "--Substantial Leverage; Liquidity."
Recent Acquisitions and Dispositions. On December 31, 1996 the Company
acquired substantially all of the assets and assumed certain liabilities of
Itronix for $65.4 million in cash. Incident to this acquisition was the
purchase of incomplete technology activities which resulted in a one-time non-
cash charge of $20.6 million reflected in the Company's results for fiscal
1997. This incomplete technology had not reached technological feasibility and
had no alternative use.
In March 1997 the Company acquired the net assets of Advent Design, Inc.
("Advent"), a supplier to ICS, for $3.5 million in cash. Advent designs and
manufactures high performance microprocessor-based systems for the computer,
medical and communications markets.
During fiscal 1997 the Company essentially completed the disposition of its
non-core businesses pursuant to a strategy approved by the Board in February
1996. The Company received proceeds of $110.2 million and $48.9 million in
1997 and 1996, respectively, related to these dispositions, which resulted in
an after-tax gain of $12.0 million.
Recapitalization Accounting; Recapitalization Fees and Expenses. The Company
expects to treat the Merger as a recapitalization for financial reporting
purposes. Accordingly, the historical basis of the Company's assets and
liabilities will not be affected by the transaction.
46
<PAGE>
The Company expects that, of the estimated $39.5 million of fees and
expenses relating to the transaction, (i) approximately $25.7 million of such
costs are attributable to costs of the Financing and will be capitalized and
amortized over the life of the Financing, and (ii) approximately $13.8 million
of such costs are attributable to costs of the Merger for which the Company
will incur a one-time charge.
SUPPLEMENTARY PRO FORMA FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1996
On December 31, 1996 the Company acquired the assets and assumed certain
liabilities of Itronix for $65.4 million in cash. As a percentage of sales,
the gross margin and selling, general and administrative expenses of Itronix
are lower than the consolidated financial results of the Company prior to that
acquisition. Therefore, the pro forma income statements below reflect a lower
gross margin and selling, general and administrative expenses as a percent of
consolidated sales. Hence, in order to demonstrate the Company's operating
performance versus the previous years, the following unaudited pro forma
information presents a summary of consolidated results of operations of the
Company as if that acquisition had occurred at the beginning of fiscal 1997,
with pro forma adjustments to give effect to amortization of goodwill and
intangibles, interest expense on acquisition debt, exclude the related non-
recurring charge for purchased incomplete technology and certain other
adjustments, together with related income tax effects (such pro forma basis,
the "Itronix Pro Forma Basis"). (In thousands except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Revenue................................................ $353,314 $322,676
Cost of sales.......................................... 151,714 140,854
-------- --------
Gross profit........................................... 201,600 181,822
Selling, general and Administrative expense............ 103,549 91,784
Product development exp................................ 41,563 35,313
Amortization........................................... 4,327 6,743
-------- --------
Operating income....................................... 52,161 47,982
Interest expense....................................... (945) (2,821)
Interest income........................................ 2,250 2,166
Other income........................................... 694 551
-------- --------
Income before taxes.................................... 54,160 47,878
-------- --------
Net income............................................. $ 32,227 $ 28,513
======== ========
Income per share:
Basic................................................ $ 1.92 $ 1.65
Diluted.............................................. $ 1.85 $ 1.57
Weighted average shares:
Basic................................................ 16,826 17,257
Diluted.............................................. 17,413 18,124
</TABLE>
Sales. Consolidated sales for the nine months ended December 31, 1997
increased $30.6 million or 9.5% to $353.3 million as compared to $322.7
million for the same period of 1996 on an Itronix Pro Forma Basis. The
increase was attributable to increased demand for communications test
products, catalog sales of industrial computing and communications products
and aircraft cabin video information services.
Sales for communications test products increased $23.4 million to $184.9
million or 14.5%. The increase is primarily attributable to increased volume
as a result of network expansions of the local Telco service providers.
Sales for industrial computing and communications products increased $2.1
million or 2.0% to $111 million as compared to $108.9 million for the same
period of 1996 on an Itronix Pro Forma Basis. The increase in sales
47
<PAGE>
for the Company's rack-mounted computers, as new products were introduced
through the catalog, was offset by slightly lower sales of the Company's
ruggedized laptop computers.
Sales of visual communications products increased $5.1 million to $57.5
million or 9.6% as compared to $52.4 million for the same period of 1996 on an
Itronix Pro Forma Basis. Sales for the Company's real-time flight information
passenger video displays increased as more airlines integrated this product
into their inflight entertainment systems. In addition, the Company has
improved its market penetration with additional sales to airline companies,
namely Air Canada, Quantas Airways and British Airways. Offsetting this
increase were lower sales volume in the video compression and graphical user-
interface (GUI) product lines.
Gross Profit. Consolidated gross profit increased $19.8 million to $201.6
million or 57.1% of consolidated sales for the nine months ended December 31,
1997, as compared to $181.8 million or 56.3% of consolidated sales for the
same period of 1996 on an Itronix Pro Forma Basis. Gross margin increased
slightly due to the increased shipment volume of higher margin communications
test equipment and airline passenger video displays.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; and amortization of
intangibles. Total operating expenses were $149.4 million or 42.3% of
consolidated sales as compared to $133.8 million or 41.5% of consolidated
sales for the same period of 1996 on an Itronix Pro Forma Basis. The percent
increase is primarily attributable to an increase in selling, general and
administrative expenses as a percent of sales.
Selling, general and administrative expense was $103.5 million or 29.3% of
consolidated sales for the nine months ended December 31, 1997, as compared to
$91.8 million or 28.4% of consolidated sales for the same period of 1996 on an
Itronix Pro Forma Basis. The increase is primarily attributable to additional
expenses related to information systems upgrades and increased selling
expenses due to the increased sales volume within the communications test
business.
Product development expense was $41.6 million or 11.8% of consolidated sales
as compared to $35.3 million or 10.9% of consolidated sales for the same
period of 1996 on an Itronix Pro Forma Basis. The increase is primarily
attributable to the development of a new test system at the Company's
communications test subsidiary and new CPU and chassis products which were
developed for rack-mounted computers.
Amortization of intangibles for the first nine months was $4.3 million as
compared to $6.7 million for the same period of 1996 on an Itronix Pro Forma
Basis. Amortization expense decreased due to the write-off of goodwill and
certain intangibles related to product and distribution transitions at the end
of fiscal 1997.
Interest. Interest income, net of interest expense, was $1.3 million for the
nine months ended December 31, 1997, as compared to net interest expense of
$0.6 million for the same period of 1996 on an Itronix Pro Forma Basis.
Assuming consummation of the recapitalization of the Company described above,
the interest expense of the Company will substantially increase as a result of
borrowing relating to such recapitalization.
Other income. Other income was $694 thousand for the nine month period ended
December 31, 1997 and compared to $551 thousand for the same period of 1996.
Taxes. The effective tax rate for the nine month periods ending December 31,
1997 and 1996 was 40.5%.
Net income. Net income for the nine month period was $32.2 million or $1.85
per share on a diluted basis, as compared to $28.5 million or $1.57 per share
on a diluted basis for the same period of 1996 on an Itronix Pro Forma Basis.
The increase is primarily attributable to the increase in sales.
48
<PAGE>
HISTORICAL RESULTS
The following table and commentary should be read in conjunction with the
Consolidated Financial Statements and related Notes to Consolidated Financial
Statements and the Unaudited Condensed Consolidated Financial Statements,
including the notes thereto.
<TABLE>
<CAPTION>
PERCENT OF SALES PERCENT CHANGE
------------------- ------------------
YEARS ENDED MARCH
31,
1997 1996 1995
VS. VS. VS.
1997 1996 1995 1996 1995 1994
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........................ 100.0% 100.0% 100.0% 23.7% 20.5% 21.8%
Gross profit................. 62.1 62.0 62.4 24.0 19.7 18.9
Selling, general &
administrative expense...... 31.6 33.6 35.5 16.2 14.1 22.1
Product development expense.. 11.9 12.4 12.6 18.7 19.2 13.9
Nonrecurring charges......... 7.7 5.8 -- 64.8 -- --
Amortization of intangibles.. 1.9 1.8 2.1 32.3 0.6 (10.9)
Operating income............. 9.1 8.4 12.2 33.1 (16.8) 22.5
Income from continuing
operations.................. 4.9 5.4 6.7 13.6 (4.3) 17.7
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996 ON AN HISTORICAL BASIS
Sales for the nine months ended December 31, 1997 increased 36.5% to $353.3
million as compared to $258.9 million for the same period of 1996. The
increase was attributable to the acquisition of Itronix and increased demand
for communications test products, catalog sales of industrial computing and
communications products, and aircraft cabin video information services.
Gross margin for the nine months ended December 31, 1997 was 57.1%, down
from 63.3% of 1996 due to the increase of lower margin sales within the
industrial communications businesses, related to both the acquisition of
Itronix and additional shipments of products to OEM manufacturers.
The effective tax rate for the nine month periods ending December 31, 1997
and 1996 was 40.5%. The 40.5% rate at December 31, 1996 excluded the one-time
charge for purchased incomplete technology related to the acquisition of
Itronix.
Net income for the nine month period was $32.2 million, an increase of
117.9% over the same period of 1996, primarily attributable to the increase in
sales and the 1996 write-off of the incomplete technology.
FISCAL 1997 COMPARED TO FISCAL 1996--HISTORICAL RESULTS
Sales. For the year ended March 31, 1997, consolidated sales from continuing
operations increased 23.7%, to $362.4 million from $293.0 million in fiscal
1996. Sales of communications test products increased 22.8%, or $39.3 million
due to increased demand for existing products and a full year of operating
results for two acquisitions made in fiscal 1996. Sales of industrial
computing and communications products increased 35.3%, or $20.4 million,
primarily driven by revenue at Itronix. Sales of visual communications
products increased 15.3%, or $9.7 million principally due to continued
strength in aircraft passenger video information systems and color correction
products.
Backlog from ongoing operations was $71.7 million at March 31, 1997, as
compared to $57.3 million at March 31, 1996.
International sales were 20% of consolidated sales in fiscal 1997, an
increase of 18% over consolidated sales in fiscal 1996.
Gross Profit. As a percentage of consolidated sales, gross profit from
continuing operations for fiscal 1997 was 62.1%, essentially at the same level
as the prior year.
49
<PAGE>
Expenses. Selling, general and administrative costs increased 16.2% in
fiscal 1997 as compared to fiscal 1996. As a percentage of consolidated sales,
selling, general and administrative expenses decreased to 31.6% as compared to
33.6% in the previous year. Administrative and selling expenses increased at a
rate slower than revenue growth in the communications test products as a
result of the fiscal 1996 acquisitions.
Product development expense increased $6.8 million to 11.9% of consolidated
sales, compared to 12.4% of sales in fiscal 1996. The increase was a result of
additional investment in developing core communications test products as well
as the full year effect of product development at Tele-Path Industries, Inc.
("TPI"), a subsidiary which was purchased in September 1995. Additional
expense was incurred due to the acquisition of Itronix.
Amortization of intangibles increased $1.7 million as a result of the
acquisitions in fiscal 1997 and fiscal 1996.
During fiscal 1997 nonrecurring charges were $27.8 million as compared to
$16.9 million in 1996. The 1997 nonrecurring charges include a $20.6 million
non-cash charge for incomplete technology which had not reached technological
feasibility and had no alternative use, purchased as part of the acquisition
of Itronix at the end of the third quarter. In addition, the Company recorded
a noncash charge of $7.1 million related to the impairment of intangible
assets, principally related to the effects of product and distribution
transitions. The charge consisted of a $4.5 million writeoff of goodwill and a
$2.6 million writeoff in product technology.
Interest expense declined in fiscal 1997 compared to the prior year as a
result of lower average borrowings. Interest income increased in fiscal 1997
primarily from higher average cash balances during the year.
Taxes. The effective tax rate, before one-time charges, increased in fiscal
1997 to 40.5% as compared to 39.8% in fiscal 1996, primarily due to losses
generated in foreign locations without tax benefit. The effective tax rate
after one-time charges increased to 49.6% due to limited tax benefits of these
charges. These charges included $20.6 million of incomplete technology from
the Itronix acquisition which resulted only in a federal tax savings. In
addition, the majority of the $7.1 million of intangibles written off
represented goodwill which was not deductible for tax purposes.
Net Income. Net income from continuing operations in fiscal 1997 was $17.8
million, or $0.99 per share on a diluted basis, as compared to $0.86 per share
on a diluted basis in fiscal 1996. Net income in the current year included a
pretax charge of $27.8 million for purchased incomplete technology and
impaired intangible asset writeoffs with an aftertax effect on earnings per
share of ($1.10) on a diluted basis. Net income for the prior year included a
charge for of incomplete purchased technology that accounted for $16.9 million
with an aftertax effect on earnings per share of ($0.56) on a diluted basis.
FISCAL 1996 COMPARED TO FISCAL 1995--HISTORICAL RESULTS
Sales. Consolidated sales from continuing operations increased 20.5% to
$293.0 million from $243.1 million in fiscal 1995 as a result of increased
revenue of 24.6% in domestic and 7.1% in international sales including export
sales.
Sales of communications test products rose 20% due to increased demand for
existing products and increased volume generated by two acquisitions during
the year. The new acquisitions generated $16.6 million in additional revenue
during fiscal 1996. Sales of industrial computing and communications products
rose 29% driven by strong demand for these products in a broad range of
markets.
Backlog from ongoing operations was $57.3 million at March 31, 1996 as
compared to $40.3 million at March 31, 1995.
Gross Profit. Consolidated gross profit from continuing operations for
fiscal 1996 was 62.0% compared to 62.4% for the prior year. The slight
reduction was primarily driven by increased sales of industrial computing and
communications products which have a lower gross margin than the consolidated
average.
50
<PAGE>
Expenses. As a percentage of consolidated sales, selling, general and
administrative expenses decreased to 33.6% as compared to 35.5% in the
previous year. General and administrative costs increased at a rate slower
than revenue growth, primarily due to the increased revenues generated from
new acquisitions. Product development expense was 12.4% of sales in fiscal
1996, down slightly from 12.6% in fiscal 1995 primarily due to relatively low
development expenses within newly acquired businesses. Amortization of
intangibles remained relatively unchanged. Decreases of amortization on
existing businesses were offset with the amortization costs associated with
current year acquisitions.
During fiscal 1996 the Company purchased incomplete technology activities of
TPI, resulting in a pretax charge to operations of $16.9 million. This
incomplete technology had not reached technological feasibility and had no
alternative use.
Interest expense declined compared to the prior year as a result of
repayment of debt. Interest income increased primarily from higher average
cash balances during the course of the year.
Taxes. The effective tax rate declined in fiscal 1996 to 39.8% compared to
41.5% as a result of the resolution of certain prior year tax rebates and
utilization of certain foreign loss carry forwards.
Extraordinary Charge. In February 1995 the Company recorded an extraordinary
charge of $1.7 million ($1.0 million, net of taxes), reflecting a payment
penalty for early debt redemption of its $30 million 10.15% term notes.
Net Income. Net income from continuing operations for fiscal 1996 was $15.7
million or $0.86 per share on a diluted basis, as compared to $0.91 per share
on a diluted basis in fiscal 1995. Net income in fiscal 1996 included a charge
for incomplete purchased technology of $16.9 million with an aftertax effect
on earnings per share of ($0.56) on a diluted basis.
CAPITAL RESOURCES AND LIQUIDITY
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments.
Cash Flows. The Company's cash and cash equivalents increased $7.8 million
during the first nine months of fiscal 1998. During this period, net cash
provided by operating activities generated $24.8 million after $12.7 million
was used for the payment of expenses related to discontinued operations.
Working Capital. The Company's working capital increased by $8.2 million
during the first nine months of fiscal 1998. During this period, inventory
levels increased from $40.1 million to $45.4 million, resulting in a $5.3
million use of cash, primarily attributable to the increased volume for the
Company's rack-mounted computers. During the first nine months of fiscal 1998,
accounts receivable increased from $70.9 million to $73.3 million, resulting
in a use of cash of $2.4 million, as a result of higher shipments in the month
of December. Other current assets increased, resulting in a use of cash of
$0.8 million during the first nine months of fiscal 1998. During this period,
accounts payable increased from $16.9 million to $20.3 million, resulting in a
source of cash of $3.4 million, as the Company continues to manage its working
capital. Other current liabilities decreased from $64.4 million to $48.7
million due to both a reduction of discontinued operations liabilities of
$12.7 million and a reduction of $3.0 million for continued operations during
the first nine months of fiscal 1998.
The Company's investing activities totaled $10.4 million primarily for the
purchase and replacement of property and equipment during the first nine
months of fiscal 1998.
During the quarter ended December 31, 1997, the Company repaid all of its
borrowings under its two existing credit facilities. In addition the Company
repurchased 163,000 shares of its common stock for $5.3
51
<PAGE>
million during the first quarter of fiscal 1998. During the first nine months
of fiscal 1998 the Company generated $4.3 million from the exercise of stock
options.
After the Merger. Following the Effective Time, the Company's liquidity
needs will arise primarily from debt service on the substantial indebtedness
to be incurred in connection with the Merger and from the funding of working
capital and capital expenditures. After completion of the Merger and related
financings, the Company expects to have outstanding approximately $568.2
million of indebtedness, primarily consisting of $275 million principal amount
of the Senior Subordinated Notes, $260 million in term loan borrowings under
the Term Loan Facility and $32.9 million in revolving credit borrowings under
the Revolving Credit Facility. See "Merger Financings" and "Risk Factors--
Substantial Leverage; Liquidity."
Debt Service. Principal and interest payments under the Senior Secured
Credit Facilities and interest payments on the Senior Subordinated Notes will
represent significant liquidity requirements for the Company. It is expected
that with respect to the $260 million to be borrowed under the Term Loan
Facility, the Company will be required to make scheduled principal payments of
the $50 million of Tranche A Term Loans over their six-year term, with
substantial amortization of the $70 million of Tranche B Term Loans, $70
million of Tranche C Term Loans and Tranche D Term Loans occurring after six,
seven and eight years, respectively. It is expected that $275 million of
Senior Subordinated Notes will mature in 2008, and will bear interest at a
fixed market rate of interest to be determined at the time of their offering.
The Senior Secured Credit Facilities are also subject to mandatory prepayment
and reduction in an amount equal to, subject to certain exceptions, (a) 100%
of the net proceeds of (i) certain debt offerings by the Company and any of
its subsidiaries, (ii) certain asset sales by the Company or any of its
subsidiaries, and (iii) casualty insurance, condemnation awards or other
recoveries received by the Company or any of its subsidiaries and (b) 50% of
the Company's excess cash flow (as to be defined) for any fiscal year. The
Senior Subordinated Notes will also be subject to certain mandatory
prepayments under certain circumstances. The Revolving Credit Facility will
mature in 2004, with all amounts then outstanding becoming due. The Company
expects that its working capital needs will require it to obtain new revolving
credit facilities at the time that the Revolving Credit Facility matures,
whether by extending, renewing, replacing or otherwise refinancing the
Revolving Credit Facility. No assurance can be given that any such extension,
renewal, replacement or refinancing can be successfully accomplished. The
loans under the Senior Secured Credit Facilities will bear interest at
floating rates based upon the interest rate option elected by the Company. See
"Merger Financings--Senior Secured Credit Facilities." Following the Effective
Time, as a result of the substantial indebtedness to be incurred in connection
with the Merger, it is expected that the Company's interest expense will be
higher and will have a greater proportionate impact on net income in
comparison to preceding periods.
Capital Expenditures. The Company's historical capital expenditures since
fiscal year 1995 have in substantial part resulted from the replacement of
existing property and equipment including computer systems. The Company's
capital expenditures (including acquisitions and divestitures) were $10.2
million, $8.2 million and $16.4 million for the three fiscal years ended March
31, 1997, 1996 and 1995, respectively. Capital expenditures are expected to be
approximately $14.0 million in fiscal year 1998. Expenditures for fiscal year
1998 will relate principally to the replacement of existing equipment. The
Company estimates that for fiscal year 1999, capital expenditures are
anticipated to be at similar levels.
Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that will remain undrawn following the Closing, currently
estimated to be $77.1 million, will be available to meet future working
capital and other business needs of the Company and will replace the Company's
two existing credit facilities totaling $180 million. The Company believes
that cash generated from operations, together with amounts available under the
Revolving Credit Facility and any other available financing sources, will be
adequate to permit the Company to meet its debt service obligations, capital
expenditure program requirements, ongoing operating costs and working capital
needs, although no assurance can be given in this regard. The Company's future
operating performance and ability to service or refinance the Senior
Subordinated Notes and to repay, extend or refinance the Senior Secured Credit
Facilities (including the Revolving Credit Facility) will be, among other
things, subject to future economic conditions and to financial, business and
other factors, many of which are beyond the Company's control. See "Risk
Factors."
52
<PAGE>
Covenant Restrictions. The Senior Secured Credit Facilities will impose
restrictions on the ability of the Company to make capital expenditures and
both the Senior Secured Credit Facilities and the indenture governing the
Senior Subordinated Notes will limit the ability of the Company to incur
additional indebtedness. Such restrictions, together with the highly leveraged
nature of the Company, could limit the Company's ability to respond to market
conditions, to meet its capital spending program, to provide for unanticipated
capital investments or to take advantage of business opportunities. The
covenants contained in the Senior Secured Credit Facilities also will, among
other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur guarantee obligations, prepay other indebtedness,
make restricted payments, create liens, make equity or debt investments, make
acquisitions, modify terms of the indenture under which the Senior
Subordinated Notes will be issued, engage in mergers or consolidations, change
the business conducted by the Company and its subsidiaries taken as a whole or
engage in certain transactions with affiliates. In addition, under the Senior
Secured Credit Facilities, the Company will be required to comply with a
minimum interest expense coverage ratio and a maximum leverage ratio. The
Tranche B Term Loans, Tranche C Term Loans and Tranche D Term Loans are
expected to have negative covenants which are substantially similar to the
negative covenants to be contained in the indenture governing the Senior
Subordinated Notes, which will also impose restrictions on the operation of
the Company's businesses. See "Merger Financings--Senior Secured Credit
Facilities" and "--Covenants."
YEAR 2000
The Company has commenced a review of its computer systems and products in
order to assess its exposure to Year 2000 issues. The Company is currently in
the process of determining the full scope, related costs and action plan to
ensure that the Company's systems continue to meet its internal needs and
those of its customers. The Company expects to make the necessary
modifications or changes to its computer information systems to enable proper
processing of transactions relating to the Year 2000 and beyond. However,
there can be no assurance that Year 2000 costs and expenses will not have a
material effect on the Company. In addition, the Company does not currently
have any information concerning the Year 2000 compliance status of its
suppliers and customers. In the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
Finally, there can be no assurance that the Company's existing or installed
base of products are Year 2000 compliant, or that the Company's products will
not be integrated by the Company or its customers with, or otherwise interact
with, non-compliant software or other products. Any such product non-
compliance may expose the Company to claims from its customers and others, and
could impair market acceptance of the Company's products and services,
increase service and warranty costs, or result in payment of damages, which in
turn could materially adversely affect the Company.
NEW PRONOUNCEMENTS
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which modifies
the calculation of earnings per share ("EPS"). The Standard replaces the
previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to APB
Opinion 15. All prior periods presented have been restated to reflect this
adoption.
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" which establishes standards for the reporting
and display of comprehensive income in general-purpose financial statements.
The Company has not assessed the impact of this Standard on its financial
statements.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the reporting of operating segments in the financial
statements. The Company has not assessed the impact of this Standard on its
financial statements.
53
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data of
the Company has been prepared to give effect to the Merger and related
transactions as a recapitalization for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities will
not be affected by the transactions. For a discussion of the Merger and
related transactions, see "The Merger and the Merger Agreement".
The pro forma adjustments presented are based upon available information and
certain assumptions that the Company believes are reasonable under the
circumstances. The historical condensed consolidated statement of continuing
operations data for the nine months ended December 31, 1997 and the historical
condensed consolidated balance sheet data as of December 31, 1997 were derived
from the unaudited condensed consolidated financial statements of the Company
included elsewhere herein. The historical condensed consolidated statement of
continuing operations data for the year ended March 31, 1997 was derived from
the audited consolidated financial statements of the Company included
elsewhere herein.
The unaudited pro forma condensed consolidated statement of continuing
operations data of the Company for the year ended March 31, 1997 give effect
to (i) the Merger as if it had occurred on April 1, 1996, and (ii) the
acquisition of Itronix on December 31, 1996 as if that acquisition had
occurred on April 1, 1996, based on the historical financial data for Itronix
for the nine months ended December 31, 1996 that was derived from Itronix's
unaudited financial statements. The unaudited pro forma condensed consolidated
statement of continuing operations data of the Company for the nine months
ended December 31, 1997 give effect to the Merger as if it had occurred on
April 1, 1997. The unaudited pro forma condensed consolidated balance sheet
data of the Company as of December 31, 1997 give effect to the Merger assuming
that it was completed on December 31, 1997.
The unaudited pro forma financial data should be read in conjunction with
the historical consolidated financial statements of the Company and notes
thereto, "Management Discussion and Analysis" and other financial data
included elsewhere in this Proxy Statement, as well as the information
concerning the Merger, including the sources and uses therefor, see "Merger
Financings."
The pro forma financial data and related notes are provided for
informational purposes only and do not necessarily reflect the results of
operations or financial position of the Company that would have actually
resulted had the events referred to above or in the notes to the unaudited pro
forma financial data been consummated as of the date and for the period
indicated and are not intended to project the Company's financial position or
results of operations for any future period.
54
<PAGE>
DYNATECH CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CONTINUING OPERATIONS
DATA
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DYNATECH
FOR THE NINE
MONTHS ENDED RECAPITALIZATION PRO FORMA
DECEMBER 31, 1997 ADJUSTMENTS DECEMBER 31, 1997
----------------- ---------------- -----------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales.................... $353,314 $353,314
Cost of Sales............ 151,714 151,714
-------- --------
Gross Profit............. 201,600 201,600
Selling, general and
administrative expense.. 103,549 103,549
Product development
expense................. 41,563 41,563
Amortization of
intangibles............. 4,327 4,327
-------- --------
Operating income......... 52,161 52,161
Interest income.......... 2,250 2,250
Interest expense......... (945) $(38,927)(f) (39,872)
Other income, net........ 694 (375)(g) 319
-------- -------- --------
Income before income
taxes................... 54,160 (39,302) 14,858
Provision (benefit) for
income taxes............ 21,933 (15,721)(h) 6,212
-------- -------- --------
Income from continuing
operations.............. $ 32,227 $(23,581) $ 8,646
======== ======== ========
Income per common
share(j)
Basic.................. $ 1.92 $ 0.07
======== ========
Diluted................ $ 1.85 $ 0.07
======== ========
Weighted average number
of common shares
Basic.................. 16,826 120,000
Diluted................ 17,413 120,539
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
Data
55
<PAGE>
DYNATECH CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF CONTINUING OPERATIONS DATA
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
DYNATECH ITRONIX
FOR THE FOR THE NINE
YEAR ENDED MONTHS ENDED ACQUISITION RECAPITALIZATION PRO FORMA
MARCH 31, 1997 DECEMBER 31, 1996 ADJUSTMENTS ADJUSTMENTS MARCH 31, 1997
-------------- ----------------- ----------- ---------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales................... $362,412 $63,822 $426,234
Cost of Sales........... 137,254 45,822 183,076
-------- ------- --------
Gross Profit............ 225,158 18,000 243,158
Selling, general and
administrative
expense................ 114,479 7,977 $ (224)(a) 122,232
Product development
expense................ 43,267 5,248 48,515
Non-recurring charges... 27,776 (20,627)(b) 7,149
Amortization of
intangibles............ 6,793 2,060 (c) 8,853
-------- ------- -------- --------
Operating income........ 32,843 4,775 18,791 56,409
Interest income......... 2,785 (1,892)(d) 893
Interest expense........ (828) (564) $(51,903)(f) (53,295)
Other income, net....... 634 (1) (500)(g) 133
-------- ------- -------- -------- --------
Income before income
taxes.................. 35,434 4,210 16,899 (52,403) 4,140
Provision (benefit) for
income taxes........... 17,585 1,474 5,915 (e) (20,961)(h) 4,013
-------- ------- -------- -------- --------
Income from continuing
operations............. $ 17,849 $ 2,736 $ 10,984 $(31,442) $ 127
======== ======= ======== ======== ========
Income per common
share(j)
Basic................. $ 1.04 $ --
======== ========
Diluted............... $ 0.99 $ --
======== ========
Weighted average number
of common shares
Basic................. 17,200 120,000
Diluted............... 18,028 120,539
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
Data
56
<PAGE>
DYNATECH CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF CONTINUING
OPERATIONS DATA
a) Amounts represent the elimination of amortization of certain historical
Itronix intangibles, principally, goodwill.
b) Represents the elimination of the non-recurring purchased incomplete
technology directly related to the acquisition of Itronix.
c) Amortization of intangibles reflects the amortized portion of the excess
purchase price due to the acquisition of Itronix.
d) Represents the loss of interest income that would have been incurred had
the purchase of Itronix been completed at the beginning of the reporting
period.
e) Represents the income tax effect of the Itronix pro forma adjustments
assuming a 35% tax rate.
f) Reflects incremental interest expense related to the Senior Secured Credit
Facilities, Senior Subordinated Notes and the Revolving Credit Facility,
assuming interest rates of 8.2%, 9.0%, and 8.0% per annum, respectively, as
well as the amortization over the term of the debt of debt issuance costs
of $25,700 related to the Senior Secured Credit Facilities, Senior
Subordinated Notes and the Revolving Credit Facility. The amortization of
debt issuance costs were $2,128 and $2,837, respectively, for the nine
months ended December 31, 1997 and for the fiscal year ended March 31,
1997.
g) Reflects the pro rated portion of the annual fee payable to CDR for
management and financial consulting services provided to the Company.
h) Reflects the income tax effects of the pro forma adjustments, assuming a
40% tax rate.
i) The Unaudited Pro Forma Condensed Consolidated Statements of Continuing
Operations Data exclude the following non-recurring items that are directly
attributable to the Recapitalization transactions:
1. A compensation charge of $13.6 million associated with the cash
settlement (net of related tax benefit) relating to certain Company
Stock Options which are retired or canceled as a result of the Merger.
2. A non-cash compensation charge of $10.7 million (net of related tax
benefit) relating to the conversion of the Management Stockholders'
Company Stock Options into fully vested and exercisable equivalent
options to purchase shares of Recapitalized Common Stock.
j) Income per common share--The Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which modifies the way in which
earnings per share (EPS) data is calculated and disclosed. The Company
adopted this standard for the interim period ending December 31, 1997, and
has restated all prior period EPS data presented. See "Management
Discussion & Analysis--New Pronouncements."
57
<PAGE>
DYNATECH CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
RECAPITALIZATION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------------- ---------
(DOLLARS IN 000'S)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 47,569 $ 263,177 (a) $ 27,144
567,900 (b)
(25,700)(c)
(22,697)(d)
(803,105)(f)
Accounts receivable, net............ 73,330 73,330
Inventories......................... 45,408 45,408
-------- --------- ---------
Other current assets.................. 11,870 11,870
-------- --------- ---------
Total current assets.............. 178,177 (20,425) 157,752
-------- --------- ---------
Property and equipment, net........... 25,178 25,178
Intangible assets, net................ 39,496 39,496
Other assets.......................... 20,926 25,700 (c) 62,861
9,079 (d)
7,156 (e)
-------- --------- ---------
$263,777 $ 21,510 $ 285,287
======== ========= =========
LIABILITIES & EQUITY
Current liabilities:
Notes payable & current portion of $ 171 $ 171
long-term debt.....................
Accounts payable.................... 20,345 20,345
Accrued expenses.................... 45,886 45,886
Net liabilities of discounted 2,793 2,793
operations.........................
-------- ---------
Total current liabilities......... 69,195 69,195
Long-term debt........................ 109 $ 567,900 (b) 568,009
Other liabilities..................... 3,101 3,101
-------- --------- ---------
3,210 567,900 571,110
SHAREHOLDERS' EQUITY (DEFICIT)
Company common stock, including 10,890 (1,999)(a) --
additional paid-in-capital........... (8,891)(f)
Recapitalized common stock, including -- 265,176 (a) 304,092
additional paid-in-capital........... 17,892 (e)
21,024 (f)
Retained earnings (deficit)........... 227,733 (13,618)(d) (657,172)
(10,736)(e)
(860,551)(f)
Cumulative translation adjustments.... (1,938) (1,938)
Treasury stock........................ (45,313) 45,313 (f) --
-------- --------- ---------
Total Shareholders' equity 191,372 (546,390) (355,018)
(deficit)........................
-------- --------- ---------
$263,777 $ 21,510 $ 285,287
======== ========= =========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet Data
58
<PAGE>
DYNATECH CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA
AS OF DECEMBER 31, 1997
(DOLLARS IN 000'S)
a) Reflects the issuance of 111,590,528 shares of Recapitalized Common Stock
in exchange for MergerCo Common Stock, net of related issuance costs of
$13,800; MergerCo is a nonsubstantive transitory merger vehicle (which will
be merged into the Company at the Effective Time) and its only tangible
assets are $277,000 of cash and 40,804 shares of Common Stock from the
issuance of its common stock.
b) Reflects the issuance of Senior Secured Credit Facilities, Senior
Subordinated Notes and borrowings under the Revolving Credit Facility.
c) Reflects deferred issuance costs incurred in connection with the issuance
of Senior Secured Credit Facilities, Senior Subordinated Notes and the
Revolving Credit Facility of which $2,500 was prepaid by the Company at
December 31, 1997.
d) Reflects the net cash paid in connection with the settlement of certain
stock options in an amount equal to the excess of $49.00 over the exercise
price per share of Common Stock subject to such settled options, and the
related tax benefit.
e) The Company has assumed that an aggregate of 1,100,000 Company Stock
Options held by Management Stockholders will be converted into equivalent
options to purchase shares of Recapitalized Common Stock (the exercise
prices of which preserve the economic value of their current Company Stock
Options), most of which will be fully vested and exercisable. Of the
1,100,000 Company Stock Options, approximately 820,618 Company Stock
Options, will have revisions to the original terms, which results in a new
measurement date for the Company Stock Options and a non-cash charge of
$10.7 million (net of related tax benefit).
f) Reflects the conversion of 16,818,945 shares of Common Stock (excluding
shares held by MergerCo and held in treasury assumed to be cancelled) into
the right to receive $47.75 per share in cash and the 0.5 shares of
Recapitalized Common Stock per share of Common Stock (totaling 8,409,473
shares of the Recapitalized Common Stock).
59
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma consolidated cash and
equivalents and capitalization of the Company (i) at December 31, 1997 and
(ii) after giving pro forma effect to the Merger and related transactions as
if they had occurred on December 31, 1997. This table should be read in
conjunction with "Selected Historical Consolidated Financial Data," "Unaudited
Pro Forma Condensed Consolidated Financial Data," "Management Discussion and
Analysis," and the Consolidated Financial Statements (including the notes
thereto) appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL PRO FORMA
---------- ------------
(DOLLARS IN MILLIONS)
------------------------
<S> <C> <C>
Cash and equivalents.......................... $ 47.6 $ 27.1
========== ===========
Debt:
Existing Debt................................ $ 0.3 $ 0.3
Merger Financings:
Senior Secured Credit Facilities............ -- 260.0
Senior Subordinated Debt.................... -- 275.0
Revolving Credit Facility................... -- 32.9
---------- -----------
Total debt.................................. 0.3 568.2
---------- -----------
Shareholders' equity (deficit):
Company common stock, including additional
paid-in-capital............................. 10.9 --
Recapitalized common stock, including addi-
tional
paid-in-capital............................. -- 304.1
Retained earnings (deficit).................. 227.7 (657.2)
Cumulative translation adjustments........... (1.9) (1.9)
Treasury stock............................... (45.3) --
---------- -----------
Total Shareholders' equity (deficit)........ 191.4 (355.0)
---------- -----------
Total Capitalization........................ $ 191.7 $ 213.2
========== ===========
</TABLE>
60
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED MARCH 31, NINE MONTHS ENDED PRO FORMA
---------------------------------- ----------------- -----------------
NINE
MONTHS YEAR
ENDED ENDED
1993 1994 1995 1996 1997 12/31/96 12/31/97 12/31/97 03/31/97
------ ------ ------ ------ ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA
Income (loss) before
income taxes and
extraordinary credit... 21,220 23,847 28,095 26,108 35,434 26,769 54,160 17,439 7,581
Add:
Portion of rents
representative of the
interest factor........ 1,400 1,533 1,467 1,900 2,067 1,550 1,933 1,933 2,567
Interest on indebted-
ness................... 2,229 3,794 3,919 1,723 828 365 1,218 35,163 47,017
Amortization of debt
expense and premium.... 2,128 2,837
------ ------ ------ ------ ------ ------ ------ ------ ------
Income as adjusted...... 24,849 29,174 33,481 29,731 38,329 28,684 57,311 56,663 60,002
------ ------ ------ ------ ------ ------ ------ ------ ------
Fixed charges:
Portion of rents
representative of
interest factor........ 1,400 1,533 1,467 1,900 2,067 1,550 1,933 1,933 2,567
Interest on indebted-
ness................... 2,229 3,794 3,919 1,723 828 365 1,218 35,163 47,017
Amortization of debt
expense and premium.... 2,128 2,837
------ ------ ------ ------ ------ ------ ------ ------ ------
Fixed charges........... 3,629 5,327 5,386 3,623 2,895 1,915 3,151 39,224 52,421
------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of earnings to
fixed charges.......... 6.8 5.5 6.2 8.2 13.2 15.0 18.2 1.4 1.1
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
61
<PAGE>
INCOME (EARNINGS) PER SHARE
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which modifies
the calculation of earnings per share ("EPS"). The Standard replaces the
previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to APB
Opinion 15. All prior periods presented have been restated to reflect this
adoption.
<TABLE>
<CAPTION>
YEARS ENDED MARCH
31,
----------------------
1997 1996 1995
------ ------ ------
(AMOUNTS IN
THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
BASIC:
Common Stock Outstanding
beginning of year...... 17,594 17,577 18,594
Weighted Avg. Treasury
Stock issued during the
period................. 144 461 56
Weighted Avg. Treasury
Stock repurchased...... (538) (69) (804)
------ ------ ------
Weighted average common
stock outstanding end
of year................ 17,200 17,969 17,846
====== ====== ======
DILUTIVE
Common Stock Outstanding
beginning of year...... 17,594 17,577 18,594
Weighted Avg. Treasury
Stock issued during the
period................. 144 461 56
Weighted Avg. common
stock equivalents...... 828 346 125
Weighted Avg. Treasury
Stock repurchased...... (538) (69) (804)
------ ------ ------
Weighted average common
stock outstanding end
of year................ 18,028 18,315 17,971
====== ====== ======
</TABLE>
BOOK VALUE PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ACTUAL 1997 1997
- ------ ------------ -----------
<S> <C> <C>
Shareholders' equity per share....................... $11.35 $ 9.57
PRO FORMA*
Shareholders' equity per share....................... ($ 2.96) ($ 3.18)
Shares of Recapitalized Common Stock................. 120 million 120 million
</TABLE>
- --------
* Reflects the following: (i) the issuance of 111,590,528 shares of
Recapitalized Common Stock in exchange for each share of MergerCo Common
Stock, net of related issuance costs of $13,800; MergerCo is a
nonsubstantive transitory merger vehicle (which will be merged into the
Company at the Effective Time) and its only tangible assets are $277,000 of
cash and 40,804 shares of Common Stock from the issuance of its common
stock; (ii) the net cash paid in connection with the settlement of certain
stock options in an amount equal to the excess of $49.00 over the exercise
price per share of Common Stock subject to such settled options, and the
related tax benefit; (iii) the conversion of 16,818,945 shares of Common
Stock (excluding shares held by MergerCo and held in treasury assumed to be
cancelled) into the right to receive $47.75 per share in cash and the 0.5
shares of Recapitalized Common Stock per share of Common Stock (totaling
8,409,473 shares of the Recapitalized Common Stock); and (iv) the Company
has assumed that an aggregate of 1,100,000 Company Stock Options held by
Management Stockholders will be converted into equivalent options to
purchase shares of Recapitalized Common Stock (the exercise prices of which
preserve the economic value of their current Company Stock Options), all of
which, other than 48,439 Company Stock Options held by Mr. Reno, will be
fully vested and exercisable.
62
<PAGE>
MARKET PRICES OF COMMON STOCK
The Common Stock was listed on the New York Stock Exchange, and commenced
trading on the New York Stock Exchange on January 28, 1997 under the symbol
"DYT." Prior to January 28, 1997, the Common Stock was listed on the Nasdaq
National Market. The Company changed its listing to the New York Stock
Exchange in an attempt to increase its visibility in the marketplace. The
number of Stockholders of record at March 4, 1998 was 937, which number
includes certain registered holders who hold Common Stock for an undetermined
number of beneficial owners. On December 19, 1997, the business day
immediately preceding the first public release of information regarding the
Merger by the Company, the reported closing sale price per share of Common
Stock was $36.75.
The following table shows, for the fiscal periods indicated, the high and
low sale prices of a share of Common Stock as reported by the New York Stock
Exchange and the Nasdaq National Market, as applicable.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- ------
<S> <C> <C>
December 31, 1997................................................ 47.875 33.50
September 30, 1997............................................... 41.9375 34.00
June 30, 1997.................................................... 42.125 28.625
March 31, 1997................................................... 54.50 28.00
December 31, 1996................................................ 58.00 40.50
September 30, 1996............................................... 46.88 30.75
June 30, 1996.................................................... 35.00 23.00
March 31, 1996................................................... 25.50 16.00
December 31, 1995................................................ 17.50 14.00
September 30, 1995............................................... 22.25 15.13
June 30, 1995.................................................... 20.50 14.75
</TABLE>
Since April 1, 1995, the Company has not declared or paid cash dividends on
its Common Stock. The Company intends to retain earnings for use in the
operation and expansion of its business. The Company's current term loan
prohibits, and it is contemplated that the Senior Secured Credit Facilities
and the indenture governing the Senior Subordinated Notes will prohibit, the
payment of cash dividends on its Common Stock or Recapitalized Common Stock,
as the case may be.
Beginning in early 1996, the Company has maintained a stock repurchase
program from time to time. Since the inception of the program, the Company has
repurchased 1,983,600 shares of Common Stock for an aggregate purchase price
of $57,393,157. The purchase price per share of Common Stock has ranged from
$21.75 to $33.00. The following table shows the average purchase price per
share of Common Stock for each quarterly period since the program began.
Except as described above, the Company has not effected any transactions in
Common Stock since November 25, 1997.
<TABLE>
<CAPTION>
QUARTER ENDED AVERAGE PURCHASE PRICE
------------- ----------------------
<S> <C>
January 1 thru March 10, 1998 no purchases made
December 31, 1997 no purchases made
September 30, 1997 no purchases made
June 30, 1997 $32.74
March 31, 1997 $32.00
December 31, 1996 no purchases made
September 30, 1996 $32.16
June 30, 1996 $31.83
March 31, 1996 $24.22
</TABLE>
63
<PAGE>
Between November 25, 1997 and March 10, 1998, a total of 34,181 shares of
Common Stock were issued by the Company upon the exercise of stock options
held by employees of the Company. On November 28, 1997, John F. Reno
transferred 15,000 shares of Common Stock to his wife, Suzanne M. Reno. On
December 1, 1997, Mr. Reno transferred 15,000 shares of Common Stock to The
John F. Reno 1997 Qualified Annuity Trust. Finally, on December 2, 1997, Mrs.
Reno transferred 15,000 shares of Common Stock to The Suzanne M. Reno 1997
Qualified Annuity Trust, of which Mr. Reno is a Trustee.
The following table gives information regarding the shares of Common Stock
purchased by Messrs. Reno, Kline and Peeler since April 1, 1995.
<TABLE>
<CAPTION>
JOHN F. RENO ALLAN M. KLINE JOHN R. PEELER
------------ -------------- --------------
<S> <C> <C> <C>
Total number of shares
purchased.............. 56,800(1) 2,011(2) 18,114(3)
Total cost of shares.... $1,683,300.00 $62,316.67 $636,000.00
Range of purchase pric-
es..................... $32.25-$25.25 $38.75-$23.00 $38.50-$34.50
<CAPTION>
AVERAGE PURCHASE PRICE
FOR QUARTER ENDED:
----------------------
<S> <C> <C> <C>
December 31, 1997...... -- -- --
September 30, 1997..... -- $25.29 --
June 30, 1997.......... -- -- --
March 31, 1997......... -- $33.37 --
December 31, 1996...... -- -- --
September 30, 1996..... -- -- $38.50
June 30, 1996.......... $32.25 -- $34.50
March 31, 1996......... $25.25 $30.87 --
December 31, 1995...... -- -- --
September 30, 1995..... -- -- --
June 30, 1995.......... -- -- --
</TABLE>
- --------
(1)Consists of 56,800 shares acquired upon the exercise of stock options.
(2)Consists of 1,600 purchased shares and 411 shares acquired under the
Company's Employee Stock Purchase Plan.
(3)Consists of [17,600] shares acquired upon the exercise of stock options and
514 shares acquired under the Company's Employee Stock Purchase Plan.
Neither CDR Fund V nor MergerCo has effected any transactions in Common
Stock since November 25, 1997.
64
<PAGE>
THE COMPANY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, risk factors and consolidated
financial statements and notes thereto appearing elsewhere in this Proxy
Statement. References herein in to a "fiscal" year refer to the Company's
fiscal year ended March 31 in the calendar year indicated (e.g., references to
fiscal 1997 are references to the Company's fiscal year ended March 31, 1997).
See "Selected Historical Consolidated Financial Data" and "Unaudited Pro Forma
Condensed Consolidated Financial Data." The market share and competitive
position data contained in this Proxy Statement are approximations derived
from industry sources, which the Company has not independently verified, or
from Company estimates, which the Company believes to be reasonable but which
have not been independently verified. The Company believes that such data are
inherently imprecise, but are generally indicative of its relative market
share and competitive position.
