<PAGE>
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission file number 1-12657
----------------
DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
MASSACHUSETTS 04-2258582
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3 New England Executive Park Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (781) 272-6100
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
At January 15, 1999 there were 120,659,076 shares of common stock of the
registrant outstanding.
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<PAGE>
PART I. Financial Information
Item 1. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended December 31 December 31
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales................................. $136,781 $133,138 $369,525 $353,314
Cost of sales......................... 60,050 58,265 158,868 151,714
-------- -------- -------- --------
Gross profit.......................... 76,731 74,873 210,657 201,600
Selling, general & administrative
expense.............................. 36,331 38,512 107,517 103,549
Product development expense........... 13,239 14,484 40,306 41,563
Recapitalization-related costs........ -- -- 43,386 --
Amortization of intangibles........... 1,625 1,445 4,697 4,327
Amortization of unearned
compensation......................... 574 -- 977 --
-------- -------- -------- --------
Total operating expenses.......... 51,769 54,441 196,883 149,439
-------- -------- -------- --------
Operating income...................... 24,962 20,432 13,774 52,161
Interest expense...................... (13,125) (164) (33,106) (945)
Interest income....................... 782 886 2,870 2,250
Gain on sale of subsidiary............ -- -- 15,900 --
Other income (expense)................ (208) 244 (275) 694
-------- -------- -------- --------
Income (loss) before income taxes..... 12,411 21,398 (837) 54,160
Income tax provision.................. 5,462 8,663 486 21,933
-------- -------- -------- --------
Net income (loss)..................... $ 6,949 $ 12,735 $ (1,323) $ 32,227
======== ======== ======== ========
Income (loss) per common share:
Basic............................... $ 0.06 $ 0.76 $ (0.01) $ 1.92
Diluted............................. $ 0.05 $ 0.73 $ (0.01) $ 1.85
======== ======== ======== ========
Weighted average number of common
shares:
Basic............................... 120,313 16,817 101,480 16,826
Diluted............................. 127,657 17,395 101,480 17,413
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31 March 31
1998 1998
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 36,499 $ 64,904
Accounts receivable, net............................... 89,762 69,988
Inventories:
Raw materials......................................... 19,497 24,263
Work in process....................................... 13,961 11,769
Finished goods........................................ 9,107 12,850
--------- --------
Total inventory...................................... 42,565 48,882
Other current assets................................... 14,634 16,823
--------- --------
Total current assets................................. 183,460 200,597
Property and equipment, net.............................. 24,615 26,365
Intangible assets, net................................... 53,392 39,595
Other assets............................................. 53,909 21,573
--------- --------
$ 315,376 $288,130
========= ========
LIABILITIES & EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt...................... $ 8,235 $ 150
Accounts payable....................................... 22,185 22,933
Accrued expenses:
Compensation and benefits............................. 21,330 21,750
Deferred revenue...................................... 22,953 13,868
Other accrued expenses................................ 33,369 24,105
--------- --------
Total current liabilities............................ 108,072 82,806
Long-term debt........................................... 528,169 83
Deferred compensation.................................... 4,376 3,122
Shareholders' Equity (Deficit):
Common stock........................................... -- 3,721
Additional paid-in capital............................. 322,582 7,647
Retained earnings (deficit)............................ (637,709) 237,282
Unearned compensation.................................. (8,582) --
Cumulative other comprehensive loss.................... (1,532) (1,600)
Treasury stock......................................... -- (44,931)
--------- --------
Total shareholders' equity (deficit)................. (325,241) 202,119
--------- --------
$ 315,376 $288,130
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss)........................................ $ (1,323) $ 32,227
Adjustments to net income (loss):
Depreciation............................................ 8,874 8,926
Amortization of intangibles............................. 4,697 4,327
Gain on sale of subsidiary.............................. (15,900) --
Recapitalization-related costs.......................... 14,640 --
Amortization of unearned compensation................... 977 --
Amortization of deferred debt issuance costs............ 1,716 --
Other................................................... 75 192
Change in deferred income tax asset...................... (5,757) (36)
Change in operating assets and liabilities............... 8,591 (8,155)
-------- --------
Net cash flows provided by continuing operations......... 16,590 37,481
Net cash flows used in discontinued operations........... (200) (12,680)
-------- --------
Net cash flows provided by operating activities............ 16,390 24,801
Investing activities:
Purchases of property and equipment...................... (7,425) (11,026)
Proceeds from disposals of property and equipment........ 246
Proceeds from sale of business........................... 21,000 --
Business acquired in purchase transaction, net of cash
acquired................................................ (19,615) --
Other.................................................... (5,043) 85
-------- --------
Net cash flows used in continuing operations............. (10,837) (10,941)
Net cash flows provided by discontinued operations....... -- 507
-------- --------
Net cash flows used in investing activities................ (10,837) (10,434)
Financing activities:
Net borrowings (repayments) of debt...................... 536,000 (5,000)
Repayment of notes payable............................... (2,156) --
Repayment of capital lease obligations................... (132) --
Financing fees........................................... (39,608) --
Proceeds from issuance of stock.......................... 277,000 --
Proceeds from exercise of stock options.................. 1,800 4,332
Purchases of treasury stock and stock outstanding........ (806,508) (5,330)
-------- --------
Net cash flows used in financing activities................ (33,604) (5,998)
Effect of exchange rate on cash............................ (354) (582)
-------- --------
Increase (decrease) in cash and cash equivalents........... (28,405) 7,787
Cash and cash equivalents at beginning of year............. 64,904 39,782
-------- --------
Cash and cash equivalents at end of period................. $ 36,499 $ 47,569
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS)
A. Condensed Consolidated Financial Statements
In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1998, and the unaudited consolidated statements of
operations and unaudited consolidated condensed statements of cash flows for
the interim periods ended December 31, 1998 and 1997 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 as
of March 31, 1998.
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. Merger/Recapitalization
On May 21, 1998 the Company completed its management-led merger with a
Company formed at the direction of Clayton, Dubilier & Rice, Inc. ("CDR") (the
"Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
C. Related Party
The Company will pay an annual management fee of $0.5 million to CDR. In
return for the annual management fee, CDR will provide management and financial
consulting services to the Company and its subsidiaries.
D. Financial Position of Dynatech Corporation and Dynatech LLC
In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness of
Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due 2008
(the "Senior Subordinated Notes") and the Senior Secured Credit Facilities
referred to elsewhere in this report.
Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with no
independent operations and no significant assets other than its membership
interest in Dynatech LLC. See Note M. Debt. Accordingly, the condensed
consolidated financial statements of Dynatech Corporation, presented in this
report, are not materially different from those of Dynatech LLC. Management has
not included separate financial statements of Dynatech LLC because management
has determined that they would not be material to holders of the Senior
Subordinated Notes or to the holders of Dynatech Corporation's common stock.
Dynatech LLC is subject, under agreements governing its indebtedness, to
prohibitions on its ability to make distributions to Dynatech Corporation (with
limited exceptions) and other significant restrictions on its operations. See
Note M. Debt.
5
<PAGE>
E. Acquisition
On June 19, 1998, the Company, through one of its indirect, wholly owned
subsidiaries, acquired all of the outstanding capital stock of Pacific Systems
Corporation of Kirkland, Washington ("Pacific") for a total purchase price of
$20 million, including an incentive earnout. The acquisition was accounted for
using the purchase method of accounting, and resulted in approximately $18
million of goodwill. The pro forma effects related to the acquisition are not
material to the consolidated financial statements of the Company and are,
therefore, not presented.
F. Divestiture
On June 30, 1998 the Company sold the assets of ComCoTec, Inc. ("ComCoTec")
located in Lombard, Illinois to The Potomac Group, Inc. for $21 million.
ComCoTec is a supplier of pharmacy management software and services and was a
subsidiary within the Company's visual communications products group.
G. Litigation
On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the
United States District Court for the Southern District of Ohio against the
Company and Whistler Corporation of Massachusetts ("Whistler"), alleging
willful infringement of CMI's patent for a mute function in radar detectors. In
1994, the Company sold its radar detector business to Whistler. The Company and
Whistler have asserted in response that they have not infringed, and that the
patent is invalid and unenforceable. The Company obtained an opinion of counsel
from Bromberg & Sunstein LLP in connection with the manufacture and sale of the
Company's Whistler series radar detectors and will be offering the opinion,
among other things, as evidence that any alleged infringement was not willful.
Litigation is on-going. The Company intends to defend the lawsuit vigorously
and does not believe that the outcome of the litigation is likely to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
H. New Pronouncements
In the quarter ended June 30,1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other things,
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
income.
In the quarter ended June 30,1998, the Company adopted Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions.
In June, 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 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 is required to adopt SFAS 131
in the fourth quarter of fiscal 1999 and its adoption may result in the
provision of additional details in the Company's disclosures.
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.
6
<PAGE>
I. Comprehensive Income (Loss)
The following table shows adjustments to net income (loss) for other
comprehensive income (loss) (consisting primarily of foreign currency
translation adjustments).
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended December 31 December 31
------------------ ------------------
1998 1997 1998 1997
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ 6,949 $ 12,735 $ (1,323) $ 32,227
Other comprehensive income (loss)....... 257 169 68 (691)
-------- --------- -------- --------
Comprehensive income (loss)............. $ 7,206 $ 12,904 $ (1,255) $ 31,536
======== ========= ======== ========
</TABLE>
J. Income (loss) per share
Effective as of 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
(In thousands except per share data)
<S> <C> <C> <C> <C>
Net income (loss).................... $ 6,949 $ 12,735 $ (1,323) $ 32,227
========= ========= ========= ========
BASIC:
Common stock outstanding, net of
treasury stock, beginning of
period.............................. 120,251 16,757 16,864 16,803
Weighted average common stock and
treasury stock issued during the
period.............................. 62 60 98,788 103
Weighted average common stock and
treasury stock repurchased.......... -- -- (14,172) (80)
--------- --------- --------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period....................... 120,313 16,817 101,480 16,826
========= ========= ========= ========
Income (loss) per common share....... $ 0.06 $ 0.76 $ (0.01) $ 1.92
========= ========= ========= ========
DILUTED:
Common stock outstanding, net of
treasury stock, beginning of
period.............................. 120,251 16,757 16,864 16,803
Weighted average common stock and
treasury stock issued during the
period.............................. 62 60 98,788 103
Weighted average common stock
equivalents (a)..................... 7,344 578 -- 587
Weighted average common stock and
treasury stock repurchased.......... -- -- (14,172) (80)
--------- --------- --------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period....................... 127,657 17,395 101,480 17,413
========= ========= ========= ========
Income (loss) per common share....... $ 0.05 $ 0.73 $ (0.01) $ 1.85
========= ========= ========= ========
</TABLE>
- --------
(a) As of December 31, 1998, the Company had options outstanding to purchase
33.3 million shares of common stock that were excluded from the diluted
earnings per share computation for the nine months ended December 31, 1998
as the effect of their inclusion would have been antidilutive with respect
to losses per share.
7
<PAGE>
The income (loss) per share and weighted average common shares outstanding
for the periods ending December 31, 1998 are based on the Company's
recapitalized structure. The income per share for the periods ending December
31, 1997 is based on the Company's capital structure at that time (prior to the
Merger).
K. Intangible Assets
Intangible assets acquired primarily from business acquisitions are
summarized as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Product technology................................. $17,042 $17,042
Excess of cost over net assets acquired............ 50,972 32,478
Other intangible assets............................ 13,307 13,307
------- -------
81,321 62,827
Less accumulated amortization...................... 27,929 23,232
------- -------
Total............................................ $53,392 $39,595
======= =======
</TABLE>
L. Other Assets
In connection with the Merger, the Company incurred financing fees which
will be amortized over the life of the Senior Secured Credit Facilities and
Senior Subordinated Notes. See Note M. Debt. In addition, the deferred tax
asset increased primarily as a result of certain compensation charges relating
to stock option cancellation payments in connection with the Merger.
The detail of Other Assets is as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Deferred financing fees........................... $25,591 $ --
Deferred tax asset................................ 22,809 17,084
Other assets...................................... 5,509 4,489
------- -------
Total other assets.............................. $53,909 $21,573
======= =======
</TABLE>
M. Debt
Long-term debt is summarized below:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Senior secured credit facilities................... $261,000 $--
Senior subordinated notes.......................... 275,000 --
Capitalized leases................................. 404 233
-------- ----
Total debt....................................... 536,404 233
Less current portion........................... 8,235 150
-------- ----
Long-term debt..................................... $528,169 $ 83
======== ====
</TABLE>
In connection with the Merger, the Company entered into a senior secured
credit agreement (the "Senior Secured Credit Agreement") consisting of a $260
million term loan facility (the "Term Loan Facility") and a $110 million
revolving credit facility (the "Revolving Credit Facility") (collectively, the
"Senior Secured Credit Facilities"). In addition, the Company incurred $275
million of debt through the sale of its 9 3/4% Senior Subordinated Notes (the
"Senior Subordinated Notes").
8
<PAGE>
In connection with the Merger and related transactions, Dynatech LLC became
the primary obligor with respect to the Senior Secured Credit Facility and the
Senior Subordinated Notes. See Note D. Financial Position of Dynatech
Corporation and Dynatech LLC. Dynatech Corporation has guaranteed the Senior
Secured Credit Facilities and the Senior Subordinated Notes.
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of which
$6 million was repaid during the first nine months of fiscal 1999. With respect
to the $260 million initially borrowed under the Term Loan Facility (which is
divided into four tranches, each of which has a different term and repayment
schedule), the Company is required to make scheduled principal payments of the
$50 million of tranche A term loan thereunder during its six-year term, with
substantial amortization of the $70 million tranche B term loan, $70 million
tranche C term loan and $70 million tranche D term loan thereunder occurring
after six, seven and eight years, respectively. The $275 million of Senior
Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum.
Total interest expense including the amortization of deferred debt issuance
costs is expected to be approximately $47 million in fiscal 1999.
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 defined in the Senior Secured Credit
Agreement) for each fiscal year in which the Company exceeds a certain leverage
ratio. The Senior Subordinated Notes are subject to certain mandatory
prepayments under certain circumstances.
The Revolving Credit Facility matures 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, 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 or accomplished on acceptable terms.
The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.5% per annum for the period commencing May 21, 1998 and ending
December 31, 1998, and is expected to be approximately 8.3% per annum for the
period commencing January 1, 1999 and ending March 31, 1999. However, the
Company has entered into interest rate swaps which will be effective for
periods ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term Loan
Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate Swaps.
As a result of the substantial indebtedness 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.
Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At December 31, 1998, the undrawn portion of this facility was $103
million. The Company believes that cash generated from operations, together
with amounts available under the Revolving Credit Facility and any other
available sources of liquidity, 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
9
<PAGE>
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.
Covenant Restrictions. The Senior Secured Credit Agreement imposes
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 limit the Company's ability 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 Agreement also, 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 governing the Senior Subordinated Notes, 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. These restrictions, among other things, preclude Dynatech LLC from
distributing assets to Dynatech Corporation (which has no independent
operations and no significant assets other than its membership interest in
Dynatech LLC), except in limited circumstances. In addition, under the Senior
Secured Credit Agreement, the Company is required to comply with a minimum
interest expense coverage ratio and a maximum leverage ratio. These financial
tests become more restrictive in future years. The term loans under the Senior
Secured Credit Facilities (other than the $50 million tranche A term loan) are
governed by negative covenants that are substantially similar to the negative
covenants contained in the indenture governing the Senior Subordinated Notes,
which also impose restrictions on the operation of the Company's business.
N. Interest Rate Swaps
The Company uses interest rate swap agreements to effectively fix a portion
of its variable rate Term Loan Facility to a fixed rate in order to reduce the
impact of interest rate changes on future income. The differential to be paid
or received under these agreements will be recognized as an adjustment to
interest expense related to the debt. At December 31, 1998 the Company had four
interest rate swap agreements (three of which commenced September 30, 1998 and
will end September 30, 2001) (with notional amounts totaling $195 million)
under which the Company will pay fixed rates of 5.85%, 5.845% and 5.8375%,
respectively, and will receive three-month LIBOR. The fourth interest rate swap
agreement commenced on October 16, 1998 and will end October 16, 2000 for a
notional amount of $25 million. The Company will pay a fixed rate of 4.715% and
will receive three-month LIBOR.
O. Unearned Compensation
On July 15, 1998, the Company granted non-qualified options to certain key
employees to purchase 14.3 million shares of common stock at an exercise price
lower than fair market value. The Company has historically granted options at a
price equal to the closing market price on the date of the grant.
Unearned compensation related to these options of $9.7 million was recorded
within shareholders' equity (deficit) and will be charged to expense over a
five-year vesting period. As of December 31, 1998, the unamortized portion of
the total compensation expense was $8.6 million.
10
<PAGE>
P. Shareholders' Equity (Deficit)
The following is a summary of changes in shareholders' equity (deficit) for
the period ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares Cumulative Total
----------------- Additional Retained Other Shareholders'
Common Treasury Common Paid-In Earnings Unearned Comprehensive Treasury Equity
Stock Stock Stock Capital (Deficit) Compensation Loss Stock (Deficit)
------- -------- ------ ---------- --------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 3/31/98.. 18,605 (1,741) $3,721 $ 7,647 $ 237,282 $(1,600) $(44,931) $ 202,119
Net loss........... (1,323) (1,323)
Translation
adjustments....... 68 68
Exercise of stock
options and other
issuances......... 408 59 (143) 1,946 1,803
Recapitalization-
related costs:
Common stock
repurchased....... (18,605) 1,682 (3,721) (7,269) (873,668) 42,985 (841,673)
Issuance of new
stock, net of
fees.............. 120,251 298,148 298,148
Stock option
expense........... 14,640 14,640
Unearned
compensation...... 9,559 $(9,559) --
Amortization of
unearned
compensation...... 977 977
------- ------ ------ -------- --------- ------- ------- -------- ---------
Balance at
12/31/98........... 120,659 0 $ 0 $322,582 $(637,709) $(8,582) $(1,532) $ 0 $(325,241)
======= ====== ====== ======== ========= ======= ======= ======== =========
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q 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 as of March 31, 1998.
Overview
The Merger. On May 21, 1998 the Company was merged with CDRD Merger
Corporation ("MergerCo"), a nonsubstantive transitory merger vehicle organized
at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private
investment firm, with the Company continuing as the surviving corporation (the
"Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes.
Accordingly, the historical basis of the Company's assets and liabilities was
not affected by these transactions.
In the Merger, (i) each then outstanding share of common stock, par value
$0.20 per share, of the Company (the "Common Stock") was converted into the
right to receive $47.75 in cash and 0.5 shares of common stock, no par value,
of the Company (the "Recapitalized Common Stock") and (ii) each then
outstanding share of common stock of MergerCo was converted into one share of
Recapitalized Common Stock.
As a result of the Merger, Clayton, Dubilier & Rice Fund V Limited
Partnership, an investment partnership managed by CDR ("CDR Fund V"), holds
approximately 92.3% of the Recapitalized Common Stock. John F. Reno, the
Chairman, President and Chief Executive Officer of the Company, together with
two family trusts, holds approximately 0.7% of the Recapitalized Common Stock
and other stockholders hold approximately 7.0% of the Recapitalized Common
Stock.
In connection with the Merger and related transactions, Dynatech LLC
(formerly known as Telecommunications Techniques Co., LLC), Dynatech
Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary
obligor (and Dynatech Corporation, a guarantor) with respect to indebtedness of
Dynatech Corporation, including the 9 3/4% Senior Subordinated Notes due 2008
(the "Senior Subordinated Notes") and the Senior Secured Credit Facilities
referred to elsewhere in this report.
Dynatech Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Dynatech Corporation, however, is a holding company with no
independent operations and no significant assets other than its membership
interest in Dynatech LLC. See "Capital Resources and Liquidity." Accordingly,
the condensed consolidated financial statements of Dynatech Corporation,
presented in this report, are not materially different from those of Dynatech
LLC. Management has not included separate financial statements of Dynatech LLC
because management has determined that they would not be material to holders of
the Senior Subordinated Notes or to the holders of Dynatech Corporation's
common stock. Dynatech LLC is subject, under the agreements governing its
indebtedness, to prohibitions on its ability to make distributions to Dynatech
Corporation (with limited exceptions) and other significant restrictions on its
operations. See "Capital Resources and Liquidity."
Acquisition. On June 19, 1998 the Company, through one of its indirect
wholly owned subsidiaries, acquired all of the outstanding capital stock of
Pacific Systems Corporation of Kirkland, Washington ("Pacific") for a total
purchase price of $20 million, including an incentive earnout, which resulted
in approximately $18 million of goodwill. The acquisition was accounted for
using the purchase method of accounting. Pacific designs and manufactures
customer-specified avionics and integrated cabin management equipment for the
corporate and general aviation market.
12
<PAGE>
Divestiture. On June 30, 1998 the Company sold the assets of ComCoTec, Inc.
("ComCoTec") located in Lombard, Illinois to The Potomac Group, Inc. for $21
million. ComCoTec is a supplier of pharmacy management software and services
and was a subsidiary within the Company's visual communications products group.
Current Trends
Growth rates of enterprises engaged in the manufacture and provision of
telecommunications equipment and services will likely be affected by the
current trend of consolidation among such enterprises. In addition,
particularly in the near term, recent capital market volatility and reduced
financing availability may affect growth rates for certain customers,
particularly those that may be highly leveraged with significant capital
requirements and those that are located in emerging markets, as well as growth
of the economy in general. Any resulting slowdown in such growth could result
in delays or reductions of orders for the Company's products, and accordingly
affect the Company's own growth.
In the shorter term, the Company believes that such consolidation is being
reflected in delays in orders for certain of the Company's test products as
consolidating companies integrate or coordinate their purchasing practices.
Conversely, the Company has experienced a recent influx of large orders from
certain of the Regional Bell Operating Companies ("RBOCs") for the Company's
ruggedized laptop computers.
In the Company's largest business, communications test, sales have been
relatively flat for the nine month period ended December 31, 1998 (a decrease
of 1.4%), compared to the same period a year ago. The Company cannot predict
whether growth will continue at historical rates in either its own business or
in the markets in which it participates, due in part to recent global economic
events.
Itronix, as a manufacturer of ruggedized portable computing and
communications hardware, generally has lower margins than the Company's other
businesses. As a result, profitability of the Company's industrial computing
and communications business is lower than the average profitability of the
Company's other businesses.
Itronix had been facing significant manufacturing and marketing challenges
earlier in this fiscal year, as well as in fiscal 1998. The Company has taken
several steps designed to improve the operating performance of Itronix,
including programs designed to reduce costs and streamline manufacturing, as
well as a change in Itronix senior management. During the third quarter Itronix
received orders totaling more than $72 million, primarily from two RBOCs. As a
result, Itronix's performance during the third quarter has significantly
improved. However, results of operations for Itronix are expected to continue
to vary widely because of the relatively small number of potential customers
with large field-service work forces and the irregularity of the timing and
size of such customers' orders.