The Company develops, manufactures and sells market-leading test, analysis,
communications and computing equipment in three product categories:
. Communications Test. The Company believes its subsidiary, TTC, is the
second largest U.S. provider of communications test instruments (by
sales). TTC provides products to communications service providers (such
as the Regional Bell Operating Companies ("RBOCs"), long-distance
companies and competitive access providers), service users (such as large
corporate and government network operators), and manufacturers of
communications equipment and systems. TTC's broad test and analysis
product line ranges from portable units (used by field service
technicians to test telephone and data communications lines and services)
to centralized test and monitoring systems installed in telephone company
central offices. TTC's communications test business accounted for 52% of
the Company's sales (or $184.9 million) for the nine months ended
December 31, 1997.
. Industrial Computing and Communications. The Company addresses two
distinct segments of the North American ruggedized computer market. The
Company's Industrial Computer Source subsidiary ("ICS") is the only
significant direct marketer of computer products and systems designed to
withstand excessive temperatures, dust, moisture and vibration in harsh
operating environments such as production facilities. ICS markets to
engineers, scientists and production managers through its widely
recognized Source-Book catalogs. The Company's Itronix Corporation
subsidiary ("Itronix") sells ruggedized portable communications and
computing devices used by field-service workers for telephone companies,
utilities, insurance companies and other organizations with large field-
service workforces. The Company's industrial computing and communications
business accounted for 31% of the Company's sales (or $111.0 million) for
the nine months ended December 31, 1997.
. Visual Communications. The Company's visual communications business
consists principally of two market-leading niche-focused subsidiaries:
(i) AIRSHOW is the world leader in passenger cabin video information
display systems and information services for the general and commercial
aviation markets; and (ii) da Vinci Systems is the world leader in
digital color enhancement systems used in the process of transferring
film images into electronic signals--a process commonly used to transfer
film images to video for use in the production of television commercials
and programming. The Company's visual communications business accounted
for 16% of the Company's sales (or $57.5 million) for the nine months
ended December 31, 1997.
For the nine months ended December 31, 1997, the Company generated sales of
$353.3 million.
COMPETITIVE STRENGTHS
The following characteristics contribute to the Company's competitive
position and outlook.
. Leading Market Positions. The Company's principal businesses occupy the
#1 or #2 overall position in their respective markets. TTC, which is the
Company's largest subsidiary and operates in a highly fragmented market,
has in recent years held the #1 or #2 position in market segments
accounting for an
65
<PAGE>
estimated 80% of the Company's sales. ICS is the only significant direct
marketer of ruggedized industrial computers and Itronix is the leading
supplier of ruggedized portable computers to telecommunications
companies. AIRSHOW and da Vinci have the # 1 shares in their respective
niche markets. The Company's market leadership is enhanced by its well
known brand names, including FIREBERD and T-BERD test instruments, the
ICS Source-Book catalogs, and the AIRSHOW map system.
. Double-Digit Market Growth. The Company participates in market segments
that management believes have been growing at least 10% in recent years.
Between fiscal 1994 and 1997, the Company increased sales at a compound
annual growth rate of 22% (16% excluding the impact of acquisitions), a
rate which management believes exceeds the composite sales growth rate
for the market segments the Company addresses. The growth of the
communications test instrument market, the Company's largest, is driven
in part by the growth of telecommunications equipment and services.
. High-Margin, Cash-Generative Business. The Company's gross profit margin
was 57.1% for the nine months ended December 31, 1997. Management
believes the Company's strong profitability is attributable to its
leading market positions, its extensive sales and distribution networks,
its entrenched customer relationships and a management culture
emphasizing product quality and customer service and support, rather than
price-based competition. The Company's strong profitability, combined
with relatively low capital expenditure requirements (averaging 3% of
sales since 1994), provides cash flow to fund the Company's growth
strategy and has facilitated a cumulative investment of approximately
$180 million in product development from the beginning of fiscal 1994
through December 31, 1997.
. High Installed Base of Products. As leaders in each of their respective
served markets, the Company's principal businesses enjoy high installed
product bases, which the Company believes generally provide a competitive
advantage in selling product enhancements, upgrades, replacements and
aftermarket parts and service. For example, the Company estimates that
there are over 100,000 of its communications test instruments
(representing over $1.0 billion in customer investment) currently in
service. This installed base also represents a substantial investment by
customers in training on the Company's communications test products, a
familiarity that the Company capitalizes on in selling and marketing its
products and in the development of new products.
. Extensive Sales and Distribution Network with Longstanding Customer
Relationships. Management believes that each of the Company's principal
businesses enjoys one of the most extensive, effective and highly trained
sales and distribution networks in its respective markets. The
communications test business, for example, has a 240-person sales
organization comprising predominantly engineers and technical
professionals, who undergo rigorous, ongoing education and training. The
Company has been selling to service providers such as AT&T, MCI, Sprint,
GTE and Bell Atlantic since prior to 1980. ICS's Source-Book (more than
six million copies distributed in fiscal 1997) is the most widely
recognized catalog of ruggedized industrial computer systems by
scientists and engineers. These purchasers rely upon ICS's sales staff,
primarily electrical engineers, to solve compatibility and functionality
issues in configuring the systems.
. Experienced Management Team with Substantial Equity Ownership. Led by CEO
John F. Reno, a 23-year Dynatech veteran, the senior management of each
of the Company's businesses have on average more than 15 years of
industry experience. Upon consummation of the Recapitalization,
approximately 350 senior managers and key employees collectively will own
or have options to acquire approximately 25% of Dynatech's common stock
on a fully diluted basis.
BUSINESS STRATEGY
The Company intends to pursue the following strategies:
. Leverage Leading Market Positions. The Company believes that its leading
market positions provide it with several competitive advantages in
comparison to smaller market participants, particularly in its
communications test business, and position it to expand its business by
(i) spreading product
66
<PAGE>
development costs over a larger sales and unit base, (ii) leveraging its
sales and marketing resources and customer relationships to sell new and
enhanced products through established channels, and (iii) taking
advantage of its high installed base of instruments to generate
incremental sales for product enhancements, upgrades, replacements and
service.
. Address New Market Segments. The Company intends to continue to develop
products to address new market segments in each of its businesses and
thereby expand the size of its total served market. For example, the
Company currently addresses approximately two-thirds of the $2.1 billion
communications test instrument market and is beginning to address
segments within the $1.5 billion communications test and monitoring
systems market. With product line extensions and additions, the Company
can expand the size of its served market while leveraging its extensive
sales and distribution network.
. Pursue Strategic Acquisitions. Since the end of fiscal 1993, the Company
has focused on its higher-growth, more profitable market-leading
businesses, selling 24 non-core businesses for gross proceeds of $190
million and acquiring four complementary businesses. The Company intends
to continue to pursue strategic acquisitions that complement its existing
businesses and further expand its product lines and technological
capabilities. The communications test instrument market is highly
fragmented, which management believes provides significant opportunities
for future strategic acquisitions. With the Company's economies of scale,
well-established sales and marketing channels and customer relationships,
the Company believes it can, through selective acquisitions, improve
profitability while expanding the breadth of its product line and
enhancing its technological expertise.
. Increase International Penetration. The Company generated 87% of sales
for the nine months ended December 31, 1997 in North America, primarily
in the United States, where it has established market-leading positions
in each of its principal businesses. The Company believes there are
significant opportunities to expand its international business. For
example, while the Company generated only 11% of its communications test
sales from markets outside North America during the nine month period
ended December 31, 1997, the $900 million international market represents
an estimated 43% of the global communications test instrument market for
the same period and has been growing at double-digit rates for the past
five years.
INDUSTRY OVERVIEW
Communications Test
Market Overview. The Company believes that the worldwide market for
communications testing is approximately $3.6 billion, comprised of the $2.1
billion communications test instrument market and the $1.5 billion test and
monitoring systems market. Test instruments are used in the design,
manufacturing, installation and maintenance of communications equipment and
networks while test and monitoring systems automate the process of detecting,
isolating and resolving faults within a communications network. TTC currently
addresses approximately two-thirds of the $2.1 billion test instruments
market, primarily in North America, and is beginning to address segments
within the $1.5 billion test and monitoring systems market.
Given the growth of communications networks, the multiplicity of
communications technologies and the broad range of applications at various
points in a network, there are numerous different tests and analyses necessary
for communications service providers and users to install, maintain and
troubleshoot communications networks. As a result, the communications test
instrument market is highly fragmented with many competitors, most of which
address only selected niches within the overall market. The Company estimates
that there are approximately 50 competitors in the communications test
instrument market having sales of over $1 million. A small number of larger
companies compete in many segments of the overall market, including Hewlett-
Packard Company, another market leader which competes in many of the same
segments as the Company. Other significant participants in the overall market
include Tektronix, Inc., Wandel & Goltermann GmbH & Co., Wavetek Corporation
and Network General Corporation.
67
<PAGE>
Industry Trends. Growth in the communications test instrument market is
driven in part by growth in the number of service providers, increased demand
for communications services and the introduction of new communications
protocols. Deregulation and privatization of the worldwide telecommunications
industry has produced increased competition and a proliferation of service
providers. To compete, communications providers must accelerate their network
deployment, maintain and upgrade existing infrastructures, and continue to
increase their quality of service, all while also reducing cost structures. In
addition, the growth of the volume of voice traffic, LAN backbones and
interconnections, high-speed interconnects, Internet access and cellular and
other wireless communications systems have led to the deployment of new high-
speed transmission technologies such as Synchronous Optical Network ("SONET"),
Asynchronous Transfer Mode ("ATM"), frame relay and Integrated Services
Digital Network ("ISDN").
The Company believes that these trends have driven overall communications
test instrument industry growth of approximately 10-12% annually over the last
five years. Growth rates vary widely across segments of the market and are
typically higher in segments that support the development of high growth
communications services such as ATM, frame relay, SONET and wireless services.
The Company believes the communications test and monitoring systems market
has grown at approximately 12% over the last five years, driven by the needs
of service providers to provide higher quality networks and to reduce costs
through efficiency, which may be gained by using test and monitoring systems.
Industrial Computing and Communications
The Company's industrial computing and communications business addresses two
markets: (1) the market for ruggedized rack-mounted computers, which is
characterized by thousands of smaller customers who typically order fewer than
ten units each, and (2) the market for ruggedized portable computers, which is
characterized by a more concentrated group of larger customers that typically
order large quantities of units.
Ruggedized Rack-Mounted Computers. The Company believes that the global
market for ruggedized industrial computer products currently exceeds $1.0
billion annually, split roughly evenly between North America and the rest of
the world. According to published industry data, this global market has been
growing approximately 10.5% for the past five years and is expected to grow at
approximately 12% through 2001, driven by the increased use of computers in
harsh environments. The market consists of sales of (i) modular component
products, which include chassis and CPUs sold separately and integrated by the
customer, and (ii) fully integrated systems, which consist of a considerably
broader product offering that is fully integrated into complete systems prior
to sale. The Company believes that modular component products and fully
integrated systems each account for approximately half of the total global
market. ICS competes primarily in the fully integrated systems segment of the
market and focuses on the direct marketing of its products to engineers and
scientists purchasing one to ten units through its catalogs, utilizing a
proprietary database developed over many years. In ICS's target market, ICS's
principal competitors include Texas Microsystems Inc., the I-Bus Division of
Maxwell Technologies, Inc., American Advantech Corp. and Diversified
Technology, Inc. Other significant competitors in the overall market include
IBM and Siemens AG.
Ruggedized Portable Computers. The market for ruggedized portable computers
consists of customers with large mobile workforces in industries such as
telecommunications, utilities, insurance and others that employ service and
maintenance technicians for a variety of products. The Company estimates that
the global market for ruggedized portable computers currently exceeds $400
million, and believes this market has grown at approximately 16% in 1997. In
this market, because of the relatively small number of customers with large
field-service work forces, the timing and size of whose orders are irregular,
growth rates vary widely. Ruggedized portable computers provide field workers
with the ability to install, diagnose and maintain company and customer
equipment and collect critical information from remote locations. The critical
feature of ruggedized portable computers is the ability to operate reliably in
adverse environments and work conditions while withstanding mechanical shock,
vibration, moisture and extreme temperatures. Itronix is the market leader in
sales to telecommunications service providers, whose large field service
personnel require portable computers to collect
68
<PAGE>
data from various remote locations. Itronix's competitors in the fully-
ruggedized portable market include Panasonic Industrial Co. (another market
leader) and a number of smaller competitors, as well as competition from
manufacturers of competing mass market "semi-rugged" mobile computers, which
constrain the pricing of premium portable ruggedized products like Itronix's.
Producers of ruggedized portable computers also face indirect competition from
off-the-shelf portable computers and single-purpose diagnostic and data
collection instruments.
Visual Communications
AIRSHOW. AIRSHOW addresses a segment of the overall market for information
and entertainment systems used by passengers of commercial and general
aviation aircraft. The market is driven by growth in aircraft production and
demand by aircraft passengers to receive real-time video or data information
while the aircraft is in the air. Management estimates growth in new general
aviation aircraft production of 20% in 1998. AIRSHOW has a leadership position
in a market niche for passenger cabin video information systems for the
general aviation and commercial airline markets. See "--Products and
Services."
da Vinci. da Vinci produces digital color correction systems, which are a
component of telecine systems used by video post production and commercial
production facilities to enhance and color match images as they are
transferred from film to video tape for editing and distribution. The
principal application of da Vinci's color correction system is to conform and
enhance color in the film editing process and to provide color to black and
white films and video images. da Vinci products occupy the leadership position
in this small niche market, growth in which is driven primarily by the
introduction of new video technologies and standards within the film and video
production industry.
PRODUCTS AND SERVICES
Communications Test
Overview. TTC provides a wide range of test and analysis products, service
and support that enable customers worldwide to develop, manufacture, install
and maintain communications networks and equipment. TTC's products include a
broad portfolio of test instruments, test systems, software and professional
services that address multiple technologies and applications at various
locations in communications networks.
TTC's test instrument products address two key categories of applications in
communications networks: (i) transmission testing between service providers'
central offices ("digital transport") and between a service provider's central
office and its customers (the "local loop"), and (ii) network services testing
by both service providers and users of a broad range of technologies and
services delivered principally to business customers. In addition, TTC is
expanding its product offerings for the communications test and monitoring
systems market.
TTC's sales in this area were $116.1 million in fiscal 1994, $143.1 million
in fiscal 1995, $172.0 million in fiscal 1996 and $211.3 million in fiscal
1997, representing a 22.1% compound annual growth rate.
Transmission Testing. TTC produces a wide range of products that test and
monitor the physical transmission of voice and data signals across a service
provider's network of transmission circuits, cables, connectors and related
network components in the central office and local loop. Domestic and
international service providers use TTC's transport test products to install
and maintain high-speed transmission circuits. Service providers have employed
such circuits as inter-office links to connect voice and data transmission
between long-distance carriers, local exchange carriers and wireless carriers.
More recently, transmission circuits employing newer technologies, such as
ISDN, SONET and ATM, have been proliferating as more analog networks are being
upgraded as customers demand improvements to facilitate high-speed data
transmission. TTC's products cover most widely accepted existing and emerging
technologies in its markets, with average selling prices ranging from $5,000
for a handheld unit to $45,000 for a fully-featured portable instrument to
$70,000 for a test system.
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Service providers use TTC's local loop test products to install and maintain
voice telephone services, ISDN, digital data system ("DDS"), T1 lines, and
fiber optic facilities between the service providers' local central offices
and the customers' premises. For example, technicians use products such as the
T-BERD 209OSP, a ruggedized field service test set, to perform fault location
and data quality testing of voice or data circuits in the local loop. With the
increased competition among service providers and the attendant workforce
downsizing of incumbent local service providers such as the RBOCs, TTC designs
its local loop test products to assist such customers in improving service
quality and productivity while reducing costs.
Network Services Testing. TTC's network services products test
communications technologies and services employed primarily by businesses,
including their physical transmission facilities, voice services, and data
services such as ATM, frame relay and ISDN. TTC's FIREBERD data communications
analyzers, for example, measure performance of a wide range of network
transmission equipment utilized on a business customer's premises and have a
modular construction to facilitate simple upgrades as new technologies and
services are employed. TTC's FIREBERD 500 Internetwork Analyzer monitors and
tests network traffic between a LAN and WAN and can analyze numerous
communications protocols. In addition, TTC manufactures portable, hand-held
test instruments that enable service technicians to install or repair
networks.
Communications Test and Monitoring Systems. TTC historically has focused on
the communications test instrument market, which continues to account for the
predominance of TTC's sales. However, TTC has been developing products to
address the $1.5 billion communications test and monitoring systems market.
For example, the CENTEST 650 was developed to automate the monitoring and
testing of DS0, DS1 and DS3 signals so that service providers can identify
network trouble spots quickly and direct mobile repair crews more efficiently
from a central location. In addition, TTC is devoting significant resources to
develop additional products for the communications test and monitoring systems
market.
Industrial Computing and Communications
Overview. The Company's industrial computing and communications business
consists of two subsidiaries addressing different segments of the worldwide
ruggedized computer market: (1) ICS, primarily a direct marketer of rack-
mounted computer products and systems used by engineers, scientists and others
in industrial or otherwise harsh operating environments, and (2) Itronix,
acquired by the Company in December 1996, which produces mobile computing and
communications devices used by companies with field service organizations such
as telephone companies and utilities. ICS generally sells to thousands of
small accounts, who typically order fewer than ten units, whereas Itronix
sells to a more concentrated group of large organizations that typically order
large quantities of units.
Industrial Computer Source. ICS employs a direct marketing strategy with its
widely recognized Source-Book catalogs, proprietary target customer database
and highly trained sales force of electrical engineers to sell a broad range
of integrated industrial computers, input/output devices, and communication
and accessory products. ICS primarily sells fully customized integrated
systems that its sales force configures to address a customer's particular
computing needs. ICS is geared to serving a large number of customers who
typically order fewer than ten units per order. Over the past two years, ICS
has sold to over 12,000 customers with an average order size of approximately
$3,000. ICS mailed over six million catalogs in 1997 to a proprietary and
growing list of over 300,000 scientists, engineers and production managers.
ICS offers rack-mounted personal computers for use in environments other
than homes and offices, including a wide range of commercial and
communications applications. Products include ruggedized computers and remote
terminals designed for operation in adverse environments (exposure to
vibration, noise, temperature fluctuations and extremes, dust, moisture,
electromagnetic fields and other hazards). ICS designs, configures and
assembles its products but generally sources components from third-party
vendors and contract manufacturers. ICS also uses its in-house CPU design
capabilities to sell customized modular products and subsystems to systems
integrators.
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ICS's sales were $36.6 million in fiscal 1994, $44.8 million in fiscal 1995,
$57.9 million in fiscal 1996 and $60.5 million in fiscal 1997, representing an
18.2% compound annual growth rate.
Itronix. Itronix is the leading supplier of portable, networked computing
and communications devices used by field-service technicians in the
telecommunications industry. These products are carried by field-service
technicians who use them in a broad range of environments to communicate--
either through wireline or wireless connections--to a central office.
Customers use Itronix's mobile computing products to automate dispatching,
work management and field reporting processes.
Itronix also targets utilities, insurance companies, and other organizations
seeking to increase the efficiency of their field-service personnel. Service
technicians often make multiple service calls to different locations without
returning to a base office. The use of networked computing devices allows for
more effective dispatching to service sites and provides two-way
communications with technicians. Itronix's flagship product provides
technicians with the ability to access engineering data and customer service
histories, or to collect and transmit key information regarding their service
calls to a central database.
Itronix currently produces two hardware product lines, the X-C Series of
laptop computers and the T Series of smaller handheld computing devices.
Itronix's flagship product line, the X-C series, is a rugged laptop computer
that features functionality and power that is similar to commodity laptops yet
is designed to withstand harsh environments, including heat, cold, rain and
the shock and vibration found in service vehicles. The X-C is also an
integrated communications device with options for both wired and wireless
communications. Other features include intelligent battery-life management and
touch screen functionality.
Itronix, which the Company acquired on December 31, 1996, is facing
significant manufacturing and marketing challenges. Management is currently
implementing a plan to (1) reduce manufacturing costs by renegotiating
component costs, outsourcing non-core manufacturing activities and redesigning
its products and (2) reposition its premium niche against new market
competition from "semi-rugged" and mass market products. See "Risk Factors--
Risks Relating to Itronix."
Itronix's sales were $62.8 million in fiscal 1996 and $81.6 million in
fiscal 1997, representing a 30% compound annual growth rate.
Visual Communications
Overview. The Company's principal visual communications businesses are
AIRSHOW Inc. and da Vinci Systems, Inc. The Company's visual communications
sales were $46.9 million in fiscal 1994, $55.2 million in fiscal 1995, $63.1
million in fiscal 1996 and $72.8 million in fiscal 1997, representing a 15.8%
compound annual growth rate.
AIRSHOW. AIRSHOW primarily manufactures passenger cabin video information
display systems for the general and commercial aviation markets, selling its
equipment to airlines, aircraft manufacturers, and aircraft electronic system
(avionics) installation centers. AIRSHOW also provides information services by
collecting data from various information service providers and transmitting
news, weather and financial information as text and graphics to aircraft
equipped with AIRSHOW Network products. AIRSHOW systems are installed on over
3,000 general aviation aircraft and 100 commercial airlines.
The AIRSHOW moving map system and real-time flight information passenger
video displays are offered across general and commercial aviation markets with
variations in equipment interface for different aircraft and video systems
types. The AIRSHOW Network is an extension of the moving map system and
includes a real-time data communications system. AIRSHOW Network is now
offered as an option by leading corporate aircraft manufacturers such as
Bombardier Inc., The Cessna Aircraft Co., Dassault Falcon Jet Corp.,
Gulfstream Aerospace Corporation and Learjet Inc. AIRSHOW recently introduced
its AIRSHOW TV service which provides for reception of direct broadcast
satellite TV aboard general aviation aircraft operating within the continental
U.S. This service is being primarily marketed to the general aviation market.
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da Vinci. da Vinci produces digital color correction systems, which are a
component of telecine systems used by video post production and commercial
production facilities to enhance and color match images as they are
transferred from film to video tape for editing and distribution. The
principal application of da Vinci's color correction system is to conform and
enhance color in the film editing process and to provide color to black and
white films and video images. da Vinci products occupy the leadership position
in this small niche market, growth in which is driven primarily by the
introduction of new video technologies and standards within the film and video
production industry.
Other Subsidiaries. The Company's other visual communications subsidiaries
are: Parallax Graphics, Inc., which the Company plans to wind down; DataViews,
which provides tools for software developers; and ComCoTec, which develops
software solutions for the pharmacy industry.
PRODUCT DEVELOPMENT
For each of the Company's businesses, the development of new and enhanced
products is a key element of its strategy, designed to further penetrate
served markets, address new markets and reduce costs. From the beginning of
fiscal 1994 through December 31, 1997, consolidated product development
expense was $180 million, representing an average of 12.3% of sales per year.
Consolidated product development expense was 12.6% of sales ($30,585,000) in
fiscal 1995, 12.4% of sales ($36,456,000) in fiscal 1996, and 11.9% of sales
($43,267,000) in fiscal 1997. The Company anticipates product development
spending to continue at similar levels as a percentage of sales in the future.
See "Risk Factors--Rapid Technological Change; Challenges of New Product
Introductions."
From the beginning of fiscal 1994 through December 31, 1997, the Company
invested approximately $125 million in development of communications test
instruments. In fiscal 1997, the Company introduced a significant number of
new test instrument products including the T-BERD 950, a lightweight
integrated test set which can test multiple technologies such as ISDN and
frame relay data services, and the TTC-2207, a hand-held instrument with a
touch screen graphical user interface designed for testing wireless networks.
The Company has also made recent Pentium product introductions in its
industrial computing and communications product lines and has significantly
expanded its AIRSHOW product offerings.
The Company uses its customer relationships to focus its product development
strategy on customer needs and emerging technologies.
CUSTOMERS AND MARKETING
Overview. The Company markets its products to a diverse customer base. The
Company's products are sold to a broad range of communications service
providers, including RBOCs, long-distance carriers, competitive access
providers, wireless service companies, independent telephone companies, cable
television operations, and a wide array of computer and data communication
users, corporate and industrial customers, and scientific organizations.
Most of the Company's revenues are generated through direct selling. The
Company also uses distributorships and representative relationships to sell
its products in areas of the United States and the rest of the world with
relatively low sales volume.
The Company's sales of goods and services to various agencies of the United
States federal government were approximately $20,040,000, $12,785,000, and
$17,484,000 in fiscal 1995, fiscal 1996, and fiscal 1997, respectively. Sales
of goods and services to the agencies of the United States federal government
are made pursuant to standard contracts which generally permit such agencies
to cancel or revise the contracts at will.
No single customer accounted for more than 10% of sales in any of these
three years.
Communications Test. In the U.S., TTC markets and sells its communications
test and analysis products primarily through a 240-person direct sales team
comprising predominantly engineers and technical professionals who undergo
intensive initial training on TTC's and its competitors' products.
Internationally, TTC employs distributors and representatives to market and
sell its products. TTC's principal customers are communications service
providers (such as RBOCs, long-distance companies and competitive access
providers), service users such as large corporate and government network
operators, and manufacturers of communications equipment and systems.
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Industrial Computing and Communications. ICS sells its ruggedized industrial
computer products to engineers and scientists primarily through its catalogs
and a telemarketing sales force comprised of highly-trained electrical
engineers. Itronix employs a direct sales force of engineers to market and
sell its ruggedized mobile computer products to organizations with large field
service groups such as telephone and insurance companies and utilities. ICS
typically sells to thousands of customers with no significant customer
concentration while Itronix's sales tend to be more concentrated on fewer
large customers.
Visual Communications. The Company's niche visual communications businesses
generally sell into niche markets directly through their own sales forces as
well as through distributors and representatives.
PRODUCT ASSEMBLY
The Company outsources most of its manufacturing and mechanical parts
fabrication and generally performs its own final assembly and testing of
products.
COMPETITION
The markets in which the Company competes are highly competitive and are
characterized by rapidly changing technology. Principal competitors include
businesses with significant financial, development, marketing, and
manufacturing resources, as well as numerous small, specialized companies. The
Company believes it holds a relatively favorable position with respect to the
important competitive factors in each of its markets. The Company considers
rapid product development, product functionality and features, and highly
trained technical sales and support staff to be key competitive factors. See
"The Company--Industry Overview" and "Risk Factors--Highly Competitive
Markets."
INTERNATIONAL
The Company maintains sales subsidiaries or branches in major countries in
Western Europe and Asia and has distribution agreements in many other
countries where sales volume does not warrant a direct sales organization. The
Company's foreign sales from continuing operations (including exports from the
United States directly to foreign customers) were approximately 20%, 20%, and
23% of consolidated net sales in fiscal 1997, fiscal 1996, and fiscal 1995,
respectively.
The Company's international business is subject to risks customarily found
in foreign operations, such as fluctuations in currency exchange rates, import
and export controls, and regulatory policies of foreign governments. A summary
of the Company's sales, earnings and identifiable assets by geographic area is
found in the Company's financial statements. See "Financial Statements."
DISCONTINUED OPERATIONS AND DIVESTED BUSINESSES
The Company engaged in a business divestiture program beginning in 1994 and
ending in fiscal 1997. Through such program, the Company sold 24 non-core
businesses, which resulted in total proceeds to the Company of approximately
$190 million, including $13.5 million in non-cash proceeds. See "Notes to
Condensed Consolidated Financial Statements."
BACKLOG
The Company's backlog of orders at December 31, 1997 and 1996 was
$77,463,000 and $52,398,000, respectively, including the effects of the
Itronix acquisition on December 31, 1996.
EMPLOYEES
At December 31, 1997, the Company employed approximately 2,200 people. The
Company's experience has been that employees having requisite skills for the
Company's purposes are generally available in the areas where its facilities
are located, although there are constraints on the Company's ability to fill
certain engineering positions. The Company's employees are not represented by
a labor union, and the Company believes its employee relations are good.
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LITIGATION
The Company is involved from time to time in routine legal matters
incidental to its business. The Company believes that the resolution of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
INTELLECTUAL PROPERTY
The Company relies primarily on trade secrets, trademark laws,
confidentiality procedures and contractual restrictions to establish and
protect its proprietary rights.
The Company generally seeks patent protection for inventions and
improvements to its products which it believes to be patentable. It holds
numerous United States and foreign patents and patent applications covering
many products. The Company does not believe that the expiration of any patent
or group of patents would materially affect its business.
FIREBERD, T-BERD, CENTEST, INTERCEPTOR, XC 6250, INDUSTRIAL COMPUTER SOURCE,
DA VINCI SYSTEMS and AIRSHOW are among the registered trademarks which the
Company considers valuable assets.
Dynatech is a registered service mark of the Company in the United States
and a registered trade or service mark (issued or applied for) of the Company
in most other major industrialized countries of the world.
The Company is subject to customary risks of infringement of its proprietary
rights. While the Company considers its proprietary rights important, it
believes its technical marketing and manufacturing capabilities are of greater
competitive significance.
SUPPLIERS
Materials and components used in the Company's products are normally
available stock items or can be obtained to Company specifications from more
than one potential supplier, with the exception of certain components which
are being sourced from a single supplier. These include certain commercially
available and customized microprocessors and application specific integrated
circuits, power supplies, display devices and certain operating system
software. Although alternative sources generally exist for these materials, a
significant amount of time could be required before the Company would begin to
receive adequate supplies from such alternative suppliers. The Company also
purchases certain key components from sole source vendors, including a semi-
conductor manufacturer of a component utilized in the Company's communications
test business and a component manufacturer for the Itronix series of
ruggedized laptop computers. There can be no assurance that such components
will continue to be produced or that the price for such components may not
significantly increase. Some components and assemblies are purchased in Asia
pursuant to volume contracts. See "Risk Factors--Dependence on Sole Source
Suppliers and Licensors."
ENVIRONMENTAL MATTERS
Federal, state and local laws or regulations which have been enacted or
adopted regulating the discharge of materials into the environment have not
had, and under present conditions, the Company does not foresee that they will
have, a material adverse effect on capital expenditures, earnings, or the
competitive position of the Company.
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PROPERTIES
The Company's policy is generally to lease real property for its
manufacturing and sales operations. Principal operating facilities for
continuing operations are as follows:
<TABLE>
<CAPTION>
SQUARE LEASE
LOCATION FEET TERMINATION
- -------- ------- -----------
<S> <C> <C>
Burlington, Massachusetts................................... 14,600 1999
Ft. Lauderdale, Florida..................................... 16,300 2001
Germantown, Maryland........................................ 30,000 2006
Germantown, Maryland........................................ 68,000 2001
Germantown, Maryland........................................ 98,000 2003
Lombard, Illinois........................................... 23,300 1998
Northampton, Massachusetts.................................. 22,500 1999
Tustin, California.......................................... 24,300 1999
Salem, Virginia............................................. 35,900 2004
San Diego, California....................................... 135,000 2004
Spokane, Washington......................................... 66,400 1999
</TABLE>
The Company has other leases for continuing operations manufacturing space
and sales offices, but in each case the total leased space is under 15,000
square feet.
The Company has leased space approximately 239,000 square feet in various
facilities in discontinued operations at December 31, 1997.
YEAR 2000
The Company has commenced a review of its computer systems and products in
order to assess its exposure to Year 2000 issues. The Company is currently in
the process of determining the full scope, related costs and action plan to
insure that the Company's systems continue to meet its internal needs and
those of its customers. The Company expects to make the necessary
modifications or changes to its computer information systems to enable proper
processing of transactions relating to the Year 2000 and beyond. However,
there can be no assurance that Year 2000 costs and expenses will not have a
material effect on the Company. In addition, the Company does not currently
have any information concerning the Year 2000 compliance status of its
suppliers and customers. In the event that any of the Company's significant
suppliers or customers do not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
Finally, there can be no assurance that the Company's existing or installed
base of products are Year 2000 compliant, or that the Company's products will
not be integrated by the Company or its customers with, or otherwise interact
with, non-compliant software or other products. Any such product non-
compliance may expose the Company to claims from its customers and others, and
could impair market acceptance of the Company's products and services,
increase service and warranty costs, or result in payment of damages, which in
turn could materially adversely affect the Company.
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THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to Stockholders is accompanied by a
proxy card furnished in connection with the solicitation of proxies by the
Board of Directors for use at the Special Meeting. The Special Meeting is
scheduled to be held on , 1998 at a.m. at the offices of Ropes & Gray,
27th Floor, 885 Third Avenue, New York, New York. At the Special Meeting,
Stockholders will consider and vote upon (i) a proposal to approve and adopt
the Merger Agreement and the Merger and (ii) such other matters as may
properly be brought before the Special Meeting.
At the Special Meeting, Stockholders will be asked to consider and vote upon
a proposal to approve and adopt the Merger Agreement between MergerCo and the
Company and the Merger contemplated thereby. A copy of the Merger Agreement is
attached as Appendix A to this Proxy Statement. The Merger Agreement provides,
among other things, for the Merger of MergerCo into the Company with the
Company continuing as the Surviving Corporation. Pursuant to the Merger
Agreement, at the Effective Time the Restated Articles of Organization of the
Company will be amended and restated to provide, among other things, that the
Company is authorized to issue 200,000,000 shares of Recapitalized Common
Stock. In the Merger, (i) each outstanding share of Common Stock will be
converted into the right to receive (a) $47.75 in cash and (b) 0.5 shares of
Recapitalized Common Stock (except that any shares held by MergerCo or held in
the Company's treasury will be canceled and any Stockholder who properly
dissents from the Merger will be entitled to appraisal rights under the MBCL)
and (ii) each share of MergerCo Common Stock will be converted into one share
of Recapitalized Common Stock.
Prior to the Merger, (a) John F. Reno, together with two family trusts
established by Mr. Reno, will contribute 40,804 shares of Common Stock to
MergerCo in exchange for 799,758 shares of MergerCo Common Stock and (b) CDR
Fund V, which is managed by CDR, will purchase 110,790,770 shares of MergerCo
Common Stock for approximately $277 million. In the Merger, all such shares of
MergerCo Common Stock will be converted into Recapitalized Common Stock as
described above. As a result of the Merger and these related transactions,
immediately following the Merger, (x) CDR Fund V will own approximately 92.3%
of the outstanding Recapitalized Common Stock, (y) Stockholders, other than
Mr. Reno and his family trusts, will own approximately 7% of the outstanding
Recapitalized Common Stock and (z) Mr. Reno (together with his family trusts)
will own approximately 0.7% of the outstanding Recapitalized Common Stock.
The Company expects to treat the Merger as a recapitalization for financial
reporting purposes. Accordingly, the historical basis of the Company's assets
and liabilities will not be affected by the transaction.
The Board of Directors has determined that the Merger Agreement and the
Merger are advisable and fair to and in the best interests of the Company and
its Stockholders, and has approved the Merger and the Merger Agreement.
ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. See "Special
Factors--Background of the Merger" and "Special Factors--Recommendation of
Board; Reasons for the Merger."
STOCKHOLDERS ARE REQUESTED PROMPTLY TO COMPLETE, DATE SIGN AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT AND THE MERGER.
RECORD DATE AND VOTING
The Record Date for the Special Meeting is the close of business on March 4,
1998. At the close of business on the Record Date, there were 16,862,874
shares of Common Stock outstanding and entitled to vote, held by approximately
937 Stockholders of record. Each holder of Common Stock on the Record Date
will be entitled
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to one vote for each share held of record. The presence, either in person or
by proxy, of a majority of the outstanding shares of Common Stock entitled to
vote is necessary to constitute a quorum at the Special Meeting. Abstentions
(including broker non-votes) are included in the calculation of the number of
votes represented at a meeting for purposes of determining whether a quorum
has been achieved.
The Board is not aware of any matters other than those set forth in the
Notice of Special Meeting of Stockholders that may be brought before the
Special Meeting. If any other matters properly come before the Special
Meeting, the persons named in the accompanying proxy will vote the shares
represented by all properly executed proxies on such matters in such manner as
shall be determined by a majority of the Board, except that shares represented
by proxies which have been voted "against" the Merger Agreement and Merger
will not be used to vote "for" postponement or adjournment of the Special
Meeting for the purpose of allowing additional time for soliciting additional
votes "for" the Merger Agreement and the Merger. See "--Vote Required;
Revocability of Proxies" and "Other Information and Stockholder Proposals."
STOCKHOLDERS SHOULD NOT FORWARD ANY COMMON STOCK CERTIFICATES WITH THEIR
PROXY CARDS. IN THE EVENT THE MERGER IS CONSUMMATED, STOCK CERTIFICATES SHOULD
BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF
TRANSMITTAL, WHICH WILL BE SENT TO STOCKHOLDERS BY BOSTON EQUISERVE, L.P., IN
ITS CAPACITY AS THE EXCHANGE AGENT, AS SOON AS IS REASONABLY PRACTICABLE AFTER
THE EFFECTIVE TIME.
VOTE REQUIRED; REVOCABILITY OF PROXIES
Approval and adoption of the Merger Agreement and the Merger require the
affirmative vote of the holders of two-thirds of the outstanding shares of
Common Stock entitled to vote thereon. At the close of business on March 4,
1998, there were 16,862,874 shares of Common Stock outstanding and entitled to
vote, held by approximately 937 Stockholders of record. The directors and
executive officers of the Company collectively owned [ ] shares of Common
Stock as of the Record Date (which represented % of outstanding shares of
Common Stock as of the Record Date). Messrs. Reno, Kline and Peeler intend to
vote their shares of Common Stock, which represent in the aggregate 0.39% of
the outstanding Common Stock, in favor of the approval and adoption of the
Merger Agreement and the Merger. The members of the Board (other than Mr.
Reno) intend to vote their shares of Common Stock, which, as of the close of
business on December 31, 1997, represented in the aggregate 0.22% of the
outstanding Common Stock, in favor of the approval and adoption of the Merger
Agreement and the Merger.
Because the required vote of the Stockholders on the Merger Agreement and
the Merger is based upon the total number of outstanding shares of Common
Stock, the failure to submit a proxy card (or to vote in person at the Special
Meeting) or the abstention from voting by a Stockholder (including broker non-
votes) will have the same effect as an "against" vote with respect to approval
and adoption of the Merger Agreement and the Merger. Proxies delivered to the
Company's Clerk that do not contain any instruction to vote for or against a
particular matter will be voted in favor of such matter.
The presence of a Stockholder at the Special Meeting will not automatically
revoke such Stockholder's proxy. However, a Stockholder may revoke a proxy at
any time prior to its exercise by (i) delivering to the Company's Clerk a
written notice of revocation prior to the Special Meeting, (ii) delivering
prior to the Special Meeting a duly executed proxy bearing a later date or
(iii) attending the Special Meeting and voting in person.
If a quorum is not obtained, or if fewer shares of Common Stock are voted in
favor of approval and adoption of the Merger Agreement and Merger than the
number required for approval, it is expected that the Special Meeting will be
postponed or adjourned for the purpose of allowing additional time for
soliciting and obtaining additional proxies or votes, and, at any subsequent
reconvening of the Special Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
special meeting, except for any proxies which have theretofore effectively
been revoked or withdrawn.
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Although approval of the stockholders of MergerCo is not a condition to
consummation of the Merger pursuant to the Merger Agreement, CDR Fund V has
committed to vote its shares of MergerCo Common Stock in favor of the Merger.
The obligations of the Company and MergerCo to consummate the Merger are
subject, among other things, to the condition that the Stockholders approve
and adopt the Merger Agreement and Merger. See "The Merger and the Merger
Agreement--Conditions to the Merger."
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies from Stockholders. The
Company has retained McKenzie Partners, Inc. to aid in the solicitation of
proxies from the Stockholders. The fees of McKenzie Partners, Inc. to be paid
by the Company and shall not exceed $10,000 plus reimbursement of out-of-
pocket expenses. In addition to soliciting proxies by mail, directors,
officers and employees of the Company solicit proxies by telephone, by
telegram or in person. Such directors, officers and employees will not be
additionally compensated for any such solicitation but may be reimbursed for
reasonable out-of-pocket expenses incurred in connection therewith.
Arrangements also will be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares held of record by such persons, and the Company will
reimburse such brokerage firms, custodians, nominees and fiduciaries for the
reasonable out-of-pocket expenses incurred by them in connection therewith.
IN THE EVENT THE MERGER IS CONSUMMATED, STOCKHOLDERS WILL RECEIVE, BY MAIL,
LETTERS OF TRANSMITTAL WITH WHICH SUCH STOCK CERTIFICATES SHOULD BE RETURNED
AFTER THE EFFECTIVE TIME. HOLDERS SHOULD THEREFORE NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
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THE MERGER AND THE MERGER AGREEMENT
The following is a summary of certain material features of the Merger and of
the Merger Agreement, a copy of which is attached hereto as Appendix A and
incorporated by reference herein. All references to and summaries of the
Merger Agreement in this Proxy Statement are qualified in their entirety by
reference to the Merger Agreement. Stockholders are urged to read the Merger
Agreement carefully and in its entirety.
MERGER CONSIDERATION
Subject to certain provisions as described herein with respect to shares of
Common Stock owned by the Company, any subsidiary of the Company, and with
respect to fractional shares and Dissenting Shares at the Effective Time each
issued and outstanding share of Common Stock will be converted into the right
to receive from the Company following the Merger $47.75 in cash and 0.5 shares
of Recapitalized Common Stock. With respect to certain risks related to the
retention of Common Stock, see "Risk Factors" above.
Immediately prior to the Merger, (a) John F. Reno, together with two family
trusts established by Mr. Reno, will contribute 40,804 shares of Common Stock
to MergerCo in exchange for 799,758 shares of MergerCo Common Stock and (b)
CDR Fund V will purchase 110,790,770 shares of MergerCo Common Stock for
approximately $277 million; such shares of MergerCo Common Stock will be
converted into Recapitalized Common Stock in the Merger on a one-for-one
basis.
Fractional shares of Common Stock will not be issued in the Merger. Holders
of Common Stock otherwise entitled to a fractional share of Common Stock
following the Merger will be paid in cash in lieu of such fractional share
determined and paid as described under "--Fractional Shares" below.
Any shares of Common Stock held by MergerCo or held in the Company's
treasury will automatically be cancelled at the Effective Time and will cease
to exist and no Merger Consideration will be delivered in exchange therefor.
In the Merger, each share of MergerCo Common Stock issued and outstanding
immediately prior to the Effective Time will be converted into one share of
Recapitalized Common Stock. As a result of the Merger, CDR Fund V will hold
110,790,770 shares of Recapitalized Common Stock, or approximately 92.3%, Mr.
Reno (together with his family trusts) will hold 799,758 shares of
Recapitalized Common Stock, or approximately 0.7%, and Stockholders, other
than Mr. Reno and his family trusts, will hold approximately 8,409,473 shares
of Recapitalized Common Stock, or approximately 7%, in each case, of the
outstanding shares of Recapitalized Common Stock expected to be outstanding
immediately after the Merger.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Articles of Merger
with the Secretary of State of The Commonwealth of Massachusetts and the
Certificate of Merger with the Secretary of State of the State of Delaware or
such later date as is specified in such Articles of Merger or Certificate of
Merger (the "Effective Time"). The filing of the Articles of Merger and the
Certificate of Merger will occur as soon as practicable on or after the
satisfaction or waiver of the conditions to the Merger specified in the Merger
Agreement unless another date is agreed to in writing by the Company and
MergerCo. Subject to certain limitations, the Merger Agreement may be
terminated by either MergerCo or the Company. See "--Conditions to the Merger"
and "--Termination; Termination Fees."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of shares of Common Stock (other than Dissenting Shares) into
the Merger Consideration will occur at the Effective Time. As soon as
practicable as of or after the Effective Time, the Exchange Agent will send a
letter of transmittal to each holder of Common Stock. The letter of
transmittal will contain instructions with respect to the surrender of
certificates representing shares of Common Stock in exchange for
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cash and shares of Recapitalized Common Stock for which the shares represented
by the certificates so surrendered are exchangeable pursuant to the Merger
Agreement.
STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as is practicable after the Effective Time, each holder of an
outstanding certificate or certificates at such time which prior thereto
represented shares of Common Stock will, upon surrender to the Exchange Agent
of such certificate or certificates and acceptance thereof by the Exchange
Agent, be entitled to the amount of cash and the number of shares of
Recapitalized Common Stock into which the number of shares of Common Stock
previously represented by such certificate or certificates surrendered will
have been converted pursuant to the Merger Agreement. The Exchange Agent will
accept such certificates upon compliance with such reasonable terms and
conditions the Exchange Agent may impose to effect an orderly exchange thereof
in accordance with normal exchange practices. After the Effective Time, there
will be no further transfer on the records of the Company or its transfer
agent of certificates representing shares of Common Stock which have been
converted, in whole or in part, pursuant to the Merger Agreement into the
right to receive cash and shares of Recapitalized Common Stock, and if such
certificates are presented to the Company for transfer, they will be cancelled
against delivery of cash and certificates for such shares of Recapitalized
Common Stock. Until surrendered as contemplated by the Merger Agreement, each
certificate for shares for Common Stock will be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
consideration contemplated by the Merger Agreement. No interest will be paid
or will accrue on any cash payable as consideration in the Merger or in lieu
of any fractional shares of Recapitalized Common Stock.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Recapitalized
Common Stock will be issued in connection with the Merger, and such fractional
share interests will not entitle the owner thereof to vote or to any rights of
a stockholder of the Company after the Merger. Each holder of shares of Common
Stock exchanged pursuant to the Merger who would otherwise have been entitled
to receive a fraction of a share of Recapitalized Common Stock (after taking
into account all shares of Common Stock delivered by such holder) will
receive, in lieu thereof, a cash payment (without interest) representing such
holder's proportionate interest in the value of such share (assuming that each
share of Recapitalized Common Stock has a cash value of $2.50).