Growth at ICS in the near term is expected to lag behind historical growth
rates. The Company is assessing the current market trend for these products.
Results of Operations
Three Months Ended December 31, 1998 as compared to Three Months Ended
December 31, 1997.
Sales. Consolidated sales increased $3.7 million or 2.7% to $136.8 million
for the three months ended December 31, 1998 as compared to $133.1 million for
the same period last year.
Sales of communications test products decreased $3.9 million to $66.3
million or 5.5% for the three months ended December 31, 1998 as compared to
$70.2 million for the same period last year. The Company has been experiencing
a decrease in demand for its core instruments which has been partially offset
by an increase in demand for its systems and services.
13
<PAGE>
Sales for industrial computing and communications products increased $3.1
million to $46.6 million or 7.1% for the three months ended December 31, 1998
as compared to $43.5 million from the same period last year. During the quarter
the Company shipped a higher number of ruggedized laptop computers as a result
of the strong order rate and backlog position at Itronix. This higher shipping
volume was offset by fewer shipments of its rack-mounted computers.
Sales of visual communications products increased $4.4 million to $23.9
million or 22.9% for the three months ended December 31, 1998 as compared to
$19.4 million from the same period last year. The increase was primarily
attributable to the continued demand for the Company's real-time flight
information passenger video displays. In addition, the Company also incurred
additional sales from Pacific which were slightly offset by the reduction in
sales from the divestiture of ComCoTec.
Gross Profit. Consolidated gross profit increased $1.9 million to $76.7
million or 56.1% of consolidated sales for the three months ended December 31,
1998 as compared to $74.9 million or 56.2% of consolidated sales for the same
period a year ago. The percentage decrease was attributable to a change in the
product mix as the Company shipped more industrial computing and communications
products during the quarter which are sold at lower gross margins. However,
selling prices and costs of sales across the Company's product lines remained
at levels similar to those during the same period last year.
Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; amortization of intangibles; and amortization of unearned
compensation. Total operating expenses were $51.8 million or 37.8% of
consolidated sales as compared to $54.4 million or 40.9% of consolidated sales
for the same period last year. The decrease in operating expenses during the
quarter was primarily attributable to greater expense control throughout the
corporation.
Selling, general and administrative expense was $36.3 million or 26.6% of
consolidated sales for the three months ended December 31, 1998, compared to
$38.5 million or 28.9% of consolidated sales for the same period a year ago.
The decrease was primarily attributable to cost containment programs as the
Company continues to respond to the leveling of incoming orders for some of the
Company's products.
Product development expense was $13.2 million or 9.7% of consolidated sales
for the three months ended December 31, 1998 as compared to $14.5 million or
10.9% of consolidated sales for the same period last year. The decrease was due
primarily to the timing of expenses for ongoing research and development
programs.
Amortization of intangibles was $1.6 million or 1.2% of consolidated sales
for the three months ended December 31, 1998 as compared to $1.4 million or
1.1% of consolidated sales for the same period last year. The increase was
primarily attributable to increased goodwill amortization related to the
acquisition of Pacific in June, 1998.
Amortization of unearned compensation of $0.6 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.
Operating income. Operating income increased 22.2% to $25.0 million or 18.2%
of consolidated sales for the three months ended December 31, 1998 as compared
to $20.4 million or 15.3% of consolidated sales for the same period a year ago.
The increase is primarily attributable to the increase in sales and the
reduction in operating expenses.
Interest. Interest expense, net of interest income, was $12.3 million for
the third quarter of fiscal 1999 as compared to net interest income of $0.7
million for the same period last year. The increase in net interest expense was
attributable to the debt incurred in connection with the Merger. Also included
in interest expense is $0.8 million of amortization expense related to deferred
debt issuance costs.
14
<PAGE>
Income before income taxes. Income before income taxes for the three months
of fiscal 1999 decreased 42% to $12.4 million, or 9% of consolidated sales as
compared to $21.4 million or 16% of consolidated sales for the same period last
year. The decrease was primarily attributable to an increase in interest
expense incurred in connection with the Merger, offset by higher gross profit
and lower operating expenses.
Taxes. The effective tax rate for the third quarter of fiscal 1999 was
44.0%, compared to 40.5% for the same period a year ago. The increase is due to
permanent differences arising as a result of the accounting for the Merger.
Net income. Net income decreased $5.8 million to $6.9 million or $0.05 per
share on a diluted basis for the three months ended December 31, 1998 as
compared to $12.7 million or $0.73 per share on a diluted basis for the same
period a year ago. The decrease was primarily attributable to the additional
interest expense incurred in connection with the Merger which was offset by
higher sales and lower operating expenses during the third quarter of fiscal
1999. The reduction in earnings per share is also attributable to a higher
number of common shares outstanding in connection with the Merger.
Nine Months Ended December 31, 1998 as compared to Nine Months Ended December
31, 1997
Sales. Consolidated sales increased $16.2 million or 4.6% to $369.5 million
for the nine months ended December 31, 1998 as compared to $353.3 million for
the same period last year.
Sales of communications test products decreased $2.7 million to $182.2
million or 1.4% for the nine months ended December 31, 1998 as compared to
$184.9 million from the same period last year. The decrease was primarily a
result of the slowdown of orders from the RBOCs.
Sales for industrial computing and communications products increased $8.7
million to $119.7 million or 7.8% for the nine months ended December 31, 1998
as compared to $111.0 million from the same period last year. The increase was
attributable to increased sales for the Company's ruggedized laptops which was
partially offset by a decrease in shipments of the Company's rack-mounted
computers.
Sales of visual communications products increased $10.2 million to $67.6
million or 17.7% for the nine months ended December 31, 1998 as compared to
$57.5 million from the same period last year. The increase was primarily
attributable to sales for the Company's real-time flight information passenger
video displays, which continued to be strong, as well as increased sales from
Pacific. Offsetting this increase were lower sales for graphical user-interface
(GUI) products as well as a reduction in sales from the sale of ComCoTec.
Gross Profit. Consolidated gross profit increased $9.1 million to $210.7
million or 57.0% of consolidated sales for the nine months ended December 31,
1998 as compared to $201.6 million or 57.1% of consolidated sales for the same
period a year ago, due primarily to an increased volume of shipments of
products.
Operating Expenses. Operating expenses consist of selling, marketing and
distribution expense; general and administrative expense; product development
expense; recapitalization-related costs; amortization of intangibles; and
amortization of unearned compensation. Total operating expenses were $196.9
million or 53.3% of consolidated sales for the nine months ended December 31,
1998 as compared to $149.4 million or 42.3% of consolidated sales for the same
period last year. Included in the operating expenses for the nine months ended
December 31, 1998 were $43.4 million of expenses related to the
Recapitalization, primarily for the option cancellation payments. Excluding
these Recapitalization-related expenses, operating expenses for the nine months
ended December 31, 1998 were $153.5 million or 41.5% of consolidated sales.
Selling, general and administrative expense was $107.5 million or 29.1% of
consolidated sales for the nine months ended December 31, 1998, compared to
$103.5 million or 29.3% of consolidated sales for the same period a year ago.
The Company continued to manage its selling, general and administrative
expenses to ensure that these expenses increase at a slower rate than sales
growth.
15
<PAGE>
Product development expense was $40.3 million or 10.9% of consolidated sales
for the nine months ended December 31, 1998 as compared to $41.6 million or
11.8% of consolidated sales for the same period last year.
Recapitalization-related costs. In connection with the Merger, the Company
incurred $43.4 million, consisting of $39.9 million (including a $14.6 million
non-cash charge) for the cancellation payments of employee stock options and
compensation expense due to the acceleration of unvested stock options, and
$3.5 million for certain other expenses resulting from the Merger, including
employee termination expense. The Company incurred an additional $41.3 million
in expenses, of which $27.3 million was capitalized and will be amortized over
the life of the Senior Secured Credit Facilities and Senior Subordinated Notes,
and $14.0 million was charged directly to shareholders' equity.
Amortization of intangibles was $4.7 million or 1.3% of consolidated sales
for the nine months ended December 31, 1998 as compared to $4.3 million or 1.2%
of consolidated sales for the same period last year. The dollar increase was
primarily attributable to increased goodwill amortization related to the
acquisition of Pacific.
Amortization of unearned compensation of $1.0 million relates to the
amortization of the $9.7 million recorded within shareholders' equity related
to the 14.3 million options that were issued in July, 1998 at a grant price
lower than fair market value.
Operating income (loss). Operating income decreased 73.6% to $13.8 million
or 3.7% of consolidated sales for the nine months ended December 31, 1998 as
compared to $52.2 million or 14.8% of consolidated sales for the same period a
year ago. The loss is primarily attributable to the Recapitalization-related
costs in connection with the Merger. Excluding these expenses, the Company
generated operating income of $57.2 million or 15.5% of consolidated sales. The
percentage increase was primarily attributable to lower operating expenses
described above.
Interest. Interest expense, net of interest income, was $30.2 million for
the first nine months of fiscal 1999 as compared to net interest income of $1.3
million for the same period last year. The increase in net interest expense was
attributable to the debt incurred in connection with the Merger on May 21,
1998. Also included in interest expense is $1.8 million of amortization expense
related to deferred debt issuance costs.
Gain on sale of subsidiary. On June 30, 1998 the Company sold the assets of
ComCoTec for $21 million which resulted in a gain of $15.9 million.
Income (loss) before income taxes. The Company incurred a loss before income
taxes of $0.8 million for the nine months ended December 31, 1998 as compared
to income before income taxes of $54.2 million for the same period last year.
The loss is primarily due to an increase in interest expense and to the one-
time Recapitalization-related costs which were in part offset by the gain on
the sale of ComCoTec. Excluding the one-time charge and gain, income before
income taxes for the nine months ended December 31, 1998 was $26.6 million or
7.2% of consolidated sales. The decrease is primarily due to additional
interest expense offset in part by higher sales.
Taxes. The effective tax rate for the first nine months of fiscal 1999 was
58% compared to a tax rate of 40.5% for the same period a year ago due to the
permanent differences arising as a result of the accounting for the
recapitalization, and a smaller amount of income (loss) before income taxes,
which magnified the effect of such permanent differences.
Net income (loss). Net income decreased $33.6 million to a net loss of $1.3
million or ($0.01) per share on a diluted basis for the nine months ended
December 31, 1998 as compared to net income of $32.2 million or $1.85 per share
on a diluted basis for the same period a year ago. The decrease was primarily
attributable to the additional interest expense and the Recapitalization-
related expenses incurred in connection with the Merger, offset by the gain on
the sale of ComCoTec.
16
<PAGE>
Backlog. Backlog at December 31, 1998 was $142.4 million, an increase of
$63.3 million over the backlog at March 31, 1998. The increase is due primarily
to the significant orders received at Itronix.
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.
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of December 31, 1998,
the Company had $536.4 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $254.0 million in
borrowings under the Term Loan Facility and $7.0 million in borrowings under
the new Revolving Credit Facility.
Cash flows. The Company's cash and cash equivalents decreased $28.4 million
during the first nine months of fiscal 1999 principally due to the
Recapitalization of the Company and repayment of debt.
Working capital. During the first nine months of fiscal 1999, the Company's
working capital increased as its operating assets and liabilities provided an
$8.6 million source of cash, excluding the acquisition of Pacific. Inventory
levels decreased, creating a source of cash of $8.1 million, due primarily to
better inventory management at the Company's industrial computing and
communications operations. Accounts receivable increased, creating a use of
cash of approximately $19.8 million, due in part to the large increase in
shipments at the end of the quarter as well as an increase in deferred service
contract billings. Other current assets decreased, creating a source of cash of
$2.4 million mainly due to the recognition of expenses previously capitalized
in connection with the Merger. Accounts payable decreased, creating a use of
cash of $1.0 million as a result of the timing of the payment of bills. Other
current liabilities increased, creating a source of cash of $19.0 million. This
is due to the increase in deferred service contract revenue; the accrual of
interest on the debt incurred in connection with the recapitalization; and the
accrual of expenses related to the final phase of the Merger.
Investing activities. The Company's investing activities used a total of
$10.8 million during the first nine months of fiscal 1999 primarily for the
purchase and replacement of property and equipment and the payment of an
earnout incentive related to the fiscal 1998 operating results of Advent
Design, Inc., a subsidiary purchased in March, 1997. Also included in this
total are the proceeds received from the sale of ComCoTec, offset by the cash
purchase price for Pacific. The Company's capital expenditures were $7.4
million compared with $11.0 million for the same period last year. The decrease
is primarily due to the timing of certain capital expenditure purchases. The
Company anticipates capital expenditures to be approximately 30% below fiscal
1998 levels, primarily as a result of the reduction of commitments at the
Company's test and industrial computing businesses.
Debt and equity. The Company's financing activities used $33.6 million in
cash during the first nine months of fiscal 1999, due mainly to the Merger.
Debt Service. In connection with the Merger, the Company entered into a
senior secured credit agreement (the "Senior Secured Credit Agreement")
consisting of a $260 million term loan facility (the "Term Loan Facility") and
a $110 million revolving credit facility (the "Revolving Credit Facility")
(collectively, the "Senior Secured Credit Facilities"). In addition, the
Company incurred $275 million of debt through the sale of its 9 3/4% Senior
Subordinated Notes (the "Senior Subordinated Notes").
17
<PAGE>
In connection with the Merger and related transactions, Dynatech LLC became
the primary obligor with respect to the Senior Secured Credit Facility and the
Senior Subordinated Notes. See Note D. Financial Position of Dynatech
Corporation and Dynatech LLC. Dynatech Corporation has guaranteed the Senior
Secured Credit Facilities and the Senior Subordinated Notes.
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. During fiscal 1999 the
Company is required to make mandatory principal payments of $8 million of which
$6 million was repaid during the first nine months of fiscal 1999. With respect
to the $260 million initially borrowed under the Term Loan Facility (which is
divided into four tranches, each of which has a different term and repayment
schedule), the Company is required to make scheduled principal payments of the
$50 million of tranche A term loan thereunder during its six-year term, with
substantial amortization of the $70 million tranche B term loan, $70 million
tranche C term loan and $70 million tranche D term loan thereunder occurring
after six, seven and eight years, respectively. The $275 million of Senior
Subordinated Notes will mature in 2008, and bear interest at 9 3/4% per annum.
Total interest expense including the amortization of deferred debt issuance
costs is expected to be approximately $47 million in fiscal 1999.
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 defined in the Senior Secured Credit
Agreement) for each fiscal year in which the Company exceeds a certain leverage
ratio. The Senior Subordinated Notes are subject to certain mandatory
prepayments under certain circumstances.
The Revolving Credit Facility matures 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, 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 or accomplished on acceptable terms.
The loans under the Senior Secured Credit Agreement bear interest at
floating rates based upon the interest rate option elected by the Company. The
Company's weighted-average interest rate on the loans under the Senior Credit
Agreement was 8.5% per annum for the period commencing May 21, 1998 and ending
December 31, 1998, and is expected to be approximately 8.3% per annum for the
period commencing January 1, 1999 and ending March 31, 1999. However, the
Company has entered into interest rate swaps which will be effective for
periods ranging from two to three years beginning September 30, 1998 to fix the
interest charged on a portion of the total debt outstanding under the Term Loan
Facility. After giving effects to these arrangements, approximately $220
million of the debt outstanding will be subject to an effective average annual
fixed rate of 5.71% plus an applicable margin. See Note N. Interest Rate Swaps
to the notes to condensed consolidated financial statements provided elsewhere
in this report. As a result of the substantial indebtedness 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.
Future Financing Sources and Cash Flows. The amount under the Revolving
Credit Facility that remained undrawn following the May, 1998 closing of the
Recapitalization was $70 million. The undrawn portion of this facility will be
available to meet future working capital and other business needs of the
Company. At December 31, 1998, the undrawn portion of this facility was $103
million. The Company believes that cash generated from operations, together
with amounts available under the Revolving Credit Facility and any other
available sources of liquidity, 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
18
<PAGE>
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.
Covenant Restrictions. The Senior Secured Credit Agreement imposes
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 limit the Company's ability 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 Agreement also, 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 governing the Senior Subordinated Notes, 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. These restrictions, among other things, preclude Dynatech LLC from
distributing assets to Dynatech Corporation (which has no independent
operations and no significant assets other than its membership interest in
Dynatech LLC), except in limited circumstances. In addition, under the Senior
Secured Credit Agreement, the Company is required to comply with a minimum
interest expense coverage ratio and a maximum leverage ratio. These financial
tests become more restrictive in future years. The term loans under the Senior
Secured Credit Facilities (other than the $50 million tranche A term loan) are
governed by negative covenants that are substantially similar to the negative
covenants contained in the indenture governing the Senior Subordinated Notes,
which also impose restrictions on the operation of the Company's business.
Year 2000
Broadly speaking, Year 2000 issues may arise when certain computer programs
use only two digits to refer to a year or to recognize a year. As a result,
computers that are not Year 2000 compliant may read the date 2000 as 1900. The
Company is aware that Year 2000 issues could adversely impact its operations,
and as detailed below, has commenced a process intended to address Year 2000
issues that the Company has been able to identify. The Company's program for
addressing Year 2000 issues at each of its businesses generally comprises the
following phases: inventory, assessment, testing and remediation. The scope of
this program includes the review of the Company's products, information
technology ("IT") systems, non-IT and embedded systems, and vendors/supply
chain.
State of Readiness. Management at each of the Company's businesses has
commenced a review of its computer systems and products to assess exposure to
Year 2000 issues. The review process is being conducted by employees with
expertise in information technology as well as engineers familiar with non-IT
systems, and focuses on both the Company's internal systems and its existing
and installed base of products. Although the Company has used the services of
consultants to a limited extent in connection with its assessment of some Year
2000 issues, it has not used independent verification and validation processes
in the testing of its systems and products. As of December 31, 1998, the
Company had conducted an inventory and test of its existing significant
internal systems with regard to Year 2000 issues. The Company anticipates that
additional testing and remediation of these systems will continue through June,
1999.
As of December 31, 1998, the Company had conducted an inventory of its
existing products. The Company anticipates that it will complete its inventory
of its installed base of products by March 31, 1999. In particular, it is
anticipated that significant focus and resources will be required for the
assessment, testing and remediation process for the Industrial Computer Source
existing product line and installed base of products. In determining state of
readiness the Company has adopted the following definition:
Year 2000 readiness means the intended functionality of a product, when used
in accordance with its associated documentation, will correctly process,
provide and/or receive date-data in and between the years
19
<PAGE>
1999 and 2000, including leap year calculations, provided that all other
products and systems (for example, hardware, software and firmware) used with
the product properly exchange accurate date-data with it.
As part of its assessment phase, the Company is in the process of
communicating with its significant suppliers and customers to determine the
extent to which the Company is vulnerable to any failure by those third parties
to remediate their own Year 2000 issues. In addition, the Company is evaluating
the extent to which Year 2000 issues may arise as a result of some combinations
of certain of its products with other companies' products. If any such
suppliers to customers or product combinations do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
materially adversely affected.
The targeted completion date for the review and remediation process for the
communications test business, the Company's largest, is June, 1999. As of
December 31, 1998, the communications test business had completed the
inventory, assessment and testing of its existing products. Management does not
consider data time fields to be critical to the functionality of the Company's
communications test products. For the Company's other product categories, which
may employ data time fields in areas that are critical to product
functionality, completion dates are targeted on or prior to June, 1999 for
testing and remediation.
Costs. The Company's historical and estimated costs of remediation have not
been and are not anticipated to be material to the Company's financial position
or results of operations, and will be funded through operating cash flows.
Total costs associated with remediation of Year 2000 (including systems,
software, and non-IT systems replaced as a result of Year 2000 issues) are
currently estimated at approximately $3 million to $4 million, of which at
least $2 million to $3 million remains to be spent. The largest cost factor to
date has consisted of expenditure of management and employee time in attention
to Year 2000 and related issues. Estimated remediation costs are based on
management's best estimates. There can be no guarantee that these estimates
will be achieved, and actual results could differ materially from those
anticipated, particularly if unanticipated Year 2000 issues arise.
Year 2000 Risks and Related Plans. While the Company expects to make the
necessary modifications of changes to both its internal IT and non-IT systems
and existing product base in a timely fashion, there can be no assurance that
the Company's internal systems and existing or installed base of products will
not be materially adversely affected by the advent of Year 2000. Certain of the
Company's products are used, in conjunction with products of other companies,
in applications that may be critical to the operations of its customers. Any
product non-readiness, whether standing alone or used in conjunction with the
products of other companies, may expose the Company to claims from its
customers or 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.
In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an effort
intended to minimize potential disruption to its internal systems, the Company
intends to perform additional hard-disk back-up of its rudimentary systems and
critical information in advance of the Year 2000.
Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could
lose or have trouble accessing or receive inaccurate third party data,
experience internal and external communications difficulties or have difficulty
obtaining components that are Year 2000 compliant from its vendors. The Company
could also experience a slowdown or reduction of sales if customers such as
telecommunications companies or commercial airlines are adversely affected by
Year 2000 issues.
20
<PAGE>
The Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the
euro. The participating countries agreed to adopt the euro as their common
legal currency on that date. The euro now trades on currency exchanges for non-
cash transactions.
As of January 1, 1999, the participating countries no longer controlled
their own monetary policies by directing independent interest rates for the
legacy currencies. Instead, the authority to direct monetary policy, including
money supply and official interest rates for the euro, is exercised by the new
European Central Bank.
Following introduction of the euro, the legacy currencies remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency.
The impact of the euro is not expected to materially affect the results of
operations of Dynatech. The Company operates primarily in U.S. dollar-
denominated purchase orders and contracts, and the Company neither has a large
customer nor vendor base within the countries participating in the euro
conversion.
New Pronouncements
In the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive
Income." SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires, among other things,
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive
income.
In the quarter ended June 30, 1998, the Company adopted Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions.
In June, 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS 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 is required to adopt SFAS 131
in the fourth quarter of fiscal 1999 and its adoption may result in the
provision of additional details in the Company's disclosures.
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Due to its limited use of derivative instruments,
the Company is assessing the impact of the adoption of SFAS 133 on its results
of operations and its financial position.
Exchange Offer of Senior Subordinated Notes
On October 8, 1998, Dynatech LLC commenced an offer to exchange, for the
Senior Subordinated Notes, notes that are registered under the Securities Act
of 1933 and that have materially identical terms (with minor exceptions
relating to payment of additional interest and registration rights). All of the
existing notes originally issued were tendered and exchanged for new notes.
21
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
On June 27, 1996, Cincinnati Microwave, Inc. ("CMI") filed an action in the
United States District Court for the Southern District of Ohio against the
Company and Whistler Corporation of Massachusetts ("Whistler"), alleging
willful infringement of CMI's patent for a mute function in radar detectors. In
1994, the Company sold its radar detector business to Whistler. The Company and
Whistler have asserted in response that they have not infringed, and that the
patent is invalid and unenforceable. The Company obtained an opinion of counsel
from Bromberg & Sunstein LLP in connection with the manufacture and sale of the
Company's Whistler series radar detectors and will be offering the opinion,
among other things, as evidence that any alleged infringement was not willful.