ACCOUNTING TREATMENT
It is intended that the Merger will be treated as a recapitalization for
financial reporting purposes. Accordingly, the historical basis of the
Company's assets and liabilities will not be impacted by the transaction.
EFFECT ON STOCK OPTIONS AND EMPLOYEE BENEFIT MATTERS
Pursuant to the Merger Agreement, except as provided in the following
paragraph, (i) each Company Stock Option will become fully vested and
exercisable immediately prior to the Merger, (ii) any Company Stock Option
that is outstanding immediately prior to the Effective Time will, subject to
the consent of the holder thereof, be cancelled and (iii) each holder of any
such cancelled Company Stock Option will receive, in consideration of such
cancellation, an Option Cancellation Payment. The Option Cancellation Payments
will be paid in cash as of or as soon as practicable after the Effective Time.
Notwithstanding the foregoing, the Company Stock Options held by Messrs.
Reno, Peeler and Kline (or, in the case of Mr. Peeler, his options to purchase
137,600 shares of Common Stock) will be converted into equivalent options to
purchase shares of Recapitalized Common Stock (the exercise prices of which
preserve the economic value of their current Company Stock Options), all of
which, other than 48,439 Company Stock Options held by Mr. Reno, will be fully
vested and exercisable. It is expected that an aggregate of 483,000 Company
Stock Options held by Management Stockholders will be converted into
equivalent options to purchase
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shares of Recapitalized Common Stock (the exercise prices of which preserve
the economic value of their current Company Stock Options), all of which will
be fully vested and exercisable. Following the Merger, it is also expected
that certain officers and key employees will receive new options to acquire
approximately 15,680,000 shares of Recapitalized Common Stock. See "Special
Factors--Interests of Certain Persons in the Merger." Shortly following the
consummation of the Merger, the Company intends to grant a substantial
majority of such options to eligible officers and key executives. The exercise
price of each share of Recapitalized Common Stock subject to such options will
generally be the fair market value of a share of Recapitalized Common Stock on
the date of grant. Such options will generally become vested in 20% increments
on each of the first five anniversaries of the date of grant, subject to the
grantee's continued employment.
Pursuant to the Merger Agreement, the Company's 1996 Employee Stock Purchase
Plan (the "ESPP") has been amended to provide that there will be no new stock
purchase periods after March 31, 1998 and the ESPP will terminate at the
Effective Time. If the Effective Time is prior to March 31, 1998, the options
then outstanding under the ESPP shall be accelerated and exercised immediately
prior to the Effective Time.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
the Company with respect to the Company and its subsidiaries relating to,
among other things, (a) organization, standing and similar corporate matters;
(b) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement; (c) the Company's capital structure; (d) documents filed
by the Company with the Commission and the accuracy of information contained
therein; (e) the absence of any violation, breach, termination, acceleration,
default (i) under certain agreements to which the Company is a party, (ii)
under the articles of organization or bylaws of the Company or (iii) under any
federal, state, local or foreign order, writ, injunction, judgment, award,
decree, statute, law, rule or regulation applicable to the Company; (f) the
absence of the need for governmental approvals and consents in connection with
the Merger Agreement; (g) the accuracy of information supplied by the Company
in connection with this Proxy Statement and any related schedules; (h) the
absence of certain changes or events since September 30, 1997, including
material adverse changes with respect to the Company; (i) the absence of
undisclosed liabilities; (j) pending or threatened material litigation,
certain labor matters and compliance with applicable laws; (k) benefit plans
and other matters relating to the Employee Retirement Income Security Act of
1974, as amended, and employment matters; (l) title to owned real or personal
property and valid leasehold and subleasehold interests in leased real or
personal property; (m) filing of tax returns and payment of taxes; (n)
environmental matters; (o) insurance matters; (p) receipt of an opinion of the
Company's financial adviser; (q) brokers' fees and expenses; (r) books and
records; (s) ownership of or rights to use Company intellectual property; (t)
material contracts; (u) the Company's Rights Agreement; (v) takeover statutes
and (w) the accuracy of information provided to MergerCo.
The Merger Agreement also contains customary representations and warranties
of MergerCo relating to, among other things, (a) organization, standing and
similar corporate matters; (b) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement and related matters;
(c) the accuracy of information supplied by MergerCo in connection with this
Proxy Statement and any related schedules; (d) the absence of the need for
governmental approvals and consents in connection with the Merger Agreement;
(e) brokers' fees and expenses; (f) the business of MergerCo outside the
consummation of the transactions contemplated by the Merger Agreement; (g)
financing matters; and (h) MergerCo's capital structure.
NO SOLICITATION
The Merger Agreement provides that the Company will not, directly or
indirectly, through any officer, director, employee, representative or agent
of the Company or any of its subsidiaries (i) solicit, initiate or knowingly
encourage (including by way of furnishing non-public information) or take any
other action to facilitate the institution of any inquiries, proposals or
offer (a "Company Takeover Proposal") regarding any direct or indirect
acquisition or purchase of a business that constitutes 50% or more of the net
revenues, net income or assets of the Company and its subsidiaries, taken as a
whole, or 50% or more of any class of equity
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securities of the Company, any tender offer or exchange offer that if
consummated would result in any person beneficially owning 50% or more of any
class of any equity securities of the Company, or any merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company (or any of its subsidiaries whose business
constitutes 50% or more of the net revenues, net income or assets of the
Company and its subsidiaries taken as a whole) (any of the foregoing being
referred to as a "Company Takeover Event") or (ii) participate in negotiations
or discussions regarding any Company Takeover Proposal; provided, however, the
Board is permitted to provide non-public information regarding the Company
pursuant to a customary confidentiality agreement, and to participate in
discussions or negotiations regarding a Company Takeover Proposal if the Board
has determined in good faith (after consultation with outside counsel) that it
is necessary to do so in order to ask in a manner consistent with its
fiduciary duties to the Stockholders; and provided, further, that the Company
has given MergerCo prior notice of any such request or Company Takeover
Proposal and the material terms and conditions of such request or Company
Takeover Proposal.
COOPERATION AND BEST EFFORTS
Pursuant to the Merger Agreement and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and use their respective reasonable best efforts to take certain
specified and other actions so that the transactions contemplated by the
Merger Agreement may be consummated as soon as practicable.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company made various customary
covenants relating to the conduct of its business prior to the Merger. The
Company has agreed that, prior to the Effective Time, unless MergerCo agrees
otherwise in writing, as required by the Merger Agreement or applicable law or
as required by a material contract, it will conduct its business and will
cause its subsidiaries to conduct their businesses in the ordinary course of
business and in a manner consistent with past practice and, to the extent
consistent therewith, will use all reasonable efforts to preserve
substantially intact its business organization, and preserve its relationships
with customers, suppliers, employees and creditors. In the Merger Agreement,
the Company has further agreed, among other things, that prior to the
Effective Time it will not and it will cause each of its subsidiaries to not:
(a) amend its charter or bylaws or similar organizational documents; (b)
issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale,
pledge, disposition or encumbrance of any shares of capital stock of any
class, or any options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock in the Company or any of its
subsidiaries; (c) sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of any assets of the Company or any of its subsidiaries
(except in the ordinary course of business consistent with past practice); (d)
declare, set aside, make or pay any dividend or other distribution in respect
of any of its capital stock; (e) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities or property in respect of, in lieu of or in substitution for shares
of its capital stock; (f) purchase, repurchase, redeem or otherwise acquire,
any of its securities or any securities of any of its subsidiaries; (g)
acquire any corporation, partnership or other business organization or
division or any equity interest therein; (h) incur any long-term indebtedness
or any short-term indebtedness other than under lines of credit existing on
December 20, 1997 (except in certain limited circumstances in the ordinary
course of business, consistent with past practice); (i) enter into or amend
any material contract or agreement; (j) increase the compensation payable or
to become payable to its officers or management employees except for increases
in salary or wages consistent with past practice; (k) adopt, enter into, or
amend or increase, accelerate the payment or vesting of, the amounts, benefits
or rights under any severance, termination, bonus, profit sharing, deferred
compensation, stock option, or other equity based or other material employee
compensation or benefit plan; (l) except as may be required as a result of a
change in generally accepted accounting principles, take any action to change
accounting policies or procedures; (m) make any material tax election
inconsistent with past practice or settle or compromise or amend any material
federal, state, local or foreign tax liability; (n) pay, discharge or satisfy
any claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business and consistent with past
practice or involving a payment not in excess of $250,000, and following prior
notice to and consultation with
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MergerCo; or (o) take, or agree in writing or otherwise to take, any of the
actions described in this paragraph, or any action which would make any of the
representations or warranties of the Company contained in the Merger Agreement
untrue or incorrect or prevent the Company from performing or cause the
Company not to perform its covenants thereunder.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that the Articles of Organization and By-laws
of the Surviving Corporation will contain the provisions with respect to
indemnification set forth in the Articles of Organization and By-laws of the
Company on the date of the Merger Agreement, which provisions may not be
amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who on or prior to the Effective Time were directors, officers,
employees or agents of the Company, unless such modification is required by
law.
The Merger Agreement also provides that after the Effective Time, the
Surviving Corporation will indemnify and hold harmless each present and former
director, officer or employee of the Company or any of its subsidiaries
against any expenses, losses, claims, damages or liabilities, arising out of
acts or omissions occurring at or prior to the Effective Time, to the same
extent as provided in the Company's Articles or Organization or By-Laws or any
applicable contract or agreement as in effect on the date of the Merger
Agreement, in each case for a period of six years after the date of the Merger
Agreement.
Pursuant to the Merger Agreement, MergerCo has agreed that, for a period of
six years after the Effective Time, it will cause the Surviving Corporation to
maintain in effect, directors' and officers' liability insurance covering
those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms comparable to those now
applicable to directors and officers of the Company.
CONDITIONS TO THE MERGER
All Parties. Pursuant to the Merger Agreement, the respective obligations of
each party to effect the merger are subject to the satisfaction or waiver of
the following conditions at or prior to the Effective Time; (i) approval and
adoption of the Merger Agreement and the Merger by the holders of at least
two-thirds of the Common Stock entitled to vote thereon; (ii) termination or
expiration of the waiting period (and any extension thereof) applicable to the
Merger under the HSR Act; (iii) no statute, rule, regulation, executive order,
decree, ruling, temporary restraining order, preliminary or permanent
injunction or other order having been enacted, entered, promulgated, enforced
or issued by any court or governmental authority of competent jurisdiction or
otherwise being in effect which prohibits, restrains, enjoins or restricts the
consummation of the Merger and (iv) the Board of Directors having received the
solvency opinion described above.
MergerCo. MergerCo's obligation to effect the Merger is further subject to
the satisfaction or waiver of the following conditions: (i) the
representations and warranties of the Company contained in the Merger
Agreement being true and correct in all material respects at and as of the
Effective Time except for (a) changes contemplated by the Merger Agreement and
(b) those representations and warranties which address matters only as of a
particular date; (ii) the Company having performed or complied in all material
respects with all agreements and covenants required to be complied with by it
under the Merger Agreement at or prior to the Effective Time; (iii) holders of
no more than 5% of the outstanding shares of the Common Stock having perfected
their dissenters' rights in accordance with Sections 85-95 of the MBCL; (iv)
there being no material adverse effect on the business, assets, condition
(financial or other) or results of operations of the Company since September
30, 1997; (v) the Company having obtained the funds pursuant to the Financing,
substantially on the terms provided therein and (vi) the Company's
Shareholders' Rights Agreement, dated February 16, 1989, as amended, and all
outstanding rights issued thereunder shall terminate at the Effective Time.
The Company. The obligation of the Company to effect the Merger is further
subject to the representations and warranties of MergerCo set forth in the
Merger Agreement being true and correct in all material respects as
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of the Effective Time (except for changes contemplated by the Merger Agreement
and except to the extent such representations and warranties speak as of an
earlier date), and MergerCo having performed all obligations required to be
performed by it under the Merger Agreement at or prior to the Effective Time.
TERMINATION; TERMINATION FEES
The Merger Agreement may be terminated and the Merger abandoned prior to the
Effective Time: (i) upon the mutual written consent of the Company and
MergerCo; (ii) by either the Company or MergerCo, if the Merger is not
completed by June 30, 1998 (provided that this right to terminate shall not be
available to a party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of such delay); (iii) by either the Company or
MergerCo if a court or other governmental body has issued a nonappealable
final statute, order, decree or regulation permanently restraining, enjoining
or otherwise legally prohibiting the Merger; (iv) by either the Company or
MergerCo, if (A) the holders of at least two-thirds of the Common Stock
entitled to vote fail to approve and adopt the Merger Agreement and the Merger
or (B) the Board withdraws or modifies its approval or recommendation of the
Merger Agreement and the transactions contemplated thereunder in a manner
adverse to MergerCo or recommends a Company Takeover Proposal (as defined in
"No Solicitation"); (v) by MergerCo, if a tender offer or exchange offer for
20% or more of the Common Stock is commenced by a third party and the Board
fails to recommend that the Stockholders not tender their shares in such
tender or exchange offer; or (vi) by either the Company or MergerCo, upon 15
days' prior written notice, if the other party breaches or fails to comply
with any of its material representations or warranties or obligations under
the Merger Agreement such that the conditions to the obligations of the
terminating party would be incapable of being satisfied by the Effective Time
of the Merger.
The Company will be obligated to pay CDR a fee of $24,500,000 in the event
the Merger Agreement is terminated in any one of the following manners: (a) by
either the Company or MergerCo if the holders of at least two-thirds of the
Common Stock fail to approve the Merger, (b) by MergerCo if the Company
materially breaches a representation or a covenant, or (c) by MergerCo if a
tender offer for 20% or more of the outstanding Common Stock is commenced and
the Board fails to recommend that Stockholders do not tender their shares in
such offer, provided, that in the case of the foregoing (a), (b) or (c), a
Company Takeover Proposal shall have been previously made public and a Company
Takeover Event shall have occurred within twelve months of such termination.
Such fee shall also be payable if the Merger Agreement is terminated by either
the Company or MergerCo if the Board or the Special Committee withdraws or
modifies in a manner adverse to MergerCo its recommendation. In addition, if
the Merger Agreement is terminated, the Company will be obligated to reimburse
MergerCo for its documented expenses up to $5,000,000. No such fees or
expenses are payable if the Merger Agreement is terminated due to the failure
of MergerCo to fulfill any of its material obligations or because
recapitalization accounting is not applicable to this transaction.
AMENDMENT; WAIVER
The Merger Agreement provides that it may be amended only by written
agreement of both the Company and MergerCo at any time prior to the Effective
Time; provided, however, that, after the Stockholders have approved the Merger
Agreement and the Merger at the Special Meeting, no such amendment is
permitted which materially adversely affects the rights of the Stockholders,
without first obtaining further approval of the Stockholders. The Merger
Agreement further provides that, at any time prior to the Effective Time, the
parties to the Merger Agreement, by action taken or authorized by their
respective Boards of Directors, may, by written agreement signed by the party
to be bound, (i) extend the time for the performance of any of the obligations
or other acts of the other party thereto, (ii) waive any inaccuracies in the
representation and warranties of any other party contained in the Merger
Agreement or in any document delivered pursuant to the Merger Agreement or
(iii) waive compliance by any other party with any of the conditions and
agreements contained in the Merger Agreement.
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DESCRIPTION OF DYNATECH CAPITAL STOCK
The Company is currently authorized by its Restated Articles of Organization
to issue an aggregate of 50,000,000 shares of Common Stock and 100,000 shares
of preferred stock, par value $1.00 per share (the "Preferred Stock"). By the
terms of the Restated Articles of Organization, the Board has the authority to
establish one or more series of preferred stock and, with respect to such
series, to fix the terms of such series. Pursuant to Section 50A of the MBCL,
the directors of the Company are classified as three staggered classes.
COMMON STOCK
The following is a summary of certain of the rights and privileges
pertaining to the Common Stock. For a full description of Common Stock,
reference is made to the Company's Restated Articles of Organization and By-
Laws, as amended, as currently in effect, copies of which are on file with the
Commission, and to the Company's Restated Articles of Organization as the same
is proposed to be in effect if the Merger is approved by the Stockholders and
consummated, a copy of which is attached hereto as Appendix C.
Voting Rights
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of Stockholders. Approval of matters brought before the
Stockholders requires the affirmative vote of a majority of shares present and
voting, except where a greater or lesser voting percentage may otherwise be
required by law.
Dividend Rights
Holders of Common Stock are entitled to participate in dividends as and when
declared by the Board out of funds legally available therefor.
Liquidation Rights
Subject to the rights of creditors and holders of Preferred Stock, if any,
holders of Common Stock are entitled to share ratably in a distribution of
assets of the Company upon any liquidation, dissolution or winding up of the
Company.
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
Pursuant to the Company's Restated Articles of Organization, the Board
created the Series A Junior Participating Cumulative Preferred Stock ("Series
A Preferred Stock") on February 16, 1989. The following is a summary of
certain of the rights and privileges pertaining to the Series A Preferred
Stock. For a full description of Series A Preferred Stock, reference is made
to the Company's Restated Articles of Organization and By-Laws, as amended, as
currently in effect, copies of which are on file with the Commission.
Rights Plan
The Series A Preferred Stock is issuable to holders of Common Stock.
pursuant to a Shareholder Rights Agreement dated February 16, 1989 between the
Company and BankBoston, N.A., as Rights Agent, as amended. No shares of Series
A Preferred Stock have been issued. The Shareholder Rights Agreement has been
amended in connection with the Merger (i) to define the Expiration Date of the
Shareholder Rights Agreement and the rights issued thereunder to be the
earlier of February 16, 1999 and the Effective Time and (ii) to ensure that
neither the execution of the Merger Agreement nor the consummation of the
Merger accelerates the rights of the Stockholders under the Shareholder Rights
Agreement.
Voting Rights
In addition to any voting rights required by law, holders of Series A
Preferred Stock are entitled to 2,000 votes (subject to adjustment) per share
on all matters submitted to a vote of Stockholders. The holders of shares
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of Series A Preferred Stock and the holders of Common Stock shall vote
together as one class. If at any time dividends on Series A Preferred Stock
are in arrears in an amount equal to six (6) quarterly periods (a "Default
Period"), the holders of the Series A Preferred Stock, subject to certain
requirements, shall have the right to elect two (2) members of the Board, such
Directors' terms to expire upon the expiration of the Default Period.
Dividend Rights
Holders of Series A Preferred Stock are entitled to receive, as and when
declared by the Board of the Company out of funds legally available therefor,
quarterly dividends payable in cash on the first day of March, June, September
and December (the "Quarterly Dividend Payment Date"), commencing after the
first issuance of any Series A Preferred Stock. The quarterly dividend shall
consist of the greater of: (a) $60.00 or (b) subject to adjustment, the sum of
2,000 times the aggregate per share amount of all cash dividends and 2,000
times the aggregate per share amount of all non-cash dividends or other
distributions (other than a dividend in the form of Common Stock) declared on
the Common Stock since the immediately preceding Quarterly Dividend Payment
Date, or with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any Series A Preferred Stock. Dividends shall begin to
accrue and be cumulative on outstanding shares of Series A Preferred Stock
from the Quarterly Dividend Payment Date next preceding the date of issue of
such shares.
Liquidation Rights
Upon any voluntary liquidation, dissolution, or winding up of the Company,
no distribution shall be made to the holders of any shares of stock ranking
junior to the Series A Preferred Stock unless, prior to such distribution, the
holders of Series A Preferred Stock shall have received an amount equal to all
accrued and unpaid dividends and distributions thereon, plus an amount equal
to the greater of (i) $200,000 per share or (ii) an aggregate amount per share
(subject to adjustment) equal to 2,000 times the aggregate amount to be
distributed per share to holders of Common Stock.
Rights upon Consolidation or Merger
If the Company enters into any consolidation, merger, or other transaction
in which shares of Common Stock are exchanged for or changed into other stock,
cash, or other property, the shares of Series A Preferred Stock shall at the
same time be exchanged or changed into an amount per share equal to 2,000
(subject to adjustment) times the aggregate amount of stock, securities, cash
or other property into which each share of Common Stock is changed or
exchanged, plus accrued and unpaid dividends.
Rights upon Redemption
The Company may, at any time, with the affirmative vote of a majority of the
Board, redeem any or all of the outstanding shares of Series A Preferred
Stock. The amount per share of Series A Preferred Stock to be redeemed to be
paid upon any such redemption shall be equal to $200,000 plus accrued and
unpaid dividends.
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RECAPITALIZED COMMON STOCK FOLLOWING THE MERGER
Following the Merger, the Company will be authorized by its Restated
Articles of Organization to issue an aggregate of 200,000,000 shares of
Recapitalized Common Stock and 100,000 shares of preferred stock, par value
$1.00 per share. The following is a summary of certain of the rights and
privileges pertaining to the Recapitalized Common Stock. The Recapitalized
Common Stock to be issued in connection with the Merger will be freely
transferable, except that shares issued to or owned by any shareholder who may
be deemed to be an "affiliate" (as defined under the Securities Act and
generally including, without limitation, directors, certain executive officers
and beneficial owners of 10% or more of a class of capital stock) of the
Company for purposes of Rule 145 under the Securities Act will not be
transferable except in compliance with the Securities Act. This Proxy
Statement does not cover sales of Recapitalized Common Stock issued to any
person who may be deemed to be an affiliate of the Company. See "The Merger
and the Merger Agreement--Certain Effects of the Merger." For a full
description of Recapitalized Common Stock, reference is made to the Company's
Restated Articles of Organization as the same is proposed to be in effect
after the Merger is approved by the Stockholders and consummated. Pursuant to
Section 50A of the MBCL, the directors of the Company are classified in three
staggered classes.
Voting Rights
Holders of Recapitalized Common Stock shall have exclusive voting rights
except as otherwise required by law and except to the extent the Board may
determine that a series of preferred stock shall have exclusive voting rights
or shall vote together as a single class with shares of Recapitalized Common
Stock. Holders of Recapitalized Common Stock will be entitled to one vote per
share on all matters submitted to a vote of stockholders. Approval of matters
brought before the stockholders will require the affirmative vote of a
majority of shares present and voting, except where a greater or lesser voting
percentage may otherwise be required by law. Immediately after the Effective
Time, Stockholders who prior to the Merger controlled all of the outstanding
shares of Common Stock will control approximately 7% of the Recapitalized
Common Stock. CDR Fund V will control approximately 92.3% of the outstanding
shares of Recapitalized Stock of the Company, and as a result of its stock
ownership, will control the Company and have the power to elect the directors
of the Company, appoint new management, and approve any action requiring
approval by the holders of the Recapitalized Common Stock of the Company. See
"Risk Factors--Control by CDR Fund V."
Dividend Rights
Holders of Recapitalized Common Stock will be entitled to participate in
dividends as and when declared by the Board of the Company out of funds
legally available therefor.
Liquidation Rights
Subject to the rights of creditors and holders of preferred stock, if any,
holders of Recapitalized Common Stock will be entitled to share ratably in a
distribution of assets of the Company upon any liquidation, dissolution or
winding up of the Company.
87
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
The rights of the holders of Common Stock are presently governed by the
Restated Articles of Organization and the Bylaws of the Company and the MBCL.
In connection with the Merger, holders of Common Stock will receive shares of
Recapitalized Common Stock as part of the Merger Consideration. The rights of
such holders of Recapitalized Common Stock will be governed by the MBCL and
the Amended and Restated Articles of Organization and the Bylaws. The Restated
Articles of Organization of the Company are proposed to be amended and
restated pursuant to the Merger Agreement.
As described above ("Description of Dynatech Capital Stock--Series A Junior
Participating Cumulative Preferred Stock"), each present outstanding share of
Common Stock has an associated Preferred Stock Purchase Right. Such right may
deter some takeover attempts and give the Board the ability, consistent with
its fiduciary duties, to respond to a takeover attempt in what the Board
believes to be the best interests of the Company and its Stockholders.
Pursuant to the Merger Agreement, the Shareholder Rights Plan will be
terminated at the Effective Time. Following the Merger, the Series A Preferred
Stock will continue to be authorized and may be issued at the discretion of
the Board.
The foregoing summary, which does not purport to be a complete statement of
the differences between the Restated Articles of Organization and the Amended
and Restated Articles of Organization, is qualified in its entirety by
reference to the full text of each of such documents, the Shareholder Rights
Agreement and the MBCL. For information as to how such documents may be
obtained, see "Available Information."
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the applicable waiting period has expired or been terminated. On February 3,
1998, the Company and certain stockholders of MergerCo filed Notification and
Report Forms under the HSR Act with the FTC and the Antitrust Division. On
February 23, 1998, the waiting period under the HSR Act was terminated.
88
<PAGE>
MANAGEMENT
The executive officers and directors of the Company, each of whom is a
citizen of the United States, are listed below. The business address for each
executive officer (including Mr. Reno) is as follows: Dynatech Corporation, 3
New England Executive Park, Burlington, MA 01803.
<TABLE>
<CAPTION>
NAME: AGE: POSITION WITH THE COMPANY:
----- ---- --------------------------
<S> <C> <C>
John F. Reno............ 58 Chairman, President and Chief Executive Officer
Allan M. Kline.......... 52 Corporate Vice President, Chief Financial Officer and Treasurer
John R. Peeler.......... 43 Corporate Vice President--Communications Test Business
Samuel W. Tishler....... 59 Corporate Vice President--Corporate Development
John A. Mixon........... 51 Corporate Vice President--Human Resources
Robert W. Woodbury,
Jr. ................... 41 Corporate Vice President--Corporate Controller
Mark V.B. Tremallo...... 41 Corporate Vice President--General Counsel
William R. Cook......... 53 Director
Robert G. Paul.......... 55 Director
L. Dennis Kozlowski..... 50 Director
Peter van Cuylenburg.... 49 Director
O. Gene Gabbard......... 57 Director
Richard K. Lochridge.... 53 Director
</TABLE>
John F. Reno presently serves as Chairman, President and Chief Executive
Officer of the Company. Mr. Reno has served in all three capacities since
August 1996 and as President and Chief Executive Officer since January 1993.
From July 1991 to January 1993, Mr. Reno was President and Chief Operating
Officer. Prior to July 1991, Mr. Reno served as Executive Vice President and
Chief Operating Officer. Mr. Reno is also a director of Millipore Corporation.
Allan M. Kline presently serves as Corporate Vice President, Chief Financial
Officer and Treasurer of the Company. Mr. Kline joined the Company in June
1996. From 1995 to 1996, he served as Senior Vice President, Chief Financial
Officer of CrossComm Corporation, a manufacturer of networking products. From
1994 to 1995, he was President of TAR Acquisition Corp., a private investment
company. From 1989 to 1994, Mr. Kline was also a Director of CrossComm
Corporation. From 1990 to 1994, Mr. Kline was Senior Vice President, Chief
Financial Officer of Cabot Safety Corporation, a subsidiary of Cabot
Corporation. Prior to that, he served at Leggett & Platt, Incorporated and was
a partner with Arthur Young & Company.
John R. Peeler presently serves as Corporate Vice President--Communications
Test Business of the Company. Mr. Peeler has been employed by the Company
since 1980.
Samuel W. Tishler presently serves as Corporate Vice President--Corporate
Development of the Company. Mr. Tishler joined the Company in September 1994.
From 1988 to 1994, he was Vice President of Raytheon Ventures, the venture
capital portfolio of Raytheon Co. From 1977 to 1986, he served as Vice
President of ADL Enterprises, a wholly owned subsidiary of Arthur D. Little,
Inc. From 1970 to 1977, Mr. Tishler was President of Harnessed Energies, Inc.,
a manufacturer of scientific instrumentation.
John A. Mixon presently serves as Corporate Vice President--Human Resources
of the Company. Mr. Mixon has been employed by the Company since 1989.
Robert W. Woodbury, Jr. presently serves as Corporate Vice President--
Corporate Controller of the Company. Mr. Woodbury joined the Company in
January 1996. From 1992 to January 1996, he served as Vice President and
Controller for Kollmorgen Corporation, a manufacturer of motion control
devices. From 1990 to 1992, he was Chief Financial Officer of Kidde Fenwal,
Inc., a manufacturer of fire suppression equipment.
Mark V.B. Tremallo presently serves as Corporate Vice President--General
Counsel of the Company. Mr. Tremallo joined the Company in May 1997. From 1995
to 1997 he served as Vice President, General Counsel
89
<PAGE>
and Secretary of Aearo Corporation (formerly Cabot Safety Corporation), a
manufacturer of industrial safety products. From 1990 to 1995 he was General
Counsel of Cabot Safety Corporation, a subsidiary of Cabot Corporation.
William R. Cook presently serves as a director. Mr. Cook has been President
and Chief Executive Officer of BetzDearborn Inc. of Trevose, Pennsylvania, a
chemical company, since 1993; President and Chief Operating Officer from 1990
to 1993. Mr. Cook is also a director of Betz Laboratories, Inc. and the
Chemical Manufacturers Association. He is a Trustee of the Academy of Natural
Sciences. Mr. Cook's business address is Betz Dearborn, Inc., 4636 Sumerton
Road, Trevose, PA 19053.
Robert G. Paul presently serves as a director. Mr. Paul has been President
and Chief Executive Officer of The Allen Group Inc., manufacturer and marketer
of electronics and other products for the wireless communications industry, in
Beachwood, Ohio since 1991; President and Chief Operating Officer prior to
1991. Mr. Paul is also a director of The Allen Group Inc. Mr. Paul's business
address is Allen Telecom Inc., 25101 Chagrin Boulevard, Beachwood, OH 44122.
L. Dennis Kozlowski presently serves as a director. Mr. Kozlowski has been
Chairman of the Board of Tyco International Ltd. since 1993; Chief Executive
Officer since 1992; President and Chief Operating Officer since 1989. He was
President of Grinnell Corporation, a subsidiary of Tyco International, since
1984. Mr. Kozlowski is also a director of RJR Holdings, Inc., Applied Power
Inc., and Raytheon Company. Mr. Kozlowski's business address is Tyco
International Ltd., One Tyco Park, Exeter, NH 03833.
Peter van Cuylenburg presently serves as a director. Mr. van Cuylenburg has
been the President of the Specialty Storage Products Group of Quantum
Corporation since September 1996. From January 1996 to September 1996, Mr. van
Cuylenburg was a consultant for Xerox Corporation. He was Executive Vice
President of Xerox from July 1993 to December 1995. From April 1992 to May
1993, Mr. van Cuylenburg was President of NeXT Computer, Inc., a manufacturer
of computer systems, and from December 1989 to April 1992, he was a Group
Director for Cable & Wireless plc. Mr. van Cuylenburg is also a director of
Mitel Corporation. Mr. van Cuylenburg's business address is Quantum
Corporation, 500 McCarthy Boulevard, Milpitas, CA 95035.
O. Gene Gabbard presently serves as a director. Mr. Gabbard has been a
consultant and entrepreneur who works with high technology start-up companies
since February 1993. Prior to that, Mr. Gabbard was an Executive Vice
President and Chief Financial Officer of MCI Communications Corporation. Mr.
Gabbard is also a director of PowerTel, Inc., Adtran, Inc., ITC Deltacom, Inc.
and MindSpring Enterprises, Inc. Mr. Gabbard's business address is 102
Marseille Place, Cary, NC 27511.
Richard K. Lochridge presently serves as a director. Mr. Lochridge has been
the President and Chief Executive Officer of Lochridge and Company, Inc.,
Boston, Massachusetts, a management consulting firm since April 1986. Prior to
that, Mr. Lochridge was a Vice President of the Boston Consulting Group.,
Boston, Massachusetts, and a member of the Management Committee of the Boston
Consulting Group, Inc. Mr. Lochridge is also a director of Hannaford Brothers
Food, Inc. and Lowe's Companies, Inc. Mr. Lochridge's business address is
Lochridge & Company, Inc., 420 Boylston Street, Boston, MA 02116.
The directors of the Company, each of whom is a citizen of the United States
after the Merger will be:
<TABLE>
<CAPTION>
NAME: AGE: POSITION WITH THE COMPANY:
----- ---- --------------------------
<S> <C> <C>
John F. Reno............ 58 Chairman, President and Chief Executive Officer
Allan M. Kline.......... 52 Director, Corporate Vice President, Chief Financial Officer and Treasurer
John R. Peeler.......... 43 Director and Corporate Vice President--Communications Test Business
Joseph L. Rice, III..... 66 Director
Brian D. Finn........... 37 Director
Charles P. Pieper....... 51 Director
</TABLE>
90
<PAGE>
Joseph L. Rice, III is Chairman and Chief Executive Officer of CDR. Mr. Rice
is a director and Vice President and Treasurer of MergerCo. After the Merger,
Mr. Rice will serve as a Director of the Company. In addition, Mr. Rice is a
director of Uniroyal Holding, Inc. and Remington Arms Company, Inc.,
corporations in which an investment partnership managed by CDR has an
investment, and serves as a trustee of Williams College and The Manhattan
Institute. He is a graduate of Williams College and Harvard Law School. Mr.
Rice is a limited partner of CDR Associates V Limited Partnership, the general
partner of Fund V ("Associates V"), and is a Director and President of CDR
Investment Associates, Inc., the managing general partner of Associates V. Mr.
Rice's business address is 375 Park Avenue, New York, New York 10022.
Brian D. Finn is a principal of CDR. Mr. Finn is President and a director of
MergerCo and after the Merger will serve as a Director of the Company. Mr.
Finn joined CDR in 1997 from Credit Suisse First Boston where he was Managing
Director and Co-Head of Mergers & Acquisitions. During his 15 years at Credit
Suisse First Boston he advised a large number of corporate clients in various
industries in transactions totaling approximately $250 billion. Mr. Finn
received his B.S. in Economics from The Wharton School of the University of
Pennsylvania. Mr. Finn's business address is 375 Park Avenue, New York, New
York 10022.
Charles P. Pieper is a principal of CDR. After the Merger, Mr. Pieper will
serve as a Director of the Company. Mr. Pieper joined CDR in 1997. He was
President and Chief Executive Officer of GE Lighting Europe. During his 16-
year career at GE, Mr. Pieper was responsible for several key business units,
including serving as President and Chief Executive Officer of: GE Japan,
Korea, Taiwan; GE Medical Systems Asia; as well as GE Lighting Europe. He
joined GE in 1981, from the Boston Consulting Group. Mr. Pieper graduated from
Harvard College and holds an M.B.A from Harvard Business School. Mr. Pieper's
business address is 375 Park Avenue, New York, New York 10022.
Richard J. Schnall is a professional employee of CDR. Mr. Schnall is a
director, Secretary and Assistant Treasurer of MergerCo. Mr. Schnall joined
CDR in 1996. Prior to joining CDR, Mr. Schnall was with McKinsey & Co., and
before that with Donaldson, Lufkin & Jenrette, and before that with Smith
Barney. Mr. Schnall is a graduate of the University of Pennsylvania and the
Harvard Business School. Mr. Schnall's business address is 375 Park Avenue,
New York, New York 10022.
The Merger Agreement provides that the directors of MergerCo at the
Effective Time and/or such other persons as may be designated by MergerCo will
be the directors of the Company following the Merger, and that such persons
will fill the vacancies and/or newly created directorship as so designated.
The present directors of MergerCo are Brian D. Finn, Joseph L. Rice, III and
Richard J. Schnall. It is expected that prior to the Effective Time, Mr.
Schnall will resign and be replaced by Charles P. Pieper. See "MergerCo, CDR
Fund V and CDR."
After the Effective Time, the Board will be subject to change from time to
time. CDR Fund V will have the right to elect the directors of the Board,
except that CDR Fund V has agreed, pursuant to the employment agreements of
certain executive officers, namely, Messrs. Reno, Kline and Peeler, to elect
such officers to serve as members of the Board during the period of their
employment with the Company.
The Merger Agreement also provides that the executive officers of the
Company at the Effective Time will be the executive officers of the Company
following the Merger until such time as may be determined by the Board
following the Merger.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth information concerning
compensation awarded to, earned by, or paid to (i) the Company's Chief
Executive Officer, (ii) the four highest compensated executive officers who
were serving as executive officers at the end of fiscal 1997, and (iii) one
other person who served as an executive officer at the end of fiscal 1997
(collectively, the "Named Executive Officers") for services rendered in all
capacities with respect to the Company's fiscal years ended March 31, 1995,
1996 and 1997:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS(2)
------------------------ ------------
ALL OTHER
NAME AND FISCAL SALARY BONUS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)(3)
------------------ ------ ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John F. Reno................. 1997 456,250 1,032,185 55,100 31,892
Chairman, President and 1996 435,000 372,836 62,000 25,533
Chief Executive Officer 1995 385,000 420,609 144,000 5,571
John R. Peeler............... 1997 244,242 662,314 20,800 18,936
Corporate Vice President-- 1996 225,042 293,128 28,000 15,939
Communications Test Division 1995 213,000 305,790 64,000 5,519
George A. Merrick(4)......... 1997 210,331 242,673 15,000 16,343
Corporate Vice President-- 1996 204,667 196,798 19,000 7,253
Display Business 1995 116,667 75,244 40,000 0
John A. Mixon................ 1997 178,500 270,591 13,800 9,910
Corporate Vice President-- 1996 172,125 94,384 14,000 8,851
Human Resources 1995 159,500 120,684 40,000 5,404
Allan M. Kline(5)............ 1997 158,333 218,918 50,000 3,234
Corporate Vice President,
Chief Financial Officer and
Treasurer
Roger C. Cady(6)............. 1997 216,000 286,508 13,000 11,875
Former Corporate Vice Presi-
dent-- 1996 211,500 99,898 14,000 10,815
Business Development 1995 202,500 145,825 13,000 5,362
Robert H. Hertz(7)........... 1997 221,500 377,747 0 17,190
Former Treasurer and 1996 216,625 133,633 19,000 11,672
Chief Financial Officer 1995 200,000 170,244 30,000 5,571
</TABLE>
- --------
(1) Perquisites and other personal benefits paid to each Named Executive
Officer in each instance aggregated less than 10% of the total annual
salary and bonus set forth in the columns entitled "Salary" and "Bonus"
for each Named Executive Officer, and accordingly, have been omitted from
the table as permitted by the rules of the SEC.
(2) The Company did not grant any restricted stock awards or stock
appreciation rights to any of the Named Executive Officers during the
years shown.
(3) Figures in this column represent the Company's contributions on behalf of
each of the Named Executive Officers under the Company's 401(k) plan. In
Fiscal 1996 and Fiscal 1997, these figures also include the Company's
contributions under a nonqualified deferred compensation plan, which
became effective April 1, 1995.
(4) Mr. Merrick's employment with the Company commenced in September 1994, and
his active employment terminated in July 1997.
(5) Mr. Kline's employment with the Company commenced in June 1996.
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<PAGE>
(6) Mr. Cady's active employment with the Company terminated on April 11,
1997. Mr. Cady will continue to be paid his monthly base salary, a
performance bonus for fiscal 1997 and certain benefits for a period of
twenty-four (24) months; provided that should he accept full-time
employment during this period, his payments from the Company shall either
cease or be reduced depending upon the amount of compensation paid by his
new employer. Mr. Cady's stock options shall continue to vest during this
period.
(7) Mr. Hertz' active employment with the Company terminated on July 31, 1996.
Mr. Hertz will continue to be paid his monthly base salary through July
31, 1998, as well as certain benefits and bonuses for the 1997, 1998 and
(pro-rated) 1999 fiscal years, such bonuses to be calculated in the manner
utilized for the fiscal 1996 bonus. Mr. Hertz' stock options shall
continue to vest during this period, and any such options not vested as of
July 31, 1998 will at that date become vested and exercisable.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options to the Named Executive Officers during the fiscal year ended
March 31, 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------
POTENTIAL REALIZABLE
% OF TOTAL VALUED AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR (%) ($/SH)(1) DATE 5% ($) 10% ($)
---- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John F. Reno............ 55,100 9.1% $33.25 7/30/06 $1,152,180 $2,919,854
John R. Peeler.......... 20,800 3.4% $33.25 7/30/06 $ 434,943 $1,102,232
George A. Merrick....... 15,000 2.5% $33.25 7/30/06 $ 313,661 $ 794,879
John A. Mixon........... 13,800 2.3% $33.25 7/30/06 $ 288,568 $ 731,288
Allan M. Kline.......... 50,000 8.2% $32.00 6/17/06 $1,006,231 $2,549,988
Roger C. Cady........... 13,000 2.1% $33.25 7/30/06 $ 271,839 $ 688,895
Robert H. Hertz......... 0 -- -- -- -- --
</TABLE>
- --------
(1) Options vest annually in five equal installments beginning on the first
anniversary date of grant. Options to purchase an aggregate of 788,861
shares held by such Named Executive Officers will vest immediately prior
to the Effective Time of the Merger. The options in this table expire 10
years after grant.
(2) These columns show the hypothetical value of the options granted at the
end of the option terms if the price of the Common Stock were to
appreciate annually by 5% and 10%, respectively. At April 30, 1997, the
aggregate value of Common Stock held by non-affiliates of the Company was
approximately $555,696,045, based upon 16,712,663 shares outstanding and
held by non-affiliates at a price per share of $33.25. If the Common Stock
appreciates at a compound rate of 5% per year for ten years, the aggregate
value of all shares held by non-affiliates would be approximately
$905,169,657, representing an increase of $349,473,612. Similarly, if the
Common Stock appreciates at a compound rate of 10% per year for ten years,
the aggregate value of all shares held by non-affiliates would be
approximately $1,441,331,905, representing an increase of $885,635,860.
There is no assurance that the stock price will appreciate at the rates
shown.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES.
The following table sets forth certain information regarding stock option
exercises by the Named Executive officers during Fiscal 1997 and stock options
held by the Named Executive Officers at March 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT FY-END(#) AT FY-END(2)($)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE(#) (1)($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John F. Reno............ 35,600 $812,500 102,800/253,500 $1,577,700/$2,926,200
John R. Peeler.......... 17,600 $461,600 38,400/103,200 $ 633,700/$1,290,900
George A. Merrick....... 3,000 $ 85,875 16,800/ 54,200 $ 292,175/$ 619,200
John A. Mixon........... 6,250 $171,922 18,050/ 55,000 $ 239,425/$ 564,450
Allan M. Kline.......... 0 $ 0 0/ 50,000 $ 0/$ 0
Roger C. Cady........... 12,000 $249,175 0/ 48,000 $ 0/$ 793,650
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the Common Stock on the
date of exercise, less the option exercise price.
(2) Calculated on the basis of the fair market value of the Common Stock on
March 31, 1997 ($30.00), less the applicable option exercise price.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SPECIAL TERMINATION AGREEMENTS
Each of the persons named in the compensation table set forth above (other
than Messrs. Cady and Hertz) as well as other key employees is party to a
special termination agreement with the Company. These agreements provide that
if there is a "Change in Control" of the Company (as defined in the
Agreements), and if during the two-year period following such Change in
Control the officer's employment is terminated for any reason other than on
account of death or for "Cause," or the officer terminates his or her own
employment following a demotion, reduction in compensation, or similar event,
the officer will be entitled to receive a lump sum severance payment from the
Company within 15 days after the date of termination and continuance of fringe
benefits. Under the special termination agreements, the amount of the
severance payment is based on an officer's length of service with the Company,
ranging incrementally from one times the officer's average annual cash
compensation to three times the officer's average annual cash compensation
after fifteen years of service.
EMPLOYMENT AND OTHER AGREEMENTS
In connection with the Merger, the Company entered into employment
agreements, effective at the Effective Time, with Messrs. Reno, Kline and
Peeler. The employment agreements will supersede the special termination
agreements currently in effect for each such Named Executive Officer. The
employment agreements generally provide for an initial term of five years,
commencing at the Effective Time, and for compensation and benefit
arrangements that are consistent with the current compensation and benefit
arrangements of each such Named Executive Officer. The employment agreements
further provide for the election of such officers to serve as directors of the
Company during their employment with the Company.
Mr. Reno's employment agreement provides that he, together with his family
trusts, will contribute 40,804 shares of Common Stock to MergerCo in exchange
for 799,758 shares of MergerCo Common Stock, which shares of MergerCo Common
Stock will be converted in the Merger into a like number of shares of
Recapitalized Common Stock. Messrs. Peeler and Kline each acknowledge that his
shares of Common Stock will be cancelled pursuant to the Merger Agreement in
exchange for the Merger Consideration. The employment agreements also provide
that all of the Company Stock Options held by each such Named Executive
Officer (or, in the case of Mr. Peeler, a substantial majority of such
options) will be converted into equivalent options to purchase shares of
Recapitalized Common Stock (the exercise prices of which preserve the economic
value of their current Company Stock Options), all of which, other than 48,439
Company Stock Options held by Mr. Reno, will be fully vested and exercisable.
In addition, the employment agreements: (i) restrict the ability of the Named
Executive Officer to transfer shares of Recapitalized Common Stock
beneficially owned by him (other than certain permitted transfers for estate
planning purposes and transfers not exceeding in the aggregate 25% of the
Recapitalized Common Stock owned, or subject to options held by the Named
Executive Officer at the Effective Time), (ii) grant the Named Executive
Officer certain "tag along" rights which entitle the Named Executive Officer
to participate in a proposed sale of Recapitalized Common Stock by CDR Fund V
prior to a Public Offering (as defined in the employment agreements), (iii)
grant CDR Fund V certain "drag along" rights which entitle CDR Fund V to
require the Named Executive Officer to sell his shares of Recapitalized Common
Stock in a proposed sale of substantially all of CDR Fund V's shares prior to
a Public Offering, and (iv) grant the Company and CDR Fund V the right,
following any termination of a Named Executive Officer's employment prior to a
Public Offering, to purchase the Named Executive Officer's shares of
Recapitalized Common Stock and options to purchase Recapitalized Common Stock.
The employment agreements also provide that, in the event of a termination
of any such Named Executive Officer's employment during the term of the
agreement by the Company other than for "Cause" (as defined in the employment
agreements) or by such Named Executive Officer for "Good Reason" (as so
defined), the Named Executive Officer will be entitled to special termination
benefits consisting of (i) continued payments of his average annual base
salary and average annual bonus until the second anniversary of the date of
termination, (ii) continued coverage under the Company's medical insurance
plan until his 65th birthday and (iii) a pro rata
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<PAGE>
incentive compensation bonus for the portion of the calendar year preceding
such termination. The agreements also contain customary indemnification,
confidentiality, noncompetition and nonsolicitation provisions.