Litigation is on-going. The Company intends to defend the lawsuit vigorously
and does not believe that the outcome of the litigation is likely to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
Item 2. Changes in Securities and Use of Proceeds
On May 21, 1998, the Company was merged with MergerCo. In the Merger, (i)
each then outstanding share of Common Stock of the Company was converted into
the right to receive $47.75 in cash and 0.5 shares of Recapitalized Common
Stock, which shares were registered on a Registration Statement on Form S-4 and
(ii) the then outstanding 111,590,528 shares of common stock of MergerCo were
converted on a one-for-one basis into an equal number of shares of
Recapitalized Common Stock pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned
to such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Amendment of Certificate of Formation of
Telecommunications Techniques Co., LLC, filed with the Secretary of
State of Delaware on December 21, 1998.
10.1 Amended and Restated Employment Agreement, entered into November 1,
1998, by and between Dynatech Corporation and John F. Reno.
10.2 Amended and Restated Employment Agreement, entered into November 1,
1998, by and between Dynatech Corporation and Allan M. Kline.
10.3 Amended and Restated Employment Agreement, entered into November 1,
1998, by and between Dynatech Corporation and John R. Peeler.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATECH CORPORATION
Date February 3, 1999 /s/ ALLAN M. KLINE
_____________________________________
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date February 3, 1999 /s/ ROBERT W. WOODBURY, JR.
_____________________________________
Robert W. Woodbury, Jr.
Vice President, Corporate
Controller and Principal Accounting
Officer
23
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF FORMATION
OF
TELECOMMUNICATIONS TECHNIQUES CO., LLC
--------------------------------------
Pursuant to Section 18-202 of the
Limited Liability Company Act
of the State of Delaware
----------------------------------------
TELECOMMUNICATIONS TECHNIQUES CO., LLC, a limited liability company
organized and existing under and by virtue of the Limited Liability Company Act
of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:
That the Certificate of Formation of the Company is hereby amended by
changing the name of the Corporation to DYNATECH, LLC.
IN WITNESS WHEREOF, the Company, has caused this Certificate of Amendment
of Certificate of Formation to be executed by a duly authorized officer thereof
as of the 21st day of December, 1998.
DYNATECH LLC
By:/s/ Mark V.B. Tremallo
-------------------------------------
Mark V. B. Tremallo
Corporate Vice President and
General Counsel
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into this 1st day
of November, 1998, by and between Dynatech Corporation, a Massachusetts
corporation ("Employer"), and John F. Reno ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by Employer as its Chairman,
President and Chief Executive Officer;
WHEREAS, pursuant and subject to the terms of the Agreement and Plan of
Merger, dated as of December 20, 1997 (the "Merger Agreement"), by and between
Employer and CDRD Merger Corporation, a Delaware corporation ("MergerCo"),
Employer will be merged with and into MergerCo (the "Merger") and Employer will
be the surviving corporation to the Merger;
WHEREAS, Executive and Employer are currently parties to an Amended and
Restated Employment Agreement, dated as of May 21, 1998 (the "Prior Agreement")
which sets forth the terms and conditions of Executive's employment with
Employer following the Merger;
WHEREAS, Employer wishes to secure the continued services of Executive and
Executive desires to accept such continued employment, in each case, on the
terms and conditions set forth herein;
WHEREAS, Employer and Executive wish to amend and restate the Prior
Agreement in its entirety, as set forth herein (as so amended and restated, the
"Amended Agreement");
WHEREAS, Employer and Executive acknowledge and agree that Executive has
had and will continue to have a prominent role in the management of the
business, and the development of the goodwill, of Employer and its Affiliates
(as defined below) and has established and developed and will continue to
establish and develop relations and contacts with the principal customers and
suppliers of Employer and its Affiliates in the United States, Europe, the
Pacific Rim and the rest of the world, all of which constitute valuable goodwill
of, and could be used by Executive to compete unfairly with, Employer and its
Affiliates;
<PAGE>
WHEREAS, (i) in the course of his employment with Employer, Executive has
-
obtained and will continue to obtain confidential and proprietary information
and trade secrets concerning the business and operations of Employer and its
Affiliates in the United States, Europe, the Pacific Rim and the rest of the
world that could be used to compete unfairly with Employer and its Affiliates;
(ii) the covenants and restrictions contained in Sections 8 through 13,
- ---
inclusive, are intended to protect the legitimate interests of Employer and its
Affiliates in their respective goodwill, trade secrets and other confidential
and proprietary information; and (iii) Executive desires to be bound by such
---
covenants and restrictions;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises contained herein and for other good and valuable consideration,
Employer and Executive hereby agree to amend and restate the Employment
Agreement as follows:
1. Agreement to Continue Employment. Upon the terms and subject to the
---------------------------------
conditions of this Amended Agreement, Employer hereby continues the employment
of Executive, and Executive hereby accepts such continued employment by
Employer.
2. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless Executive's employment shall sooner
------------------
terminate pursuant to Section 7, Employer shall employ Executive for a term
commencing on the date of the consummation of the Merger (the "Commencement
Date") and ending on the fifth anniversary of the Commencement Date (the
"Initial Term"). Effective upon the expiration of the Initial Term and of each
Additional Term (as defined below), Executive's employment hereunder shall be
deemed to be automatically extended, upon the same terms and conditions, for an
additional period of one year (each, an "Additional Term"), in each such case,
commencing upon the expiration of the Initial Term or the then current
Additional Term, as the case may be, unless Employer, at least 60 days prior to
the expiration of the Initial Term or such Additional Term, shall give written
notice (a "Non-Extension Notice") to Executive of its intention not to extend
the Employment Period (as defined below) hereunder, provided that a Non-
--------
Extension Notice shall not constitute a notice to Executive of the termination
of his employment by Employer unless such notice specifically provides for such
termination of employment and the specific date thereof. The period during
which Executive is employed pursuant to this Amended Agreement, including any
extension thereof in accordance with the preceding sentence, shall be referred
to as the "Employment Period".
2
<PAGE>
(b) Position and Responsibilities. During the Employment Period,
-----------------------------
Executive shall serve as Chairman, President and Chief Executive Officer of
Employer and have such duties and responsibilities as are customarily assigned
to individuals serving in such position and such other duties consistent with
Executive's title and position as the Board of Directors of Employer (the
"Board") specifies from time to time. Executive shall devote all of his skill,
knowledge and working time (except for (i) vacation time as set forth in Section
-
6(c) and absence for sickness or similar disability and (ii) to the extent that
--
it does not interfere with the performance of Executive's duties hereunder, (A)
-
such reasonable time as may be devoted to service on boards of directors of
other corporations and entities, subject to the provisions of Section 9, and the
fulfillment of civic responsibilities and (B) such reasonable time as may be
-
necessary from time to time for personal financial matters) to the conscientious
performance of the duties and responsibilities of such position. During the
Employment Period, Employer shall use its reasonable best efforts to cause
Executive to be nominated and elected to serve as a member of the Board of
Directors, without additional compensation.
3. Base Salary. As compensation for the services to be performed by
-----------
Executive during the Employment Period, Employer shall pay Executive a base
salary at an annualized rate of $500,000, payable in installments on Employer's
regular payroll dates. The Board shall review Executive's base salary annually
during the period of his employment hereunder and, in its sole discretion, the
Board may increase (but may not decrease) such base salary from time to time
based upon the performance of Executive, the financial condition of Employer,
prevailing industry salary levels and such other factors as the Board shall
consider relevant. (The annual base salary payable to Executive under this
Section 3, as the same may be increased from time to time and without regard to
any reduction therefrom in accordance with the next sentence, shall hereinafter
be referred to as the "Base Salary".) The Base Salary payable under this
Section 3 shall be reduced to the extent that Executive elects to defer such
Base Salary under the terms of any deferred compensation, savings plan or other
voluntary deferral arrangement that may be maintained or established by
Employer.
4. Incentive Compensation Arrangements.
-----------------------------------
(a) Annual Incentive Compensation. During the Employment Period, Employer
-----------------------------
shall maintain an annual incentive compensation program for its senior
executives in which Executive shall be entitled to participate in accordance
with the terms thereof as in effect from time to time, at a level commensurate
with his position and duties with Employer, which program shall be operated in
accordance with Employer's customary corporate practices and shall provide for
an annual bonus based on such performance targets as may be established from
time to time by the Compensation Committee of the Board.
3
<PAGE>
(b) Roll-Over of Certain Options; Retention of Equity.
-------------------------------------------------
(i) Prior to the Merger, Executive was the beneficial owner of 40,804
shares (together with the rights associated therewith pursuant to the
Shareholders' Rights Agreement, dated as of February 16, 1989, as amended and
restated as of March 12, 1990, the "Previously Owned Shares") of the common
stock, par value $.20 per share, of Employer (the "Prior Common Stock"),
including 30,000 shares held in two family trusts, and held options (the "Prior
Options") to purchase 413,000 additional shares of Prior Common Stock.
(ii) Immediately prior to the effective time of the Merger (the
"Effective Time"), Executive contributed all of the Previously Owned Shares to
MergerCo in exchange for shares of common stock, par value $.20 per share, of
MergerCo (the "MergerCo Common Stock"), which shares of MergerCo Common Stock
were converted into a like number of shares of common stock, par value $.20 per
share, of the corporation surviving the Merger (the "Recapitalized Common
Stock").
(iii)(x) In the case of each Prior Option that, immediately prior to
-
the Effective Time, was intended to be a nonqualified stock option (each, a
"Prior Nonqualified Option"), such Prior Nonqualified Stock Option became fully
vested and exercisable as of the Effective Time and (y) in the case of each
-
Prior Option (each, a "Prior ISO")that, immediately prior to the Effective Time,
was intended to qualify as an "incentive stock option" under section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), (A) each Prior ISO that
-
had become vested and exercisable prior to the Effective Time in accordance with
the award agreement evidencing such Prior ISO remains fully vested and
exercisable from and after the Effective Time, (B) Prior ISOs that had not
-
become vested and exercisable prior to the Effective Time having an aggregate
exercise price not exceeding the excess of
(1) $100,000 over
-
(2) the aggregate exercise price of any Prior ISOs that become vested
-
in calendar year 1998 prior to the Effective Time
became vested and exercisable as of the Effective Date and (C) each
-
remaining Prior ISO shall become vested after the Effective Time in
accordance with the terms of the award agreement evidencing such Prior ISO.
At the Effective Time, each Prior Option was automatically converted into
an option (the "Recapitalized Option") to purchase a number of shares (such
shares, the "Recapitalized Option Shares") of common stock, par value $.20
per share, of the corporation surviving the Merger (the "Recapitalized
Common Stock") equal to the sum of:
4
<PAGE>
(x) the quotient of
(I) the product of (A) the number of shares of Prior Common
-
Stock subject to such Prior Option immediately prior to the
Effective Time, multiplied by (B) the cash consideration per
-
share of Prior Common Stock paid pursuant to the Merger Agreement
to holders of Prior Common Stock, divided by
(II) the price per share of Recapitalized Common Stock paid by
the CD&R Fund (as defined below) for the shares of MergerCo which
were exchanged for the shares of the Company's Recapitalized
Common Stock upon the consummation of the Merger, and
(y) the product of (I) the number of shares of Prior Common Stock
-
subject to such Prior Option immediately prior to the Effective Time,
multiplied by (II) the number of shares of Recapitalized Common Stock
--
transferred pursuant to the Merger Agreement to holders of Prior
Common Stock for each such share of Prior Common Stock.
Each Recapitalized Option shall have an exercise price per Recapitalized
Option Share equal to the quotient of:
(x) the aggregate exercise price for all shares of Prior Common Stock
subject to the corresponding Prior Option, divided by
(y) the number of Recapitalized Option Shares subject to such
Recapitalized Option immediately following the conversion thereof
contemplated hereby.
Each of the Company and Executive agree that the foregoing adjustment in the
number of shares and the exercise prices applicable in respect of Recapitalized
Options is intended to comply with the procedures for adjusting the number of
shares subject to stock options (and the corresponding exercise prices) in a
corporate transaction under Section 424 of the Code and the regulations
thereunder, regardless of whether such Section is applicable to such
Recapitalized Options. The method used to determine fair market value of the
Company's stock for purposes of such adjustment as a result of the Merger was
the arm's length negotiated value assigned to the Recapitalized Common Stock in
connection with the Merger (the "Merger Method"), which is one of several
acceptable valuation methods expressly set forth in Treas. Reg. (S)1.425-
1(b)(7).
5
<PAGE>
(iv) Each Recapitalized Option that is the successor option to a
Prior Nonqualified Option shall provide that it shall expire on the normal
expiration date specified in the option award agreement evidencing such
corresponding Prior Nonqualified Option that applies if Executive's employment
continues at least until such date (such expiration date, the "Original
Termination Date"), provided that (x) in the event of the termination of
-
Executive's employment with Employer prior to an applicable Original Termination
Date as a result of Executive's death, Executive's Disability (as defined
below), a termination of Executive's employment by Employer Without Cause (as
defined below) or a termination of Executive's employment by Executive for Good
Reason (as defined below), each such Recapitalized Option that is then
outstanding shall expire on the earlier of (I) the Original Termination Date and
-
(II) the later of (A) the six month anniversary of the date of the expiration of
-- -
any initial lock-up period imposed on sales of Recapitalized Common Stock in
connection with the first underwritten public offering of any shares of
Recapitalized Common Stock led by one or more underwriters, at least one of
which is of nationally recognized standing (such expiration date, the "Lock-Up
Expiration Date"), and (B) the first anniversary of the applicable Date of
-
Termination (as defined below) and (y) in the event of the termination of
-
Executive's employment with Employer prior to such Original Termination Date for
any reason other than the reasons described in the immediately preceding clause
(x), each such Recapitalized Option that is then outstanding shall expire on the
-
earliest of (I) the Original Termination Date, (II) the later of (1) the 90th
- -- -
day following the Lock-Up Expiration Date and (2) the 30th day following the
-
applicable Date of Termination and (III) the first anniversary of the applicable
---
Date of Termination.
Each Recapitalized Option that is the successor option to a Prior ISO
shall provide that it shall expire on the expiration date specified in the
option award agreement evidencing such corresponding Prior ISO, including,
without limitation, any such early expiration date applicable in the case of a
termination of Executive's employment.
(v) Executive, Employer and Clayton, Dubilier & Rice Fund V Limited
Partnership (the "CD&R Fund") shall enter into a separate agreement (the
"Ancillary Agreement"), to become effective as of the Effective Time, that will
provide, among other things, that:
(A) during the Employment Period, the CD&R Fund will vote its shares of
Recapitalized Common Stock in favor of the election of Executive to serve
as a member of the Board;
(B) Executive shall not be permitted, at any time during his employment
with Employer, to sell, transfer or otherwise dispose of any shares of
Recapitalized Common Stock beneficially owned by him (including any
Recapitalized Option Shares), other than (I) transfers upon death to
-
Executive's estate, (II) transfers to
--
6
<PAGE>
family trusts or partnerships for estate planning purposes or (III) de
---
minimis transfers during the Employment Period not exceeding, in the
aggregate, 25% of the sum of the aggregate shares of Recapitalized Common
Stock beneficially owned by Executive as of the Commencement Date and the
aggregate Recapitalized Option Shares subject to the Recapitalized Options
held by Executive as of the Commencement Date, provided, in the case of any
--------
transfer pursuant to the foregoing clause (I) or (II), that the executor of
Executive's estate or the trustee or general partner of any such trust or
partnership, as applicable, shall agree, in form and substance reasonably
satisfactory to Employer, to be bound by all of the provisions of the
Ancillary Agreement;
(C) following any termination of Executive's employment with Employer,
Employer and the CD&R Fund shall have successive rights to repurchase any
Recapitalized Options and/or Recapitalized Option Shares then beneficially
owned or held by Executive for a purchase price equal to the then fair
market value of the Recapitalized Option Shares or the Recapitalized Option
Shares then subject to the Recapitalized Options, as applicable (reduced by
the option exercise price in the case of a purchase of Recapitalized
Options), such fair market value to be determined in good faith by the
Board on the basis of an independent valuation of the Recapitalized Common
Stock, provided, that the determination of such fair market value will not
--------
give effect to (x) any restrictions on transfer of such shares, (y) the
- -
fact that such shares are not registered for resale by Executive under the
Securities Act of 1933, as amended, or (z) the fact that such shares would
-
represent a minority interest in Employer;
(D) in the event of certain qualifying sales of Recapitalized Common Stock
by the CD&R Fund, Executive shall have the right to sell a pro rata portion
of the shares of Recapitalized Common Stock then owned by him, on the same
terms and conditions as the CD&R Fund; and
(E) in the event of the sale by the CD&R Fund of substantially all of the
Recapitalized Common Stock then beneficially owned by it (other than any
such sale to an Affiliate of the CD&R Fund), the CD&R Fund shall have the
right to require Executive to sell the same percentage of the Recapitalized
Common Stock then beneficially owned by him as will be sold by the CD&R
Fund, on the same terms and conditions as the CD&R Fund, and Employer shall
have the right to cause any Recapitalized Options then held by Executive to
be canceled in exchange for a payment in respect of each Recapitalized
Option Share covered by such Recapitalized Options equal to the excess, if
any, of the price per share of Recapitalized Common Stock paid to holders
of Recapitalized Common Stock in connection with such sale over the
applicable option exercise price.
7
<PAGE>
(F) The transfer restrictions described in the foregoing subparagraph (B)
shall terminate on the earlier of (I) the fifth anniversary of the
-
Commencement Date and (II) the Lock-Up Expiration Date. The rights and
--
obligations of Executive and Employer under the foregoing subparagraphs
(C), (D) and (E) of this Section 4(b)(v) shall terminate on the closing
date following the effective date of the first registration statement filed
under the Securities Act by Employer after the Commencement Date with
respect to an underwritten public offering of any shares of Employer's
capital stock led by one or more underwriters, at least one of which is of
nationally recognized standing.
(c) In the event that, due to the adjustment provided in this Section
4 with respect to the number of shares of the Recapitalized Common Stock subject
to Recapitalized Options, the amount of Covered Federal Taxes (as defined below)
payable by Executive solely in respect of the Recapitalized Options exceeds the
amount of such Covered Federal Taxes that would have been incurred by Executive
solely in respect of the Recapitalized Options had the proper adjustment
applicable to such Recapitalized Options been finally determined for Federal
income tax purposes to be a method of adjustment other than the Merger Method
and, as a result, the amount of Covered Federal Taxes payable by Executive
exceeds the amount of such Covered Federal Taxes otherwise payable by Executive,
to be determined after first taking into account the provisions of Section
7(i)(i)-(v) hereof (such excess hereinafter referred to as the "Excess
Liability"), the Company shall, in addition to any other amounts payable to
Executive under this Agreement, pay to Executive an amount equal to the sum of
(i) such Excess Liability and (ii) any and all Covered Federal Taxes and any
- --
other Federal taxes and any state or local income and employment taxes, if any,
incurred by Executive by reason of the payment required to be made under this
Section 4(c). For purposes of this Section 4(c), Covered Federal Taxes shall
mean any tax imposed on Executive under any provision of the Code as in effect
on the date hereof (or any successor provision thereto), other than any income,
employment, estate or gift tax.
5. Employee Benefits. During the Employment Period, Executive shall be
-----------------
entitled to participate in all of Employer's profit sharing, pension, savings,
deferred compensation, supplemental savings, life, medical, dental and
disability insurance plans, as the same may be amended and in effect from time
to time, applicable to senior executives of Employer, provided that Executive
--------
shall not be entitled to participate in any severance plan of Employer or
otherwise receive any severance benefits under any other type of plan. The
benefits referred to in this Section 5 shall be provided to Executive on a basis
that is commensurate with Executive's position and duties with Employer
8
<PAGE>
hereunder and shall be substantially comparable, in the aggregate, to the
benefits (exclusive of severance and equity or other incentive compensation
benefits) provided to Executive immediately prior to the Commencement Date.
6. Perquisites and Expenses.
------------------------
(a) General. During the Employment Period, Executive shall be entitled to
-------
participate in all special benefit or perquisite programs generally available
from time to time to senior executives of Employer, including Employer's
programs providing for reimbursement of certain automobile expenses, club
social dues and fees for tax return preparation, financial planning and
investment advisory services, on the terms and conditions in effect from time to
time under each such program.
(b) Business Travel, Lodging, etc. Employer shall reimburse Executive for
------------------------------
reasonable travel, lodging, meal and other reasonable expenses incurred by him
in connection with his performance of services hereunder upon submission of
evidence, satisfactory to Employer, of the incurrence and purpose of each such
expense and otherwise in accordance with Employer's business travel
reimbursement policy applicable to its senior executives as in effect from time
to time.
(c) Vacation. During the Employment Period, Executive shall be entitled
--------
to a number of weeks of paid vacation, without carryover accumulation,
determined in accordance with the terms of Employer's vacation policy applicable
to senior executives as in effect from time to time. As soon as reasonably
practicable following the Commencement Date, Employer shall pay Executive a cash
amount equal to $96,829, which shall be in full and complete satisfaction of all
then unpaid vacation pay accrued by Executive with respect to periods of
employment completed prior to November 30, 1997.
7. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that Executive's
--------------------------------------
employment hereunder terminates due to death or is terminated by Employer due to
Executive's Disability (as defined below), no termination benefits shall be
payable to or in respect of Executive except as provided in Section 7(f)(ii).
For purposes of this Amended Agreement, "Disability" shall mean a physical or
mental disability that prevents the performance by Executive of his duties
hereunder lasting (or likely to last, based on competent medical evidence
presented to the Board) for a continuous period of six months or longer. The
reasoned and good faith judgment of the Board as to Executive's Disability shall
be based on such competent medical evidence as shall be pre-
9
<PAGE>
sented to it by Executive or by any physician or group of physicians or other
competent medical experts employed by Executive or Employer to advise the Board.
(b) Termination by Employer for Cause. Executive's employment with
---------------------------------
Employer may be terminated by Employer for Cause (as defined below), provided
--------
that Executive shall be permitted to attend a meeting of the Board within 30
days after delivery to him of a Notice of Termination (as defined below)
pursuant to this Section 7(b) to explain why he should not be terminated for
Cause and, if following any such explanation by Executive, the Board determines
that Employer does not have Cause to terminate Executive's employment, any such
prior Notice of Termination delivered to Executive shall thereupon be withdrawn
and of no further force or effect. "Cause" shall mean (i) the willful failure
-
of Executive substantially to perform his duties hereunder (other than any such
failure due to Executive's physical or mental illness) or other willful and
material breach by Executive of any of his obligations hereunder, after a
written demand for substantial performance has been delivered, and a reasonable
opportunity to cure has been given, to Executive by the Board, which demand
identifies in reasonable detail the manner in which the Board believes that
Executive has not substantially performed his duties or has breached his
obligations, (ii) Executive's dishonesty or engaging in willful and serious
--
misconduct, which misconduct has caused or is reasonably expected to result in
direct or indirect material injury to Employer or any of its Affiliates or (iii)
---
Executive's conviction of, or entering a plea of guilty or nolo contendere to, a
---- ----------
crime that constitutes a felony.