In connection with the Merger, the Company will enter into certain
agreements (the "Mixon Agreements"), effective at the Effective Time, with Mr.
Mixon. The Mixon Agreements will supersede Mr. Mixon's current special
termination agreement. The Mixon Agreements will provide that, in the event of
a termination of his employment prior to the third anniversary of the
Effective Time by the Company other than for "Cause" (as defined in the
employment agreements) or by Mr. Mixon for "Good Reason" (as so defined), he
will be entitled to special termination benefits during a severance period
which will be based on his period of service with the Company. Such severance
benefits will consist of continued payments of his average annual base salary,
average annual bonus and continued coverage under the Company's medical
insurance and other benefit plans. The Mixon Agreements will also contain
customary indemnification, confidentiality, noncompetition and nonsolicitation
provisions.
The Mixon Agreements will also provide that [a substantial majority of] his
Company Stock Options will be converted into equivalent options to purchase
shares of Recapitalized Common Stock (the exercise prices of which preserve
the economic value of his current Company Stock Options), all of which will be
fully vested and exercisable. In addition, his agreements will provide for
certain call options upon termination of employment, and for certain drag-
along and tag-along rights.
Certain other executives of the Company will convert [substantially all of]
their existing Company Stock Options into equivalent options to purchase
shares of Recapitalized Common Stock (the exercise prices of which preserve
the economic value of their current Company Stock Options), all of which will
be fully vested and exercisable and will enter into agreements substantially
similar to the Mixon Agreements.
Prior to the Merger, assuming the vesting and exercise of all Company Stock
Options, Messrs. Reno, Kline, Peeler and Mixon own shares representing 2.39%,
0.36%, 0.99% and %, respectively, of the outstanding Common Stock. Following
the Merger, assuming the conversion of Company Stock Options and the issuance
of the options described above and the vesting and exercise of all outstanding
options, Messrs. Reno, Kline, Peeler and Mixon would own shares representing
%, %, % and %, respectively, of the outstanding Recapitalized Common
Stock.
96
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors was established in 1979
and is comprised solely of independent, non-employee directors. The
Compensation Committee reviews and approves all compensation plans, benefit
programs, and perquisites for executives and other employees. The Compensation
Committee sets the salary of the Chief Executive Officer (the "CEO"), sets
relative relationships between the CEO's salary and the salary of other key
executives, and recommends to the board the compensation program for
directors. The Compensation Committee reviews and approves management
recommendations for stock option grants under the Company's stock option plan.
The Compensation Committee periodically reviews the job performance of the
Chief Executive Officer.
The Company's executive compensation program has been designed to attract
and retain exceptional executives who seek a long-term association with the
Company and who enjoy the challenge of pay for performance. The basic program
consists of two cash compensation components: base salary and a performance
based annual bonus. A third component, ownership-linked stock options, is used
for executive retention, to attract new key people, to recognize
accomplishments under individually tailored business growth programs, and to
align the long-term interests of eligible executives with those of the
Stockholders.
Base salary for the CEO is set annually taking into consideration Company
sales and profit growth, overall job performance, and mid-range pay levels for
CEOs of corporations of similar size. The Compensation Committee utilizes, as
a reference, up-to-date information on compensation practices of other
companies from several independent sources. Base salary is then set so as to
represent no more than 40% of total attainable compensation, the majority of
which is fully contingent upon the achievement of both qualitative and
quantitative levels of performance and stockholder return. Mr. Reno's annual
base salary is at approximately the median base compensation level paid to
chief executive officers of corporations of a similar size and complexity to
the Company.
The Company's pay for performance annual bonus program is considered the
most significant cash-based compensation component. Executives in this program
earn a bonus set by growth in profit and return on assets from either their
particular business unit or the Company as a whole. The plan is formula-based
using weighted average three year (current and two trailing) performance and
is designed so that consistently good individual performance over the three
years provides the executive with the highest payout. The intent is to
encourage investment decisions in undertakings that will provide the best
medium term (three year) financial results. With consistently outstanding
profit growth, an executive can earn a bonus of several times the executive's
annual salary; or, with no profit growth and return on assets below standard,
no bonus at all. For Fiscal 1997, Mr. Reno's bonus was $1,032,185,
representing approximately 217.3% of his current base salary. Mr. Reno's
Fiscal 1997 bonus was earned as a result of current and prior years'
performance, including the Company's completion during fiscal 1997 of its
strategy to dispose of the Company's noncore businesses. This compares to
Fiscal 1996 when his bonus, calculated under the same formula, was $372,836
and represented 82.9% of his base salary.
The third compensation component is an ownership-linked stock option
program, which provides long-term incentives to executives that are aligned
with the interests of the Stockholders. Stock options, granted at market
price, typically vest annually in 20% increments over five years. A longer
term perspective is established by sequential grants. The stock option program
requires specified levels of continued stock ownership for senior executives
based on position and years of participation in the program. The program is
designed to encourage senior executives to be long-term Stockholders and to
have owner concern and care for the Company as a whole. The intent of the
option program is to provide an executive with the opportunity for financial
gain which is larger than cumulative annual bonuses but which takes much
longer to achieve; and which requires meaningful long-term growth in the
market price of the Common Stock for the gain to be realized.
The size and frequency of option grants are based on level of
responsibility, performance of the Company as a whole, the performance of the
executive's business unit, and the executive's personal performance. Annually,
both financial and non-financial specific goals are set aimed at building
future marketplace strengths,
97
<PAGE>
intercompany cooperation and alliances, achieving corporate success factors,
and, when appropriate, restructuring issues. For senior executives, option
grants may be subject to reduction and/or elimination in proportion to the
executive's ownership position relative to ownership levels required by the
plan. Other option grants may be made based upon management's specific
recommendations, and review and approval by the Compensation Committee. Grants
are made from a Compensation Committee defined pool of shares. In accordance
with these goals and policies, in Fiscal 1997, Mr. Reno was granted an option
to purchase 55,100 shares of common sock.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), which became effective on January 1, 1994, generally limits the
Company's ability to deduct compensation expense in excess of $1 million paid
to the Company's Chief Executive Officer or each of the four other most highly
paid executive officers. The Compensation Committee's policy with respect to
Section 162(m) is to make every reasonable effort to insure that compensation
is deductible to the extent permitted while simultaneously providing Company
executives with appropriate rewards for their performance. Toward this end,
the Company's 1994 Stock Option and Incentive Plan has been drafted in a
manner that will qualify stock options as performance-related compensation not
subject to the cap on deductibility imposed by Section 162(m).
Robert G. Paul, Chairman
O. Gene Gabbard
William R. Cook
REPORTS UNDER SECTION 16(A) OF THE EXCHANGE ACT
Based solely on its review of copies of reports filed by persons ("Reporting
Persons") required to file such reports pursuant to Section 16(a) of the
Exchange Act, the Company believes that all filings required to be made by
Reporting Persons of the Company were timely made in accordance with the
requirements of the Exchange Act.
98
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
FOR THE YEAR ENDED MARCH 31, 1997
The graph that follows compares the five-year cumulative total return of the
Common Stock with the S&P 500 Composite Stock Price Index and the S&P High
Tech Composite Index. It assumes an investment of $100 on March 31, 1992 in
the Common Stock and the stocks comprising the S&P 500 and the S&P High Tech
Composite Index and assumes reinvested dividends.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Mar 92 Mar 93 Mar 94 Mar 95 Mar 96 Mar 97
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DYNATECH CORPORATION 100.00 135.443 93.670 159.494 237.975 303.797
- --------------------------------------------------------------------------------
S&P HIGH TECH COMPOSITE 100.00 112.917 131.347 169.815 230.093 303.579
- --------------------------------------------------------------------------------
S&P 500 INDEX 100.00 115.188 116.891 135.059 178.278 213.567
- --------------------------------------------------------------------------------
</TABLE>
99
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 4, 1998, with respect to (i) each
director and each executive officer of the Company named below; (ii) all
current directors and executive officers of the Company as a group; and (iii)
each current beneficial owner of five percent or more of Common Stock.
PRE-MERGER BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OWNERSHIP(1)(2) STOCK(2)
---- --------------- ----------
<S> <C> <C>
Lazard Freres & Co. LLC (3)........................ 1,104,342 6.5%
30 Rockefeller Plaza, New York, NY 10020
John F. Reno (4)................................... 227,674 1.3%
John R. Peeler (5)................................. 91,650 *
John A. Mixon (6).................................. 36,306 *
Allan M. Kline (7)................................. 12,011 *
Robert G. Paul (8)................................. 11,275 *
Richard K. Lochridge (9)........................... 12,450 *
O. Gene Gabbard (10)............................... 7,600 *
William R. Cook (11)............................... 8,600 *
L. Dennis Kozlowski................................ 3,000 *
Peter van Cuylenburg............................... 2,400 *
All current Directors and Executive Officers as a
group (13 persons) (12)........................... 421,096 2.5%
</TABLE>
- --------
* Less than 1% of outstanding Common Stock.
(1) Represents shares of Common Stock beneficially owned on March 4, 1998.
Unless otherwise noted, each person has sole voting and investment power
with respect to such shares.
(2) Based upon 16,862,874 shares of Common Stock outstanding as of March 4,
1998. Common Stock includes all shares of outstanding Common Stock plus,
as required for the purpose of determining beneficial ownership (in
accordance with Rule 13d-3 promulgated pursuant to the Exchange Act), all
shares of Common Stock subject to any right of acquisition by such person,
through exercise or conversion of any security, within 60 days of March 4,
1998.
(3) Based on information provided to the Company by Lazard Freres & Co. LLC.
(4) Includes 2,000 shares owned by Mr. Reno's spouse, 15,000 shares owned by
The John F. Reno 1997 Qualified Annuity Trust for which Mr. Reno has sole
voting power, 15,000 shares owned by The Suzanne M. Reno 1997 Qualified
Annuity Trust, of which Mr. Reno is a Trustee, and 9,050 shares owned by a
relative for which Mr. Reno has power of attorney. Includes 175,820 shares
of Common Stock issuable upon exercise of stock options which are
exercisable within 60 days of March 4, 1998.
(5) Includes 68,160 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(6) Includes 30,360 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(7) Includes 10,000 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(8) Includes 2,000 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(9) Includes 3,000 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(10) Includes 2,000 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
100
<PAGE>
(11) Includes 2,000 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998.
(12) Includes 303,560 shares of Common Stock issuable upon exercise of stock
options which are exercisable within 60 days of March 4, 1998. Excludes
shares which may become vested and exercisable upon a Change in Control
as defined in the stock option plan pursuant to which such options were
granted.
The following table sets forth certain information regarding the ownership
of Recapitalized Common Stock that will be outstanding immediately following
the Merger.
POST-MERGER OWNERSHIP OF OUTSTANDING RECAPITALIZED COMMON STOCK
<TABLE>
<CAPTION>
SHARES OWNED
IMMEDIATELY AFTER MERGER(1)
-------------------------------
NAME NUMBER PERCENT(4)
---- ------------- ---------------
<S> <C> <C>
Clayton, Dubilier & Rice Fund V Limited
Partnership (2)...........................
John F. Reno(3)............................
John R. Peeler.............................
John A. Mixon..............................
Allan M. Kline.............................
All future Directors and Executive Officers
as a group ( persons)...................
</TABLE>
- --------
* Less than 1% of outstanding Recapitalized Common Stock.
(1) Assumes conversion of the Company Stock Options as described under "The
Merger and the Merger Agreement--Effect on Stock Options and Employee
Benefits Matters."
(2) B. Charles Ames, William A. Barbe, Kevin J. Conway, Donald J. Gogel, Leon
J. Hendrix, Jr., Hubbard C. Howe and Joseph L. Rice, III may be deemed to
share beneficial ownership of the shares owned of record by CDR Fund V by
virtue of their status as stockholders of Associates, Inc., the managing
general partner of Associates V, the general partner of CDR Fund V, but
each expressly disclaims such beneficial ownership of the shares owned by
CDR Fund V. The voting stockholders of Associates, Inc. share investment
and voting power with respect to securities owned by CDR Fund V. The
business address for each of them is 1403 Foulk Road, Suite 106,
Wilmington, Delaware 19803.
(3) Includes 294,000 shares owned by The John F. Reno 1997 Qualified Annuity
Trust for which Mr. Reno has sole voting power and 294,000 shares owned by
The Suzanne M. Reno 1997 Qualified Annuity Trust, of which Mr. Reno is a
Trustee. Includes shares of Recapitalized Common Stock issuable upon
exercise of stock options.
(4) Assumes no Stockholders exercise their appraisal rights.
101
<PAGE>
FEES AND EXPENSES
Estimated fees and expenses incurred or to be incurred by the Company in
connection with the Merger and the Financing are approximately as follows:
<TABLE>
<S> <C>
Financing Fees........................................................
Investment banking fees and expenses..................................
Legal fees and expenses...............................................
SEC filing fee........................................................
Accounting fees.......................................................
Printing and mailing fees.............................................
Proxy Solicitation Agent fees.........................................
Exchange Agent fees...................................................
Miscellaneous expenses................................................
Total...............................................................
</TABLE>
Estimated fees and expenses incurred or to be incurred by MergerCo, CDR Fund
V and the CDR/Management Group in connection with the Merger are approximately
as follows:
<TABLE>
<S> <C>
Investment banking fees and expenses..................................
Legal fees and expenses...............................................
Accounting fees.......................................................
Miscellaneous expenses................................................
Total...............................................................
</TABLE>
The above fees and expenses of MergerCo, CDR Fund V and the CDR/Management
Group will be paid by the Surviving Corporation if the Merger is consummated.
See "Special Factors--Interests of Certain Persons." In the event that the
Merger Agreement is terminated under certain circumstances, certain fees and
expenses of the CDR/Management Group will be paid by the Company. See "The
Merger and the Merger Agreement--Termination; Termination Fees."
Pursuant to an engagement letter, dated as of December 9, 1997, between the
Company and Merrill Lynch, the Company has agreed to pay Merrill Lynch a fee
of $5,000,000 for services rendered in connection with the Merger. Of this
amount, $250,000 was payable on the date of the engagement letter, $2,250,000
was payable upon the execution of the Merger Agreement, and $2,500,000 will be
payable if, up to one year after the Board ceases to retain Merrill Lynch, (a)
the Company engages in a business combination with an acquiror or (b) the
Company enters into an agreement with an acquiror which results in a business
combination. The Company has also agreed to reimburse Merrill Lynch for the
expenses reasonably incurred by it in connection with its engagement
(including reasonable counsel fees and disbursements) and to indemnify Merrill
Lynch and its affiliates from and against certain liabilities, including
liabilities under the federal securities laws, arising out of its engagement.
102
<PAGE>
MERGER FINANCINGS
SOURCE AND AMOUNT OF FUNDS
The Company expects that approximately $865.3 million will be required to
(i) finance the payment of the Merger Consideration, (ii) pay Option
Cancellation Payments (as defined herein) and (iii) pay the fees and expenses
expected to be incurred in connection with the Merger. It is contemplated that
at the Effective Time, (a) $292.9 million of bank financing will be borrowed
pursuant to the Senior Secured Credit Facilities with a group of banks led by
Morgan and CSFB and (b) $275 million in gross proceeds will be provided
through the sale by the Company of the Senior Subordinated Notes. At the
Effective Time, the Company will also have at least $20.4 million of cash on-
hand and $277 million of proceeds from the sale of MergerCo Common Stock to
CDR Fund V, which proceeds will become an asset of the Company upon
effectiveness of the Merger.
The following table illustrates the estimated sources and uses of funds
necessary to consummate the Transactions:
<TABLE>
<CAPTION>
SOURCES
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Senior Secured Credit Facilities:
Revolving Credit Facility...... $ 32.9
Tranche A Term Loan............ 50.0
Tranche B Term Loan............ 70.0
Tranche C Term Loan............ 70.0
Tranche D Term Loan............ 70.0
Senior Subordinated Notes........ 275.0
Shareholders' Equity............. 277.0
Cash............................. 20.4
Total Sources.................. $865.3
</TABLE>
- --------
(a) Includes underwriting discounts and commissions, bank and financial
advisory fees, legal and accounting fees and other transaction expenses
described under "Fees and Expenses."
Shortly before the Merger, TTC will be converted into a Delaware limited
liability company. The initial obligors under the Senior Secured Credit
Facilities and the Senior Subordinated Notes will be the Company and a new
direct subsidiary of the Company, TTC Merger Co. LLC ("TTC Merger").
Immediately after the consummation of the Merger, TTC Merger will merge with
TTC, with TTC surviving, and TTC will succeed to and assume all obligations
with respect to the Senior Secured Credit Facilities and the Senior
Subordinated Notes. At the same time, the Company will contribute the shares
of each of its direct subsidiaries to TTC and the Company will be released as
an obligor with respect to the Senior Secured Credit Facilities and the Senior
Subordinated Notes.
<TABLE>
<CAPTION>
USES
(DOLLARS IN MILLIONS)
---------------------
<S> <C>
Purchase of Common Stock........ $803.1
Option Cancellation Payment..... 22.7
Estimated Fees and Expenses(a).. 39.5
Total Uses.................... $865.3
</TABLE>
SENIOR SECURED CREDIT FACILITIES
The credit agreement expected to be entered into in connection with the
Merger will provide for aggregate maximum borrowings by TTC under a $260
million term loan facility (the "Term Loan Facility") and a $110 million
revolving credit facility (the "Revolving Credit Facility").
Pursuant to a letter dated December 19, 1997 addressed to MergerCo., Morgan
and CSFB have committed to provide, or arrange for a syndicate of lenders to
provide, the Company, subject to certain terms and conditions, the Senior
Secured Credit Facilities in an aggregate principal amount not to exceed $370
million ($185 million each). At the consummation of the Merger, (i)
approximately $260 million is expected to be drawn under the Term Loan
Facility described below and (ii) approximately $32.9 million is expected to
be drawn under the Revolving Credit Facility. Undrawn amounts under the
Revolving Credit Facility will be available on a revolving credit basis for
general corporate purposes of TTC and its subsidiaries.
103
<PAGE>
Structure
The Senior Secured Credit Facilities are expected to consist of (a) the Term
Loan Facility which provides for term loans in an aggregate principal amount
of $260 million, consisting of four tranches in principal amounts of $50
million, $70 million, $70 million and $70 million (the "Tranche A Term Loans",
"Tranche B Term Loans", "Tranche C Term Loans" and "Tranche D Term Loans",
respectively) and (b) the Revolving Credit Facility which provides for
revolving loans to TTC (including a $10 million swingline subfacility and a
$25 million letter of credit subfacility) at any time not to exceed $110
million.
Availability
The availability of the Senior Secured Credit Facilities is expected to be
subject to various conditions precedent including, but not limited to, the
Merger being consummated; repayment of the material outstanding other debt of
the Company and its subsidiaries (other than the Senior Subordinated Notes,
intercompany debt and certain other exceptions to be determined) and discharge
of all liens securing such debt; receipt by MergerCo or the Company of at
least $275 million in equity financing; receipt by the Company of $275 million
in gross cash proceeds from an offering of Senior Subordinated Notes; and
continued equity investment in common stock of the Company of at least $20
million by certain Stockholders and members of management; at least $20
million of cash-on-hand being held by the Company at the Effective Time;
receipt of $25 million of proceeds from exercise of existing options for
Common Stock (which proceeds may be provided as a reduction against amounts
payable to option holders as consideration in connection with the Merger);
total cost of consummating the transactions contemplated by the Merger
Agreement not exceeding $920 million and related fees and expenses, estimates
of which shall not exceed $42.5 million; and other conditions precedent
typical of bank loans. Each of Morgan's and CSFB's respective commitment to
provide the Senior Secured Credit Facilities is also subject to, among other
things, the receipt of all material government and third party consents and
approvals. The full amount of the Term Loan Facility will have to be drawn by
the Effective Time.
The Tranche A Term Loans and the Revolving Credit Facility are expected to
mature in 2004. The Tranche B Term Loans are expected to mature in 2005, the
Tranche C Term Loans are expected to mature in 2006 and the Tranche D Term
Loans are expected to mature in 2007. The Company expects that its working
capital needs will require it to obtain new revolving credit facilities at the
time that the Revolving Credit Facility matures, whether by extending,
renewing, replacing or otherwise refinancing the Revolving Credit Facility,
but there can be no assurance of any such extension, renewal, replacement or
refinancing being successfully accomplished.
Amortization of the principal amount of the respective tranches of the Term
Loan Facility is expected to be on an installment schedule, with amortization
of the Tranche A Term Loans over their six-year term and with no substantial
amortization of the Tranche B Term Loans, Tranche C Term Loans and Tranche D
Term Loans until after the sixth, seventh and eighth year, respectively. The
Senior Secured Credit Facilities are expected to be subject to mandatory
prepayment and reduction in an amount equal to, subject to certain exceptions,
(a) 100% of the net proceeds of (i) certain debt offerings by TTC and any of
its subsidiaries, (ii) certain asset sales by TTC or any of its subsidiaries,
and (iii) casualty insurance, condemnation awards or other recoveries received
by the Company or any of its subsidiaries and (b) 50% of the Company's excess
cash flow (as defined under the Senior Secured Credit Facilities), for any
fiscal year.
Security; Guaranty
The obligations of TTC under the Senior Secured Credit Facilities are
expected to be unconditionally and irrevocably guaranteed by the Company and
each existing and each subsequently acquired or created domestic subsidiary of
TTC (other than certain immaterial domestic subsidiaries) (such subsidiaries,
the "Subsidiary Guarantors"). In addition, the Senior Secured Credit
Facilities and the guarantees thereunder are expected to be secured by
security interests in the Company's membership interests in TTC and pledges of
or liens on substantially all the material tangible and intangible assets of
TTC and the Subsidary Guarantors, including pledges of all the capital stock
of each direct or indirect domestic subsidiary of TTC (other than certain
immaterial domestic subsidiaries) and of up to 65% of the capital stock of
each material direct foreign subsidiary of TTC.
104
<PAGE>
Interest
At TTC's election, the interest rates per annum applicable to the loans
under the Senior Secured Credit Facilities are expected to be a fluctuating
rate of interest measured by reference to either (a) an adjusted London inter-
bank offered rate ("LIBOR") plus a borrowing margin or (b) an alternate base
rate ("ABR") (equal to the higher of Morgan's published prime rate and 1/2 of
1% over the Federal Funds effective rate) plus a borrowing margin. The
borrowing margins applicable to the Tranche A Term Loans and loans under the
Revolving Credit Facility are expected to be 1.25% for ABR loans and 2.25% for
LIBOR loans through the six-month anniversary of the Effective Time. The
interest rate borrowing margins applicable to the Tranche B Term Loans, the
Tranche C Term Loans and the Tranche D Term Loans are expected to be 1.50%,
1.75% and 2.00%, respectively, for ABR loans and 2.50%, 2.75% and 3.00%,
respectively, for LIBOR loans through the six-month anniversary of the
Effective Time. The borrowing margins applicable to such term loans and the
loans under the Revolving Credit Facility after such six-month anniversary of
the Effective Time are expected to be determined pursuant to the terms of the
definitive documentation. Amounts under the Senior Secured Credit Facilities
not paid when due bear interest at a default rate equal to 2.00% above the
rate then borne by such borrowings.
Fees
Subject to the consummation of the Merger, TTC is expected to agree to pay
certain fees with respect to the Senior Secured Credit Facilities, including
(i) fees on the unused commitments of the lenders, which fees will initially
accrue at a rate equal to 1/2 of 1% on the undrawn portion of the commitments
in respect of the Revolving Credit Facility; (ii) letter of credit fees on the
aggregate face amount of outstanding letters of credit equal to the then
applicable borrowing margin for LIBOR loans under the Revolving Credit
Facility plus an amount at a rate to be agreed upon but not exceeding 1/4 of
1% per annum fronting bank fee for the letter of credit issuing bank; (iii)
annual administration fees; and (iv) agent, arrangement and other similar
fees.
Covenants
The Senior Secured Credit Facilities are expected to contain a number of
covenants that, among other things, would limit or restrict the ability of TTC
and its subsidiaries to dispose of assets, incur additional indebtedness,
incur guarantee obligations, prepay other indebtedness, make restricted
payments, create liens, make equity or debt investments, make acquisitions,
modify terms of the indenture under which the Senior Subordinated Notes are
issued, engage in mergers or consolidations, change the business conducted by
TTC and its subsidiaries taken as a whole, make capital expenditures, or
engage in certain transactions with affiliates. In addition, under the Senior
Secured Credit Facilities, TTC is expected to be required to comply with a
minimum interest expense coverage ratio and a maximum leverage ratio. The
Tranche B Term Loans, Tranche C Term Loans and Tranche D Term Loans are
expected to be subject to negative covenants which are substantially similar
to those contained in the indenture governing the Senior Subordinated Notes.
See"--Senior Subordinated Notes."
Events of Default
The Senior Secured Credit Facilities are expected to contain customary
events of default including non-payment of principal, interest or fees,
failure to meet covenants, inaccuracy of representations or warranties in any
material respect, cross default to certain other indebtedness, loss of lien
perfection or priority, material judgments and change of ownership or control.
The Tranche B Term Loans, Tranche C Term Loans and Tranche D Term Loans are
expected to be subject to events of default which are substantially similar to
those applicable to those contained in the indenture governing the Senior
Subordinated Notes, with certain exceptions. See"--Senior Subordinated Notes."
Senior Subordinated Notes.
In connection with the Merger, the Company intends to offer and sell up to
approximately $275 million of Senior Subordinated Notes, in a private offering
with registration rights. The following is a summary description
105
<PAGE>
of certain terms of the Senior Subordinated Notes and the indenture under
which such Senior Subordinated Notes are expected to be issued (the
"Indenture"), based on the Company's preliminary discussions with financing
sources and its current expectations.
The Senior Subordinated Notes will mature in 2008, and will bear interest at
a fixed, market rate of interest to be determined at the time of their
offering. With certain exceptions, the Company will not have the right at its
option to redeem the Senior Subordinated Notes during the first five years
that they will be outstanding. Thereafter, the Company may at its option
redeem such Senior Subordinated Notes, in whole or in part, at certain
redemption prices, together with accrued and unpaid interest, if any, to the
date of redemption. These redemption prices will be calculated at a premium
over the principal amount of the Senior Subordinated Notes, which will decline
ratably to zero at the final maturity date. In addition, at any time during
the first three years that the Senior Subordinated Notes are outstanding, the
Company will have the right, subject to certain requirements, to redeem a
portion of the Senior Subordinated Notes with the cash proceeds of certain
equity offerings by the Company. This redemption price will be calculated at a
premium over the principal amount to be redeemed.
The Indenture is expected to provide that, upon the occurrence of certain
events constituting a "Change of Control," the Company will have the right to
redeem the Senior Subordinated Notes. The redemption price will be calculated
at a premium over the principal amount to be redeemed. In addition, upon a
Change of Control, unless the Company has exercised any right to redeem the
Senior Subordinated Notes, the Company will be required to offer to purchase
the Senior Subordinated Notes from their holders at a price equal to 101% of
the principal amount to be purchased. Under certain circumstances, the Company
also will be required to apply certain asset sale proceeds to an offer to
purchase Senior Subordinated Notes, at a price equal to the principal amount
to be purchased.
The Senior Subordinated Notes will be unsecured, general obligations of the
Company, and will be subordinated to all indebtedness under the Senior Credit
Facilities and all other existing and future "Senior Indebtedness" (to be
defined in the Indenture) of the Company. Under certain circumstances, the
Senior Subordinated Notes may be guaranteed, on an unsecured, subordinated
basis, by certain subsidiaries of the Company. In addition, the Indenture will
contain certain negative covenants, including limitations on incurrence of
indebtedness, including guarantees; limitations on dividends, investments and
certain other restricted payments; limitations on restrictions on
distributions and transfers from subsidiaries; limitations on asset sales;
limitations on affiliate transactions; and limitations on certain liens
securing pari passu or subordinated indebtedness. The Indenture will also
contain certain affirmative covenants, including financial and other reporting
requirements, and certain default provisions.
SALE OF MERGERCO COMMON STOCK
In connection with the Merger, MergerCo will sell to CDR Fund V, for
approximately $277 million in cash, 110,790,770 shares of MergerCo Common
Stock. Upon the effectiveness of the Merger, the proceeds of such purchase
will become an asset of the Company. Additionally, immediately prior to the
Effective Time, John F. Reno and two family trusts established by Mr. Reno
will be issued an aggregate amount of approximately 799,758 shares of MergerCo
Common Stock, in exchange for Mr. Reno and such family trusts contributing
40,804 shares of Common Stock to MergerCo. See "Special Factors--Interests of
Certain Persons in the Merger." Each share of MergerCo Common Stock will be
converted into one share of Recapitalized Common Stock in the Merger.
106
<PAGE>
MERGERCO, CDR FUND V AND CDR
MERGERCO
MergerCo is a newly formed Delaware corporation which was organized at the
direction of CDR in connection with the transactions contemplated by the
Merger Agreement. MergerCo is a nonsubstantive transitory merger vehicle which
will be merged out of existence at the Effective Time. Accordingly, it is not
expected to have significant assets or liabilities (other than arising under
the Merger Agreement or in connection with the Merger) or to engage in any
activities (other than those incident to its formation and the Merger). The
authorized capital stock of MergerCo consists of 125,000,000 shares of common
stock, par value $0.01, of which no shares are currently outstanding.
The principal executive offices of MergerCo are c/o Clayton, Dubilier & Rice
Fund V Limited Partnership, 1403 Foulk Road, Suite 106, Wilmington, Delaware
19803.
CDR FUND V
CDR Fund V, a Cayman Islands exempted limited partnership, is a private
investment fund managed by CDR. Amounts contributed to CDR Fund V by its
limited partners are invested at the discretion of the general partner in
equity or equity-related securities of entities formed to effect leveraged
acquisition transactions and in the equity of corporations where the infusion
of capital, coupled with the provision of managerial assistance by CDR, can be
expected to generate returns on investments comparable to returns historically
achieved in leveraged acquisition transactions. The general partner of CDR
Fund V is CD&R Associates V Limited Partnership, a Cayman Islands exempted
limited partnership ("Associates V"). The managing general partner of CD&R
Associates V Limited Partnership is CD&R Investment Associates, Inc., a
Delaware corporation ("Associates Inc.") and the administrative general
partner is CD&R Cayman Investment Associates, Inc., a Cayman Islands exempted
company ("Associates Cayman Inc."). CDR Fund V has committed to purchase
110,790,770 shares of MergerCo Common Stock for approximately $277 million
immediately prior to the Merger. The principal executive offices of CDR Fund
V, Associates V and Associates Inc. are located at 1403 Foulk Road, Suite 106,
Wilmington, DE 19803.
Set forth below are the names, business address, present principal
occupation or employment and five year employment history of each director and
officer of Associates Inc. and each director and shareholder of Associates
Cayman Inc., each of whom is a United States citizen. The business address of
each person listed below is Clayton, Dubilier & Rice, Inc., 375 Park Avenue,
New York, New York 10125. The shareholders of Associates Inc. are principals
of CDR. No shareholder holds more than approximately 18% of the voting stock
of Associates Inc. Associates Cayman Inc. has no officers. It is currently
expected that Associates Inc. will be replaced as managing general partner of
Associates V by a not yet formed Cayman Islands exempted company. The
officers, directors and shareholders of the new managing general partner will
be the existing officers, directors and employees and certain other
professional employees of CDR, including Messrs. Brian D. Finn and Charles P.
Pieper.
Joseph L. Rice, III has been a principal of CDR since 1978 and the Chairman
and Chief Executive Officer of CDR since 1995. Mr. Rice is a Director and the
President of Associates Inc. and is a shareholder and director of Associates
Cayman Inc. Mr. Rice also serves as a Director of RACI Holding, Inc. and
Remington Arms Company, Inc. B. Charles Ames has been a principal of CDR since
1987, and a Director and Vice President of Associates Inc. since 1995. Since
October 1996, Mr. Ames has served as Chairman of Riverwood Holding, Inc., RIC
Holding, Inc. and Riverwood International Corporation. Mr. Ames is also a
Chairman of WESCO Distribution, Inc. and CDW Holding Corporation, and serves
as a member of the board of directors of Lexmark International Group, Inc.,
and Lexmark International, Inc. Donald J. Gogel has been a principal of CDR
since 1989 and the President, Assistant Secretary and Assistant Treasurer of
CDR since 1995. Mr. Gogel is a Director, Vice President, Treasurer and
Secretary of Associates Inc. and is a shareholder and director of Associates
Cayman Inc. Mr. Gogel is also a Director of APS Holding Corporation, A.P.S.
Inc., Lexmark International Group, Inc., and Lexmark International, Inc.
Hubbard C. Howe is a principal of and has been a professional
107
<PAGE>
employee of CDR since 1991. Mr. Howe serves as a Director and Vice President
of Associates Inc. Mr. Howe is also a Director of RACI Holding, Inc.,
Remington Arms Company, Inc., APS Holding Corporation, A.P.S. Inc., Riverwood
Holding, Inc., RIC Holding, Inc. and Riverwood International Corporation.
William A. Barbe is a principal of CDR and has been a professional employee of
CDR since 1992. Mr. Barbe serves as Vice President, Secretary and Treasurer of
CDR and as Assistant Treasurer and Assistant Secretary of Associates Inc. Mr.
Barbe serves as a Director of WESCO Distribution, Inc., CDW Holding
Corporation and Kinko's Inc. Mr. Finn is a principal of CDR and has been a
professional employee of CDR since 1997. Mr. Finn serves as a director of
MergerCo, CDRJ Holding Company and CDR-PC Acquisition, L.L.C. Mr. Pieper is a
principal of CDR and has been a professional employee of CDR since 1997. Mr.
Pieper serves as a Director of Alliant Foodservice, Inc. and CDRF Holding,
Inc.
CDR
CDR is a private investment firm which is organized as a Delaware
corporation. CDR is the manager of a series of investment funds, including CDR
Fund V, formed to invest in equity or equity-related securities of entities
formed to effect leveraged acquisition transactions and in the equity of
corporations where the infusion of capital, coupled with the provision of
managerial assistance by CDR, can be expected to generate returns on
investments comparable to returns historically achieved in leveraged
acquisition transactions. CDR generally assists in structuring, arranging
financing for and negotiating the transactions in which the funds it manages
invest. After the consummation of such transactions, CDR generally provides
management and financial consulting services to the companies in which its
investment funds have invested during the period of such fund's investment.
Such services include helping such companies to establish effective banking,
legal and other business relationships and assisting management in developing
and implementing strategies for improving the operational, marketing and
financial performance of such companies.
Upon or following the Merger, the Company expects to enter into a consulting
agreement with CDR which will provide for (i) an annual fee, initially of
$500,000, for providing such management and financial consulting services to
the Company and its subsidiaries and (ii) reimbursement of out-of-pocket
expenses it incurs after the Merger, for so long as CDR Fund V has an
investment in the Company and its subsidiaries. At or following the Merger, it
is expected that the Company will pay CDR a transaction fee of approximately
$9.2 million, plus reimbursement of out-of-pocket expenses incurred by CDR in
consideration for services provided by CDR in arranging the Merger, arranging
and negotiating the financing for the Merger, and related services. In
addition, it is expected that, upon and following the Merger, the Company will
agree to indemnify CDR and CDR Fund V and certain related parties, subject to
certain limitations, against all claims and liabilities arising out of or in
connection with the Securities Act, the Exchange Act or any other applicable
securities or other laws, in connection with the Merger and related
transactions and the operation of the business following the Merger. It is
also expected that, upon and following the Merger, the Company will enter into
a registration rights agreement with the shareholders of MergerCo which will
provide that such shareholders may require the Company to register their
shares of Recapitalized Common Stock under the Securities Act.
The principal executive offices of CDR is located at 375 Park Avenue, 18th
Floor, New York, New York 10022. The officers of CDR are Messrs. Rice, Gogel
and Barbe. Messrs. Rice and Gogel are the sole shareholders and directors of
CDR. It is currently expected that a number of other professional employees of
CDR, including Messrs. Finn and Pieper, will become shareholders and directors
of CDR.
108
<PAGE>
APPRAISAL RIGHTS
Set forth below is a summary of the procedure which a Dissenting Stockholder
must follow in order to seek to exercise appraisal rights. The information
contained below with respect to Stockholders' appraisal rights is qualified in
its entirety by reference to the applicable sections of the MBCL, which are
attached to this Proxy Statement as Appendix D. A person having a beneficial
interest in shares of the Company that are held of record in the name of
another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect whatever appraisal rights the beneficial owner may have.
THIS DISCUSSION AND APPENDIX D SHOULD BE REVIEWED CAREFULLY BY ANY STOCKHOLDER
WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE
THE RIGHT TO DO SO. FAILURE STRICTLY TO COMPLY WITH ANY OF THE PROCEDURAL
REQUIREMENTS OF SECTIONS 85 THROUGH 98 OF THE MBCL COULD RESULT IN A
TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER SECTIONS 85 THROUGH 98 OF THE
MBCL.
Sections 85 through 98, inclusive, of the MBCL contain provisions which, in
the case of a merger of a corporation organized under Massachusetts law, grant
to Dissenting Stockholders who comply with the procedures specified in these
sections the right to receive payment in cash equal to the "fair value" of
their shares. The principal provisions of the statute are summarized below.
This summary is qualified in its entirety by the provisions of Sections 85
through 98 of the MBCL, which are annexed as Appendix D to this Proxy
Statement and should be carefully reviewed by holders of Common Stock.
To claim appraisal rights, a Dissenting Stockholder must (a) file a written
objection to the Merger and the transactions contemplated thereby prior to the
Stockholder vote, stating that such Dissenting Stockholder intends to demand
payment for his or her shares of Common Stock if the Merger is consummated,
(b) not vote such Dissenting Stockholder's shares in favor of approval of the
Merger and the transactions contemplated thereby, and (c) in the event the
Merger and the transactions contemplated thereby are approved by the
Stockholders and consummated, demand in writing payment for such shares of
Common Stock from the Company within 20 days after the date of mailing to the
Dissenting Stockholder of a notice that the Merger has become effective. Such
notice is to be mailed by registered or certified mail by Merger within 10
days of the Effective Time to all Dissenting Stockholders who have complied
with the requirements described in (a) and (b) above.
A vote against the Merger and the transactions contemplated thereby will not
be deemed to satisfy the requirement that a written objection be filed with
the Company prior to the taking of the stockholder vote on the Merger and the
transactions contemplated thereby. However, a Dissenting Stockholder who has
filed a written objection to the Merger and the transactions contemplated
thereby as provided in (a) above will not be deemed to have waived such
Dissenting Stockholder's appraisal rights by failing to vote against the
Merger and the transactions contemplated thereby so long as such Dissenting
Stockholder does not actually vote in favor of it.
The Company is required to make payment of the fair market value of the
shares of Common Stock owned by each Dissenting Stockholder within 30 days
after the expiration of the 20-day period during which a demand for payment
for shares may be made. If, during such 30-day period, the Company and a
Dissenting Stockholder fail to agree as to the fair value of such Dissenting
Stockholder's shares, either the Company or the Dissenting Stockholder may,
within four months after the expiration of such 30-day period, request a court
determination of the fair value of all shares held by the Dissenting
Stockholders by filing a bill in equity in the Superior Court of Middlesex
County in the Commonwealth of Massachusetts. The cost of such an action, other
than counsel fees and fees of experts retained by a party, will be determined
by the court and apportioned in such a manner as appears to the court to be
equitable; however, all costs of giving notice to the Dissenting Stockholders
entitled to notice of the filing of such an action will be paid by the
Company. In any such action, the fair value of the shares of Common Stock of
the Dissenting Stockholder parties to the action will be determined as of the
day preceding the date that the Merger and the transactions contemplated
thereby were approved by the Stockholders of the Company, and will not include
any element of value arising from the expectation or consummation of the
Merger. The Company has not yet determined whether it will file such a bill in
equity and, therefore, any
109
<PAGE>
Dissenting Stockholder who desires such a bill in equity to be filed is
advised to file it on a timely basis. Unless the Company files such a bill in
equity, the failure by a Dissenting Stockholder to file such a bill could
nullify all written demands for appraisal.
Any Dissenting Stockholder contemplating the exercise of rights summarized
above is urged to consult with counsel. The failure by a Dissenting
Stockholder to follow precisely all of the steps required by Sections 85
through 98 of the MBCL will result in the loss of those rights. Under Section
98 of the MBCL, the enforcement by a Dissenting Stockholder of the right to
receive payment for his or her or its shares of Common Stock is an exclusive
remedy, except that such provisions do not exclude the right of a Dissenting
Stockholder to bring or maintain an appropriate proceeding to obtain relief on
the ground that the Merger will be or is fraudulent or illegal as to him or
her.
OTHER INFORMATION AND STOCKHOLDER PROPOSALS
Management of the Company knows of no other matters that may properly be, or
which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before such Special Meeting, the persons
named in the enclosed Proxy Statement or their substitutes intend to vote the
proxies in accordance with their judgment with respect to such matters, unless
authority to do so is withheld in the proxy.
EXPERTS
The consolidated balance sheets as of March 31, 1997 and 1996 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1997, have been set
forth herein in reliance of the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL COUNSEL
The legality of the shares of Recapitalized Common Stock being issued in the
Merger will be passed upon by Ropes & Gray.
110
<PAGE>
DYNATECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS......................................... F-2
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996 AND 1997............... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 1995, 1996 AND 1997.......................................... F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY......................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
MARCH 31, 1995, 1996 AND 1997.......................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-7
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 AND FOR THE NINE MONTHS ENDED DECEMBER 31,
1996 AND 1997 (UNAUDITED).............................................. F-20
CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND AS OF DE-
CEMBER 31, 1997 (UNAUDITED)............................................ F-21
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)............... F-22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Dynatech Corporation:
We have audited the accompanying consolidated balance sheets of Dynatech
Corporation as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, cash flow and related schedule
of valuation and qualifying accounts for each of the three fiscal years in the
period ended March 31, 1997. 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 our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and schedule referred to above
present fairly, in all material respects, the consolidated financial position
of Dynatech Corporation as of March 31, 1997 and 1996, and the consolidated
results of its operations, and its cash flow, and related schedule of
valuation and qualifying accounts for each of the three fiscal years in the
period ended March 31, 1997 in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
May 1, 1997
F-2
<PAGE>
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
------------------
1997 1996
-------- --------
(AMOUNTS IN
THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 39,782 $ 46,094
Accounts receivable (net of allowance of $1,872 and $957,
respectively)........................................... 70,930 45,367
Inventories:
Raw materials.......................................... 19,423 10,210
Work in process........................................ 11,376 9,381
Finished goods......................................... 9,326 7,325
-------- --------
Total inventory...................................... 40,125 26,916
Other current assets..................................... 11,074 5,981
Net assets of discontinued operations held for sale...... -- 22,824
-------- --------
Total current assets................................. 161,911 147,182
Property and equipment:
Land, building and leasehold improvements................ 4,141 2,468
Machinery and equipment.................................. 47,020 39,441
Furniture and fixtures................................... 9,940 6,680
-------- --------
61,101 48,589
Less accumulated depreciation and amortization........... (37,268) (30,038)
-------- --------
23,833 18,551
Other assets:
Intangible assets, net................................... 43,813 28,406
Other.................................................... 20,478 11,050
-------- --------
$250,035 $205,189
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt...... $ 201 $ 655
Accounts payable......................................... 16,900 9,849
Accrued expenses:
Compensation and benefits.............................. 23,912 16,120
Taxes, other than income taxes......................... 1,850 834
Deferred revenue....................................... 8,876 3,424
Other.................................................. 19,948 9,500
Accrued income taxes..................................... 657 939
Net liabilities of discontinued operations............... 9,173 --
-------- --------
Total current liabilities............................ 81,517 41,321
Long-term debt............................................. 5,226 1,800
Deferred income taxes...................................... 1,025 531
Deferred compensation...................................... 1,581 818
Commitments and contingencies
Shareholders' equity:
Serial preference stock, par value $1 per share;
authorized 100,000 shares; none issued..................