(c) Termination Without Cause. A termination "Without Cause" shall mean a
-------------------------
termination of Executive's employment by Employer other than due to Disability
as described in Section 7(a) or for Cause as described in Section 7(b).
(d) Termination by Executive. Executive may terminate his employment for
------------------------
any reason. A termination of employment by Executive for "Good Reason" shall
mean a termination by Executive of his employment with Employer within 30 days
following the occurrence, without Executive's consent, of any of the following
events: (i) the assignment to Executive of (x) a title that is different from,
- -
and a diminution from, the title specified in Section 2 or (y) duties that are
-
significantly different from, and that result in a substantial diminution of,
the duties that he is to assume on the Commencement Date, (ii) the failure of
--
Employer to obtain the assumption of this Amended Agreement by any Successor (as
defined below) to Employer as contemplated by Section 14, (iii) a reduction in
---
the rate of Executive's Base Salary, (iv) a material reduction in the aggregate
--
level of employee and executive benefits provided to Executive pursuant to
Section 5 hereof, (v) Employer's delivery to Executive of a Non-Extension Notice
-
or (vi) a relocation of Executive's principal place of business to a location
--
beyond a radius of 30 miles from the location of such place of business on the
Commencement Date, provided that, within 30 days following the occurrence of any
--------
of
10
<PAGE>
the events set forth therein, Executive shall have delivered written notice to
Employer of his intention to terminate his employment for Good Reason, which
notice specifies in reasonable detail the circumstances claimed to give rise to
Executive's right to terminate his employment for Good Reason, and Employer
shall not have cured such circumstances to the reasonable satisfaction of
Executive.
(e) Notice of Termination. Any termination of Executive's employment
---------------------
hereunder by Employer pursuant to Section 7(a), 7(b) or 7(c), or by Executive
pursuant to Section 7(d), shall be communicated by a written Notice of
Termination addressed to the other. A "Notice of Termination" shall mean a
notice stating that Executive's employment with Employer has been or will be
terminated and setting forth the provisions hereof pursuant to which such
employment has or will be terminated.
(f) Payments Upon Certain Terminations.
----------------------------------
(i) In the event of a termination of Executive's employment by Employer
Without Cause or a termination by Executive of his employment for Good Reason
during the Employment Period, Employer shall pay to Executive his full Base
Salary through the Date of Termination and an amount equal to the pro rata
amount of annual incentive compensation for the portion of the fiscal year
preceding the Date of Termination that would have been payable to Executive
pursuant to Section 4(a) if he had remained employed for the entire fiscal year,
determined on the basis of the actual performance achieved by Employer through
the Date of Termination and the performance objectives established for such
fiscal year, pro rated to reflect the calculation of such annual incentive
compensation for the portion of the fiscal year preceding the Date of
Termination. In addition, in the event of any such termination, Employer shall
pay or, in the case of the Continued Benefits (as defined below), provide to
Executive (or, following his death, to Executive's designated beneficiary or
beneficiaries), as liquidated damages,
(A) his Average Base Salary (as defined below), which shall be payable in
installments on Employer's regular payroll dates, for the period beginning on
the Date of Termination (as defined below) and ending on the second
anniversary of the Date of Termination (such period, the "Severance Period")
and
(B) on the last day of each calendar month included in the Severance
Period, an amount equal to one-twelfth of the Average Annual Bonus (as defined
below); and
11
<PAGE>
(C) continued coverage for Executive and his eligible dependents under
Employer's medical insurance plans referred to in Section 5 (the "Continued
Benefits") during the period commencing on the Termination Date and ending
on the earlier of (i) Executive's 65th birthday and (ii) the date of
- --
Executive's death, subject to timely payment by Executive of all premiums,
contributions and other co-payments required to be paid by senior
executives of Employer under the terms of such plans as in effect from time
to time;
provided that Employer may, at any time, pay to Executive, in a single lump sum
- --------
and in satisfaction of Employer's obligations under clauses (A) and (B) of this
Section 7(f)(i), an amount equal to the present value (as determined by Employer
using a discount rate equal to the then prevailing applicable federal short-term
rate under section 1274(d) of the Code) of the sum of the installments of the
Average Base Salary and Average Annual Bonus then remaining to be paid to
Executive pursuant to clauses (A) and (B) above.
Executive shall not have a duty to mitigate the costs to Employer
under this Section 7(f)(i), except that (i) payments of Base Salary and Average
-
Annual Bonus will be reduced, but not below zero, by the amount of any
compensation earned by Executive (whether paid currently or deferred) during any
portion of the Severance Period from any subsequent employer or other Person (as
defined in Section 17(k) below) for which Executive performs services, including
but not limited to consulting services, and (ii) Continued Benefits shall be
--
reduced or canceled if comparable medical benefit coverage is provided or
offered to Executive by any subsequent employer or other Person for which
Executive performs services, including but not limited to consulting services,
at any time after the Date of Termination.
The term "Average Annual Bonus" means the average of the annual
bonuses paid to Executive pursuant to Employer's annual incentive compensation
plan for each of the three fiscal years of Employer ending immediately prior to
the Date of Termination or, if fewer, each of such fiscal years during which
Executive was at any time employed by Employer and the term "Average Base
Salary" means the average of the annual base salary rate of Executive in effect
immediately prior to the Date of Termination and as of the last day of each of
the two fiscal years of Employer ending immediately prior to the Date of
Termination or, if fewer, each of such fiscal years during which Executive was
at any time employed by Employer; provided that if Executive's employment is
--------
terminated by Executive pursuant to clause (iii) of the definition of Good
Reason, Executive's annual base salary rate in effect immediately prior to any
reduction thereof shall be substituted for Executive's annual base salary rate
in effect immediately prior to the Date of Termination in calculating the
Average Base Salary.
12
<PAGE>
(ii) If Executive's employment shall terminate upon his death or
Disability or if Employer shall terminate Executive's employment for Cause or
Executive shall terminate his employment without Good Reason during the
Employment Period, Employer shall pay Executive his full Base Salary through the
Date of Termination and, in the case of any such termination upon Executive's
death or Disability, Executive shall be entitled to receive (x) a cash payment
-
equal to the pro rata amount of annual incentive compensation for the portion of
the fiscal year preceding the Date of Termination (exclusive of any time between
the onset of a physical or mental disability that prevents the performance by
Executive of his duties hereunder and the resulting Date of Termination) that
would have been payable to Executive pursuant to Section 4(a) if he had remained
employed for the entire fiscal year, determined on the basis of the actual
performance achieved by Employer through the Date of Termination and the
performance objectives established for such fiscal year, pro rated to reflect
the calculation of such annual incentive compensation for the portion of the
fiscal year preceding the Date of Termination and (y) such death or Disability
-
benefits, as applicable, as are provided under the terms of any employee and
executive death benefit and disability plans and programs referred to in Section
5 or 6(a).
(iii) Except as specifically set forth in this Section 7(f), Executive
shall be entitled to receive all amounts payable and benefits accrued under any
otherwise applicable plan, policy, program or practice of Employer in which
Executive was a participant during his employment with Employer (including,
without limitation, Employer's 401(k) Savings Plan and Supplemental 401(k)
Savings Plan) in accordance with the terms thereof, provided that Executive
shall not be entitled to receive any payments or benefits under any such plan,
policy, program or practice providing any bonus or incentive compensation or
severance compensation or benefits (and the provisions of this Section 7(f)
shall supersede the provisions of any such plan, policy, program or practice).
(g) Date of Termination. As used in this Amended Agreement, the term
-------------------
"Date of Termination" shall mean (i) if Executive's employment is terminated by
-
his death, the date of his death, (ii) if Executive's employment is terminated
--
by Employer for Cause, the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if later, the date of termination specified in
such Notice, and (iii) if Executive's employment is terminated by Employer
---
Without Cause, due to Executive's Disability or by Executive for any reason, the
date that is 30 days after the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if no such Notice is given, immediately upon
the termination of Executive's employment.
(h) Resignation upon Termination. Effective as of any Date of Termination
----------------------------
under this Section 7 or otherwise as of the date of Executive's termination of
13
<PAGE>
employment with Employer, Executive shall resign, in writing, from all Board
memberships and other positions then held by him with Employer and its
Affiliates.
(i) Limit on Payments by the Company.
--------------------------------
(i) Notwithstanding any provision of this Amended Agreement other than
Section 7(i)(vi) below, in the event that any amount or benefit paid, payable or
distributed to Executive pursuant to this Amended Agreement which is a
parachute payment as defined in Section 280G of the Code, taken together with
any amounts or benefits otherwise paid, payable or distributed to Executive by
Employer or any Affiliate thereof which are parachute payments as defined in
Section 280G of the Code (collectively, the "Covered Payments"), would be an
"excess parachute payment" as defined in Section 280G of the Code, and would
thereby subject Executive to the tax (the "Excise Tax") imposed under Section
4999 of the Code (or any similar tax that may hereafter be imposed), the
provisions of this Section 7(i) shall apply to determine the amounts payable to
Executive pursuant to Section 7(f) of this Amended Agreement.
(ii) Immediately following delivery of any Notice of Termination, the
Company shall notify Executive of the aggregate present value of all termination
benefits to which he would be entitled under this Amended Agreement and any
other plan, program or arrangement as of the projected Date of Termination,
together with the projected maximum payments, determined as of such projected
Date of Termination that could be paid without Executive being subject to the
Excise Tax.
(iii) If the aggregate value of all parachute payments to be paid or
provided to Executive under this Amended Agreement and any other plan, agreement
or arrangement with Employer or any Affiliate thereof exceeds the amount of
parachute payments which can be paid to Executive without Executive incurring an
Excise Tax, then the amounts payable to Executive under Section 7(f) shall be
reduced (but not below zero) to the maximum amount which may be paid hereunder
without Executive becoming subject to such an Excise Tax (such amount to be
referred to as the "Payment Cap"). In the event that Executive receives reduced
payments and benefits hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided for in Section 7(f) of
this Amended Agreement he will receive in connection with the application of the
Payment Cap.
(iv) For purposes of determining whether any of the Covered Payments will
be subject to the Excise Tax and the amount of such Excise Tax,
(A) (x) whether any amount or benefit paid, payable or distributed to
Executive is a "parachute payment" within the meaning of Section 280G of
the Code, and (y) whether there are "parachute payments" in excess of
14
<PAGE>
the "base amount" (as defined under Section 280G(b)(3) of the Code)
shall be determined in good faith by Employer's independent certified
public accountants or tax counsel selected by such accountants (the
"Accountants"), provided however that payments or benefits made or
provided to Executive pursuant to Sections 3 through 6 of this Amended
Agreement in respect of periods of Executive's employment with
Employer (other than any amount attributable to the acceleration of
any Prior Options) shall not be treated as parachute payments, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance with the
principles of Section 280G of the Code.