Common stock, par value $0.20 per share; authorized
50,000,000 shares; issued 18,605,689.................... 3,721 3,721
Additional paid-in-capital............................... 9,887 12,102
Retained earnings........................................ 195,506 165,657
Cumulative translation adjustments....................... (1,247) 342
Treasury stock, at cost; 1,812,287 and 1,020,605 shares,
respectively............................................ (47,181) (21,103)
-------- --------
Total shareholders' equity........................... 160,686 160,719
-------- --------
$250,035 $205,189
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales............................................ $362,412 $293,042 $243,078
Cost of sales.................................... 137,254 111,436 91,412
-------- -------- --------
Gross profit..................................... 225,158 181,606 151,666
Selling, general and administrative expense...... 114,479 98,487 86,329
Product development expense...................... 43,267 36,456 30,585
Nonrecurring charges............................. 27,776 16,852 --
Amortization of intangibles...................... 6,793 5,136 5,106
-------- -------- --------
Operating income............................... 32,843 24,675 29,646
Interest expense................................. (828) (1,723) (3,919)
Interest income.................................. 2,785 2,181 1,518
Other income, net................................ 634 975 850
-------- -------- --------
Income from continuing operations before income
taxes........................................... 35,434 26,108 28,095
Provision for income taxes....................... 17,585 10,394 11,671
-------- -------- --------
Income from continuing operations................ 17,849 15,714 16,424
Discontinued operations:
Gain on sale of businesses net of income tax
provision of $22,692.......................... 12,000 -- --
Operating income (loss), net of income tax
provision (benefit) of $(1,009) in 1996 and
$2,948 in 1995................................ -- (1,471) 3,763
-------- -------- --------
Income before extraordinary charge............... 29,849 14,243 20,187
Extraordinary charge for early retirement of
debt, net of income tax benefit of $738......... -- -- (1,019)
-------- -------- --------
Net income....................................... $ 29,849 $ 14,243 $ 19,168
======== ======== ========
Income (loss) per common share--basic:
Continuing operations.......................... $ 1.04 $ 0.87 $ 0.92
Discontinued operations........................ 0.70 (0.08) 0.21
Extraordinary charge........................... -- -- (0.06)
-------- -------- --------
$ 1.74 $ 0.79 $ 1.07
======== ======== ========
Income (loss) per common share--diluted:
Continuing operations.......................... $ 0.99 $ 0.86 $ 0.91
Discontinued operations........................ 0.67 (0.08) 0.21
Extraordinary charge........................... -- -- (0.06)
-------- -------- --------
$ 1.66 $ 0.78 $ 1.07
======== ======== ========
Weighted average number of shares:
Basic.......................................... 17,200 17,969 17,846
Diluted........................................ 18,028 18,315 17,971
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------- ADDITIONAL CUMULATIVE TOTAL
COMMON TREASURY COMMON PAID-IN RETAINED TRANSLATION TREASURY SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS ADJUSTMENTS STOCK EQUITY
-------- --------- ------ ---------- -------- ----------- -------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1994................... 12,387 (3,090) $2,477 $9,414 $185,957 $ (757) $(54,448) $142,643
Net income--1995........ 19,168 19,168
Purchases of treasury
stock.................. (597) (12,576) (12,576)
Translation
adjustments............ 3,416 3,416
Exercise of stock
options and other
issuances.............. 90 (215) 1,790 1,575
Retirement of treasury
stock.................. (3,085) 3,085 (617) (53,711) 54,328 --
Two-for-one stock
split.................. 9,303 (521) 1,861 (1,861) --
Tax benefit from
exercise of stock
options................ 94 94
-------- -------- ------ ------ -------- ------- -------- --------
Balance, March 31,
1995................... 18,605 (1,033) 3,721 7,432 151,414 2,659 (10,906) 154,320
Net income--1996........ 14,243 14,243
Purchases of treasury
stock.................. (800) (19,367) (19,367)
Translation
adjustments............ (2,317) (2,317)
Exercise of stock
options and other
issuances.............. 812 3,688 9,170 12,858
Tax benefit from
exercise of stock
options................ 982 982
-------- -------- ------ ------ -------- ------- -------- --------
Balance, March 31,
1996................... 18,605 (1,021) 3,721 12,102 165,657 342 (21,103) 160,719
Net income--1997........ 29,849 29,849
Purchases of treasury
stock.................. (1,021) (32,695) (32,695)
Translation
adjustments............ (1,589) (1,589)
Exercise of stock
options and other
issuances.............. 230 (3,533) 6,617 3,084
Tax benefit from
exercise of stock
options................ 1,318 1,318
-------- -------- ------ ------ -------- ------- -------- --------
Balance, March 31,
1997................... 18,605 (1,812) $3,721 $9,887 $195,506 $(1,247) $(47,181) $160,686
======== ======== ====== ====== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income from operations..................... $ 29,849 $ 15,714 $ 20,187
Adjustment for noncash items included in net
income:
Gain on discontinued operations.............. (12,000) -- --
Depreciation................................. 9,280 8,279 14,112
Amortization of intangibles.................. 6,793 5,136 8,471
Purchased incomplete technology.............. 20,627 16,852 --
Intangibles writeoff......................... 7,149 -- --
Change in net deferred income tax asset...... (7,617) (5,173) 7,187
Other........................................ 797 457 283
Changes in operating assets and liabilities,
net of effects of purchase acquisitions and
divestitures.................................. 4,926 (19,556) (16,013)
-------- -------- --------
Net cash provided by continuing operations..... 59,804 21,709 34,227
Net cash provided by (used in) discontinued
operations.................................... (52,313) 699 (3,250)
-------- -------- --------
Net cash flows provided by operating
activities.................................... 7,491 22,408 30,977
Investing activities:
Purchases of property and equipment............ (10,176) (8,198) (16,426)
Disposals of property and equipment............ 214 308 437
Proceeds from sales of businesses.............. 96,682 48,901 27,140
Businesses acquired in purchase transactions,
net of cash acquired.......................... (68,930) (17,143) (1,056)
Other.......................................... 290 5,597 (1,095)
-------- -------- --------
Net cash flows provided by continuing
operations.................................... 18,080 29,465 9,000
Net cash flows used in discontinued
operations.................................... (951) (5,487) --
-------- -------- --------
Net cash flows provided by investing
activities.................................... 17,129 23,978 9,000
Financing activities:
Net borrowings (repayment) of debt............. 2,522 (9,400) (24,125)
Premium paid on early retirement of debt....... -- -- (1,757)
Proceeds from exercise of stock options........ 1,693 952 1,461
Purchases of treasury stock.................... (32,695) (19,367) (12,576)
-------- -------- --------
Net cash flows used in financing activities.... (28,480) (27,815) (36,997)
Effect of exchange rate on cash.................. (2,452) (272) 1,714
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... (6,312) 18,299 4,694
Cash and cash equivalents at beginning of year... 46,094 27,795 23,101
-------- -------- --------
Cash and cash equivalents at end of year......... $ 39,782 $ 46,094 $ 27,795
======== ======== ========
Change in operating asset and liability
components:
Increase in trade accounts receivable.......... $(15,833) $(10,287) $ (1,215)
Decrease (increase) in inventories............. 450 (2,007) (2,820)
Decrease (increase) in other current assets.... (3,341) (297) 180
Increase (decrease) in accounts payable........ 2,059 (402) 129
Increase (decrease) in accrued expenses and
taxes......................................... 21,591 (6,563) (12,287)
-------- -------- --------
Change in operating assets and liabilities..... $ 4,926 $(19,556) $(16,013)
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest..................................... $ 889 $ 1,739 $ 4,833
Income taxes................................. 42,340 13,798 7,672
Tax benefit of disqualifying dispositions of
stock options................................. 1,318 982 94
Noncash proceeds from sale of businesses:
Promissory notes............................. 7,200 -- 5,200
Preferred stock.............................. 6,300 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Dynatech is a global communications equipment company focused on network
technology solutions. Its products address communications test, industrial
computing and communications, and visual communications applications.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and its wholly owned domestic and international subsidiaries.
Intercompany accounts and transactions have been eliminated. Certain prior
year amounts have been reclassified to conform with the current year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Significant estimates in these financial statements include
allowances for accounts receivable, net realizable value of inventories, tax
valuation reserves, nonrecurring charges, and the carrying values of
discontinued operations. Actual results could differ from those estimates.
Foreign Exchange Contracts
The Company enters into a limited number of forward exchange contracts to
manage the exposure to foreign currency fluctuations associated with certain
monetary assets and liabilities denominated in a foreign currency, as well as
certain highly anticipated cash flows or firm commitments. Gains and losses on
these contracts will be included in income when the operating revenue and
expenses related to the underlying transactions are recognized. Amounts as of
March 31, 1997 and 1996 were $0 and $1.0 million, respectively.
Cash Equivalents
Cash equivalents represent highly liquid debt instruments with a maturity of
three months or less at the time of purchase. Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
primarily of short-term deposits in Europe with major banks, with investment
levels and debt ratings set to limit exposure from any one institution.
Inventories
Inventories are stated at the lower of cost (first-in, first-out or average)
or market.
Property and Equipment
Property and equipment are carried at cost and include expenditures for
major improvements which substantially increase their useful life. Repairs and
maintenance are expensed as incurred. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss
is recognized in the Statement of Operations.
Depreciation and Amortization
For financial reporting purposes, depreciation of machinery, equipment, and
fixtures is computed on the straight-line method over estimated useful lives
of two to ten years. Leasehold improvements are amortized over
F-7
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the lesser of the lives of the leases or estimated useful lives of the
improvements. Buildings are depreciated on the straight-line method over the
estimated useful lives, up to 30 years.
Intangible Assets
Intangible assets acquired primarily from business acquisitions are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Product technology.......................................... $17,042 $18,259
Excess of cost over net assets acquired..................... 30,861 17,424
Other intangible assets..................................... 13,307 13,307
------- -------
61,210 48,990
Less accumulated amortization............................... 17,397 20,584
------- -------
Total..................................................... $43,813 $28,406
======= =======
</TABLE>
At each balance sheet date, management evaluates whether there has been a
permanent impairment in the value of goodwill or intangible assets by
assessing the carrying value of the asset against the anticipated future cash
flows from related operating activities. Factors which management considers in
performing this assessment include current operating results, trends, product
transition, distribution channels and prospects, and, in addition, demand,
competition, and other economic factors. In March 1997, the Company recorded a
$7.1 million charge related to product and distribution transitions.
Product technology and other intangible assets are amortized on a straight-
line basis primarily over three to ten years, but in no event longer than
their expected useful lives. Amortization expense related to product
technology was $3.1 million in fiscal 1997, $1.9 million in fiscal 1996, and
$1.6 million in fiscal 1995, and was excluded from cost of sales. Excess of
cost over fair market value of net assets is being amortized on a straight-
line basis primarily over 15 years.
Foreign Currency Translation
The functional currency for the majority of the Company's foreign operations
is the applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using the
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains
or losses resulting from such translation are included in shareholders'
equity. Gains or losses resulting from foreign currency transactions are
included in other income.
Treasury Stock
The Company delivers treasury shares upon the exercise of stock options and
the difference between the cost of the treasury shares, on a last-in, first-
out basis, and the exercise price of the option is reflected in additional
paid-in capital. Repurchase of treasury stock is accounted for by using the
cost method of accounting.
Revenue Recognition
Sales of products and services are recorded based on product shipment and
performance of service, respectively. Proceeds received in advance of product
shipment or performance of service are recorded as deferred revenue in the
balance sheet.
F-8
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research, Development and Warranty Costs
Costs relating to research, development and product warranty are expensed as
incurred. Warranty costs are not material to the consolidated financial
statements. Internal software development costs that qualify for
capitalization are not material.
Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Income (Earnings) Per Share
The Company adopted Statement of Financial Accounting Standards No.
128,"Earnings per Share," which modifies the calculation of earnings per share
("EPS"). The Standard replaces the previous presentation of primary and fully
diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
includes the dilution of common stock equivalents, and is computed similarly
to fully diluted EPS pursuant to APB Opinion 15. All prior periods presented
have been restated to reflect this adoption.
<TABLE>
<CAPTION>
YEARS ENDED MARCH
31,
----------------------
1997 1996 1995
------ ------ ------
(AMOUNTS IN
THOUSANDS EXCEPT PER
SHARE DATE)
<S> <C> <C> <C>
BASIC:
Common Stock Outstanding
beginning of year...... 17,594 17,577 18,594
Weighted Avg. Treasury
Stock issued during the
period................. 144 461 56
Weighted Avg. Treasury
Stock repurchased...... (538) (69) (804)
------ ------ ------
Weighted average common
stock outstanding end
of year................ 17,200 17,969 17,846
====== ====== ======
DILUTIVE
Common Stock Outstanding
beginning of year...... 17,594 17,577 18,594
Weighted Avg. Treasury
Stock issued during the
period................. 144 461 56
Weighted Avg. common
stock equivalents...... 828 346 125
Weighted Avg. Treasury
Stock repurchased...... (538) (69) (804)
------ ------ ------
Weighted average common
stock outstanding end
of year................ 18,028 18,315 17,971
====== ====== ======
</TABLE>
F-9
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Pronouncements
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" which establishes standards for the reporting
and display of comprehensive income in general-purpose financial statements.
The Company has not assessed the impact of this Standard on its financial
statements.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the reporting of operating segments in the financial
statements. The Company has not assessed the impact of this Standard on its
financial statements.
DISCONTINUED OPERATIONS
A formal plan to discontinue noncore businesses was approved by the Board of
Directors on February 7, 1996. In fiscal 1997, the Company essentially
completed its disposition of the noncore businesses. Proceeds from these sales
in fiscal 1997 and 1996 were $96.7 million in cash, $7.2 million in long-term
promissory notes, and Class A Preferred Stock of CMSI Holdings Corporation
with an aggregate liquidation preference of $6.3 million, and $48.9 million in
cash, respectively, which resulted in an aftertax gain of $12 million or $0.67
per share.
In connection with the sale of one of its subsidiaries, the Company agreed
to guarantee the purchaser's payment obligations under a credit facility
obtained by the purchaser. The guaranteed portion of the principal amount of
this facility is $3 million for a period of seven years from the closing date
and is to be used to fund the purchaser's capital expenditures.
During fiscal 1995 the Corporation sold ten businesses for approximately
$27.1 million in cash and long-term promissory notes approximating $5.2
million. The provision for losses was reflected in fiscal 1994 and did not
affect fiscal 1995 earnings.
Summary operating results of noncore businesses prior to the formal plan to
discontinue operations are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Sales.................................................... $182,040 $256,452
Gross margin............................................. 79,571 109,563
Income (loss) before taxes............................... (3,460) 6,711
Net income (loss)........................................ $ (1,471) $ 3,763
</TABLE>
In connection with the disposition of these subsidiaries, the Company has
net liabilities of $9.2 million. Included in this amount are liabilities
related to severance, legal, lease runout, taxes and warranty accruals offset
by noncash investments.
NOTES PAYABLE
Short-term notes payable, primarily in Europe, were $0 and $640 thousand at
March 31, 1997 and 1996, respectively. The maximum amount of short-term
borrowings, domestic and foreign, at any month end during the year was $330
thousand in fiscal 1997, $1.1 million in 1996, and $4.4 million in 1995. The
average amount of short-term borrowings during the year was $186 thousand in
fiscal 1997, $886 thousand in 1996, and $3.4 million in 1995. The approximate
weighted average interest rate was 6.2% in fiscal 1997, 6.6% in 1996, and 6.2%
in 1995 (calculated by dividing interest expense for such borrowings by the
weighted average borrowings outstanding during the year).
At year end, the Company had short-term unused lines of credit aggregating
$500 thousand for continuing foreign operations.
F-10
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
Long-term debt is summarized below:
<TABLE>
<CAPTION>
1997 1996
------ ------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Revolving credit and term bank loan........................... $5,000 $1,800
Capital lease obligations..................................... 427 15
Total debt.................................................. 5,427 1,815
Less current portion.......................................... 201 15
------ ------
Long-term debt................................................ $5,226 $1,800
====== ======
</TABLE>
The Company has an unsecured $70 million revolving credit and term bank loan
agreement ("Old Agreement") with several commercial banks which allows for
borrowings in various currencies and provides for interest to be payable at
the Eurocurrency rate, or base or money market rate quoted by the lender,
depending upon the currencies borrowed and the form of borrowing. Under the
terms of the Old Agreement, the principal borrowings may convert to a term
loan payable in eight equal quarterly installments beginning September 30,
1998.
In April 1997, the Company entered into a new $150 million revolving credit
and term loan agreement ("New Agreement") with several commercial banks. This
agreement allows for borrowings using various instruments with interest
payable at Eurodollar rate plus an applicable margin based on the Company's
leverage ratio or base rate, quoted by the lender. Under the terms of the New
Agreement, the principal borrowings may convert to a term loan payable in
eight equal quarterly installments beginning June 30, 2000.
The approximate weighted average cost of capital was 8.6% in both fiscal
1997 and in 1996. The composite rate at March 31, 1997 was 6.9% and at March
31, 1996 was 5.9%.
The terms of the Old Agreement require, among other things, specific levels
of current ratio, fixed-charge coverage ratio, and minimum tangible net worth.
The Company was in compliance with all covenants at March 31, 1997.
Aggregate maturities of the above term debt for each of the years in the
five-year period ending March 31, 2002 are as follows: $201 thousand, $2.0
million, $2.6 million, $625 thousand, and $0, respectively.
F-11
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The components of income (loss) from continuing operations before taxes are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Domestic........................................... $38,486 $26,657 $27,771
Foreign............................................ (3,052) (549) 324
------- ------- -------
Total............................................ $35,434 $26,108 $28,095
======= ======= =======
</TABLE>
The components of the provision (benefit) for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Provision for income taxes:
United States................................... $11,729 $ 9,092 $ 9,552
Foreign......................................... 234 (428) 127
State........................................... 5,622 1,730 1,992
------- ------- -------
Total......................................... $17,585 $10,394 $11,671
======= ======= =======
Components of income tax provision:
Current:
Federal......................................... $19,297 $15,247 $10,609
Foreign......................................... 234 (423) 112
State........................................... 5,671 3,072 2,130
------- ------- -------
Total current................................. 25,202 17,896 12,851
Deferred:
Federal......................................... (7,568) (6,155) (1,057)
Foreign......................................... -- (5) 15
State........................................... (49) (1,342) (138)
------- ------- -------
Total deferred................................ (7,617) (7,502) (1,180)
------- ------- -------
Total....................................... $17,585 $10,394 $11,671
======= ======= =======
</TABLE>
F-12
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliations between U.S. federal statutory rate and the effective tax
rate of continuing operations follow:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate....................... 35.0% 35.0% 35.0%
Increases (reductions) to statutory tax rate resulting
from:
Foreign income subject to tax at a rate different than
U.S. rate............................................. 0.6 (0.5) 0.4
State income taxes, net of federal income tax benefit.. 3.8 4.3 4.4
Research and development tax credit.................... (0.7) (0.7) (0.9)
Nondeductible amortization............................. 1.1 1.9 1.8
Other.................................................. 0.7 (0.2) 0.8
---- ---- ----
Effective tax rate before certain charges............ 40.5% 39.8% 41.5%
Nondeductible purchased research and development....... 8.2 -- --
Nondeductible writeoff of intangibles.................. 0.9 -- --
---- ---- ----
Total effective tax rate on continuing operations.... 49.6% 39.8% 41.5%
==== ==== ====
</TABLE>
The principal components of the deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
1997 1996
------- -------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 3,291 $ 1,993
Vacation benefits........................................ 792 632
Bad debt allowance....................................... 364 196
Inventory capitalization................................. 363 347
Depreciation and amortization............................ 16,767 9,283
Other deferred assets.................................... 4,434 3,979
------- -------
26,011 16,430
Valuation allowance........................................ (3,291) (1,993)
------- -------
22,720 14,437
Deferred tax liabilities:
Depreciation and amortization............................ 1,025 531
Other deferred liabilities............................... 1,491 1,319
------- -------
2,516 1,850
------- -------
Net deferred tax assets.................................... $20,204 $12,587
======= =======
</TABLE>
Deferred income taxes are included in the following balance sheet accounts:
<TABLE>
<CAPTION>
1997 1996
------- -------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Other current assets....................................... $ 3,846 $ 3,495
Other assets............................................... 17,383 9,623
Deferred income taxes...................................... (1,025) (531)
------- -------
$20,204 $12,587
======= =======
</TABLE>
The valuation allowance applies to state and foreign net operating loss
carryforwards that may not be fully utilized by the Company. The increase in
the valuation reserve relates to the increase in these net loss carryforwards.
F-13
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE RETIREMENT PLANS
The Company has a trusteed employee retirement profit sharing and 401(k)
savings plan for eligible U.S. employees. The Plan does not provide for stated
benefits upon retirement. Employees outside the U.S. are covered principally
by government-sponsored plans that are deferred contribution plans. The cost
of Company-provided plans is not material.
The Company has a nonqualified deferred compensation plan which permits
certain key employees to annually elect to defer a portion of their
compensation for their retirement. The amount of compensation deferred and
related investment earnings will be placed in an irrevocable rabbi trust and
presented as assets in the Company's balance sheet because they will be
available to the general creditors of the Company in the event of the
Company's insolvency. An offsetting liability will reflect amounts due
employees.
Corporate contributions to employee retirement plans were $4.0 million in
fiscal 1997, $3.3 million in 1996, and $3.0 million in 1995.
STOCK COMPENSATION AND PURCHASE PLANS
The Company maintains two Stock Option plans in which common stock is
available for grant to key employees at prices not less than fair market value
(110% of fair market value for employees holding more than 10% of the
outstanding common stock) at the date of grant determined by the Board of
Directors. Incentive or nonqualified options may be issued under the plans and
are exercisable from one to ten years after grant.
On July 30, 1996 the shareholders adopted the 1996 Employee Stock Purchase
Plan under which eligible employees may contribute up to 10% of their salary
toward semi-annual purchases of the Company's capital stock. The plan
commenced October 1, 1996 and each plan period lasts six months beginning on
October 1 and April 1 of each year. The purchase price for each share of stock
is the lesser of 85% of the market price on the first or last day of the plan
period. A total of 600,000 shares are available for purchase under the plan
and 36,536 shares were reserved for issuance at March 31, 1997.
A summary of activity in the Company's option plans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
1997 EXERCISE 1996 EXERCISE 1995 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares under option,
beginning of year...... 1,684,580 $15.17 1,296,720 $12.09 705,806 $10.55
Options granted (at an
exercise price of $32
to $54 in 1997, $15.50
to $20.25 in 1996,
$10.375 to $17.50 in
1995).................. 607,550 34.51 673,700 20.01 927,000 12.68
Options exercised....... (255,690) 11.99 (126,500) 10.26 (193,920) 9.90
Options canceled........ (265,880) 17.82 (159,340) 14.44 (142,166) 9.67
--------- --------- ---------
Shares under option, end
of year................ 1,770,560 21.87 1,684,580 15.17 1,296,720 12.09
========= ========= =========
Shares exercisable...... 300,710 $14.77 261,780 $11.52 163,936 $10.01
</TABLE>
Options available for future grants under the plans were 1.0 million, 1.4
million and 0 at March 31, 1997, 1996, and 1995, respectively.
The fair market value of each option granted during 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: expected volatility of
F-14
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
39%, risk-free interest rate of 6.59% in 1997 and 6.27% in 1996, expected life
of 7 years and a dividend yield of 0%. The Weighted Average Fair Value of
options granted, net of forfeitures, during the years 1997 and 1996 was $18.68
and $10.68, respectively.
The following table summarizes information about currently outstanding and
exercisable stock options at March 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE WEIGHTED
OPTIONS REMAINING AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICE AT 3/31/97 LIFE PRICE
----------------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 9.00 - $15.00............................. 533,590 5.86 $10.93
$15.00 - $30.00............................. 638,120 8.12 19.13
$30.00 - $54.00............................. 598,850 9.35 34.53
---------
Total..................................... 1,770,560 7.86 $21.87
=========
</TABLE>
The Company applies ABP Opinion 25 and related interpretations in accounting
for its plans. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS123"), which is effective for transactions
entered into for fiscal years that begin after December 15, 1995. FAS123
established a fair value-based method of accounting for stock-based
compensation plans. In adopting FAS123 in 1997, the Company elected footnote
disclosure only. Accordingly, no compensation cost has been recognized for its
stock option plans and its stock purchase plan under FAS123. Had compensation
cost for the Company's stock-based compensation plans been recorded based on
the fair value of awards or grant date consistent with the method prescribed
by FAS123, the Company's net income and earnings per share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
AMOUNTS IN THOUSANDS EXCEPT PER SHARE
<S> <C> <C> <C> <C>
Net income....................... $29,849 $27,863 $14,243 $13,464
Net income per share
Basic........................... $ 1.74 $ 1.62 $ 0.79 $ 0.75
Diluted......................... $ 1.66 $ 1.55 $ 0.78 $ 0.74
</TABLE>
The effect of applying FAS123 in this pro forma disclosure is not indicative
of future amounts. FAS123 does not apply to awards prior to 1995; and
additional awards in future years are anticipated.
SHAREHOLDER RIGHTS PLAN
In February 1989 the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend distribution of one Right for each outstanding share
of Dynatech's common stock. The Plan was amended in March 1990. Each Right,
when exercisable, entitles a qualifying shareholder to buy shares of Dynatech
junior participating cumulative preferred stock. The Rights would only become
exercisable (i) ten days after a person has become the beneficial owner of 15%
or more of Dynatech's common stock, or (ii) ten business days after the
commencement of a tender offer that would result in the ownership of 15% or
more of the common stock, or (iii) upon determination by the Board of
Directors that a person who holds 10% or more of Dynatech's common stock
intends to, or is likely to, act in certain specified manners adverse to the
interests of Dynatech and its shareholders.
F-15
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the event Dynatech is acquired and is not the surviving corporation in a
merger, or in the event of the acquisition of 50% or more of the assets or
earning power of Dynatech, each Right would then entitle the qualified holder
to purchase, at the then-current exercise price, shares of common stock of the
acquiring company having a value of twice the exercise price of the Right.
Furthermore, if any party were to acquire 15% or more of Dynatech's common
stock or were determined to be an adverse person as described above, qualified
holders of the Rights would be entitled to acquire shares of Dynatech junior
participating cumulative preferred stock having a value of twice the then-
current exercise price. At the option of the Board of Directors, all of the
Rights could be exchanged into shares of common or preferred stock.
The Rights will expire February 16, 1999, but may be redeemed at the option
of the Board for $0.02 per Right until one of the triggering events described
above has occurred. The Rights do not entitle holders to any voting power or
other shareholder benefits. Issuance of the Rights does not dilute the
shareholders' ownership of Dynatech, nor does it affect reported earnings per
share.
COMMITMENTS AND CONTINGENCIES
The Company has operating leases from continuing operations covering plant,
office facilities, and equipment which expire at various dates through 2006.
Future minimum annual fixed rentals required during the years ending in fiscal
1998 through 2002 under noncancelable operating leases having an original term
of more than one year are $7.5 million, $7.0 million, $5.7 million, $4.6
million, and $4.1 million, respectively. The aggregate obligation subsequent
to fiscal 2002 is $9.5 million. Rent expense from continuing operations was
approximately $6.2 million, $5.7 million, and $4.4 million in fiscal 1997,
1996, and 1995, respectively.
The Company is a party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined with
certainty, the Company's counsel and management are of the opinion that the
final outcome should not have a material adverse effect on the Company's
operations or financial position.
NONRECURRING CHARGES
The components of nonrecurring expenses include the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Incomplete technology........................................ $20,627 $16,852
Intangible writeoffs......................................... 7,149 --
------- -------
Total...................................................... $27,776 $16,852
======= =======
</TABLE>
ACQUISITIONS
1997 Acquisitions
In March of 1997, the Company acquired the net assets of Advent Design, Inc.
("Advent") for $3.5 million in cash. Advent designs and manufactures high-
performance microprocessor-based systems for the computer, medical and
communications markets. This acquisition generated $3.4 million of goodwill
which is being amortized over 15 years. In order to ensure that key personnel
would remain with Advent, a targeted three-year earnout incentive of $1
million per year of the Company's stock, was negotiated but not included in
the purchase price. The earnout is based on, among other things, a positive
operating income.
F-16
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On December 31, 1996, the Company acquired substantially all of the assets
and assumed certain liabilities of Itronix Corporation ("Itronix") located in
Spokane, Washington, for $65.4 million in cash. Approximately $40 million of
the purchase price was borrowed pursuant to the terms of the Company's
revolving credit and term loan agreement in effect at that time. A significant
portion of the borrowed funds was repaid during the fourth quarter. Itronix is
a manufacturer of mobile computing and communications devices, including
ruggedized laptop computers, which increase the efficiency of large, mission-
critical service groups.
Incident to this acquisition was the purchase of incomplete technology
activities which resulted in a one-time pretax charge of $20.6 million or
($0.74) per share. This purchased incomplete technology that had not reached
technological feasibility and which had no alternative future use was valued
using a risk adjusted cash flow model, both in 1997 and 1996, under which
future cash flows associated with in-process research and development were
discounted considering risks and uncertainties related to the viability of
potential changes in future target markets and to the completion of the
products that will ultimately be marketed by the Company. Acquired complete
technology of $8.4 million is being amortized over two to seven years, and
goodwill of $17.9 million is being amortized over 15 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the acquisition had
occurred at the beginning of fiscal 1996, with pro forma adjustments to give
effect to amortization of goodwill and intangibles, interest expense on
acquisition debt, and certain other adjustments, together with related income
tax effects.
<TABLE>
<CAPTION>
1997 1996
-------- --------
AMOUNTS IN
THOUSANDS
<S> <C> <C>
Revenue................................................... $426,234 $355,886
Net income from continuing operations..................... $ 31,569 $ 14,609
Income per share:
Basic................................................... $ 1.84 $ 0.81
Diluted................................................. $ 1.74 $ 0.80
Weighted average shares:
Basic................................................... 17,200 17,969
Diluted................................................. 18,028 18,315
</TABLE>
1996 Acquisitions
On February 20, 1996 Dynatech acquired the stock of Synergistic Solutions,
Inc. ("SSI"), of Atlanta, Georgia, for approximately $5.5 million. Acquired
technology and other intangible assets of approximately $4.3 million are being
amortized over four to seven years. The investment in excess of fair market
value of assets purchased of $964 thousand is being amortized over 15 years.
On September 1, 1995 Dynatech acquired substantially all of the business and
assets of Tele-Path Industries, Inc. ("TPI"), of Salem, Virginia, for $23.6
million. Approximately $12.6 million was cash, including a $2.6 million
contingent adjustment for the stock price, and 688,096 shares of the Company's
common stock at $19.91 per share. Acquired complete technology and other
intangible assets of approximately $6.7 million are being amortized over five
years.
Incident to this acquisition, the Company purchased the incomplete
technology activities of TPI, resulting in a one-time pretax charge in the
second quarter of approximately $16.9 million, or ($0.56) per share. This
purchased incomplete technology that had not reached technological feasibility
and which had no alternative future use was valued using a risk adjusted cash
flow model.
Acquisitions, both in fiscal 1997 and 1996, were recorded using the purchase
method of accounting.
F-17
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEGMENT INFORMATION AND GEOGRAPHIC AREAS
The Corporation operates predominantly in a single industry as a global
communications equipment manufacturer focused on network technology solutions.
Its products address communications test, industrial computing and
communications, and visual communications applications. Dynatech is a multi-
national corporation with continuing operations outside the United States
consisting of distribution and sales offices in Germany, England, France and
the Pacific Rim.
Net income in fiscal 1997, 1996, and 1995 included currency gains (losses)
of approximately $99,300, $(90,300), and $292,900, respectively. Information
by geographic areas for the years ended March 31, 1997, 1996, and 1995 is
summarized below:
<TABLE>
<CAPTION>
OUTSIDE U.S.
(PRINCIPALLY
UNITED STATES EUROPE) COMBINED
------------- ------------ --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Sales to unaffiliated customers
1997................................. $340,603* $21,809 $362,412
1996................................. 268,830* 24,212 293,042
1995................................. 220,907* 22,171 243,078
Income (loss) before taxes from
continuing operations
1997................................. $ 38,486 $(3,052) $ 35,434
1996................................. 26,657 (549) 26,108
1995................................. 27,771 324 28,095
Identifiable assets at
March 31, 1997....................... $216,243 $33,792 $250,035
March 31, 1996....................... 186,186 19,003 205,189
March 31, 1995....................... 177,317 79,075 256,392
</TABLE>
--------
* Includes export sales of $48,959, $35,844 and $33,929 in 1997, 1996 and
1995, respectively.
F-18
<PAGE>
DYNATECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF OPERATIONS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
1997
FIRST SECOND THIRD FOURTH YEAR
------- ------- ------- -------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
Sales.................... $81,122 $85,725 $92,007 $103,558 $362,412
Gross profit............. 50,874 54,463 58,485 61,336 225,158
Income (loss) from
continuing operations... 8,412 9,277 (2,896)(b) 3,056(c) 17,849
Net income (loss)........ 8,412 9,277 (2,896) 15,056(d) 29,849
Income (loss) per share
cont ops:
Basic................... $ 0.48 $ 0.54 $ (0.16) $ 0.18 $ 1.04
Diluted................. 0.46 0.52 (0.16) 0.17 0.99
Income (loss) per share:
Basic................... $ 0.48 $ 0.54 $ (0.16) $ 0.88 $ 1.74
Diluted................. 0.46 0.52 (0.16) 0.84 1.66
Market Share Price(a)--
High.................... $ 35.00 $ 46.88 $ 58.00 $ 54.50
--Low........... 23.00 30.75 40.50 28.00
<CAPTION>
1996
FIRST SECOND THIRD FOURTH YEAR
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales.................... $66,758 $68,513 $80,540 $ 77,231 $293,042
Gross profit............. 41,509 42,251 49,917 47,929 181,606
Income (loss) from
continuing operations... 5,047 (4,883)(b) 8,141 7,409 15,714
Net income (loss)........ 4,625 (4,993) 7,807 6,804 14,243
Income (loss) per share
from continuing
operations
Basic................... $ 0.29 $ (0.27) $ 0.44 $ 0.41 $ 0.87
Diluted................. 0.28 (0.27) 0.44 0.40 0.86
Net Income (loss) per
share:
Basic................... $ 0.26 $ (0.27) $ 0.43 $ 0.38 $ 0.79
Diluted................. 0.26 (0.27) 0.42 0.37 0.78
Market Share Price(a)--
High.................... $ 20.50 $ 22.25 $ 17.50 $ 25.50
--Low........... 14.75 15.13 14.00 16.00
</TABLE>
- --------
(a) Dynatech common shares are traded on the New York Stock Exchange. Prior to
January 28, 1997, Dynatech common shares were traded on the Nasdaq
National Market. No cash dividends were paid on Dynatech common shares.
(b) Includes charge for purchased incomplete technology of $20.6 million or
($0.74) per share in 1997 on a diluted basis, $16.9 million or ($0.56) per
share on a diluted basis in 1996.
(c) Includes a charge of $7.1 million or ($0.36) per share on a diluted basis
relating to the writeoff of certain intangible assets.
(d) Includes gain on discontinued operations of $12 million or $0.67 per share
on a diluted basis.
F-19
<PAGE>
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales................................ $ 133,138 $ 92,007 $353,314 $258,854
Cost of sales........................ 58,265 33,522 151,714 95,032
--------- -------- -------- --------
Gross profit......................... 74,873 58,485 201,600 163,822
Selling, general & administrative ex-
pense............................... 38,512 30,084 103,549 84,031
Product development expense.......... 14,484 10,163 41,563 30,065
Purchased incomplete technology...... -- 20,627 -- 20,627
Amortization of intangibles.......... 1,445 1,558 4,327 4,683
--------- -------- -------- --------
Operating income (loss).............. 20,432 (3,947) 52,161 24,416
Interest expense..................... (164) (86) (945) (365)
Interest income...................... 886 942 2,250 2,166
Other income......................... 244 130 694 552
--------- -------- -------- --------
Income (loss) before income taxes.... 21,398 (2,961) 54,160 26,769
Income tax provision (benefit)....... 8,663 (65) 21,933 11,976
--------- -------- -------- --------
Net income (loss).................... $ 12,735 $ (2,896) $ 32,227 $ 14,793
========= ======== ======== ========
Income (loss) per common share:
Basic.............................. $ 0.76 $ (0.16) $ 1.92 $ 0.86
Diluted............................ 0.73 (0.16) 1.85 0.82
========= ======== ======== ========
Weighted average number of common
shares:
Basic.............................. 16,817 17,074 16,826 17,257
Diluted............................ 17,395 17,074 17,413 18,124
========= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEC. 31 MARCH 31
1997 1997
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 47,569 $ 39,782
Accounts receivable, net................................ 73,330 70,930
Inventories:
Raw materials......................................... 21,076 19,423
Work in process....................................... 11,970 11,376
Finished goods........................................ 12,362 9,326
-------- --------
Total inventory..................................... 45,408 40,125
Other current assets.................................... 11,870 11,074
-------- --------
Total current assets................................ 178,177 161,911
Property and equipment, net............................... 25,178 23,833
Intangible assets, net.................................... 39,496 43,813
Other assets.............................................. 20,926 20,478
-------- --------
$263,777 $250,035
======== ========
LIABILITIES & EQUITY
Current Liabilities:
Current portion of long-term debt....................... $ 171 $ 201
Accounts payable........................................ 20,345 16,900
Accrued expenses:
Compensation and benefits............................. 21,923 23,912
Deferred revenue...................................... 9,954 8,876
Other accrued expenses................................ 14,009 22,455
Net liabilities of discontinued operations.............. 2,793 9,173
-------- --------
Total current liabilities........................... 69,195 81,517
Long-term debt............................................ 109 5,226
Deferred income taxes..................................... 989 1,025
Deferred compensation..................................... 2,112 1,581
SHAREHOLDERS' EQUITY
Common stock.............................................. 3,721 3,721
Additional paid-in capital................................ 7,169 9,887
Retained earnings......................................... 227,733 195,506
Cumulative translation adjustment......................... (1,938) (1,247)
Treasury stock............................................ (45,313) (47,181)
-------- --------
Total shareholders' equity.......................... 191,372 160,686
-------- --------
$263,777 $250,035
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income............................................... $ 32,227 $ 14,793
Adjustments for noncash items included in net income:
Depreciation........................................... 8,926 6,710
Amortization of intangibles............................ 4,327 4,683
Purchased incomplete technology........................ -- 20,627
Increase (decrease) in deferred taxes.................. (36) 938
Other.................................................. 192 390
Change in operating assets and liabilities............... (8,155) (29,451)
-------- --------
Net cash flows provided by continuing operations......... 37,481 18,690
Net cash flows provided by (used in) discontinued
operations.............................................. (12,680) 3,761
-------- --------
Net cash flows provided by operating activities............ 24,801 22,451
Investing activities:
Purchases of property and equipment...................... (11,026) (6,676)
Proceeds from sale of businesses......................... -- 44,467
Business acquired in purchase transaction................ -- (65,751)
Other.................................................... 85 (70)
-------- --------
Net cash flows used in continuing operations............. (10,941) (28,030)
Net cash flows provided by (used in) discontinued
operations.............................................. 507 (911)
-------- --------
Net cash flows used in investing activities................ (10,434) (28,941)
Financing activities:
Debt borrowings (repayments)............................. (5,000) 39,750
Repayment of notes payable............................... -- (390)
Proceeds from exercise of stock options.................. 4,332 1,382
Purchases of treasury stock.............................. (5,330) (22,334)
-------- --------
Net cash flows provided by (used in) financing activities.. (5,998) 18,408
Effect of exchange rate on cash............................ (582) (1,231)
-------- --------
Increase in cash and cash equivalents...................... 7,787 10,687
Cash and cash equivalents at beginning of year............. 39,782 46,094
-------- --------
Cash and cash equivalents at end of period................. $ 47,569 $ 56,781
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
DYNATECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1997, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for the
interim periods ended December 31, 1997 and 1996 include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
these financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data was
derived from audited financial statements, but does not include disclosures
required by generally accepted accounting principles. It is suggested that
these condensed statements be read in conjunction with the Company's most
recent Form 10-K and Annual Report as of March 31, 1997.
This Proxy Statement contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, commercialization and
technological difficulties, capacity and supply constraints or difficulties,
availability of capital resources, general business and economic conditions,
the effect of the Company's accounting policies, and other risks detailed in
the Company's most recent Form 10-K, Annual Report as of March 31, 1997 and
this Proxy Statement.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Significant estimates in these financial statements include
allowances for accounts receivable, net realizable value of inventories, and
tax valuation reserves. Actual results could differ from those estimates.
B.NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" which establishes standards for the reporting
and display of comprehensive income in general-purpose financial statements.
The Company has not assessed the impact of this Standard on its financial
statements.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the reporting of operating segments in the financial
statements. The Company has not assessed the impact of this Standard on its
financial statements.
F-23
<PAGE>
DYNATECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
C.PRO FORMA FINANCIAL INFORMATION
On December 31, 1996 the Company acquired substantially all of the assets
and assumed certain liabilities of Itronix Corporation ("Itronix") located in
Spokane, Washington, for $65.4 million in cash. As a percentage of sales, the
gross margin and selling, general and administrative expenses of Itronix are
lower than the consolidated financial results of the Company prior to the
acquisition. Therefore, the pro forma income statements below reflect a lower
gross margin and selling, general and administrative expenses as a percent of
consolidated sales. Hence, in order to demonstrate the Company's operating
performance versus the previous years, the following unaudited pro forma
information presents a summary of consolidated results of operations of the
Company as if the acquisition had occurred at the beginning of fiscal 1997,
with pro forma adjustments to give effect to amortization of goodwill and
intangibles, interest expense on acquisition debt, and certain other
adjustments, together with related income tax effects. (In thousands except
per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue............................... $114,284 $322,676
Cost of sales......................... 48,726 140,854
-------- --------
Gross profit.......................... 65,558 181,822
Selling, general and Administrative
expense.............................. 32,694 91,784
Product development exp............... 12,150 35,313
Amortization.......................... 2,244 6,743
-------- --------
Operating income...................... 18,470 47,982
Interest expense...................... (923) (2,821)
Interest income....................... 942 2,166
Other income.......................... 129 551
-------- --------
Income before taxes................... 18,618 47,878
-------- --------
Net income............................ $ 11,131 $ 28,513
======== ========
Income per share:
Basic............................... $ 0.65 $ 1.65
Diluted............................. $ 0.61 $ 1.57
Weighted average shares:
Basic............................... 17,074 17,257
Diluted............................. 18,161 18,124
</TABLE>
F-24
<PAGE>
DYNATECH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D.INCOME (EARNINGS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," which modifies the calculation of earnings per share
("EPS"). The Standard replaces the previous presentation of primary and fully
diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
includes the dilution of common stock equivalents, and is computed similarly
to fully diluted EPS pursuant to APB Opinion 15. All prior periods presented
have been restated to reflect this adoption. (In thousands except per share
data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income........................ $ 12,735 $ (2,896) $ 32,227 $ 14,793
========= ========= ======== ========
BASIC:
Common stock outstanding, net of
treasury stock, beginning of
period........................... 16,757 17,062 16,803 17,594
Weighted average treasury stock
issued during the period......... 60 12 103 123
Weighted average treasury stock
repurchased...................... -- -- (80) (460)
--------- --------- -------- --------
Weighted average common stock
outstanding, net of treasury
stock, end of period............. 16,817 17,074 16,826 17,257
========= ========= ======== ========
Income per common share........... $ 0.76 $ (0.16) $ 1.92 $ 0.86
========= ========= ======== ========
DILUTIVE:
Common stock outstanding, net of
treasury stock, beginning of
period........................... 16,757 17,062 16,803 17,594
Weighted average treasury stock
issued during the period......... 60 12 103 123
Weighted average common stock
equivalents(a)................... 578 -- 587 867
Weighted average treasury stock
repurchased...................... -- -- (80) (460)
--------- --------- -------- --------
Weighted average common stock
outstanding, net of treasury
stock, end of period............. 17,395 17,074 17,413 18,124
========= ========= ======== ========
Income per common share........... $ 0.73 $ (0.16) $ 1.85 $ 0.82
========= ========= ======== ========
</TABLE>
--------
(a) not included if antidilutive
F-25
<PAGE>
Appendix A
Conformed Copy
=====================================================================
AGREEMENT AND PLAN OF MERGER
by and among
DYNATECH CORPORATION
and
CDRD MERGER CORPORATION
dated as of
December 20, 1997
=====================================================================
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
<S> <C>
THE MERGER......................................................................................1
Section 1.1 The Merger.........................................................................1
Section 1.2 Effective Time.....................................................................2
Section 1.3 Closing............................................................................2
Section 1.4 Articles of Organization; By-Laws..................................................2
Section 1.5 Directors and Officers of the Surviving Corporation................................3
ARTICLE II
CONVERSION OF SHARES............................................................................3
Section 2.1 Conversion of Capital Stock........................................................3
Section 2.2 Exchange of Certificates...........................................................4
Section 2.3 Options............................................................................7
Section 2.4 Dissenting Shares..................................................................8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................8
Section 3.1 Organization.......................................................................8
Section 3.2 Capitalization.....................................................................9
Section 3.3 Authorization; Validity of Agreement..............................................11
Section 3.4 No Violations; Consents and Approvals.............................................12
Section 3.5 SEC Reports and Financial Statements..............................................13
Section 3.6 Absence of Certain Changes........................................................14
Section 3.7 Absence of Undisclosed Liabilities................................................14
Section 3.8 Information in Form S-4; Proxy Statement; Exchange Act Schedules..................14
Section 3.9 Employee Benefit Plans; ERISA.....................................................15
Section 3.10 Litigation; Compliance with Law..................................................17
Section 3.11 Intellectual Property............................................................18
Section 3.12 Contracts........................................................................19
Section 3.13 Taxes............................................................................22
Section 3.14 Environmental Matters............................................................23
Section 3.15 Required Vote by Company Stockholders............................................24
Section 3.16 Brokers..........................................................................24
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 3.17 Opinions of Financial Advisors...................................................24
Section 3.18 Assets...........................................................................25
Section 3.19 Real Property....................................................................26
Section 3.20 Insurance........................................................................26
Section 3.21 Labor Matters, etc...............................................................27
Section 3.22 Disclosure.......................................................................27
Section 3.23 Rights Agreement.................................................................27
Section 3.24 Takeover Statutes................................................................27
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGERCO.....................................................28
Section 4.1 Organization......................................................................28
Section 4.2 Authorization; Validity of Agreement.............................................28
Section 4.3 Consents and Approvals; No Violations.............................................29
Section 4.4 Information in Form S-4; Proxy Statement; Exchange Act Schedules..................30
Section 4.5 Financing.........................................................................31
Section 4.6 Beneficial Ownership of Shares....................................................31
Section 4.7 Brokers...........................................................................31
Section 4.8 Formation of MergerCo; No Prior Activities........................................31
ARTICLE V
COVENANTS......................................................................................32
Section 5.1 Interim Operations of the Company.................................................32
Section 5.2 No Solicitation by the Company....................................................35
Section 5.3 Access to Information.............................................................37
Section 5.4 Further Action; Reasonable Best Efforts...........................................38
Section 5.5 Employee Benefits.................................................................39
Section 5.6 Shareholders' Meeting; Form S-4; Proxy Statement..................................39
Section 5.7 Notification of Certain Matters..................................................42
Section 5.8 Directors' and Officers' Insurance and Indemnification............................42
Section 5.9 Publicity.........................................................................43
Section 5.10 Shareholder Litigation...........................................................43
Section 5.11 Recapitalization.................................................................43
Section 5.12 Conveyance Taxes.................................................................44
Section 5.13 Delisting........................................................................44
Section 5.14 Affiliates.......................................................................44
Section 5.15 Letter as to Solvency............................................................45
ARTICLE VI
CONDITIONS.....................................................................................45
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.1 Conditions to Each Party's Obligation To Effect the Merger........................45
Section 6.2 Conditions to the Obligation of the Company to Effect the Merger..................46
Section 6.3 Conditions to Obligations of MergerCo to Effect the Merger........................46
ARTICLE VII
TERMINATION....................................................................................47
Section 7.1 Termination.......................................................................47
Section 7.2 Effect of Termination.............................................................49
ARTICLE VIII
MISCELLANEOUS..................................................................................49
Section 8.1 Fees and Expenses.................................................................50
Section 8.2 Amendment; Waiver.................................................................51
Section 8.3 Survival..........................................................................52
Section 8.4 Notices...........................................................................52
Section 8.5 Interpretation....................................................................54
Section 8.6 Headings; Schedules...............................................................54
Section 8.7 Counterparts......................................................................54
Section 8.8 Entire Agreement; Third Party Beneficiaries.......................................54
Section 8.9 Severability......................................................................55
Section 8.10 Governing Law....................................................................55
Section 8.11 Assignment.......................................................................55
</TABLE>
iii
<PAGE>
SCHEDULES
Schedule 2.3 Company Stock Options
Schedule 3.1(a) Active Subsidiaries
Schedule 3.1(b) Other Subsidiaries
Schedule 3.2 (a) Capitalization
Schedule 3.2 (b) Ownership
Schedule 3.4 (a) No Violations; Consents and
Approvals
Schedule 3.4 (b) Filings by the Company
Schedule 3.6 Absence of Certain Changes
Schedule 3.7 Absence of Undisclosed Liabilities
Schedule 3.9 (b) Employee Benefit Plans
Schedule 3.9 (c) Severance Benefits
Schedule 3.10 (a) Litigation
Schedule 3.10 (b) Compliance with Laws
Schedule 3.11 Intellectual Property
Schedule 3.12 (a) Contracts
Schedule 3.13 Taxes
Schedule 3.14 (c) Environmental Matters
Schedule 3.18 Assets
Schedule 3.18 (b) Certain Liens
Schedule 3.19 (a)(i) Formerly Owned Property
Schedule 3.19 (a)(ii) Leases
Schedule 3.20 Insurance Policies
Schedule 4.3 (b) Filings by the MergerCo
Schedule 5.1 (iii) Interim Operations
EXHIBITS
Exhibit A Form of Articles of Organization of
Surviving Corporation
Exhibit B Form of Affiliates' Letter
iv
<PAGE>
TABLE OF DEFINED TERMS
----------------------
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acquiring Person 3.23
Active Subsidiaries 3.1
Aggregate Merger Consideration Value 2.3
Antitrust Division 5.4(b)
Articles of Merger 1.2
Articles of Organization 3.1
Assets 3.18(a)
Balance Sheet 3.7
Certificate of Merger 1.2
Certificates 2.2(b)
CD&R 8.1(b)
Closing 1.3
Closing Date 1.3
Code 3.9(b)(v)
Collective Bargaining Agreement 3.21
Company Recitals
Company Acquisition Agreement 5.2(b)
Company Authorized Preferred Stock 3.2(a)
Company Common Stock 2.1
Company Intellectual Property 3.11
Company Real Property 3.19
Company Reports 3.5
Company SEC Documents 3.5
Company Stock Options 2.3
Company Stock Plans 2.3
Company Superior Proposal 5.2(b)
Company Takeover Event 5.2(a)
Company Takeover Proposal 5.2(a)
Competition Laws 5.4(b)
Confidentiality Agreement 5.3
Consolidated Group 3.13(b)
Delaware Secretary of State 1.2
DGCL Recitals
Disclosure Schedule 3.1
Dissenting Shares 2.4
Distribution Date 3.23
Effective Time 1.2
Employee Stock Purchase Plan 2.3
Environmental Law 3.14(d)
ERISA Plans 3.9(a)
Evaluation Material 5.3
Exchange Act 3.4(b)
Exchange Agent 2.2(a)
Expenses 8.1(b)
Fee 8.1(b)
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Form S-4 3.8(a)
Formerly Owned Property 3.19
FTC 5.4(b)
Fund Recitals
GAAP 3.5
Governmental Entity 3.4(b)
Hazardous Materials 3.14(d)
HSR Act 5.4(b
Identified Contracts 3.12(a)
Indemnified Parties 5.8(a)
Intellectual Property 3.11
Laws 3.4(a)
Leased Real Property 3.19
Leases 3.19
Lien 3.18
Litigation 3.10(a)
Massachusetts Secretary of State 1.2
Material Adverse Effect 3.1
Material Contracts 3.12(a)
MBCL Recitals
Merger 1.1
MergerCo Recitals
MergerCo Common Stock 2.1
MergerCo Disclosure Schedule 4.3(b)
Merger Consideration 2.1(a)
New Certificates 2.2(a)
NYSE 2.3
Owned Real Property 3.19
Permits 3.10(c)
Permitted Liens 3.18(b)
Person 3.1
Plans 3.9(a)
Proxy Statement 5.6(a)
Real Property 3.19
Recapitalized Common Stock 2.1(b)
Registration Period 5.13
Representative 5.3
Rights 2.1
Rights Agreement 3.2(a)
Schedule 13E-3 5.6(c)
SEC 3.5
Securities Act 3.4(b)
September 30, 1997 Balance Sheet 3.18
Shares 2.1
Special Committee Recitals
Special Meeting 5.6(a)
Stock Acquisition Date 3.23
Subsidiary 3.1
Surviving Corporation 1.1
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Takeover Statute 3.24
Tax Returns 3.13(b)
Taxes 3.13(b)
Triggering Event 3.23
</TABLE>
vii
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER, dated as of December 20, 1997, by and
between Dynatech Corporation a Massachusetts corporation (the "Company"), and
CDRD Merger Corporation, a Delaware corporation ("MergerCo") formed by Clayton,
Dubilier & Rice Fund V Limited Partnership ("Fund").
WHEREAS, the Board of Directors of MergerCo has approved, and deems it
advisable and in the best interests of the stockholders of MergerCo to
participate in the recapitalization of the Company, upon the terms and subject
to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company, based upon the
unanimous recommendation of a special committee of independent directors of the
Company (the "Special Committee"), has approved, and deems it advisable and in
the best interests of the shareholders of the Company to consummate, the
recapitalization of the Company, upon the terms and subject to the conditions
set forth herein; and
WHEREAS, in furtherance of such recapitalization, the Board of
Directors of MergerCo and the Board of Directors of the Company have each
approved this Agreement and the merger of MergerCo with and into the Company in
accordance with the terms of this Agreement, the Business Corporation Law of The
Commonwealth of Massachusetts (the "MBCL") and the Delaware General Corporation
Law (the "DGCL");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. (a) Upon the terms and subject to the
----------
conditions of this Agreement and in accordance with the applicable provisions of
the MBCL, at the Effective Time (as defined in Section 1.2 hereof), MergerCo
shall be merged (the "Merger") with and into the Company and the separate
corporate existence of MergerCo
<PAGE>
shall cease. After the Merger, the Company shall continue as the surviving
corporation (sometimes hereinafter referred to as the "Surviving Corporation")
and shall continue to be governed by the laws of the Commonwealth of
Massachusetts. The Merger shall have the effect as provided in the applicable
provisions of the MBCL and the DGCL. Without limiting the generality of the
foregoing, upon the Merger, all the rights, privileges, immunities, powers and
franchises of the Company and MergerCo shall vest in the Surviving Corporation
and all restrictions, obligations, duties, debts and liabilities of the Company
and MergerCo shall be the obligations, duties, debts and liabilities of the
Surviving Corporation.
Section 1.2 Effective Time. On or as promptly as practicable
--------------
following the Closing (as defined in Section 1.3), MergerCo and the Company will
cause the appropriate articles of merger (the "Articles of Merger") to be
executed and filed with the Secretary of State of the Commonwealth of
Massachusetts (the "Massachusetts Secretary of State") in such form and executed
as provided in Section 79 of the MBCL and the appropriate certificate of merger
(the "Certificate of Merger") to be executed and filed with the Secretary of
State of the State of Delaware (the "Delaware Secretary of State") in such form
and executed as provided in Section 252(c) of the DGCL. The Merger shall become
effective on the date on which the Articles of Merger and the Certificate of
Merger have been duly filed with the Massachusetts Secretary of State and the
Delaware Secretary of State, respectively, or such time as is agreed upon by the
parties and specified in the Articles of Merger and the Certificate of Merger,
but not later than 30 days after such filings, and such time is hereinafter
referred to as the "Effective Time."
Section 1.3 Closing. The closing of the Merger (the "Closing") will
-------
take place at 10:00 a.m., New York time, on a date to be specified by the
parties, which shall be no later than the second business day after satisfaction
or waiver of all of the conditions set forth in Article VI hereof (the "Closing
Date"), at the offices of Debevoise & Plimpton, 875 Third Avenue, New York, New
York 10022, unless another date or place is agreed to in writing by the parties
hereto.
Section 1.4 Articles of Organization; By-Laws. Pursuant to the
---------------------------------
Merger, (x) the restated articles of organization, as amended, of the Company in
-
the form attached as Exhibit A hereto, shall be the articles of
2
<PAGE>
organization of the Surviving Corporation until thereafter amended as provided
by applicable law and such articles of organization and (y) the By-laws of the
-
Company, as in effect immediately prior to the Effective Time, shall be the By-
laws of the Surviving Corporation until thereafter amended as provided by
applicable law, the articles of organization of the Surviving Corporation and
such By-laws.
Section 1.5 Directors and Officers of the Surviving Corporation.
---------------------------------------------------
(a) The directors of MergerCo immediately prior to the Effective Time
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's articles of organization and By-laws.
(b) The officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation and shall hold
office until their respective successors are duly elected and qualified, or
their earlier death, resignation or removal.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Conversion of Capital Stock. As of the Effective Time,
---------------------------
by virtue of the Merger and without any action on the part of the holders of any
shares of common stock, par value $.20 per share, of the Company (referred to
herein, together with the rights (the "Rights") associated therewith pursuant to
the Rights Agreement (as defined in Section 3.2(a)), the "Shares" or "Company
Common Stock") or the common stock, par value $.01 per share, of MergerCo (the
"MergerCo Common Stock"):
(a) Each issued and outstanding share of Company Common Stock (other
than (i) Shares to be cancelled in accordance with Section 2.1(c) and (ii)
- --
Dissenting Shares covered by Section 2.4) shall be converted into the right to
receive (A) $47.75 in cash, payable to the holder thereof, without interest and
-
(B) 0.5 shares of Recapitalized Common Stock (as defined below) (collectively,
-
the "Merger Consideration"), upon surrender of the certificate formerly
representing such share of Company Common Stock in the
3
<PAGE>
manner provided in and otherwise in accordance with Section 2.2. All such shares
of Company Common Stock, when so converted, shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist, and each
holder of a certificate representing any such Shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration therefor upon the surrender of such certificate in the manner
provided in and in accordance with Section 2.2.
(b) Each issued and outstanding share of MergerCo Common Stock shall
be converted into and become one fully paid and nonassessable share of common
stock, no par value per share, of the Surviving Corporation (the "Recapitalized
Common Stock").
(c) All shares of Company Common Stock that are held by the Company
as treasury stock or that are held by MergerCo shall be cancelled and retired
and shall cease to exist and no Merger Consideration shall be delivered in
exchange therefor.
Section 2.2 Exchange of Certificates.
------------------------
(a) Prior to the Effective Time, MergerCo shall designate the
Company's registrar and transfer agent, or The Chase Manhattan Bank (or any
successor thereto), or such other bank or trust company as may be approved in
writing by the Company (which approval shall not be unreasonably withheld), to
act as exchange agent for the holders of Shares in connection with the Merger,
pursuant to an agreement providing for the matters set forth in this Section 2.2
and such other matters as may be appropriate and the terms of which shall be
reasonably satisfactory to the Company (the "Exchange Agent"), to receive the
certificates (the "New Certificates") representing the shares of the
Recapitalized Common Stock and the funds to which holders of Shares shall become
entitled pursuant to Section 2.1(a). At the Effective Time, the Surviving
Corporation will deposit in trust with the Exchange Agent, for the benefit of
holders of Company Common Stock, (i) the funds necessary to complete the
-
payments contemplated by Sections 2.1(a) and 2.2(c) on a timely basis and (ii)
--
the New Certificates.
(b) At the Effective Time, the Surviving Corporation will instruct
the Exchange Agent to promptly, and in any event not later than three business
days following the Effective Time, mail (and to make available
4
<PAGE>
for collection by hand) to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates"), whose Shares
were converted pursuant to Section 2.1(a) into the right to receive the Merger
Consideration (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 MergerCo and the Company may
reasonably specify) and (ii) instructions for use in effecting the surrender of
--
the Certificates in exchange for the Merger Consideration (which shall provide
that at the election of the surrendering holder, Certificates may be
surrendered, and payment therefor collected, by hand delivery). Upon surrender
of a Certificate for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by the Company, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor the Merger Consideration for each share of Company
Common Stock formerly represented by such Certificate, to be mailed (or made
available for collection by hand if so elected by the surrendering holder)
within three business days of receipt thereof, and the Certificate so
surrendered shall forthwith be cancelled. If payment of the Merger Consideration
is to be made to a person other than the person in whose name the surrendered
Certificate is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and that the person requesting such payment shall have
paid any transfer and other taxes required by reason of the payment of the
Merger Consideration to a person other than the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Surviving Corporation that such tax either has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate (other
than Certificates representing Dissenting Shares) shall be deemed at any time
after the Effective Time to represent only the right to receive the Merger
Consideration as contemplated by this Section 2.2.
(c) Notwithstanding the foregoing, no fractions of a share of
Recapitalized Common Stock shall be issued in the Merger, but in lieu thereof
each holder of Shares otherwise entitled to a fraction of a share of
Recapitalized Common Stock shall, upon surrender of his or her certificate
5
<PAGE>
or certificates, be entitled to receive an amount of cash (without interest)
determined by multiplying the fractional share interest to which such holder
would otherwise be entitled by an amount equal to $2.50.
(d) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration deliverable in respect thereof as determined in accordance with
this Article II, provided that the Person (as defined in Section 3.1) to whom
--------
the Merger Consideration is paid shall, as a condition precedent to the payment
thereof, give the Surviving Corporation a bond in such sum as it may direct or
otherwise indemnify the Surviving Corporation in a manner satisfactory to it
against any claim that may be made against the Surviving Corporation with
respect to the Certificate claimed to have been lost, stolen or destroyed.
(e) After the Effective Time, the stock transfer books of the Company
shall be closed and there shall be no transfers on the stock transfer books of
the Surviving Corporation of Shares which were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation, they shall be cancelled and exchanged for the Merger
Consideration as provided in this Article II.
(f) Any portion of the funds deposited with the Exchange Agent (and
the proceeds of any interest and other income received by the Exchange Agent in
respect of all such funds) and any New Certificates that remain unclaimed by the
former stockholders of the Company six months after the Effective Time shall be
delivered to the Surviving Corporation. Any former shareholders of the Company
who have not theretofore complied with this Article II shall thereafter look
only to the Surviving Corporation for payment of any Merger Consideration that
may be payable upon surrender of any Certificates such shareholder holds, as
determined pursuant to this Agreement, without any interest thereon.
(g) None of MergerCo, the Company, the Surviving Corporation, the
Exchange Agent or any other person shall be liable to any former holder of
shares of Company Common Stock for any amount properly delivered to a public
official
6
<PAGE>
pursuant to applicable abandoned property, escheat or similar laws.
(h) Any payment made pursuant to this Section 2.2 shall be subject to
and made net of applicable withholding taxes.
Section 2.3 Options. The Board shall take all actions necessary or
-------
appropriate to cause all options to purchase Company Common Stock (individually,
a "Company Stock Option" and collectively, the "Company Stock Options") granted
to any current or former employee or director of the Company or any Subsidiary
under any of the Company's 1982 Incentive Stock Option Plan, 1992 Stock Option
Plan or 1994 Stock Option or Incentive Plan prior to the date hereof
(collectively, the "Company Stock Plans") and that are outstanding immediately
prior to the Effective Time to be fully vested and exercisable immediately prior
to the Effective Time in accordance with the terms of the Company Stock Plans
and the individual agreements evidencing such Company Stock Options. Each
Company Stock Option that is not exercised prior to the Effective Time shall,
subject to the consent of the holder thereof, be cancelled at the Effective Time
and, in consideration thereof, each holder of such a Company Stock Option will
be entitled to receive, for each share of Company Common Stock subject to such
Company Stock Option, an amount in cash equal to the excess, if any, of the sum
(such sum, the "Aggregate Merger Consideration Value") of (i) $47.75 and the
-
cash value of 0.5 shares of Recapitalized Common Stock, such cash value to be
$1.25, representing one half of the per share price paid by the Fund for a share
of common stock of MergerCo, over (ii) the per share exercise price for such
--
share of Company Common Stock, without interest. Amounts contributed on or
prior to March 31, 1998 for the purchase of Company Common Stock pursuant to the
terms of the Employee Stock Purchase Plan that have not theretofore been applied
to the purchase of such Company Common Stock in accordance with the terms of
such plan shall be applied to the purchase of such Company Common Stock
immediately prior to the Effective Time based on a purchase price per share
equal to 85% of the lesser of (x) the closing price per share of Company Common
-
Stock on the New York Stock Exchange ("NYSE") on October 1, 1997 and (y) the
-
Aggregate Merger Consideration Value, and the Employee Stock Purchase Plan shall
be amended as required by the proviso contained in Section 5.1(d)(ii) and shall
be terminated immediately following the consummation of the purchase of Company
Common Stock contemplated hereby. Each share of Company Common Stock issued in
accordance with the
7
<PAGE>
immediately preceding sentence shall be treated in the same manner as each other
share of Company Common Stock outstanding at the Effective Time. The Company
shall use its reasonable best efforts to obtain prior to the Effective Time any
consent of current or former employees and/or directors required to effect the
cancellation of options contemplated hereby. Notwithstanding the foregoing, the
Company Stock Options of the individuals listed on Schedule 2.3 (as such
Schedule 2.3 may be amended from time to time after the date hereof and prior to
the Effective Time by MergerCo to include additional employees, with the consent
of each such additional employee) shall, in connection with the Merger, be
treated as set forth on Schedule 2.3. The amounts payable pursuant to this
Section 2.3 shall be paid as soon as reasonably practicable following the
Closing Date and shall be subject to and made net of all applicable withholding
taxes.
Section 2.4 Dissenting Shares. Notwithstanding anything in this
-----------------
Agreement to the contrary, Shares which are issued and outstanding immediately
prior to the Effective Time and which are held by shareholders who have validly
demanded payment of the fair value for such shareholders' shares as determined
by appraisal in accordance with the MBCL (the "Dissenting Shares"), shall not be
converted into or be exchangeable for the right to receive the Merger
Consideration provided in Section 2.1(a) of this Agreement, unless and until
such holder shall have failed to perfect or shall have effectively withdrawn or
lost such holder's right to appraisal and payment under the MBCL. If such
holder shall have so failed to perfect or shall have effectively withdrawn or
lost such right, such holder's Shares shall thereupon be deemed to have been
converted into and to have become exchangeable for, at the Effective Time, the
right to receive the consideration provided for in Section 2.1 of this
Agreement, without any interest thereon.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to MergerCo as of the date hereof
that:
Section 3.1 Organization. Each of the Company and its Active
------------
Subsidiaries (as hereinafter defined) is a corporation or other entity duly
organized, validly existing, and in good standing under the laws of the
8
<PAGE>
jurisdiction of its incorporation or organization, and has all requisite
corporate power and authority to own, lease, use and operate its properties and
to carry on its business as it is now being conducted. Each of the Company and
its Subsidiaries (as hereinafter defined) is qualified or licensed to do
business as a foreign corporation and is in good standing in each jurisdiction
in which it owns real property or in which the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so qualified or licensed in the aggregate would not have or result in a
Material Adverse Effect. The term "Material Adverse Effect" shall mean any
change, effect, event, occurrence or state of facts that is, or would reasonably
be expected to be, materially adverse to the business, assets, liabilities,
results of operations or financial or other condition of the Company and its
Subsidiaries taken as a whole. None of the Company or any of its Subsidiaries is
in breach or violation of any of its certificate of incorporation, by-laws or
other organizational documents. The Company has previously delivered to MergerCo
a complete and correct copy of each of its restated articles of organization, as
amended (the "Articles of Organization") and By-Laws, as currently in effect.
"Active Subsidiary" shall mean each of the Subsidiaries of the Company other
than those Subsidiaries which conduct no business and hold no more than de
minimis assets. Schedule 3.1(a) of the disclosure schedule delivered by the
Company to MergerCo on or prior to the date hereof (the "Disclosure Schedule")
sets forth a complete and correct list of the Active Subsidiaries of the Company
and their respective jurisdictions of incorporation or organization and Schedule
3.1(b) sets forth a complete and correct list of each of the other Subsidiaries
of the Company and their respective jurisdictions of incorporation. "Subsidiary"
shall mean with respect to any Person, any corporation or other entity of which
50% or more of the securities or other interests having by their terms ordinary
voting power for the election of directors or others performing similar
functions with respect to such entity is directly or indirectly owned by such
Person. "Person" shall mean any natural person, firm, individual, partnership,
joint venture, business trust, trust, association, corporation, company,
unincorporated entity or Governmental Entity (as defined in Section 3.4(b)).
Section 3.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of
50,000,000 shares of Company Common Stock and
9
<PAGE>
100,000 shares of preferred stock, par value $1.00, of the Company (the "Company
Authorized Preferred Stock"), of which 24,000 shares have been designated as
Series A Preferred Stock. At the close of business on December 18, 1997: (i)
16,852,774 shares of Company Common Stock were issued and outstanding; (ii)
1,761,524 shares of Company Common Stock were issued and held by the Company in
its treasury; (iii) 24,000 shares of Series A Preferred Stock were reserved for
issuance pursuant to the Shareholders' Rights Agreement, dated February 16,
1989, as amended and restated as of March 12, 1990 (the "Rights Agreement");
(iv) 3,564,537 shares of Company Common Stock were reserved for issuance
pursuant to the Company Stock Plans, of which 2,132,200 shares are subject to
outstanding Company Stock Options; and (v) no shares of Company Authorized
Preferred Stock have been designated (except for the 24,000 shares of Series A
Preferred Stock referenced above) or issued. All out standing shares of capital
stock of the Company are, and all shares thereof which may be issued will be,
when issued, duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights. Except as expressly provided in this Agreement
and except for changes since December 18, 1997 resulting from the issuance of
shares of Company Common Stock upon exercise of Company Stock Options granted
prior to the date hereof or pursuant to the Employee Stock Purchase Plan as
contemplated by Section 2.3, (x) there are not issued, reserved for issuance or
outstanding (A) any shares of capital stock or other voting securities of the
Company, (B) any securities of Company or any of its Subsidiaries convertible
into or exchangeable or exercisable for shares of capital stock or voting
securities of the Company, (C) any warrants, calls, options or other rights to
acquire from Company or any of its Subsidiaries, and any obligation of Company
or any of its Subsidiaries to issue, any capital stock, voting securities or
securities convertible into or exchangeable or exercisable for capital stock or
voting securities of the Company, and (y) there are no outstanding obligations
of Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any such securities or to issue, deliver or sell, or cause to be issued,
delivered or sold, any such securities, in each case, other than those described
in the second sentence of this Section 3.2(a). Except as set forth in Schedule
3.2(a) of the Disclosure Schedule, there are no existing or outstanding (i)
-
options, warrants, calls, preemptive rights, subscriptions or other rights,
convertible securities, agreements or commitments of any character obligating
the Company or any of its Subsidiaries to issue, transfer or sell any shares of
capital stock or
10
<PAGE>
other equity interest in, the Company or any of its Subsidiaries or securities
convertible into or exchangeable for such shares or equity interests, (ii)
contractual obligations--of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any capital stock of the Company or any
Subsidiary of the Company or (iii) voting trusts or similar agreements to which
---
the Company or any of its Subsidiaries is a party with respect to the voting of
the capital stock of the Company or any of its Subsidiaries. The Company has
delivered to MergerCo prior to the execution of this Agreement a complete and
correct copy of the Rights Agreement (together with the amendment thereof
contemplated by Section 3.23).
(b) Except as set forth in Schedule 3.2(b) of the Disclosure
Schedule, (i) all of the outstanding shares of capital stock (or equivalent
-
equity interests of entities other than corporations) of each of the Company's
Subsidiaries are beneficially owned, directly or indirectly, by the Company
and (ii) neither the Company nor any of its Subsidiaries owns any shares of
--
capital stock or other securities of, or interest in, any other Person (other
than any Subsidiaries listed on Schedule 3.1), or is obligated to make any
capital contribution to or other investment in any other Person, provided that
--------
Schedule 3.2(b) shall not be required to set forth any cash equivalents held by
the Company or any of its Subsidiaries or any Person in which the Company or any
of its Subsidiaries owns less than 100 shares of publicly traded securities.
Section 3.3 Authorization; Validity of Agreement. The Company has the
------------------------------------
requisite corporate power and authority to execute and deliver this Agreement
and, subject to approval of its stockholders as contemplated by Section 5.6
hereof, to consummate the transactions contemplated hereby. The execution,
delivery and performance by the Company of this Agreement and the consummation
of the transactions contemplated hereby have been duly recommended by the
Special Committee of the Board of Directors and duly authorized by the Board of
Directors of the Company and, other than approval and adoption of this Agreement
by the holders of two-thirds of the outstanding shares of Company Common Stock,
no other corporate proceedings on the part of the Company are necessary to
authorize the execution and de livery of this Agreement by the Company and the
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by the Company and, assuming due authorization,
execution and delivery of this Agreement by MergerCo, is a valid and binding
obligation of
11
<PAGE>
the Company in accordance with its terms, except that such enforcement may be
subject to or limited by (i) bankruptcy, insolvency or other similar laws, now
-
or hereafter in effect, affecting creditors' rights generally, and (ii) the
--
effect of general principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity).
Section 3.4 No Violations; Consents and Approvals.
-------------------------------------
(a) Neither the execution and delivery of this Agreement by the
Company nor the consummation by the Company of the transactions contemplated
hereby will (i) violate any provision of the Articles of Organization or By-Laws
-
of the Company, (ii) except as set forth in Schedule 3.4(a) of the Disclosure
--
Schedule, conflict with, result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration, or to the
imposition of any Lien (as defined in Section 3.18(b))) under, or result in the
acceleration or trigger of any payment, time of payment, vesting or increase in
the amount of any compensation or benefit payable pursuant to, the terms,
conditions or provisions of any note, bond, mortgage, indenture, guarantee or
other evidence of indebtedness, or any lease, license, contract, agreement,
plan or other instrument or obligation, to which the Company or any of its
Subsidiaries is a party or by which any of them or any of their assets may be
bound or (iii) conflict with or violate any federal, state, local or foreign
---
order, writ, injunction, judgment, award, decree, statute, law, rule or
regulation (collectively, "Laws") applicable to the Company, any of its
Subsidiaries or any of their properties or assets; except in the case of clauses
(ii) or (iii) for such conflicts, violations, breaches or defaults which in the
aggregate would not have or result in a Material Adverse Effect or materially
impair or delay the consummation of the transactions contemplated hereby.
(b) Except as disclosed in Schedule 3.4(b) of the Disclosure
Schedule, no filing or registration with, declaration or notification to, or
order, authorization, consent or approval of, any federal, state, local or
foreign court, legislative, executive or regulatory authority or agency (a
"Governmental Entity") or any other Person is required in connection with the
execution, delivery and performance of this Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby, except (i)
-
12
<PAGE>
applicable requirements under Competition Laws (as defined in Section 5.4(b)),
(ii) applicable requirements under the Securities Exchange Act of 1934, as
- ---
amended (the "Exchange Act"), (iii) applicable requirements under the Securities
---
Act of 1933, as amended (the "Securities Act"), (iv) the filing of the Articles
--
of Merger with the Massachusetts Secretary of State and the filing of the
Certificate of Merger with the Delaware Secretary of State, (v) applicable
-
requirements under "blue sky" laws of various states,(vi) such other consents,
--
approvals, orders, authorizations, notifications, registrations, declarations
and filings the failure of which to be obtained or made in the aggregate would
not have or result in a Material Adverse Effect or materially impair or delay
the consummation of the transactions contemplated hereby.
Section 3.5 SEC Reports and Financial Statements. The Company has
------------------------------------
timely filed with the Securities and Exchange Commission (the "SEC"), any
applicable state securities authorities and any other Governmental Entity all
forms and documents required to be filed by it since January 1, 1993
(collectively, the "Company Reports") and has heretofore made available to the
Merger Sub (i) its Annual Reports on Form 10-K for the fiscal years ended March
-
31, 1993, March 31, 1994, March 31, 1995, March 31, 1996 and March 31, 1997,
respectively, (ii) its Quarterly Reports on Form 10-Q for the periods ended June
--
30 and September 30, 1997, (iii) all proxy statements relating to meetings of
---
stockholders of the Company since January 1, 1993 (in the form mailed to
stockholders) and (iv) all other forms, reports and registration statements
--
filed by the Company with the SEC since January 1, 1993 (other than registration
statements on Form S-8 or Form 8-A, filings on Form T-1 or preliminary materials
and registration statements in forms not declared effective). The documents
described in clauses (i)-(iv) above (whether filed before, on or after the date
hereof) are referred to in this Agreement collectively as the "Company SEC
Documents". As of their respective dates, the Company Reports (a) did not
-
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied in all material respects with the applicable
-
requirements of Law, including in the case of SEC filings, the Exchange Act and
the Securities Act, as the case may be, and the applicable rules and regulations
of the SEC thereunder. The consolidated financial statements included in the
Company SEC Documents have been prepared in accordance with United
13
<PAGE>
States generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as otherwise noted therein and except
that the quarterly financial statements are subject to year end adjustment and
do not contain all footnote disclosures required by GAAP) and fairly present in
all material respects the consolidated financial position and the consolidated
results of operations and cash flows of the Company and its consolidated
Subsidiaries as at the dates thereof or for the periods presented therein.
Section 3.6 Absence of Certain Changes. Except as disclosed in the
--------------------------
Company SEC Documents filed prior to the date hereof or as disclosed in Schedule
3.6 of the Disclosure Schedule, since September 30, 1997, (i) the Company and
-
its Subsidiaries have conducted their respective operations only in the ordinary
course consistent with past practice, (ii) there has not been a Material Adverse
--
Effect and (iii) the Company and the Subsidiaries have not taken action that if
---
taken after the date hereof would constitute a violation of Section 5.1 (other
than clause (a) thereof).
Section 3.7 Absence of Undisclosed Liabilities. Except as and to the
----------------------------------
extent disclosed (a) in the Company's Annual Report on Form 10-K for the period
-
ended March 31, 1997, including as reflected or reserved against in the balance
sheet dated as of and as at March 31, 1997 constituting a portion of the
financial statements included therein (the "March 31, 1997 Balance Sheet") or in
the notes thereto, (b) in the Company SEC Documents filed prior to the date
-
hereof or (c) in Schedule 3.7 of the Disclosure Schedule, neither the Company
-
nor any of its Subsidiaries had as of that date any liabilities or obligations
(accrued, contingent or otherwise) which would be material to the Company and
its Subsidiaries taken as a whole or which would be required to be set forth in
an audited consolidated balance sheet of the Company and its Subsidiaries as of
that date or the notes thereto prepared in accordance with GAAP.
Section 3.8 Information in Form S-4; Proxy Statement; Exchange Act
------------------------------------------------------
Schedules.
- ---------
(a) The registration statement on Form S-4 (including the Proxy
Statement (as defined in Section 5.6(a)) contained therein as a prospectus) to
be filed with the SEC by the Company in connection with the issuance of the
Recapitalized Common Stock of the Company following the Merger (the "Form S-4")
at the time or times it is filed with the SEC and at any time it is amended or
supplemented
14
<PAGE>
and at the time it becomes effective under the Securities Act, and the
prospectus contained therein, as of its date, (i) will not contain any
-
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading and (ii)
--
will comply in all material respects with the provisions of the Securities Act
and the rules and regulations thereunder; except that no representation is made
by the Company with respect to statements made in the Form S-4 based on
information supplied by MergerCo specifically for inclusion in the Form S-4.
(b) The Proxy Statement (and any amendment thereof or supplement
thereto) at the date mailed to Company stockholders and at the time of the
Special Meeting (as defined in Section 5.6(b)), (i) will not contain any untrue
-
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading and (ii) will comply
--
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder; except that no representation is made by the Company
with respect to statements made in the Proxy Statement based on information
supplied by MergerCo specifically for inclusion in the Proxy Statement.
(c) Any Schedule 14A or 13E-3 and any related schedules (and any
amendment or supplement to any of the foregoing) filed with the SEC at the date
so filed (i) will not contain any untrue statement of a material fact or omit to
-
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading and (ii) will comply in all material respects with the
--
provisions of the Exchange Act and the rules and regulations thereunder; except
that no representation is made by the Company with respect to statements made in
any such document based on information supplied by MergerCo specifically for
inclusion therein.
Section 3.9 Employee Benefit Plans; ERISA.
-----------------------------
(a) No material liability under Title I or IV of ERISA or the penalty
or excise tax provisions of the Code relating to employee plans (or equivalent
legislation of a foreign jurisdiction) has been incurred by the Company or
15
<PAGE>
any of its Subsidiaries and, to the Company's best knowledge, no condition
exists or event has occurred that presents a risk to the Company or any of its
Subsidiaries of incurring any such material liability.
(b) Each bonus, incentive or deferred compensation, stock option or
other equity based, severance, termination, change in control, retention,
employment, medical, life, disability, other welfare, profit-sharing, retirement
or other material compensation or benefit plan, agreement or policy in respect
of which the Company or any of its Subsidiaries has any material liability has
been filed with the Company SEC Documents or is listed on Schedule 3.9(b) of the
Disclosure Schedule (collectively, the "Plans"). No such Plan is subject to
section 302 of ERISA or section 412 of the Code and no such Plan has incurred
any "accumulated funding deficiency" (as defined in section 302 of ERISA or
section 412 of the Code), whether or not waived. Each such Plan that is intended
to be "qualified" within the meaning of section 401(a) of the Code has received
a determination letter from the Internal Revenue Service confirming its
qualified status and no condition exists or event has occurred since the date of
such determination letter that would adversely affect the qualified status of
any such Plan. Each Plan has been operated and administered in all respects in
substantial compliance with its terms and applicable Law, including but not
limited to ERISA, the Code and equivalent applicable legislation of a foreign
jurisdiction. There are no pending, or to the best knowledge of the Company,
threatened claims by or on behalf of any Plan, by any employee or beneficiary or
otherwise involving any such Plan or the assets thereof, except for claims the
resolution of which would not individually or in the aggregate have or result in
a material liability to the Company or a Subsidiary.
(c) Assuming that no amount is paid to any employee listed on
Schedule 3.9(c)(i) as a severance benefit with respect to a termination of
employment, no payment, benefit or other amount paid, payable or required to be
paid in respect of any employee will fail to be deductible under section 280G of
the Code. Except as provided in Section 2.3 hereof or as set forth on Schedule
3.9(c)(ii) of the Disclosure Schedule, (i) no current or former employee or
-
director of the Company or any Subsidiary is or will become entitled to any
additional or new compensation, benefits or other compensatory payment or an
increase in the amount of any compensation, benefits or other compensatory
payment in connection with or as a result of the consummation of the
16
<PAGE>
transactions contemplated by this Agreement and (ii) neither the vesting nor the
--
timing of the payment of any such compensation, benefit or other compensatory
payment in respect of any such employee or director has been or will be
accelerated in connection with or as a result of the consummation of the
transactions contemplated by this Agreement.
Section 3.10 Litigation; Compliance with Law.
-------------------------------
(a) Except as disclosed in the Company SEC Documents filed prior to
the date hereof or in Schedule 3.10(a) of the Disclosure Schedule, (i) there is
-
no suit, claim, action, arbitration, proceeding or investigation or other
Litigation (as defined below) pending or, to the knowledge of the Company,
threatened, against the Company or any of its Subsidiaries or any of their
properties or assets which, individually or in the aggregate, if determined
adversely to the Company or any such Subsidiary, would have or result in a
Material Adverse Effect, and (ii) neither the Company nor any of its
--
Subsidiaries is subject to any settlement or similar agreement with any
Governmental Entity, or to any order, judgment, decree, injunction or award of
any Governmental Entity or arbitrator, that individually or in the aggregate,
would have or result in a Material Adverse Effect. "Litigation" means any
action, cause of action, claim, demand, suit, proceeding, citation, summons,
subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or
otherwise, in law or in equity, by or before any court, tribunal, arbitrator or
other Governmental Entity.
(b) Except as disclosed in the Company SEC Documents filed prior to
the date hereof, the operations of the Company and its Subsidiaries have not
been and are not being conducted, and no Real Property (as defined in Section
3.19) is, in violation of any law, statute or regulation, any judgment, decree,
order or injunction of any Governmental Entity, any other Law, or any Permit (as
defined below), except where such violations in the aggregate would not have or
result in a Material Adverse Effect. Except as set forth in Schedule 3.10(b) of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries has
received any notice, or has knowledge of any claim, alleging any such violation.
(c) The Company and its Subsidiaries hold all licenses, permits,
variances, consents, authorizations, waivers, grants, franchises, concessions,
exemptions, orders, registrations and approvals of Governmental Entities
17
<PAGE>
or other Persons necessary for the ownership, leasing, operation, occupancy and
use of the Real Property and the conduct of their respective businesses as
currently conducted ("Permits"), except where the failure to hold such Permits
in the aggregate would not have or result in a Material Adverse Effect. There is
no Litigation pending or, to the knowledge of the Company, threatened, that
would result in the termination, modification or nonrenewal of any Permit, and
neither the Company nor any of its Subsidiaries has received notice that any
Permit will be terminated or modified or cannot be renewed in the ordinary
course of business, and there is no reasonable basis for any such termination,
modification or nonrenewal, except for such terminations, modifications or
nonrenewals as in the aggregate would not have or result in a Material Adverse
Effect. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
violate any Permit, or result in any termination, modification or nonrenewal
thereof, except for such violations terminations, modifications or nonrenewals
thereof as in the aggregate would not have or result in a Material Adverse
Effect.
Section 3.11 Intellectual Property. (a) The Company and its
---------------------
Subsidiaries own (beneficially and as of record), or possess valid and legally
enforceable licenses or rights to use, any and all United States and foreign
patents, patent applications, patent disclosures, mask works, software,
trademarks, trade names, copyrights and service marks, including applications to
register and registrations for any of the foregoing, as well as trade secrets,
know-how and other proprietary rights and information (collectively,
"Intellectual Property") necessary for the conduct of, or otherwise material to,
their business and operations as currently conducted or as proposed to be
conducted (the "Company Intellectual Property"), free and clear of any Liens
(except for any Permitted Liens, as defined in Section 3.18(b)). Except as
disclosed in Schedule 3.11 of the Disclosure Schedule, the conduct of the
business of the Company and its Subsidiaries as currently conducted does not
infringe or conflict with any Intellectual Property of any Person; and neither
the Company nor any of its Subsidiaries has received notice or has actual
knowledge of any such current infringement or conflict except where such
infringements and conflicts as in the aggregate would not have or result in a
Material Adverse Effect. All of the patents, patent applications and patent
disclosures included in Company Intellectual Property are valid, subsisting and
enforceable. To the knowledge of the
18
<PAGE>
Company, no Person is infringing or allegedly infringing any Intellectual
Property of the Company or its Subsidiaries except where such actual and alleged
infringements as in the aggregate would not have or result in a Material Adverse
Effect. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in the loss of, or creation of
any Lien on, the rights of the Company or any Subsidiary with respect to the
Intellectual Property owned or used by them, except where such losses and such
Liens as in the aggregate would not have or result in a Material Adverse Effect.
Schedule 3.11 of the Disclosure Schedule contains a complete and correct list of
all patents, patent applications, patent disclosures, mask works, software
(other than any software that is commercially available for an amount less than
$50,000), trademarks, trade names, registered copyrights and service marks,
including applications to register and registrations for any of the foregoing,
included in Company Intellectual Property except that Schedule 3.11 need not
disclose any trademarks, trade names or service marks that are not (a)
-
registered or applied for and (b) not material to the business of the Company or
-
any of its Subsidiaries as currently conducted. Except as disclosed in Schedule
3.11 of the Disclosure Schedule, all software used by the Company or any of its
Subsidiaries, or sold, licensed or otherwise made available to any other Person
by the Company or any of its Subsidiaries, that in each case, contains or calls
on a calendar function, including but not limited to any function that is
indexed to a computer processing unit clock, provides specific dates or
calculates spans of dates, is and will be able to record, store, process and
provide true and accurate dates and calculations for dates and spans of dates
including and following January 1, 2000.
Section 3.12 Contracts. (a) Other than the contracts or agreements
---------
of the Company listed as exhibits to the Company's Annual Report on Form 10-K
for the year ended March 31, 1997 (the "Material Contracts"), Schedule 3.12(a)
of the Disclosure Schedule sets forth a complete and correct list of each of the
following contracts, commitments and agreements to which the Company or any of
its Subsidiaries is a party or by which any of them is bound (the contracts,
commitments and agreements of the types described below that are scheduled or
required to be scheduled, collectively, the "Identified Contracts"), in each
case, as such Identified Contract is in effect on the date hereof:
19
<PAGE>
(i) contracts, commitments and agreements governing the terms of
indebtedness for borrowed money, or guarantees of indebtedness, of, or
secured by assets of, the Company or any of its Subsidiaries;
(ii) shareholder, voting trust or similar contracts and agreements
relating to the voting of shares or other equity or debt interests of the
Company or any of its Subsidiaries;
(iii) contracts, commitments and agreements entered into since 1994
providing for the acquisition or disposition of assets having a value in
excess of $500,000, other than sales of inventories in the ordinary course
of business and sales of obsolete equipment;
(iv) leases, subleases and licenses or real property, occupancy, use
and other agreements relating to or constituting real property, each with a
term of one year or more and an annual payment obligation in excess of
$500,000;
(v) (a) joint venture agreements, partnership agreements and other
-
similar contracts, commitments and agreements involving a sharing of
profits and expenses; contracts, commitments and agreements providing for a
"strategic alliance" or "preferred vendor" relationship; or (b) contracts,
-
commitments or agreements with distributors, brokers or sales agents
except, in the case of (b), only to the extent that any such distributors,
brokers or sales agents are responsible for revenues to the Company or any
of its Subsidiaries in excess of $500,000 per year;
(vi) contracts, commitments and agreements governing the terms of
indebtedness (other than trade payables in the ordinary course of
business) of third parties to the Company or by any of its Subsidiaries,
or guarantees by the Company or any of its Subsidiaries of indebtedness of
third parties;
(vii) contracts, commitments and agreements prohibiting or materially
restricting the ability of the Company or any of its Subsidiaries to
conduct its business, to engage in any business or operate in any
geographical area or to compete with any Person;
20
<PAGE>
(viii) contracts, commitments and agreements with "change of control"
provisions except to the extent that if a "change of control" event
occurred, it would not result in a termination or other alteration of such
contract, commitment or agreement that would have or would reasonably be
expected to have a material adverse effect on the business of the Company
or its Subsidiary that is a party thereto;
(ix) contracts, commitments, and agreements with any federal or
state Governmental Entity;
(x) exchange-traded or over-the-counter swap, forward, future,
option, cap floor or collar financial contract, or interest rate or foreign
currency protection contract, other than those listed in the financial
statements contained in the Company SEC Documents;
(xi) licenses, licensing arrangements and other contracts and
agreements either (x) providing, in whole or in part, for the use of, or
-
limiting the use of, any Intellectual Property or (y) relating to the
-
development, support or maintenance of any Intellectual Property (in each
case, that is material to the business of the Company or any of its
Subsidiaries that is a party thereto and other than relating to software
that is commercially available for less than $50,000); and
(xii) contracts and agreements that are or will be material to the
business, operations, results of operations, condition (financial or
otherwise), assets or properties of the Company and its Subsidiaries
involving amounts in excess of $250,000.
(b) Each of the Identified Contracts and Material Contracts is in
full force and effect, and neither the Company nor any of its Subsidiaries, nor,
to the knowledge of the Company, any other Person, is in breach of, or default
under, any such contract, commitment or agreement, and no event has occurred
that with notice or passage of time or both would constitute such a breach or
default thereunder by the Company or any of its Subsidiaries, or, to the
knowledge of the Company, any other Person, except for such failures to be in
full force and effect and such conflicts, violations, breaches or defaults as in
the aggregate would not have or result in a Material Adverse
21
<PAGE>
Effect or materially delay the consummation of the transactions contemplated
hereby.
Section 3.13 Taxes.
-----
(a) Except as disclosed in Section 3.13 of the Disclosure Schedule:
(i) each of the Company, its Subsidiaries, and any Consolidated Group (as
-
defined below) has timely filed all material Tax Returns (as defined below)
required to be filed by it and has paid all Taxes (as defined below) shown
thereon to be owing, and each of the Company and its Subsidiaries has provided
reserves in accordance with GAAP in its most recent financial statements
included in the Company SEC Documents for any Taxes (as defined below) that have
not been paid for the periods covered by such financial statements; (ii) none of
--
the Company or its Subsidiaries has granted any extension or waiver of the
statute of limitations period applicable to any material Tax Return, which
period (after giving effect to such extension or waiver) has not expired; (iii)
---
all Tax periods of each of the Company and its Subsidiaries, and any
Consolidated Group, through and including March 31, 199_ are closed or no longer
subject to audit; (iv) no audits or other administrative proceedings or court
--
proceedings are presently pending with regard to any Taxes or Tax Return of any
of the Company, its Subsidiaries or any Consolidated Group as to which any
taxing authority has asserted in writing any claim which, if adversely
determined, individually or in the aggregate would have or result in a Material
Adverse Effect; and (v) none of the Company or any of its Subsidiaries has
-
received any notice of deficiency or assessment from any taxing authority with
respect to liabilities for income or any material other Taxes which has not been
fully paid or finally settled.
(b) "Consolidated Group" shall mean any consolidated, combined,
unitary or aggregate group for Tax purposes of which the Company or any of its
Subsidiaries is a member. "Taxes" shall mean all federal, state, local and
foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including interest and penalties, and
additions thereto. "Tax Returns" shall mean all federal, state, local and
foreign tax returns, declarations, statements, reports, schedules, forms and
information returns, and any amendments to any of the foregoing, relating to
Taxes.
22
<PAGE>
Section 3.14 Environmental Matters.
---------------------
(a) Each of the Company and its Subsidiaries has complied and is in
compliance in all respects with all applicable Environmental Laws (as defined
below) pertaining to any of the properties and assets of the Company or any of
its Subsidiaries (including the Real Property and the properties currently or
formerly owned or leased) and the use and ownership thereof, and to their
businesses and operations. No violation by the Company or any of its
Subsidiaries is being alleged or has been alleged of any applicable
Environmental Law relating to any of their respective properties and assets
including (the Real Property and the properties currently or formerly owned or
leased) or the use or ownership thereof, or to their respective businesses and
operations.
(b) Neither the Company nor any of its Subsidiaries nor any other
Person (including any tenant or subtenant) has caused or taken any action that
will result in, and neither the Company nor any of its Subsidiaries is subject
to, any liability or obligation on the part of the Company or any of its
Subsidiaries relating to (x) the environmental conditions on, under, or about
-
the Real Property or other properties or assets currently or formerly owned,
leased, operated or used by the Company or any of its Subsidiaries or any
predecessor thereto at the present time or in the past, including without
limitation, the air, soil and groundwater conditions at such properties or (y)
-
the past or present use, management, handling, transport, treatment,
generation, storage, disposal, discharge, leak, emission, or other manner of
release of any Hazardous Materials (as defined below).
(c) The Company has disclosed and made available to MergerCo all
information, including, without limitation, all studies, analyses and test
results, in the possession, custody or control of or otherwise known to the
Company or any of its Subsidiaries relating to (x) the environmental conditions
-
on, under or about the Real Property or other properties or assets currently or
formerly owned, leased, operated or used by the Company or any of its
Subsidiaries or any predecessor in interest thereto at the present time or in
the past, and (y) any Hazardous Materials used, managed, handled, transported,
-
treated, generated, stored, discharged, leaked, emitted, or otherwise released
by the Company or any of its Subsidiaries or any other Person on, under, about
or from any of the Real Property and the properties currently or formerly owned
or leased, or
23
<PAGE>
otherwise in connection with the use or operation of any of the properties and
assets of the Company or any of its Subsidiaries, or their respective businesses
and operations. Except as disclosed in Schedule 3.14(c), none of the current or
past operations of the Company or any of its Subsidiaries, or any by-product
thereof, and none of the currently or formerly owned or leased property or
assets of the Company or any of its Subsidiaries, including without limitation
the Real Property, is related to or subject to any Litigation related to any
Environmental Law.
(d) "Environmental Law" means any foreign, federal, state or local
law, regulation, rule, ordinance or case law relating to pollution or protection
of human health and safety or the environment, including, but not limited to,
laws relating to releases or threatened releases of Hazardous Materials into the
environment and including laws pertaining to the protection of the health and
safety of employees. "Hazardous Materials" means any substance or material that
is classified or regulated as "hazardous" or "toxic" pursuant to any
Environmental Law, including without limitation, asbestos, polychlorinated
biphenyls and petroleum.
Section 3.15 Required Vote by Company Stockholders. The affirmative
-------------------------------------
vote of the holders of two-thirds of the outstanding Shares entitled to vote
hereon is the only vote of any class of capital stock of the Company required by
the MBCL, the Articles of Organization or the By-Laws of the Company to adopt
this Agreement and approve the transactions contemplated hereby.
Section 3.16 Brokers. Except for Merrill Lynch & Co., Inc., a
-------
complete and accurate copy of the engagement letter of which has been provided
to MergerCo, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries, that is or will be payable
by the Company or any of its Subsidiaries.
Section 3.17 Opinions of Financial Advisors. The Company has
------------------------------
received from Merrill Lynch & Co., Inc., and provided to MergerCo on or prior to
the date hereof, an executed copy of its opinion that the Merger Consideration
to be received by the holders of Shares in the Merger is fair, from a financial
point of view, to such holders. The Company has been authorized by the Financial
Advisor to
24
<PAGE>
include the Fairness Opinion in the Proxy Statement and has not been notified by
the Financial Advisor that the Fairness Opinion has been withdrawn or modified.
Section 3.18 Assets.
------
(a) The Company and its Subsidiaries own, or otherwise have
sufficient and legally enforceable rights to use, all of the properties and
assets (real, personal or mixed, tangible or intangible), reasonably necessary
for the conduct of, or otherwise material to, their business and operations (the
"Assets"). The Company and its Subsidiaries have good, valid and marketable
title to, or in the case of leased property have good and valid leasehold
interests in, all Assets, including but not limited to all such Assets reflected
in the balance sheet dated as of September 30, 1997, constituting a portion of
the Company's Quarterly Report on Form 10-Q for the period ended September 30,
1997 (the "September 30, 1997 Balance Sheet") or acquired since the date thereof
(except as may have been disposed of in the ordinary course of business
consistent with past practices prior to the date hereof or in accordance
herewith), in each case free and clear of any Lien (as defined below), except
Permitted Liens (as defined below). All tangible Assets are reasonably adequate
and suitable for the purposes for which they are presently being used. Schedule
3.18(a) of the Disclosure Schedule sets forth a complete and correct list of
each of the countries in which Assets are located.
(b) "Lien" means any mortgage, pledge, deed of trust, hypothecation,
right of others, claim, security interest, encumbrance, burden, title defect,
title retention agreement, lease, sublease, license, occupancy agreement,
easement, covenant, condition, encroachment, voting trust agreement, interest,
option, right of first offer, negotiation or refusal, proxy, lien, charge or
other restrictions of any nature whatsoever. "Permitted Liens" means (a) Liens
-
reserved against in the September 30, 1997 Balance Sheet, to the extent so
reserved, (b) Liens for Taxes not yet due and payable or that are being
-
contested in good faith by appropriate proceedings and for which adequate
reserves have been provided in accordance with GAAP or that are statutory Liens
for Taxes not yet delinquent, (c) those Liens that are set forth in Schedule
-
3.18(b) of the Disclosure Schedule and (d) those Liens that, in the aggregate
-
with all other Permitted Liens, do not and will not materially detract from the
value of the properties and assets of any of the Company and its Subsidiaries
materially interfere with the present
25
<PAGE>
use of any thereof or otherwise have a Material Adverse Effect.
Section 3.19 Real Property. There is no Owned Real Property (as
-------------
defined below). Schedule 3.19(a)(i) contains a complete and correct list of each
parcel of Formerly Owned Property (as defined below) setting forth the street
address, current owner, date of disposition to the current owner, and the legal
description of each parcel of Formerly Owned Property. Schedule 3.19(a)(ii) of
the Disclosure Schedule contains a complete and correct list of all Leases (as
defined below) setting forth the address, tenant for each Lease and the
documents of which each Lease is comprised. No material damage or destruction
has occurred since March 31, 1997 with respect to any of the Company Real
Property. "Company Real Property" means the Owned Real Property and the Leased
Real Property. "Formerly Owned Property" means any Real Property previously
owned by the Company or any of its Subsidiaries since 1990, but not owned by the
Company or any of its Subsidiaries as of the date of this Agreement. "Leases"
means the leases, subleases, licenses and use or occupancy agreements pursuant
to which the Company or any of its Subsidiaries is the lessee, sublessee,
licensee, user or occupant of Real Property. "Leased Real Property" means all
interests in Real Property pursuant to the Leases. "Owned Real Property" means
the real property owned by the Company and its Subsidiaries. "Real Property"
means real property and structures, facilities and improvements located thereon
or attached or appurtenant thereto and all easements, licenses, rights and
appurtenances relating to the foregoing.
Section 3.20 Insurance. Schedule 3.20 of the Disclosure Schedule
---------
contains a complete and correct list and summary description of all insurance
policies maintained at present or at any time during the past three calendar
years by or on behalf of any of the Company and its Subsidiaries. Such policies
are in full force and effect, and all premiums due thereon have been paid. The
Company and its Subsidiaries have complied in all material respects with the
terms and provisions of such policies. The insurance coverage provided by such
policies is adequate and suitable for the business and operations of the Company
and its Subsidiaries, and is on such terms (including without limitation as to
deductibles and self-insured retentions), covers such risks, contains such
deductibles and retentions, and is in such amounts, as the insurance customarily
carried by comparable companies of established reputation similarly situated and
carrying on the same or similar business and operations.
26
<PAGE>
Section 3.21 Labor Matters, etc. Neither the Company nor any of its
------------------
Subsidiaries is a party to or bound by and none of their respective employees is
subject to any collective bargaining agreement, memorandum of understanding or
other written document relating to the terms and conditions of employment for
any group of employees (any such agreement, memorandum or document, a
"Collective Bargaining Agreement"), and there are no labor unions or other
organizations representing or purporting or attempting to represent any
employees employed by any of the Company and its Subsidiaries. The Company and
its Subsidiaries have complied with all applicable Laws pertaining to the
employment or termination of employment of their respective employees,
including, without limitation, all such Laws relating to labor relations, equal
employment opportunities, fair employment practices, prohibited discrimination
or distinction and other similar employment activities, except for any failures
so to comply that individually or in the aggregate would not have or result in a
Material Adverse Effect.
Section 3.22 Disclosure. To the actual knowledge of the Company,
----------
this Agreement and each certificate or other instrument or document furnished by
or on behalf of the Company to MergerCo pursuant hereto, taken as a whole, do
not 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
contained herein or therein in light of the circumstances under which they were
made, not misleading.
Section 3.23 Rights Agreement. The Board of Directors of the Company
----------------
has contemporaneously with the execution of this Agreement amended the Rights
Agreement so that (i) none of CD&R, Fund or MergerCo will become an "Acquiring
Person" as a result of the consummation of the transactions contemplated by this
Agreement, (ii) no "Stock Acquisition Date", "Triggering Event" or "Distribution
Date" (as such terms are defined in the Rights Agreement) will have occurred as
a result of the consummation of the transactions contemplated by this Agreement,
and (iii) all outstanding Rights issued and outstanding under the Rights
Agreement and the Rights Agreement will terminate immediately prior to the
Effective Time and no shares of Recapitalized Common Stock issued on or after
the Effective Time will have any Rights associated with them under the Rights
Agreement.
Section 3.24 Takeover Statutes. No "Fair price," "Moratorium,"
-----------------
"control share acquisition" or other similar
27
<PAGE>
anti-takeover statute or regulation enacted under state or federal laws in the
United States (each, a "Takeover Statute") including, without limitation,
Chapters 110C, 110D and 110F of the Massachusetts General Laws, applicable to
the Company or any of its Subsidiaries is applicable to the execution, delivery
and performance of this Agreement or the consummation of the Merger or the other
transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGERCO
MergerCo represents and warrants to the Company as of the date hereof
and as of the Closing Date as follows:
Section 4.1 Organization. MergerCo is a corporation duly
------------
organized, validly existing and in good standing under the laws of Delaware.
MergerCo has all requisite corporate power and authority to own, lease, operate
or use its properties and to carry on its business as now being conducted and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which it owns real property or in which the nature of the
business conducted by it makes such qualification or licensing necessary.
MergerCo is not in breach of its certificate of incorporation or by-laws.
MergerCo has previously delivered to the Company complete and correct copies of
the certificate of incorporation and by-laws of MergerCo, as currently in
effect.
Section 4.2 Authorization; Validity of Agreement.
------------------------------------
(a) MergerCo has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance by MergerCo of this Agreement
and the consummation by MergerCo of the transactions contemplated hereby have
been duly authorized by its Board of Directors and, other than the approval and
adoption of this Agreement by the stockholders of MergerCo, no other corporate
proceedings on the part of MergerCo are necessary to authorize the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by MergerCo and,
assuming due authorization, execution and delivery of this Agreement by the
Company, is
28
<PAGE>
a valid and binding obligation of MergerCo enforceable against it in
accordance with its terms, except that such enforcement may be subject to or
limited by (i) bankruptcy, insolvency or other similar laws, now or hereafter in
-
effect, affecting creditors rights generally, and (ii) the effect of general
--
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
(b) MergerCo has previously delivered to the Company a letter from
Fund, addressed to the Company, confirming Fund's agreement to vote to approve
and adopt this Agreement, in its capacity as a stockholder of MergerCo, upon its
purchase of MergerCo Common Stock.
Section 4.3 Consents and Approvals; No Violations.
-------------------------------------
(a) Neither the execution and delivery of this Agreement by MergerCo
nor the consummation by MergerCo of the transactions contemplated hereby will
(i) violate any provision of the certificate of incorporation or by-laws of
-
MergerCo, (ii) conflict with, result in a violation or breach of, or constitute
--
(with or without due notice or lapse of time or both) a default (or give rise to
any right of termination, amendment, cancellation or acceleration) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
guarantee, other evidence of indebtedness, license, or any material lease,
contract, agreement or other instrument or obligation, to which MergerCo or any
of its Subsidiaries is a party or by which any of them or any of their assets
may be bound or (iii) conflict with or violate any Laws applicable to MergerCo,
---
any of its Subsidiaries or any of their properties or assets; except in the case
of clauses (ii) and (iii) for such conflicts, violations, breaches or defaults
which in the aggregate would not have a material adverse effect on the business,
assets, liabilities, results of operations or financial or other condition of
MergerCo and its Subsidiaries, taken as a whole, or materially impair or delay
the consummation of the transactions contemplated by this Agreement.
(b) Except as set forth in Schedule 4.3(b) of the disclosure schedule
delivered by MergerCo to the Company on or prior to the date hereof (the
"MergerCo Disclosure Schedule") and assuming that the representation and
warranty of the Company set forth in Section 3.4(b) is true and correct, no
filing or registration with, declaration or no-
29
<PAGE>
tification to, or order, authorization, consent or approval of, any Governmental
Entity is required in connection with the execution and delivery of this
Agreement by MergerCo or the consummation by MergerCo of the transactions
contemplated hereby, except (i) applicable requirements under Competition
-
Laws (as defined in Section 5.4(b)), (ii) applicable requirements under the
--
Exchange Act, (iii) applicable requirements under the Securities Act, (iv) the
--- --
filing of the Articles of Merger with the Massachusetts Secretary of State and
the filing of the Certificate of Merger with the Delaware Secretary of State,
(v) applicable requirements under "blue sky" laws of various states, (vi)
- --
applicable requirements under Environmental Laws and (vii) such other consents,
---
approvals, orders, authorizations, notifications, registrations, declarations
and filings (x) required to be obtained or made by the Company or any of its
-
Subsidiaries or (y) the failure of which to be obtained or made would not have a
-
material adverse effect on the business, assets, liabilities, results of
operations or financial or other condition of MergerCo and its Subsidiaries,
taken as a whole, or materially impair or delay the consummation of the
transactions contemplated by this Agreement.
Section 4.4 Information in Form S-4; Proxy Statement; Exchange Act
------------------------------------------------------
Schedules.
- ---------
(a) None of the information supplied in writing by MergerCo
specifically for inclusion in the Form S-4 will, at the time or times the Form
S-4 is filed with the SEC and at any time it is amended or supplemented and at
the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
(b) None of the information supplied in writing by MergerCo
specifically for inclusion in the Proxy Statement (including any amendments or
supplements thereto) will, at the date mailed to stockholders and at the time of
the Special Meeting, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
(c) None of the information supplied in writing by MergerCo
specifically for inclusion in any Schedule 14A
30
<PAGE>
or 13E-3 (and any amendment or supplement to any of the foregoing) will, at the
date such documents are filed with the SEC, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 4.5 Financing. MergerCo has received and delivered to the
---------
Company (i) a commitment letter from Credit Suisse First Boston and J.P. Morgan
-
Securities, Inc. and Morgan Guaranty Trust Company of New York, addressed to
MergerCo, whereby such financial institutions have committed, upon the terms and
subject to the conditions set forth therein, to provide debt financing to the
Company in the amount of $370 million, and (ii) a letter from Credit Suisse
--
First Boston and/or J.P. Morgan Securities, Inc., addressed to MergerCo,
expressing confidence in its ability to place an additional $275 million in debt
financing for the Company, in each case, as in effect on the date hereof.
MergerCo has received, and delivered to the Company a letter, as in effect on
the date hereof, from the Fund, whereby the Fund has committed, upon the terms
and subject to the conditions set forth therein, to provide equity financing to
MergerCo up to $277 million.
Section 4.6 Beneficial Ownership of Shares. MergerCo does not
------------------------------
"beneficially own" (as defined in Rule 13d-3 under the Exchange Act) more than
l% of the outstanding shares of Company Common Stock or any securities
convertible into or exchangeable for Company Common Stock.
Section 4.7 Brokers. Except as otherwise previously disclosed by
-------
MergerCo to the Company in writing and except for Credit Suisse First Boston and
J.P. Morgan Securities Inc. and Morgan Guaranty Trust Company of New York, who
will provide financing in connection with the transactions contemplated by this
Agreement, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
MergerCo, that is or will be payable by the Company or any of its Subsidiaries.
Section 4.8 Formation of MergerCo; No Prior Activities. MergerCo was
------------------------------------------
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement. As of the date hereof and the Effective Time, except for (i)
obligations or liabilities incurred in connection with its
31
<PAGE>
incorporation or organization and the transactions contemplated by this
Agreement, (ii) this Agreement and any other agreements or arrangements
contemplated by this Agreement or in furtherance of the transactions
contemplated hereby and (iii) the contribution by certain members of the
Company's management, immediately prior to the Effective Time, of certain shares
of Company Common Stock owned by them in exchange for shares of MergerCo Common
Stock, MergerCo has not incurred, directly or indirectly, through any subsidiary
or affiliate, any obligations or liabilities or engaged in any business
activities of any type or kind whatsoever or entered into any agreements or
arrangements with any Person.
ARTICLE V
COVENANTS
Section 5.1 Interim Operations of the Company. The Company covenants
---------------------------------
and agrees that, except as (i) required by this Agreement, (ii) required by
- --
applicable law, (iii) required by any Material Contract or Identified Contract
---
or by any Plan disclosed on Schedule 3.9(b), in each case to the extent such
requirement is specifically described on Schedule 5.1(iii) or (iv) agreed to in
--
writing by MergerCo, after the date hereof and prior to the Effective Time:
(a) the business of the Company and its Subsidiaries shall be
conducted only in the ordinary course consistent with past practice and, to the
extent consistent therewith, each of the Company and its Subsidiaries shall use
its reasonable efforts to preserve its business organization and the business
organization of its Subsidiaries intact and maintain existing relations with
customers, suppliers, employees and creditors;
(b) the Company shall not amend its Articles of Organization or By-
Laws;
(c) the Company shall not declare, set aside or pay any dividend or
other distribution payable in cash, stock or property with respect to its
capital stock (except for cash dividends on Company Common Stock in the ordinary
course of business consistent with past practice); and neither the Company nor
any of its Subsidiaries shall (i) issue, sell, grant, transfer, pledge, dispose
-
of or encumber any additional shares of, or securities convertible
32
<PAGE>
into or exchangeable for, or options, warrants, calls, commitments or rights of
any kind to acquire, any shares of capital stock of any class of the Company or
any of its Subsidiaries (except pursuant to the exercise of stock options
outstanding on the date hereof and stock issuable under the Employee Stock
Purchase Plan to the extent contemplated by this Agreement); (ii) incur any long
--
term indebtedness (whether evidenced by a note or other instrument, pursuant to
a financing lease, sale-leaseback transaction, or otherwise) or incur short-term
indebtedness other than under lines of credit existing on the date hereof,
except for borrowings under existing credit facilities or lines of credit in the
ordinary course of business consistent with past practice; (iii) redeem,
---
purchase or otherwise acquire directly or indirectly any of its capital stock or
other securities; or (iv) enter into or amend in any material respect any Lease
, Material Contract or Identified Contract;
(d) neither the Company nor any of its Subsidiaries shall (i)
-
except for normal salary increases in the ordinary course of business consistent
with past practice, grant any increase in the compensation or benefits payable
or to become payable by the Company or any of its Subsidiaries to any officer or
other management employee of the Company or any Subsidiary; (ii) adopt, enter
--
into or amend or increase, or accelerate the payment or vesting of the amounts,
benefits or rights payable or accrued or to become payable or accrued under, any
bonus, incentive or deferred compensation, severance, termination, change in
control, retention, stock option or other equity based or other material
employee compensation or benefit plan, agreement or policy, provided that the
--------
Employee Stock Purchase Plan shall be (A) amended simultaneously with the
-
execution of this Agreement to preclude (1) any increases after the date hereof
in the rate of payroll deduction contributions that may be made thereunder and
(2) any employees who are not participating under such Employee Stock Purchase
Plan as of the date hereof to become participants thereunder and (B) subject to
-
Section 2.3, terminated effective as of March 31, 1998; or (iii) enter into or
---
amend in any material respect any employment, severance, retention or collective
bargaining agreement or, except in accordance with the existing written policies
of the Company or existing contracts or agreements, grant any severance or
termination pay to any officer, director or employee of the Company or any of
its Subsidiaries;
33
<PAGE>
(e) neither the Company nor its Subsidiaries shall change the
accounting principles used by it unless required by GAAP (or, if applicable with
respect to Subsidiaries, foreign generally accepted accounting principles);
(f) neither the Company nor any of its Subsidiaries shall acquire
or agree to acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or by any other manner, any business
or any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets of any
other Person (other than the purchase of assets in the ordinary course of
business consistent with past practice);
(g) neither the Company nor any of its Subsidiaries shall sell,
lease, exchange, mortgage, pledge, trans transfer or otherwise dispose of, or
agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose
of, any of its Assets, except in the ordinary course of business consistent with
past practice;
(h) neither the Company nor its Subsidiaries shall enter into any
material arrangement, agreement or contract, or any material amendment,
supplement, waiver or other modification in respect of any existing arrangement,
agreement or contract, with any third party (other than customers in the
ordinary course of business) that provides for an exclusive arrangement with
that third party or is substantially more restrictive on the Company or its
Subsidiaries or substantially less advantageous to the Company or its
Subsidiaries than arrangements, agreements or contracts existing on the date
hereof; and
(i) neither the Company nor any of its Subsidiaries shall compromise,
settle, grant any waiver or release relating to or otherwise adjust any
Litigation, except in the ordinary course of business consistent with past
practice, or involving a payment not in excess of $250,000, and following prior
notice to and consultation with MergerCo;
(j) neither the Company nor any of its Subsidiaries shall make any
material Tax election, amend any Tax Return or settle or compromise any material
federal, state, local or foreign Tax liability; and
34
<PAGE>
(k) neither the Company nor any of its Subsidiaries will enter into
an agreement, contract, commitment or arrangement to do any of the foregoing.
Section 5.2 No Solicitation by the Company.
------------------------------
(a) The Company shall not, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any of its directors, officers
or employees or any investment banker, financial advisor, attorney, accountant
or other representative retained by it or any of its subsidiaries to, directly
or indirectly through another person, (i) solicit, initiate or knowingly
-
encourage (including by way of furnishing non-public information), or take any
other action designed to facilitate, any inquiries or the making of any proposal
which constitutes a Company Takeover Proposal (as defined below) or (ii)
--
participate in any discussions or negotiations regarding any Company Takeover
Proposal; provided, however, that if and to the extent that, at any time prior
-------- -------
to the time of the adoption of this Agreement by the Company's shareholders at
the Special Meeting, the Board of Directors of the Company determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to act in a manner consistent with its fiduciary duties to the Company's
shareholders under applicable law, the Company may, in response to any Company
Takeover Proposal which was not solicited by it and which did not otherwise
result from a breach of this Section 5.2(a), and subject to providing prior
notice of any such proposal or any such request for non-public information and
of its decision to take such action to MergerCo and compliance with Section
5.2(c), (x) furnish information with respect to the Company and its Subsidiaries
to any person inquiring about or making a Company Takeover Proposal pursuant to
a customary confidentiality agreement (as determined by the Company based on the
advice of its outside counsel) and (y) participate in discussions or
negotiations regarding such Company Takeover Proposal. For purposes of this
Agreement, "Company Takeover Proposal" means any inquiry, proposal or offer from
any person relating to any Company Takeover Event. For purposes of this
Agreement, "Company Takeover Event" means any direct or indirect acquisition or
purchase of a business that constitutes 50% or more of the net revenues, net
income or assets of the Company and its Subsidiaries, taken as a whole, or 50%
or more of any class of equity securities of the Company, any tender offer or
exchange offer that if consummated would result in any person beneficially
owning 50% or more of any class of any
35
<PAGE>
equity securities of the Company, or any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company (or any Subsidiary whose business constitutes 50% or more
of the net revenues, net income or assets of the Company and its Subsidiaries
taken as a whole), other than the transactions contemplated by this Agreement.
(b) Except as expressly permitted by this Section 5.2, neither the
Board of Directors of the Company, the Special Committee nor any other committee
shall (i) withdraw or modify or propose publicly to withdraw or modify, in a
-
manner adverse to MergerCo, the approval or recommendation by such Board of
Directors or such committee of the Merger or this Agreement, (ii) approve or
--
recommend, or propose publicly to approve or recommend any Company Takeover
Proposal, or (iii) cause the Company to enter into any letter of intent,
---
agreement in principle, acquisition agreement or other similar agreement (each,
a "Company Acquisition Agreement") related to any Company Takeover Proposal
unless prior to the adoption of this Agreement by the Company's shareholders at
the Special Meeting, the Board of Directors of the Company, to the extent that
it determines in good faith, following the recommendation of the Special
Committee and after consultation with outside counsel, that in light of a
Company Superior Proposal it is necessary to do so in order to act in a manner
consistent with its fiduciary duties. For purposes of this Agreement, a
"Company Superior Proposal" means any proposal made by a third party to acquire,
directly or indirectly, including pursuant to a tender offer, exchange offer,
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of the
Company's capital stock then outstanding or all or substantially all the assets
of the Company and otherwise on terms which the Board of Directors of the
Company determines in its good faith judgment, is more favorable to the
Company's stockholders than the Merger.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 5.2, the Company shall immediately advise
MergerCo orally and in writing of any request for information or of any Company
Takeover Proposal and the material terms and conditions of such request or
Company Takeover Proposal.
36
<PAGE>
(d) Nothing contained in this Section 5.2 shall prohibit the Company
from taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders if, in the good faith judgment of the Board of Directors
of the Company, after consultation with outside counsel, failure so to disclose
would be inconsistent with its obligations under applicable law; provided,
--------
however, that, neither the Company nor its Board of Directors nor any committee
- -------
thereof shall withdraw or modify, or propose publicly to withdraw or modify, its
position with respect to this Agreement or the Merger or approve or recommend,
or propose publicly to approve or recommend, a Company Takeover Proposal except
to the extent permitted by Section 5.2(b).
Section 5.3 Access to Information. From the date of this Agreement
---------------------
until the Effective Time, the Company shall, and shall cause each of its
Subsidiaries to, afford to MergerCo and its authorized representatives
reasonable access during normal business hours upon reasonable prior notice to
all of its books and records, including but not limited to tax, financial and
accounting books and records. In addition, during such period, the Company
shall, and shall cause each of its Subsidiaries to, furnish promptly to MergerCo
(a) a copy of each report, schedule, registration statement and other document
-
filed or received by it during such period pursuant to the requirements of the
Exchange Act or other applicable Law and (b) such other information concerning
-
its business, properties and personnel as MergerCo may reasonably request.
MergerCo and its authorized representatives will use all reasonable efforts to
conduct all such inspections in a manner which will minimize any material
disruptions of the business and operations of the Company and its Subsidiaries.
Until the Effective Time, MergerCo will hold any such information in accordance
with the provisions of the certain letter agreement, dated November 5, 1997,
between CD&R and the Company (the "Confidentiality Agreement"), and will cause
such information to be so held by its Representatives (as defined in the
Confidentiality Agreement) of MergerCo. Upon a termination of this Agreement
pursuant to Section 7.1, MergerCo and its Representatives shall return or
destroy (and hold confidential) all information provided pursuant to this
Section 5.3 and all other Evaluation Material (as defined in the Confidentiality
Agreement) pursuant to the procedures set forth in the Confidentiality
Agreement.
37
<PAGE>
Section 5.4 Further Action; Reasonable Best Efforts.
---------------------------------------
(a) Upon the terms and subject to the conditions herein provided,
each of the parties hereto agrees to use its reasonable best 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,
including using reasonable best efforts to satisfy the conditions precedent to
the obligations of any of the parties hereto, to obtain all necessary
authorizations, consents and approvals, and to effect all necessary
registrations and filings. Each of the parties hereto will furnish to the other
parties such necessary information and reasonable assistance as such other
parties may reasonably request in connection with the foregoing and will provide
the other parties with copies of all filings made by such party with any
Governmental Entity or any other information supplied by such party to a
Governmental Entity in connection with this Agreement and the transactions
contemplated hereby.
(b) MergerCo and the Company shall use their respective reasonable
best efforts to resolve such objections, if any, as may be asserted with respect
to the transactions contemplated hereby under the laws, rules, guidelines or
regulations of any Governmental Entity. Without limiting the foregoing, each of
the Company and MergerCo shall, as soon as practicable, file (or cause its
respective "ultimate parent entity" within the meaning of the HSR Act to file)
Notification and Report Forms under the HSR Act (as defined below) with the
Federal Trade Commission (the "FTC") and Antitrust Division of the Department of
Justice (the "Antitrust Division") and shall use reasonable best efforts to
respond as promptly as practicable to all inquiries received from the FTC or the
Antitrust Division for additional information or documentation. Each party
hereto shall use its reasonable best efforts to take or cause to be taken all
actions necessary, proper or advisable to obtain any consent, waiver, approval
or authorization relating to any Competition Law that is required for the
consummation of the transactions contemplated by this Agreement. "Competition
Laws" means statutes, rules, regulations, orders, decrees, administrative and
judicial doctrines, and other laws that are designed or intended to prohibit,
restrict or regulate actions having the purpose or effect of monopolization,
lessening of competition or restraint of trade and includes the Hart-Scott-
Rodino Antitrust Im-
38
<PAGE>
provement Act of 1976, as amended (the "HSR Act") and, to the extent applicable,
equivalent laws of the European Union or the Member States thereof, and of other
countries.
(c) Except as provided in Sections 3.23 with respect to the
transactions contemplated by this Agreement, the Board of Directors of the
Company shall not so long as this Agreement is in effect (a) amend the Rights
Agreement in a manner adverse to the interests of MergerCo, or (b) take any
actions with respect to, or make any determination under, the Rights Agreement,
including, but not limited to, any redemption of the Rights or any action that
would have the effect of facilitating a Company Takeover Proposal or Company
Takeover Event.
Section 5.5 Employee Benefits. (a) Continuation of Employee
----------------- ------------------------
Benefits. For the period commencing at the Effective Time and ending on
- --------
December 31, 1998, the Surviving Corporation shall make available to employees
of the Company and the Subsidiaries employee benefits, other than equity based
benefits, that are substantially comparable in the aggregate to the aggregate
employee benefits made available to such employees immediately prior to the
Effective Time, provided that, nothing in this Section 5.5(a) shall be construed
--------
to preclude the provision of a lesser level of benefits to any employee of the
Company or any Subsidiary who consents to such lesser level of benefits in
writing.
(b) Certain Existing Agreements. From and after the Effective Time,
---------------------------
the Surviving Corporation shall honor, pay and perform all obligations under
each employment, severance and special termination agreement with any employee
of the Company or any Subsidiary in accordance with the terms thereof in effect
as of the date hereof (or as the same may be amended from time to time
hereafter, with the prior written approval of the Surviving Corporation).
Section 5.6 Shareholders' Meeting; Form S-4; Proxy Statement.
------------------------------------------------
(a) As promptly as practicable after the date hereof, the Company
shall prepare the Proxy Statement (as defined below), and the Company shall
prepare and file with the SEC, and MergerCo shall cooperate with the Company in
such preparation and filing, the Form S-4 in which the Proxy Statement, will be
included. The Company will use its best efforts, after consultation with
MergerCo, to respond promptly to any comments made by the SEC with respect to
the
39
<PAGE>
Form S-4 or the Proxy Statement and use its best efforts to have the Form S-4
declared effective under the Securities Act, as promptly as practicable
following such filing. The Company will use its best efforts to cause a
definitive proxy statement (the "Proxy Statement") to be mailed to its
shareholders as promptly as practicable after the Form S-4 is declared
effective. The Company shall include in the Proxy Statement the recommendation
of the Board and the Special Committee that shareholders of the Company approve
and adopt this Agreement and the transactions contemplated hereby.
(b) The Company shall, as soon as practicable following the date the
Form S-4 is declared effective under the Securities Act, in accordance with
applicable law and the Articles of Organization and the By-laws of the Company,
duly call, set a record date for, give notice of, convene and hold a special
meeting of its stockholders (the "Special Meeting") as promptly as practicable
after the date the Form S-4 is declared effective under the Securities Act for
the purpose of considering and taking action upon this Agreement and such other
matters as may be appropriate at the Special Meeting. The Company shall,
through its Board of Directors, recommend that its shareholders approve the
Merger and shall use all reasonable efforts to solicit from shareholders of the
Company proxies in favor of the approval and adoption of this Agreement and the
transactions contemplated hereby.
(c) The Company and MergerCo shall together prepare and file a
Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") under the
Exchange Act. Each of MergerCo and the Company shall furnish all information
concerning it, its affiliates and the holders of its capital stock required to
be included in the Schedule 13E-3 and, after consultation with each other, shall
respond promptly to any comments made by the SEC with respect to the Schedule
13E-3.
(d) The information supplied by the Company for inclusion in the Form
S-4, the Proxy Statement or the Schedule 13E-3 shall not, at the time the Form
S-4 is declared effective under the Securities Act, or at the time the Proxy
Statement is mailed, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading or, at the time of the Special Meeting, as then amended or
supplemented, or at the Effective Time, omit to state any material fact
necessary to
40
<PAGE>
correct any statement originally supplied by the Company for inclusion in the
Form S-4, the Proxy Statement or the Schedule 13E-3 which has become false or
misleading. If at any time prior to the Effective Time any event relating to the
Company or any of its affiliates, or its, or its affiliates', respective
officers, directors or shareholders, should be discovered which should be set
forth in an amendment of, or a supplement to such Form S-4, Proxy Statement or
Schedule 13E-3, the Company shall promptly so inform MergerCo and will furnish
all necessary information to MergerCo relating to such event and an appropriate
amendment or supplement to such Form S-4, Proxy Statement or Schedule 13E-3 will
thereafter be filed with the SEC by the Company. All documents that the Company
is responsible for filing with the SEC in connection with the transactions
contemplated by this Agreement shall comply in all material respects, both as to
form and otherwise, with the Exchange Act and/or the Securities Act, as the case
may be, and the rules and regulations thereunder. The Company shall also take
any action required to be taken under any applicable state securities laws in
connection with the registration and qualification in connection with the Merger
of Recapitalized Common Stock following the Merger.
(e) The Company will immediately notify MergerCo of (i) the
effectiveness of the Form S-4, (ii) the receipt of any comments from the SEC and
(iii) any request by the SEC for any amendment to the Form S-4 or for additional
information. All filings with the SEC, including the Form S-4 and any amendment
thereto, and all mailings to the Company's stockholders in connection with the
Merger, including the Proxy Statement, shall be subject to the prior review,
comment and approval of MergerCo. No such filing or mailing shall be made
without the prior consent of MergerCo.
(f) The information supplied or to be supplied by MergerCo for
inclusion in the Form S-4, the Proxy Statement or the Schedule 13E-3 shall not,
at the time the Form S-4 is declared effective under the Securities Act, or at
the time the Proxy Statement is mailed, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or, at the time of the
Special Meeting, as then amended or supplemented, or at the Effective Time, omit
to state any material fact necessary to correct any statement originally
supplied by MergerCo for inclusion in the Proxy Statement or the Schedule 13E-3
which has become false or misleading. If at any time prior to the
41
<PAGE>
Effective Time any event relating to MergerCo or any of its affiliates, or its
affiliates' respective officers, directors or shareholders should be discovered
which should be set forth in an amendment of, or a supplement to, such Form S-4,
Proxy Statement or Schedule 13E-3, MergerCo shall promptly so inform the Company
and will furnish all necessary information to the Company relating to such event
and an appropriate amendment or supplement to such Form S-4, Proxy Statement or
Schedule 13E-3 will thereafter be filed with the SEC by the Company. All
documents that MergerCo is responsible for filing with the SEC in connection
with the transactions contemplated by this Agreement shall comply in all
material respects, both as to form and otherwise, with the Exchange Act and the
rules and regulations thereunder.
(g) The Company shall use its reasonable best efforts to cause its
independent accountants to deliver two letters, one dated as of the date on
which the Form S-4 shall become effective under the Securities Act and one dated
as of the Closing Date, each addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance for
comfort letters delivered by independent public accounts in connection with
registration statements similar to the Form S-4.
Section 5.7 Notification of Certain Matters. The Company shall give
-------------------------------
prompt notice to MergerCo, and MergerCo shall give prompt notice to the Company,
of (i) the occurrence or non-occurrence of any event the occurrence or non-
-
occurrence of which would cause any representation or warranty of the Company,
or of MergerCo, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at the Effective Time, (ii) any material
--
failure of the Company, or MergerCo, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder and (iii) any event, occurrence, fact, condition, change,
---
development or effect that, individually or in the aggregate, would have or
result in a Material Adverse Effect or a breach of Section 5.1.
Section 5.8 Directors' and Officers' Insurance and Indemnification.
---------------------------------- -------------------
(a) For a period of six years after the Effective Time, the Surviving
Corporation shall indemnify, defend and hold harmless the present and former
officers, directors, employees and agents of the Company and its Subsidiaries in
such capacities ("Indemnified Parties") against all losses,
42
<PAGE>
claims, damages, expenses or liabilities arising out of actions or omissions or
alleged actions or omissions occurring at or prior to the Effective Time to the
same extent and on the same terms and conditions (including with respect to
advancement of expenses) provided for in the Company's Articles of Organization
and By-Laws in effect at the date hereof (to the extent consistent with
applicable law).
(b) For a period of six years after the Effective Time, the Surviving
Corporation shall maintain in effect directors' and officers' liability
insurance covering the persons who are currently covered by the Company's
existing directors' and officers' liability insurance with respect to claims
arising from facts or events which occurred at or prior to the Effective Time,
on terms and conditions no less favorable to such directors and officers than
those in effect on the date hereof;
(c) The provisions of this Section 5.8 are intended for the benefit
of, and shall be enforceable by, the respective Indemnified Parties. Nothing in
this Section 5.8 shall limit or restrict the right or ability of the Surviving
Corporation to change its state of domicile to Delaware.
Section 5.9 Publicity. Neither the Company, MergerCo nor any of
---------
their respective affiliates shall issue or cause the publication of any press
release or other announcement with respect to the Merger, this Agreement or
the other transactions contemplated hereby without the prior consultation of the
other party, except as may be required by law or by any listing agreement with a
national securities exchange if all reasonable efforts have been made to consult
with the other party.
Section 5.10 Shareholder Litigation. Each of the Company and MergerCo
----------------------
shall give the other the reasonable opportunity to participate in the defense of
any shareholder litigation against the Company or MergerCo, as applicable, and
its directors relating to the transactions contemplated by this Agreement.
Section 5.11 Recapitalization. Each of the Company and MergerCo
----------------
shall use its best efforts to cause the transactions contemplated by this
Agreement, including the Merger, to be accounted for as a recapitalization and
such accounting treatment to be accepted by their respective accountants and by
the SEC, and each of the Company and
43
<PAGE>
MergerCo agrees that it shall take no action that would cause such accounting
treatment not to be obtained.
Section 5.12 Conveyance Taxes. MergerCo and the Company shall
----------------
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees or any similar taxes
which become payable by the Company or any of its Subsidiaries in connection
with the transactions contemplated by this Agreement that are required or
permitted to be filed on or before the Effective Time.
Section 5.13 Delisting. Each of the parties agrees to cooperate with
---------
each other in taking, or causing to be taken, all actions necessary to delist
the Company Common Stock from the NYSE, provided that such delisting shall not
be effective until after the Effective Time of the Merger. Notwithstanding the
foregoing, the Surviving Corporation will not take any action, for at least five
years after the Effective Time (the "Registration Period"), to terminate the
registration of the Recapitalized Common Stock under Section 12 of the Exchange
Act other than in connection with a merger in which the Surviving Corporation is
not the surviving corporation unless less than 100 record holders of shares of
Recapitalized Common Stock and any other shares of capital stock of the
Surviving Corporation (or any successor entity by merger or otherwise, issued in
respect of such shares, whether as a result of stock splits, stock dividends,
reclassifications, recapitalizations or similar events) are non-affiliates of
the Surviving Corporation. The Surviving Corporation will continue to file
timely and accurately all reports required by Sections 13(a) and 15(d) of the
Exchange Act, until the earlier to occur of (x) the expiration of the
Registration Period and (y) such time as the Recapitalized Common Stock is no
longer registered under Section 12 of the Exchange Act.
Section 5.14 Affiliates. Prior to the Closing Date, the Company
----------
shall deliver to MergerCo a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the stockholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use its reasonable best efforts to cause each such person to
deliver to MergerCo on or prior to the Closing Date a written agreement
substantially in the form attached as Exhibit B hereto.
44
<PAGE>
Section 5.15 Letter as to Solvency. The parties hereto shall engage
---------------------
an appraisal firm to deliver a letter addressed to the Board of Directors of the
Company and the Company (and on which the Board of Directors shall be entitled
to rely) indicating that immediately after the Effective Time, and after giving
effect to the Merger and the financings contemplated by this Agreement and any
other transactions contemplated in connection with the Merger, the Surviving
Corporation will not (i) be insolvent or (ii) have unreasonably small capital
- --
with which to engage in its business
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Each Party's Obligation To Effect the
---------------------------------------------------
Merger. The respective obligation of each party to effect the Merger shall be
- ------
subject to the satisfaction on or prior to the Closing Date of each of the
following conditions (any or all of which may be waived by the parties hereto in
writing, in whole or in part, to the extent permitted by applicable law):
(a) No statute, rule, order, decree or regulation shall have been
enacted or promulgated by any Governmental Entity of competent jurisdiction
(whether temporary, liminary or permanent) which is in effect and has the
effect of prohibiting the consummation of the Merger or making the Merger
illegal;
(b) There shall be no order or injunction of a Governmental Entity of
competent jurisdiction (whether temporary, preliminary or permanent) in effect
precluding, restraining, enjoining or prohibiting consummation of the Merger;
(c) The Form S-4 (including the Proxy Statement) in form and
substance consistent with the intent of the Parties set forth in Section 5.11
shall have become effective under the Securities Act and shall not be the
subject of any stop order or proceedings seeking a stop order, and any material
"blue sky" and other state securities laws applicable to the registration and
qualification of the Recapitalized Common Stock following the Merger shall have
been complied with.
45
<PAGE>
(d) The applicable waiting period under the HSR Act with respect to
the actions contemplated by this Agreement shall have expired or been
terminated; and
(e) Other than filing the Articles of Merger in accordance with the
MBCL and the Certificate of Merger in accordance with the DGCL, all
authorizations, consents and approvals of all Governmental Entities required to
be obtained prior to consummation of the Merger shall have been obtained, except
for such authorizations, consents, and approvals the failure of which to be
obtained would not have a Material Adverse Effect.
(f) The Board of Directors of the Company and the Company shall have
received the letter contemplated by Section 5.15.
Section 6.2 Conditions to the Obligation of the Company to Effect the
---------------------------------------------------------
Merger. The obligation of the Company to effect the Merger is further subject
- ------
to the satisfaction or waiver at or prior to the Effective Time of the following
conditions:
(a) The representations and warranties of MergerCo contained in this
Agreement shall be true and correct at and as of the date hereof, and true and
correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in the
case of any representation or warranty without any materiality qualification) at
and as of the Effective Time as if made at and as of such time; and
(b) MergerCo shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Effective Time pursuant to the terms hereof.
Section 6.3 Conditions to Obligations of MergerCo to Effect the
---------------------------------------------------
Merger. The obligations of MergerCo to effect the Merger are further subject to
- ------
the satisfaction or waiver at or prior to the Effective Time of the following
conditions:
(a) The representations and warranties of the Company contained in
this Agreement shall be true and correct at and as of the date hereof, and true
and correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in the
case of any representation or warranty
46
<PAGE>
without any materiality qualification) at and as of the Effective Time as if
made at and as such time;
(b) The Company shall have performed in all material respects its
obligations under this Agreement required to be performed by it at or prior to
the Effective Time pursuant to the terms hereof;
(c) MergerCo and the Company shall have received sufficient funds to
pay the Merger Consideration, repay or redeem all of the existing indebtedness
of the Company and its Subsidiaries, and otherwise enable MergerCo to consummate
the transactions contemplated hereby and to meet the working capital
requirements of the Surviving Corporation pursuant to financing arrangements and
definitive financing agreements completed to the satisfaction of MergerCo in its
reasonable judgment;
(d) The number of Dissenting Shares shall not exceed 5% of the issued
and outstanding shares of Company Common Stock;
(e) No event, occurrence, fact, condition, change, development or
effect shall exist or have occurred or come to exist or been threatened since
September 30, 1997 that, individually or in the aggregate, has had or resulted
in, or could reasonably be expected to become or result in, a Material Adverse
Effect;
(f) All outstanding Rights issued and outstanding under the Rights
Agreement shall have been terminated and the Rights Agreement shall have
terminated and be of no further force or effect, as contemplated by Section
3.23.
ARTICLE VII
TERMINATION
Section 7.1 Termination. Notwithstanding any thing herein to the
-----------
contrary, this Agreement may be terminated and the Merger may be abandoned at
anytime prior to the Effective Time, whether before or after shareholder
approval thereof:
(a) By the mutual consent of the Boards of Directors of MergerCo and
the Company.
(b) By either the Company, on the one hand, or MergerCo, on the other
hand, if: (i) the Merger has not been
-
47
<PAGE>
consummated on or prior to June 30, 1998 or such other date, if any, as MergerCo
and the Company shall agree upon (provided that the right to terminate this
Agreement under this Section 7.1(b)(i) shall not be available to a party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Effective Time to occur on or before such date);
or (ii) any Governmental Entity shall have issued a statute, order, decree or
--
regulation or taken any other action (which statute, order, decree, regulation
or other action the parties hereto shall use their best efforts to lift), in
each case permanently restraining, enjoining or otherwise prohibiting the Merger
or making the Merger illegal and such statute, order, decree, regulation or
other action shall have become final and non-appealable.
(c) By the Company, (i) if holders of two-thirds of the outstanding
-
Company Common Stock fail to approve and adopt this Agreement and the
transactions contemplated hereby at the Special Meeting (including any
postponement or adjournment thereof), or (ii) if, prior to the Effective Time,
--
either of the Board of Directors of the Company or the Special Committee, shall
have withdrawn, or modified or changed in a manner adverse to MergerCo its
approval or recommendation of this Agreement or the Merger pursuant to Section
5.2; provided in the case of (ii) that such termination shall not be effective
--------
until the Company has made payment to CD&R (as defined in Section 8.1(b)) of the
Fee (as defined in Section 8.1(b)) and has either paid to MergerCo or deposited
with a mutually acceptable escrow agent $5 million for reimbursement to MergerCo
of Expenses (as defined in Section 8.1(b)), in each case in accordance with
Section 8.1.
(d) By the Company, upon 15 days' prior written notice, in the event
of a material breach of any representation, warranty, covenant or agreement on
the part of MergerCo such that the condition set forth in Section 6.2(a) or
6.2(b) would not be satisfied as of the Effective Time, which breach is not
cured prior to the expiration of such 15 day period (provided that if such
--------
breach is not curable, the Company may terminate this Agreement immediately
under this Section 7.1(d)); except where the Company is in material breach of
any representation, warranty, covenant or agreement as provided in Section
7.1(e).
(e) By MergerCo, upon 15 days' prior written notice, in the event of
a material breach of any
48
<PAGE>
representation, warranty, covenant or agreement on the part of the Company such
that the condition set forth in Section 6.3(a) or 6.3(b) would not be satisfied
as of the Effective Time, which breach is not cured prior to the expiration of
such 15 day period (provided that if such breach is not curable, MergerCo may
--------
terminate this Agreement immediately under this Section 7.1(e)); except where
MergerCo is in material breach of any representation, warranty, covenant or
agreement as provided in Section 7.1(d).
(f) By MergerCo, if (i) holders of at least two-thirds of the
-
outstanding Company Common Stock fail to approve and adopt this Agreement and
the transactions contemplated hereby at the Special Meeting (including any
postponement or adjournment thereof); (ii) either the Board of Directors of the
--
Company or the Special Committee withdraws, modifies or changes its
recommendation of this Agreement or the Merger in a manner adverse to MergerCo
or shall have resolved to do any of the foregoing or the Board of Directors of
the Company shall have recommended to the shareholders of the Company any
Company Takeover Proposal or resolved to do so; or (iii) a tender offer or
---
exchange offer for outstanding shares of capital stock of the Company then
representing 20% or more of the combined power to vote generally for the
election of directors is commenced, and the Board of Directors of the Company
does not recommend that stockholders not tender their shares into such tender or
exchange offer.
Section 7.2 Effect of Termination. In the event of the termination
---------------------
of this Agreement as provided in Section 7.1, written notice thereof shall
forthwith be given by the terminating party or parties to the other party or
parties specifying the provision hereof pursuant to which such termination is
made, and this Agreement shall forthwith become null and void, and there shall
be no liability on the part of MergerCo or the Company, except as set forth in
Section 8.1 hereof and except with respect to the requirement to comply with
the Confidentiality Agreement and return, destroy or hold Evaluation Material
pursuant to the procedures set forth therein or set forth in Section 5.3;
provided that nothing herein shall relieve any party from any liability or
- --------
obligation with respect to any wilful breach of this Agreement.
ARTICLE VIII
MISCELLANEOUS
49
<PAGE>
Section 8.1 Fees and Expenses. (a) Except as contemplated by this
-----------------
Agreement, all costs and expenses incurred in connection with this Agreement and
the consummation of the transactions contemplated hereby shall be paid by the
party incurring such expenses except that the Company shall bear and pay the
costs and expenses incurred in connection with (i) the preparation, filing,
-
printing and mailing of the Form S-4 and the Proxy Statement (including SEC
filing fees) and (ii) the filing of the Schedule 13E-3.
--
(b) The Company shall promptly pay Clayton, Dubilier & Rice, Inc.
("CD&R") a termination fee of $24.5 million (the "Fee") (x) in the event that
-
this Agreement is terminated pursuant to Sections 7.1(c)(i), 7.1(e) or 7.1(f)(i)
or (iii), provided that (A) prior to the time this Agreement is terminated or
--------
the time of the Special Meeting, as the case may be, a Company Takeover Proposal
shall have been publicly announced or shall have become publicly known and (B)
during the term of this Agreement or within twelve months after the termination
of this Agreement a Company Takeover Event shall occur, (y) the Company
-
terminates this Agreement pursuant to Section 7.1(c)(ii), or (z) MergerCo
-
terminates this Agreement pursuant to Section 7.1(f)(ii). In addition, the
Company shall promptly pay MergerCo an amount equal to all Expenses in the event
of any termination of this Agreement other than a termination resulting from (i)
-
the failure by MergerCo to fulfill any of their material obligations under this
Agreement or (ii) the failure of the condition specified in Section 6.1(c) to be
--
satisfied because recapitalization accounting treatment is not available for the
transactions contemplated by this Agreement, including the Merger. All such
payments shall be in immediately available funds. In the event that the Company
shall pay MergerCo an amount in respect of Expenses as contemplated by the
proviso to Section 7.1(c), and such amount shall subsequently prove to exceed
the amount of Expenses actually incurred, MergerCo shall refund the excess to
the Company. The term "Expenses" means all documented out-of-pocket fees, costs
and other expenses, not to exceed $5 million, incurred or assumed by MergerCo or
incurred on its behalf in connection with this Agreement or any of the
transactions contemplated hereby, including but not limited to in connection
with the negotiation, preparation, execution and performance of this Agreement,
the structuring and financing of the Merger and the other transactions
contemplated hereby, or any commitments or agreements relating to such
financing.
50
<PAGE>
(c) The Company acknowledges that the agreements contained in this
Section 8.1 are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, MergerCo would not enter into
this Agreement; accordingly, if the Company fails promptly to pay the amount due
pursuant to this Section 8.1, and, in order to obtain such payment, MergerCo
commences a suit which results in a judgment against the Company for any of the
Fees or Expenses set forth in this Section 8.1, the Company shall pay to
MergerCo its costs and expenses (including attorneys' fees and expenses) in
connection with such suit, together with interest on the amount of such Fees and
Expenses at the rate on six-month U.S. Treasury obligations plus 300 basis
points in effect on the date such payment was required to be made.
(d) This Section 8.1 shall survive any termination of this Agreement.
Section 8.2 Amendment; Waiver.
-----------------
(a) This Agreement may be amended by the parties hereto, by action
taken or authorized by their respective Boards of Directors (and, in the case of
the Company, the Special Committee), at any time before or after approval by the
shareholders of the Company of the matters presented in connection with the
Merger, but after any such approval no amendment shall be made without the
approval of such shareholders if such amendment changes the Merger Consideration
or alters or changes any of the other terms or conditions of this Agreement if
such alteration or change would materially adversely affect the rights of such
shareholders. Except as otherwise provided in Section 2.3 with respect to
Schedule 2.3, this Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
(b) At any time prior to the Effective Time, the parties may (i)
-
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (ii) waive any inaccuracies in the representations and
--
warranties of the other parties contained herein or in any document, certificate
or writing delivered pursuant hereto or (iii) waive compliance with any of the
---
agreements or conditions of the other parties hereto contained herein. Any such
extension or waiver by the Company shall require the consent of the Special
Committee or the Board of Directors of the Company. Any agreement on the part
of any party to any such extension or waiver shall be valid only if
51
<PAGE>
set forth in an instrument in writing signed on behalf of such party. Any such
waiver shall constitute a waiver only with respect to the specific matter
described in such writing and shall in no way impair the rights of the party
granting such waiver in any other respect or at any other time. Neither the
waiver by any of the parties hereto of a breach of or a default under any of the
provisions of this Agreement, nor the failure by any of the parties, on one or
more occasions, to enforce any of the provisions of this Agreement or to
exercise any right or privilege hereunder, shall be construed as a waiver of any
other breach or default of a similar nature, or as a waiver of any of such
provisions, rights or privileges hereunder. The rights and remedies herein
provided are cumulative and none is exclusive of any other, or of any rights or
remedies that any party may otherwise have at law or in equity. The rights and
remedies of any party based upon, arising out of or otherwise in respect of any
inaccuracy or breach of any representation, warranty, covenant or agreement or
failure to fulfill any condition shall in no way be limited by the fact that the
act, omission, occurrence or other state of facts upon which any claim of any
such inaccuracy or breach is based may also be the subject matter of any other
representation, warranty, covenant or agreement as to which there is no
inaccuracy or breach. The representations and warranties of the Company shall
not be affected or deemed waived by reason of any investigation made by or on
behalf of MergerCo (including but not limited to any of its advisors, counsel,
consultants or representatives) or by reason of the fact that MergerCo or any of
such advisors, counsel, consultants or representatives knew or should have known
that any such representation or warranty is or might be inaccurate.
Section 8.3 Survival. The respective representations and warranties
--------
of MergerCo and the Company contained herein or in any certificates or other
documents delivered prior to or as of the Effective Time shall not survive
beyond the Effective Time. The covenants and agreements of the parties hereto
(including the Surviving Corporation after the Merger) shall survive the
Effective Time without limitation (except for those which, by their terms,
contemplate a shorter survival period).
Section 8.4 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given upon (a) transmitter's
-
confirmation of a receipt of a facsimile transmission, (b) confirmed delivery
-
by a standard overnight carrier or when delivered by hand or
52
<PAGE>
(c) the expiration of five business days after the day when mailed in the
-
United States by certified or registered mail, postage prepaid, addressed at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to the Company, to:
Dynatech Corporation
Corporate Headquarters
3 New England Executive Park
Burlington, Massachusetts 01803
Facsimile: (617) 229-8850
Telephone: (781) 272-6100
Attention: General Counsel
and
Attention: Mark V. B. Tremallo, Esq.
with a copy to:
Hale & Dorr LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) 526-5000
Telephone: (617) 526-6000
Attention: Peter Tarr
and with a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Facsimile: (617) 951-7050
Telephone: (617) 951-7000
Attention: John E. Beard, Esq.
(b) if to MergerCo, to:
CDRD Merger Corporation
c/o the Clayton, Dubilier & Rice
Fund V Limited Partnership
1043 Foulk Road, Suite 106
Wilmington, Delaware 19803
53
<PAGE>
with a copy to
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, New York 10152
Facsimile: (212) 407-5252
Telephone: (212) 407-5200
Attention: Brian D. Finn
and with a copy to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telephone: (212) 909-6000
Facsimile: (212) 909-6836
Attention: Franci J. Blassberg, Esq.
Section 8.5 Interpretation. When a reference is made in this
--------------
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. Whenever the words "include", "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation". The phrase "made available" when used in this
Agreement shall mean that the information referred to has been made available
to the party to whom such information is to be made available. The words
"affiliates" and "associates" when used in this Agreement shall have the
respective meanings ascribed to them in Rule 12b-2 under the Exchange Act. The
phrase "beneficial ownership" and words of similar import when used in this
Agreement shall have the meaning ascribed to it in Rule 13d-3 under the
Exchange Act.
Section 8.6 Headings; Schedules. The headings contained in this
-------------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Disclosure of any matter
pursuant to any Schedule to the Disclosure Schedule shall not be deemed to be an
admission or representation as to the materiality of the item so disclosed.
Section 8.7 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original but all of which
shall be considered one and the same agreement.
Section 8.8 Entire Agreement; Third Party Beneficiaries. This
-------------------------------------------
Agreement, together with the
54
<PAGE>
Confidentiality Agreement, (a) constitutes the entire agreement, and supersedes
all prior agreements and understandings (written and oral), among the parties
with respect to the subject matter hereof and (b) except for the provisions of
Sections 5.8, 5.13 and 8.1(b), are not intended to confer upon any person other
than the parties any rights or remedies.
Section 8.9 Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, 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.
Section 8.10 Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of New York, except to the
extent that it is mandatorily governed by the laws of the Commonwealth of
Massachusetts.
Section 8.11 Assignment. Neither this Agreement nor any of the
----------
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, that MergerCo may assign this
--------
Agreement to any Subsidiary of MergerCo. This Agreement will be binding upon,
inure to the benefit of and be enforceable by, the parties and their respective
successors and assigns.
55
<PAGE>
IN WITNESS WHEREOF, MergerCo and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
DYNATECH CORPORATION
By: /s/ John F. Reno
--------------------------------
Name: John F. Reno
Title: Chairman, President
and Chief Executive
Officer
[Seal]
By: /s/ Allan M. Kline
--------------------------------
Name: Allan M. Kline
Title: Corporate Vice President,
Chief Financial Officer
and Treasurer
CDRD MERGER CORPORATION
By: /s/ Brian D. Finn
--------------------------------
Name: Brian D. Finn
Title: President
[Seal]
By: /s/ Joseph L. Rice, III
--------------------------------
Name: Joseph L. Rice, III
Title: Vice President and
Treasurer
56
<PAGE>
Appendix B
[LETTERHEAD OF MERRILL LYNCH APPEARS HERE]
December 20, 1997
Board of Directors
Dynatech Corporation
3 New England Executive Park
Burlington, Massachusetts 01803
Members of the Board of Directors:
Dynatech Corporation (the "Company") and CDRD Merger Corporation
("MergerCo"), a corporation formed by Clayton, Dubilier & Rice Fund V Limited
Partnership (the "Fund"), propose to enter into an Agreement and Plan of Merger
(the "Agreement") pursuant to which MergerCo will be merged with and into the
Company in a transaction (the "Merger") in which (i) the Company will be the
surviving corporation (the "Surviving Corporation") and (ii) each outstanding
share of the Company's common stock, par value $0.20 per share (the "Shares"),
other than Shares held by the Company as treasury stock or that are held by
MergerCo and other than Dissenting Shares (as defined in the Agreement), will be
converted into the right to receive (A) $47.75 in cash, without interest, and
(B) 0.5 shares of Class A common stock, no par value per share, of the Surviving
Corporation (the "Recapitalized Common Stock"). The Merger is expected to be
considered by the shareholders of the Company at a special shareholders' meeting
in early 1998 and consummated on or shortly after the date of such meeting
(assuming the shareholders of the Company approve the Merger).
You have asked us whether, in our opinion, the proposed consideration to be
received in the Merger pursuant to the Agreement by the holders of the Shares
(other than the Company, with respect to treasury stock, and MergerCo) is fair
from a financial point of view to such holders.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and information relating to certain pro
forma effects on the Company's capital structure after giving effect
to the Merger furnished to us by the Company and the Fund;
(3) Conducted discussions with members of senior management of the
Company and of the Fund concerning the matters described in clauses 1
and 2 above;
B-1
<PAGE>
[LOGO OF MERRILL LYNCH APPEARS HERE]
(4) Reviewed the market prices and valuation multiples for the Shares and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(5) Reviewed the results of operations of the Company and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
(6) Compared the proposed financial terms of the Merger with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Fund;
(8) Reviewed a draft dated December 19, 1997 of the Agreement; and
(9) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities, contingent or otherwise, of the Company or been furnished with any
such evaluation or appraisal. In addition, we have not assumed any obligation
to conduct any physical inspection of the properties or facilities of the
Company. With respect to the financial forecast information furnished to or
discussed with us by the Company and the information regarding certain pro forma
effects on the Company's capital structure after giving effect to the Merger, we
have assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of the Company's management as to the
expected future financial performance of the Company and, subsequent to the
Merger, the Surviving Corporation, and as to such pro forma effects on the
Company's capital structure, respectively. We also assumed that the Merger will
be accounted for as a recapitalization under generally accepted accounting
principles. We have further assumed that the final form of the Agreement will
be substantially similar to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. Additionally, for the purposes of rendering this
opinion, we have assumed in all respects material to our analysis that the
representations and warranties of each party in the Agreement are true and
correct, that each party to the Agreement will perform all of the covenants and
agreements required to be performed by such party under the Agreement, and that
all conditions to the consummation of the Merger will be satisfied without
waiver thereof.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or any
part of the Company. In connection with the preparation of this opinion, we
have not been asked to consider, and this opinion does not in any manner
address, the value of the Recapitalized Common Stock or the prices at which
shares of the Recapitalized Common Stock will actually trade following
consummation of the Merger.
We are acting as financial advisor to the Board of Directors in connection
with the Merger and will receive a fee for our services, a significant portion
of which is contingent upon the consummation of the Merger. In addition, the
Company has agreed to indemnify us for certain liabilities arising out of our
engagement. We are currently providing and have, in the past, provided
financial advisory and financing
<PAGE>
[LOGO OF MERRILL LYNCH APPEARS HERE]
services to the Fund and/or its affiliates and may continue to do so and have
received, and may receive, fees for the rendering of such services. In addition,
in the ordinary course of our business, we may actively trade the Shares for our
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger or
any matter related thereto.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the proposed consideration to be received in the Merger
pursuant to the Agreement by the holders of the Shares (other than the Company,
with respect to treasury stock, and MergerCo) is fair from a financial point of
view to such holders.
Very truly yours,
[SIGNATURE APPEARS HERE]
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
<PAGE>
Appendix C
The Commonwealth of Massachusetts
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL J. CONNOLLY, Secretary
ONE ASHBURTON PLACE BOSTON, MASSACHUSETTS 02108
ARTICLES OF ORGANIZATION
(Under G.L. Ch. 156B)
ARTICLE 1
The name of the corporation is:
DYNATECH CORPORATION
ARTICLE II
The purpose of the corporation is to engage
in the following business activities:
To carry on any engineering, research, consulting, development, manufacturing,
mercantile, selling, management, service or other business operation or activity
which may be lawfully carried on by a corporation organized under the Business
Corporation Law of the Commonwealth of Massachusetts.
Note: If the space provided under any article or item on this form is
insufficient additions shall be set forth on a Separate 8 1/2 x 11 sheet of
paper leaving a left hand margin at least 1 inch. Additions to more than one
article maybe continued on a single sheet so long as each article requiring each
such addition is clearly indicated.
C-1
<PAGE>
ARTICLE III
The Type and issuance of stock and the total number of shares and par value, if
any, of each type and class of stock which the corporation is authorized to
issue
WITHOUT PAR VALUE STOCKS
<TABLE>
<CAPTION>
-------------------------------------
TYPE NUMBER OF SHARES
-------------------------------------
<S> <C>
COMMON:
200,000,000
-------------------------------------
PREFERRED:
-------------------------------------
</TABLE>
WITH PAR VALUE STOCKS
<TABLE>
<CAPTION>
---------------------------------------------------
TYPE NUMBER OF SHARES PAR VALUE
---------------------------------------------------
<S> <C> <C>
COMMON:
---------------------------------------------------
PREFERRED:
100,000 $1
---------------------------------------------------
</TABLE>
ARTICLE IV
If more than one type, class or series is authorized, a description of each
_____, if any, the preferences, voting powers, qualifications, special or
relative rights or privileges as to each type and class thereof and any series
now established.
See pages 2A - 2G
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are as follows:
None
ARTICLE VI
Other lawful provisions, if any, for the conduct and regulation of business and
affairs of the corporation, for its voluntary dissolution, or for limiting,
defining, regulating the powers of the corporation, or of its directors or
stockholders or of any class of shareholders: (if there are no provisions state
"None".)
See pages 2H - 2M
Note: The preceding (6) articles are considered to be permanent and may only
be changed by filing appropriate articles of amendment.
<PAGE>
Article IV
----------
A description of each of the different classes of stock with the
preferences, voting powers, qualifications, special or relative rights or
privileges as to each class thereof is as follows:
SERIAL PREFERENCE STOCK
-----------------------
1. Issuance. The Serial Preference Stock may from time to time be
--------
divided into and issued in one or more series. The different series shall be
established and designated, and the variations in the relative rights and
preferences as between the different series shall be fixed and determined by the
Board of Directors as provided in Section 2 hereof. In all other respects all
shares of Serial Preference Stock shall be identical.
The Serial Preference Stock may be issued from time to time by
authority of the Board of Directors for such consideration as from time to time
may be fixed by vote of the Board of Directors providing for the issue of such
stock.
2. Rights and Privileges. The Board of Directors is hereby
---------------------
expressly authorized, subject to the provisions of these Articles of
Organization, to establish one or more series of Serial Preference Stock and,
with respect to such series, to fix and determine by vote providing for the
issue of such series:
(a) the number of shares to constitute such series and the
distinctive designation thereof;
(b) the dividend rate on the shares of such series and the dividend
payment dates;
(c) whether or not the shares of such series shall be redeemable,
and, if redeemable, the redemption prices which the shares of such series
shall be
2A
<PAGE>
entitled to receive and the terms and manner of redemption;
(d) the preferences, if any, and the amounts which the shares of such
series shall be entitled to receive and all other special or relative
rights of the shares of such series, upon the voluntary and involuntary
dissolution of, or upon any distribution of the assets of, the Corporation;
(e) whether or not the shares of such series shall be subject to the
operation of retirement or sinking funds to be applied for redemption of
such shares and, if such retirement or sinking fund or funds be
established, the annual amount thereof and the terms and provisions
relative to the operation thereof;
(f) whether or not the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any
other series of the same or any other class or classes of stock of the
Corporation and the conversion price or prices or ratio or ratios or the
rate or rates at which such exchange may be made, with such adjustments, if
any, as shall be stated in such vote;
(g) whether or not the shares of such series shall have voting
rights, and, if so, the conditions under which the shares of such series
shall vote as a separate class; and
(h) such other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions of such series to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts.
Notwithstanding the fixing of the number of shares constituting a particular
series, the Board of Directors may at any time thereafter authorize the issuance
of additional shares of the same series.
2B
<PAGE>
3. Dividends. Holders of Serial Preference Stock shall be entitled
---------
to receive, when and as declared by the Board of Directors but only out of funds
legally available for the payment of dividends, cash dividends (which may be
cumulative) at the annual rates fixed by the Board of Directors for the
respective series and no more, payable on such dates in each year as the Board
of Directors shall fix for the respective series as provided in subsection 2(b)
(hereinafter referred to as "dividend dates"). Until all accrued dividends on
all series of Serial Preference Stock which bear cumulative dividends have been
declared and set apart for payment through the last preceding dividend date set
for all such series, no cash payment or distribution shall be made to holders of
any other class of Stock of the Corporation. Dividends on shares of Serial
Preference Stock of any series which bears cumulative dividends shall accumulate
from and after the day on which such shares are issued, but arrearages in the
payment of dividends on any shares of Serial Preference Stock shall not bear
interest. No dividend shall be declared and set apart for payment on any series
of Serial Preference Stock in respect of any dividend period unless there shall
likewise be declared and set apart for payment on all shares of Serial
Preference Stock of each series at the time outstanding such dividends as would
be payable on the said shares through the last preceding dividend date if all
dividends were declared and paid in full. Nothing herein contained shall be
deemed to limit the right of the Corporation to purchase or otherwise acquire at
any time any shares of its capital stock; provided that no shares of capital
stock shall be repurchased at any time when accrued dividends on any series of
Serial Preference Stock which bears cumulative dividends remain unpaid for any
period to any including the last preceding dividend date.
For purposes of these Articles of Organization, and of any vote fixing
the terms of any series of Serial Preference Stock the amount of dividends
"accrued" on any share of Serial Preference Stock of any series as at any
dividend date which bears cumulative dividends shall be
2C
<PAGE>
deemed to be the amount of any unpaid dividends accumulated thereon to and
including such dividend date, whether or not earned or declared, and the amount
of dividends "accrued" on any such share of Serial Preference Stock of any
series which bears cumulative dividends as at any date other than a dividend
date shall be calculated as the amount of any unpaid dividends accumulated
thereon to and including the last preceding dividend date, whether or not earned
or declared, plus an amount computed, on the basis of 360 days per annum, for
the period after such last preceding dividend date to and including the date as
of which the calculation is made at the annual dividend rate fixed for the
shares of such series.
4. Preference Upon Dissolution. Upon the dissolution of, or upon
---------------------------
any distribution of the assets of, the Corporation, before any payment or
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for any other class of stock, the holders of Serial
Preference Stock shall be entitled to payment of the amount of the preference
payable upon such dissolution of, or distribution of the assets of, the
Corporation fixed by the Board of Directors for the respective series as
provided in subsection 2(d), and shall be entitled to no further payment. If
upon any such dissolution or distribution the assets of the Corporation shall be
insufficient to pay in full to the holders of the Serial Preference Stock the
preferential amount aforesaid, then such assets, or the proceeds thereof, shall
be distributed among the holders of each series of Serial Preference Stock
ratably in accordance with the sums which would be payable on such distribution
if all sums payable were discharged in full. The voluntary sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property and assets of the
Corporation, the merger or consolidation of the Corporation into or with any
other Corporation, or the merger of any other corporation into it, shall not be
deemed to be a dissolution of, or a distribution of the assets of, the
Corporation, for the purpose of this Section 4.
2D
<PAGE>
5. Redemption. In the event that and during the period in which the
----------
Serial Preference Stock of any series shall be redeemable, then, at the option
of the Board of Directors, the Corporation from time to time may redeem all or
any part of the outstanding shares of such series at the redemption price and
upon the terms and conditions fixed by the Board of Directors as provided in
subsection 2(c) (the sum so payable upon any redemption of Serial Preference
Stock being herein referred to as the "redemption price"); provided, that not
less than 30 days previous to the date fixed for redemption notice of the time
and place thereof shall be mailed to each holder of record of the shares so to
be redeemed at his address as shown by the records of the Corporation; and
provided, further, that in case of redemption of less than all of the
outstanding shares of any series of Serial Preference Stock the shares to be
redeemed shall be chosen by lot or in such equitable manner as may be prescribed
by the Board of Directors. At any time after notice of redemption shall have
been mailed as above provided but before the redemption date, the Corporation
may deposit the aggregate redemption price in trust with a bank or trust company
in New York, New York, Boston, Massachusetts, or any other city in which the
Corporation shall at that time maintain a transfer agency with respect to any
class of its stock, having capital, surplus and undivided profits of at least
$5,000,000, and named in such notice. Upon the making of such deposit, or if no
such deposit is made then upon such redemption date (unless the Corporation
shall default in making payment of the redemption price), holders of the shares
of Serial Preference Stock called for redemption shall cease to be stockholders
with respect to such shares notwithstanding that any certificate for such shares
shall not have been surrendered; and thereafter such shares shall no longer be
transferable on the books of the Corporation and such holders shall have no
interest in or claim against the Corporation with respect to said shares, except
the right (a) to receive payment of the redemption price upon surrender of their
-
certificates, or (b) to exercise on or before the date fixed for redemption the
-
rights, if any, not
2E
<PAGE>
theretofore expiring, to convert the shares so called for redemption into, or to
exchange such shares for, shares of stock of any other class or classes of stock
of the Corporation. Any funds deposited in trust as aforesaid which shall not be
required for such redemption, because of the exercise of any right of conversion
subsequent to the date of such deposit or otherwise, shall be returned to the
Corporation forthwith. The Corporation shall be entitled to receive from any
such bank or trust company the interest, if any, allowed on any moneys deposited
pursuant to this Section, and the holders of any shares so redeemed shall have
no claim to any such interest. Any funds so deposited by the Corporation and
unclaimed at the end of five years from the date fixed for such redemption shall
be repaid to the Corporation upon its request, after which repayment the holders
of such shares who shall not have made claim against such moneys prior to such
repayment shall be deemed to be unsecured creditors of the Corporation, but only
for a period of two years from the date of such repayment (after which all
rights of the holders of such shares as unsecured creditors or otherwise shall
cease), for an amount equivalent to the amount deposited as above stated for the
redemption of such shares and so repaid to the Corporation, but shall in no
event be entitled to any interest.
In order to facilitate the redemption of any shares of Serial
Preference Stock, the Board of Directors is authorized to cause the transfer
books of the Corporation to be closed as to the shares to be redeemed.
6. Retirement. Any shares of Serial Preference Stock which shall at
----------
any time have been redeemed, or which shall at any time have been surrendered
for conversion or exchange or for cancellation pursuant to any retirement or
sinking fund provisions with respect to any series of Serial Preference Stock,
shall be retired and shall thereafter have the status of authorized and unissued
shares of Serial Preference Stock undesignated as to series.
2F
<PAGE>
COMMON STOCK
------------
1. Issuance. The Common Stock may be issued from time to time by
--------
authority of the Board of Directors for such consideration as from time to time
may be fixed by vote of the Board of Directors providing for the issue of such
stock.
2. Dividends. Holders of Common Stock shall be entitled to receive
---------
dividends when and as declared by the Board of Directors but only out of funds
legally available for the payment thereof and not until all accrued dividends on
all series of Serial Preference Stock which bear cumulative dividends shall have
been declared and set apart for payment through the last preceding dividend date
set for all such series.
3. Preference to Serial Preference Stock Upon Dissolution. Upon the
------------------------------------------------------
dissolution of, or upon any distribution of the assets of, the corporation, the
assets, or the proceeds thereof, which are available for distribution to
stockholders shall be distributed ratably among the holders of Common Stock
after payment to the holders of each series of Serial Preference Stock of the
amount of the preference payable upon such dissolution of, or distribution of
the assets of, the Corporation.
4. Voting Rights. The Common Stock shall have exclusive voting
-------------
rights except as otherwise required by law and except to the extent the Board of
Directors may, at the time any series of Serial Preference Stock is established,
determine that the shares of such series shall have exclusive voting rights or
shall vote together as a single class with shares of Common Stock and/or with
shares of one or more other series of Serial Preference Stock on all or certain
matters. Each share of Common Stock shall be entitled to one vote.
2G
<PAGE>
Article VI
----------
POWERS OF THE CORPORATION, DIRECTORS AND STOCKHOLDERS
-----------------------------------------------------
The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation and for the
purpose of creating, defining, limiting and regulating the powers of the
Corporation and its Directors (as defined below) and stockholders:
1. The number of Directors of the Corporation shall be fixed and may
be altered from time to time in the manner provided in the By-Laws, and
vacancies in the Board of Directors and newly created directorships resulting
from any increase in the authorized number of Directors may be filled, and
Directors may be removed, as provided in the By-Laws.
2. The election of Directors may be conducted in any manner approved
by the stockholders at the time when the election is held and need not be by
ballot.
3. All corporate powers and authority of the Corporation (except as
at the time otherwise provided by law, by these Articles of Organization or by
the By-Laws) shall be vested in and exercised by the Board of Directors.
4. No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a Director, provided that nothing contained in these Articles
--------
of Organization shall eliminate or limit the liability of a Director (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) under Section 61 or 62 of
---
the Business Corporation Law of the Commonwealth of Massachusetts (the
2H
<PAGE>
"MBCL"), or (iv) for any transaction from which the Director derived an improper
--
personal benefit.
No amendment to or repeal of this Article shall apply to or have any
effect on the liability or alleged liability of any Director of the Corporation
for or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
The provisions of this Article shall not eliminate or limit the
liability of a Director of the Corporation for any act or omission occurring
prior to the date on which this Article became effective.
If the MBCL is subsequently amended to eliminate or further limit the
personal liability of Directors or to authorize corporate action to eliminate or
further limit such liability, then the liability of the Directors of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the MBCL as so amended.
5. The By-Laws of this Corporation may provide that the Directors
may make, amend or repeal the By-Laws in whole or in part, except with respect
to any provision thereof which by law, the Articles of Organization or the By-
Laws requires action by the stockholders.
INDEMNIFICATION
---------------
1. Definitions. For purposes of these Articles:
-----------
(a) A "Director" or "Officer" means any person serving as a director
of the Corporation or in any other office filled by appointment or election by
the Directors or the stockholders and also includes (i) a Director or Officer of
-
the Corporation serving at the request of the Corporation as a director,
officer, employee, trustee, partner or other agent of another organization or
who serves at its request in any capacity with respect to any employee benefit
plan,
2I
<PAGE>
and (ii) any person who formerly served as a Director or Officer;
--
(b) "Expenses" means (i) all expenses (including attorneys' fees and
-
disbursements) actually and reasonably incurred in connection with a Proceeding,
in being a witness in a Proceeding, or in successfully seeking indemnification
under these Articles, and (ii) any judgments, awards, fines or penalties paid by
--
a Director or Officer in connection with a Proceeding or amounts paid in
settlement of a Proceeding, including any taxes or penalties imposed on such
Director or Officer with respect to any employee benefit plan under applicable
law; and
(c) A "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
and any claim which could be the subject of a Proceeding.
2. Rights to Indemnification. Except as limited by law, the
-------------------------
Corporation shall indemnify its Directors and Officers against all Expenses
incurred by them in connection with any Proceeding resulting from their serving
as an Officer or Director, except that no indemnification shall be provided
regarding any matter as to which it shall be adjudicated that such Director or
Officer did not act in good faith and in the reasonable belief that his or her
action was in the best interests of the Corporation (the "Standard"); for
purposes of this Section 2 in connection with service to an employee benefit
plan, no Director or Officer shall be deemed to have failed to have acted in
accordance with the Standard if he or she acted in good faith in the reasonable
belief that his or her action was in the best interests of the participants or
beneficiaries of said plan; and provided that as to any matter disposed of by a
compromise payment by the Director or Officer seeking indemnification hereunder,
pursuant to a consent decree or otherwise, no indemnification shall be provided
unless such compromise shall be approved (i) by a majority vote of the Directors
-
who were not parties to such Proceeding, or
2J
<PAGE>
(ii) by legal counsel (who may be the counsel regularly employed by the
--
Corporation) in a written opinion to the effect that such Director's or
Officer's actions were not contrary to the Standard or (iii) by vote of a
---
majority of stockholders present in person or by proxy at a meeting at which a
quorum is present.
The Board of Directors may, by general vote pertaining to a specific
employee or agent or class thereof, authorize indemnification of the
Corporation's employees and agents to whatever extent it may determine, which
may be in the same manner and to the same extent provided above.
3. Advance Payments. Except as limited by law, expenses of a
----------------
Director or Officer shall be paid by the Corporation in advance of the final
determination of a Proceeding, no later than 45 days after the written request
therefor by said Director or Officer, unless it is determined (i) by a majority
-
vote of a quorum consisting of the Directors who were not parties to such
Proceeding, or (ii) by legal counsel (who may be the counsel regularly employed
--
by the Corporation) in a written opinion, to the effect that such Director or
Officer did not act in accordance with the Standard; provided, however, that
such advance shall only be made upon receipt of an undertaking by the Director
or Officer to repay the advances if it is ultimately determined that he or she
is not eligible to be indemnified, which undertaking may be unsecured and
accepted without regard to the financial ability of such Director or Officer to
make repayment.
4. Insurance. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any Director or Officer against any liability or
cost incurred by him or her as a Director or Officer or arising out of such
status, whether or not the Corporation would have the power to indemnify such
Director or Officer against such liability or cost.
2K
<PAGE>
5. Other Rights and Remedies. The provisions of these Articles
-------------------------
shall not be construed to limit the power of the Corporation to indemnify its
Officers or Directors to the full extent permitted by law or to enter into
specific agreements, commitments or arrangements for indemnification permitted
by law.
The indemnification provided hereunder shall inure to the benefit of
the heirs and personal representative of a Director or Officer.
All rights to indemnification under these Articles shall be deemed to
be in the nature of a contractual obligation of the Corporation bargained for by
each Director and Officer who serves in such capacity at any time while these
Articles or other relevant provisions of the MBCL and other applicable law, if
any, are in effect. No repeal or modification of these Articles shall adversely
affect any such rights or obligations then existing with respect to any state of
facts then or theretofore existing or any Proceeding theretofore or thereafter
brought based in whole or in part upon any such state of facts.
In the event that the laws of the Commonwealth of Massachusetts
hereafter shall be amended, the effect of which is to modify, change, expand or
contract the right or ability of a Massachusetts corporation to provide
indemnification to any or all of its Officers or Directors, the Board of
Directors of the Corporation shall be authorized to amend the By-Laws of the
Corporation to insert therein an indemnification provision not inconsistent with
the statutory law of Massachusetts then in effect and any such By-Law provision
shall not be invalid or unenforceable by reason of the fact that it is
inconsistent with the provisions of these Articles.
TRANSACTIONS WITH INTERESTED PERSONS
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1. In the absence of bad faith, no contract or transaction by this
Corporation shall be void, voidable or
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in any way invalid by reason of the fact that it is with an Interested Person.
2. For this purpose, Interested Person shall mean an officer,
director, stockholder or employee of the Corporation, any person in any other
way interested in the Corporation, and a corporation or organization in which an
officer, director, stockholder or employee of this Corporation is an officer,
director, stockholder or employee or in any way interested.
3. In the absence of bad faith, no Interested Person shall be liable
because of his interest in this Corporation to the Corporation or any other
Interested Person for any loss or expense incurred by reason of such contract or
transaction or be accountable for any gain or profit realized from such contract
or transaction.
4. The provisions of this Article shall be operative notwithstanding
the fact that the presence of an Interested Person was necessary to constitute a
quorum at a meeting of Directors or stockholders of the Corporation at which
such contract or transaction was authorized or that the vote of an Interested
Person was necessary for the authorization of such contract or transaction.
The Corporation reserves the right to amend or repeal any provision
contained in these Articles of Organization in the manner now or hereafter
prescribed by the law of the Commonwealth of Massachusetts and all rights herein
conferred upon stockholders or Directors are granted subject to this
reservation.
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ARTICLE VII
The effective date of organization of this corporation shall be the date
approved and filed by the Secretary of the Commonwealth. If a later effective
date is desired, specify such date which shall not be more than thirty days
after the date of filing.
The information continued in ARTICLE VIII is NOT a PERMANENT part of the
Articles of Organization and may be changed ONLY by filing the appropriate form
provided therefor.
ARTICLE VIII
a. The street address of the corporation IN MASSACHUSETTS is:(post office boxes
are not acceptable)
3 New England Executive Park, Burlington, Massachusetts 01803
b. The name, residence and post office address (if different) of the directors
and officers of the corporation as follows:
<TABLE>
<CAPTION>
NAME RESIDENCE POST OFFICE ADDRESS
<S> <C> <C> <C>
President:
Treasurer:
Clerk:
Director:
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day
of the month of: March
d. The name and BUSINESS address of the RESIDENT AGENT of the corporation, if
any, is:
ARTICLE IX
By-laws of the corporation have been duly adopted and the president, treasurer,
clerk and directors whose names are set forth above, have been duly elected.
IN WITNESS WHEREOF and under the gains and penalties of perjury, I/WE, whose
signature(s) appear below as incorporator(s) and whose names and business or
residential address(es) ARE CLEARLY TYPED OR PRINTED beneath each signature do
hereby associate with the intention of forming this corporation under the
provisions of General Laws Chapter 1568 and do hereby sign these Articles of
Organization as incorporator(s)
this day of 19 .
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Note: If any already existing corporation is acting as incorporator, type in the
exact name of the corporation, the state or other jurisdictions where it was
incorporated, the name of the persons signing on behalf of said corporation and
the title he/she holds or other authority by which such action is taken.
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THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF ORGANIZATION
GENERAL LAWS, CHAPTER 156B, SECTION 12
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I hereby certify that, upon an examination of these articles of
organization, duly submitted to me, it appears that the provisions of the
General Laws relative to the organization of corporations have been complied
with, and I hereby approve said articles; and the filing fee in the amount of
$ having been paid, said articles are deemed to have been filed with me
this day of 19 .
Effective date
MICHAEL J. CONNOLLY
Secretary of State
FILING FEE: 1/10 of 1% of the total amount of the authorized capital stock, but
not less than $200.00. For the purpose of filing, shares of stock with a par
value less than one dollar or no par stock shall be deemed to have a par value
of one dollar per share.
PHOTOCOPY OF ARTICLES OF ORGANIZATION TO BE SENT
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Appendix D
MASSACHUSETTS APPRAISAL STATUTE
Chapter 156B of the General Laws of
the Commonwealth of Massachusetts
(S) 85. Dissenting stockholder; right to demand payment for stock; exception
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation or
corporations under the provisions of sections seventy-eight or seventy-nine who
objects to such consolidation or merger may demand payment for his stock from
the resulting or surviving corporation and an appraisal in accordance with the
provisions of sections eighty-six to ninety-eight, inclusive, and such
stockholder and the resulting or surviving corporation shall have the rights and
duties and follow the procedure set forth in those sections. This section shall
not apply to the holders of any shares of stock of a constituent corporation
surviving a merger if, as permitted by subsection (c) of section seventy-eight,
the merger did not require for its approval a vote of the stockholders of the
surviving corporation.
(S) 86. Selections applicable to appraisal; prerequisites
If a corporation proposes to take a corporate action as to which any
section of this chapter provides that a stockholder who objects to such action
shall have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty-three, no stockholder shall have such
right unless (1) he files with the corporation before the taking of the vote of
the shareholders on such corporate action, written objection to the proposed
action stating that he intends to demand payment for his shares if the action is
taken and (2) his shares are not voted in favor of the proposed action.
(S) 87. Statement of rights of objecting stockholders in notice of meeting;
form
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights of
objecting stockholders. The giving of such notice shall not be deemed to create
any rights in any stockholder receiving the same to demand payment for his
stock, and the directors may authorize the inclusion in any such notice of a
statement of opinion by the management as to the existence or non-existence of
the right of the stockholders to demand payment for their stock on account of
the proposed corporate action. The notice may be in such form as the directors
or officers calling the meeting deem advisable, but the following form of notice
shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the corporation
before the taking of the vote on the approval of such action, written objection
to the proposed action stating that he intends to demand payment for his shares
if the action is taken and (2) whose shares are not voted in favor of such
action has or may have the right to demand in writing from the corporation (or,
in the case of a consolidation or merger, the name of the resulting or surviving
corporation shall be inserted), within twenty days
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after the date of mailing to him of notice in writing that the corporate action
has become effective, payment for his shares and an appraisal of the value
thereof. Such corporation and any such stockholder shall in such cases have the
rights and duties and shall follow the procedure set forth in sections 88 to 98,
inclusive, of chapter 156B of the General Laws of Massachusetts."
(S) 88. Notice of effectiveness of action objected to
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty-six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which he
is a stockholder has become effective. The giving of such notice shall not be
deemed to create any rights in any stockholder receiving the same to demand
payment for his stock. The notice shall be sent by registered or certified
mail, addressed to the stockholder at his last known address as it appears in
the records of the corporation.
(S) 89. Demand for payment; time for payment
If within twenty days after the date of mailing of a notice under
subsection (e) of section eighty-two, subsection (f) of section eighty-three, or
section eighty-eight, any stockholder to whom the corporation was required to
give such notice shall demand in writing from the corporation taking such
action, or in the case of a consolidation or merger from the resulting or
surviving corporation, payment for his stock, the corporation upon which such
demand is made shall pay to him the fair value of his stock within thirty days
after the expiration of the period during which such demand may be made.
(S) 90. Demand for determination of value; bill in equity; venue
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county where
the corporation in which such objecting stockholder held stock had or has its
principal office in the commonwealth.
(S) 91. Parties to suit to determine value; service
If the bill is filed by the corporation, it shall name as parties
respondent all stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof. If the
bill if filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares and
with whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to each
stockholder party to the bill by registered or certified mail, addressed to the
last known address of such stockholder as shown in the records of the
corporation, and the court may order such additional notice by publication or
otherwise as it deems
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advisable. Each stockholder who makes demand as provided in section eighty-nine
shall be deemed to have consented to the provisions of this section relating to
notice, and the giving of notice by the corporation to any such stockholder in
compliance with the order of the court shall be a sufficient service of process
on him. Failure to give notice to any stockholder making demand shall not
invalidate the proceedings as to other stockholders to whom notice was properly
given, and the court may at any time before the entry of a final decree make
supplementary orders of notice.
(S) 92. Decree determining value and ordering payment; valuation date
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of and
payment for their shares, and shall order the corporation to make payment of
such value, together with interest, if any, as hereinafter provided, to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if uncertificated,
upon receipt of an instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and shall
be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
(S) 93. Reference to special master
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report the
same to the court, all in accordance with the usual practice in suits in equity
in the superior court.
(S) 94. Notation on stock certificates of pendency of bill
On motion the court may order stockholder parties to the bill to submit
their certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
(S) 95. Costs; interest
The costs of the bill, including the reasonable compensation and expenses
of any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed upon
the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided in
this chapter shall be paid by the corporation. Interest shall be paid upon any
award from the date of the vote approving the proposed corporate action, and the
court may on application of any interested party determine the amount of
interest to be paid in the case of any stockholder.
(S) 96. Dividends and voting rights after demand for payment
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
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other distributions payable to stockholders of record at a date which is prior
to the date of the vote approving the proposed corporate action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
(S) 97. Status of shares paid for
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
(S) 98. Exclusive remedy; exception
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground that
such corporate action will be or is illegal or fraudulent as to him.
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