(v) If Executive receives reduced payments and benefits as a result
of the provisions of this Section 7(i) (or this Section 7(i) is determined not
to be applicable to Executive because the Accountants conclude that Executive is
not subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a "Final
Determination") that, notwithstanding the good faith of Executive and Employer
in applying the terms of this Amended Agreement, the aggregate "parachute
payments" within the meaning of Section 280G of the Code paid to Executive or
for his benefit are in an amount that would result in Executive's being subject
to an Excise Tax, then any amounts actually paid to or on behalf of Executive
which are treated as excess parachute payments shall be deemed for all purposes
to be a loan to Executive made on the date of receipt of such excess payments,
which Executive shall have an obligation to repay to Employer on demand,
together with interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code) from the date of the payment hereunder to the
date of repayment by Executive. If Executive receives reduced payments and
benefits by reason of this Section 7(i) and it is established pursuant to a
Final Determination that Executive could have received a greater amount without
exceeding the Payment Cap, then Employer shall promptly thereafter pay Executive
the aggregate additional amount which could have been paid without exceeding the
Payment Cap, together with interest on such amount at the applicable Federal
rate (as defined in Section 1274(d) of the Code) from the original payment due
date to the date of actual payment by Employer.
(vi) Notwithstanding anything else contained in this Section 7(i) to
the contrary, nothing in this Section 7(i) shall be construed to limit the
Company's obligation to make any payment to Executive with respect to any Excess
Liability determined pursuant to Section 4(c) above.
15
<PAGE>
8. Unauthorized Disclosure. During the period of Executive's employment
-----------------------
with Employer and the ten year period following any termination of such
employment, without the prior written consent of the Board or its authorized
representative, except to the extent required by an order of a court having
jurisdiction or under subpoena from an appropriate government agency, in which
event, Executive shall use his best efforts to consult with the Board prior to
responding to any such order or subpoena, and except as required in the
performance of his duties hereunder, Executive shall not disclose any
confidential or proprietary trade secrets, customer lists, drawings, designs,
information regarding product development, marketing plans, sales plans,
manufacturing plans, management organization information (including but not
limited to data and other information relating to members of the Board or the
Board of Directors of any of Employer's Affiliates or to management of Employer
or any of its Affiliates), operating policies or manuals, business plans,
financial records, packaging design or other financial, commercial, business or
technical information (a) relating to Employer or any of its Affiliates or (b)
- -
that Employer or any of its Affiliates may receive belonging to suppliers,
customers or others who do business with Employer or any of its Affiliates
(collectively, "Confidential Information") to any third person unless such
Confidential Information has been previously disclosed to the public or is in
the public domain (other than by reason of Executive's breach of this Section
8).
9. Non-Competition. During the period of Executive's employment with
---------------
Employer and, following any termination thereof, the period ending on the second
anniversary of the Date of Termination (such periods, collectively, the
"Restriction Period"), Executive shall not, directly or indirectly, become
employed in an executive capacity by, engage in business with, serve as an agent
or consultant to, or become a partner, member, principal or stockholder (other
than a holder of less than 5% of the outstanding voting shares of any publicly
held company) of, any Person that competes or has a reasonable potential for
competing, anywhere in the world, with any part of the business of Employer or
any of its Subsidiaries (as defined below). For purposes of this Section 9, the
phrase employment "in an executive capacity" shall mean employment in any
position in connection with which Executive has or reasonably would be viewed as
having powers and authorities with respect to any other Person or any part of
the business thereof that are substantially similar, with respect thereto, to
the powers and authorities assigned to the Chairman, President or Chief
Executive Officer or any superior executive officer of Employer in the By-Laws
of Employer as in effect on the date hereof, a copy of the relevant portions of
which has been delivered to Executive on or before the date hereof, and which
Executive hereby confirms that he has reviewed.
Notwithstanding the foregoing, in the event that, as a result of the
operation of the provisions of Section 7(i), payments of Average Base Salary and
Average Annual Bonus otherwise required to be paid to Executive for the entire
Severance Period are paid to Executive for a period of less than two years
following the
16
<PAGE>
applicable Date of Termination, the Restriction Period shall expire as of the
later of (i) the date such payments of Average Base Salary and Average Annual
-
Bonus cease (or, if Employer elects to pay Executive a lump sum amount pursuant
to Section 7(f)(i), the date such payments would have ceased had such payments
continued to be made in installments) and (ii) the first anniversary of the Date
--
of Termination.
10. Non-Solicitation of Employees. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, (i) solicit for employment,
-
employ or otherwise interfere with the relationship of Employer or any of its
Affiliates with any natural person throughout the world who is or was employed
by or otherwise engaged to perform services for Employer or any of its
Affiliates at any time during which Executive was employed by Employer (in the
case of any such activity during such time) or during the six-month period
preceding such solicitation, employment or interference (in the case of any such
activity after the Date of Termination), other than any such solicitation or
employment on behalf of Employer or any of its Affiliates during Executive's
employment with Employer, or (ii) induce any employee of Employer or any of its
--
Affiliates who is a member of management to engage in any activity which
Executive is prohibited from engaging in under any of Sections 8, 9, 10 or 11 or
to terminate his employment with Employer.
11. Non-Solicitation of Customers. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, solicit or otherwise attempt
to establish any business relationship of a nature that is competitive with the
business or relationship of Employer or any of its Affiliates with any Person
throughout the world which is or was a customer, client or distributor of
Employer or any of its Affiliates at any time during which Executive was
employed by Employer (in the case of any such activity during such time) or
during the twelve-month period preceding the Date of Termination (in the case of
any such activity after the Date of Termination), other than any such
solicitation on behalf of Employer or any of its Affiliates during Executive's
employment with Employer.
12. Return of Documents. In the event of the termination of Executive's
-------------------
employment for any reason, Executive shall deliver to Employer all of (a) the
-
property of each of Employer and its Affiliates and (b) the non-personal
-
documents and data of any nature and in whatever medium of each of Employer and
its Affiliates, and he shall not take with him any such property, documents or
data or any reproduction thereof, or any documents containing or pertaining to
any Confidential Information.
17
<PAGE>
13. Injunctive Relief with Respect to Covenants; Forum, Venue and
-------------------------------------------------------------
Jurisdiction. Executive acknowledges and agrees that the covenants, obligations
- ------------
and agreements of Executive contained in Sections 8, 9, 10, 11, 12 and 13 relate
to special, unique and extraordinary matters and that a violation of any of the
terms of such covenants, obligations or agreements will cause Employer
irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that Employer shall be entitled to an injunction,
restraining order or such other equitable relief (without the requirement to
post bond) as a court of competent jurisdiction may deem necessary or
appropriate to restrain Executive from committing any violation of such
covenants, obligations or agreements. These injunctive remedies are cumulative
and in addition to any other rights and remedies Employer may have. Employer
and Executive hereby irrevocably submit to the exclusive jurisdiction of the
courts of Massachusetts and the Federal courts of the United States of America,
in each case located in Boston, Massachusetts, in respect of the injunctive
remedies set forth in this Section 13 and the interpretation and enforcement of
Sections 8, 9, 10, 11, 12 and 13 insofar as such interpretation and enforcement
relate to any request or application for injunctive relief in accordance with
the provisions of this Section 13, and the parties hereto hereby irrevocably
agree that (a) the sole and exclusive appropriate venue for any suit or
-
proceeding relating solely to such injunctive relief shall be in such a court,
(b) all claims with respect to any request or application for such injunctive
-
relief shall be heard and determined exclusively in such a court, (c) any such
-
court shall have exclusive jurisdiction over the person of such parties and over
the subject matter of any dispute relating to any request or application for
such injunctive relief, and (d) each hereby waives any and all objections and
-
defenses based on forum, venue or personal or subject matter jurisdiction as
they may relate to an application for such injunctive relief in a suit or
proceeding brought before such a court in accordance with the provisions of this
Section 13.
Notwithstanding any other provision hereof, (i) Executive's obligations
-
under Sections 9, 10 and 11 are subject to timely payment by Employer of the
amounts, if any, required to be paid to Executive pursuant to Section 7(f)
(taking into account any reduction in such amounts permitted under Section 7(i))
and (ii) Employer's obligations to pay Executive any amount pursuant to Section
--
7(f) is subject to Executive's compliance with his obligations under Sections 9,
10 and 11.
14. Assumption of Agreement. Employer shall require any Successor
-----------------------
thereto, by agreement in form and substance reasonably satisfactory to
Executive, to expressly assume and agree to perform this Amended Agreement in
the same manner and to the same extent that Employer would be required to
perform it if no such succession had taken place.
18
<PAGE>
15. Entire Agreement; Termination of Prior Agreement. This Amended
------------------------------------------------
Agreement constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof. All prior correspondence and proposals (including
but not limited to summaries of proposed terms) and all prior promises,
representations, understandings, arrangements and agreements relating to such
subject matter (including but not limited to those made to or with Executive by
any other Person and those contained in the Employment Agreement, the Prior
Agreement or any other prior employment, consulting or similar agreement entered
into by Executive and Employer or any predecessor thereto or Affiliate thereof)
are merged herein and superseded hereby.
Executive and Employer each acknowledges and agrees that, subject to the
consummation of, and effective as of effective time of, the Merger, the Prior
Agreement is hereby terminated in its entirety and shall be of no further force
or effect, without any payment or other consideration to or in respect of
Executive.
16. Indemnification. Employer hereby agrees that, notwithstanding the
---------------
fact that Employer is a Massachusetts corporation, Employer shall indemnify and
hold harmless Executive to the fullest extent permitted by Delaware law, as if
Employer were a Delaware corporation, from and against any and all liabilities,
costs, claims and expenses, including all costs and expenses incurred in defense
of litigation (including attorneys' fees), arising out of the employment of
Executive hereunder, it being understood that there shall be no indemnification
in respect of any claim arising out of or based upon Executive's gross
negligence or willful misconduct. Costs and expenses incurred by Executive in
defense of such litigation (including attorneys' fees) shall be paid by Employer
in advance of the final disposition of such litigation upon receipt by Employer
of (a) a written request for payment, (b) appropriate documentation evidencing
- -
the incurrence, amount and nature of the costs and expenses for which payment is
being sought, and (c) an undertaking adequate under Massachusetts law made by or
-
on behalf of Executive to repay the amounts so paid if it shall ultimately be
determined that Executive is not entitled to be indemnified by Employer under
this Amended Agreement, including but not limited to as a result of such
exception.
17. Miscellaneous.
-------------
(a) Binding Effect; Assignment. This Amended Agreement shall be binding on
--------------------------
and inure to the benefit of Employer, and its successors and permitted assigns.
This Amended Agreement shall also be binding on and inure to the benefit of
Executive and his heirs, executors, administrators and legal representatives.
This Amended Agreement shall not be assignable by any party hereto without the
prior written consent of the other, except as provided pursuant to this Section
17(a). Employer may effect such an assignment without prior written approval of
Executive upon the transfer of all or substantially all of its business and/or
assets (by whatever means), provided that the
--------
19
<PAGE>
Successor to Employer shall expressly assume and agree to perform this Amended
Agreement in accordance with the provisions of Section 14.
(b) Governing Law. This Amended Agreement shall be governed by and
-------------
construed in accordance with the laws of Massachusetts without reference to
principles of conflicts of laws.
(c) Taxes. Employer may withhold from any payments made under this Amended
-----
Agreement all applicable taxes, including but not limited to income, employment
and social insurance taxes, as shall be required by law.
(d) Amendments. No provision of this Amended Agreement may be modified,
----------
waived or discharged unless such modification, waiver or discharge is approved
by the Board or a Person authorized thereby and is agreed to in writing by
Executive. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this Amended
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No waiver of any provision of this Amended Agreement shall be
implied from any course of dealing between or among the parties hereto or from
any failure by any party hereto to assert its rights hereunder on any occasion
or series of occasions.
(e) Severability. In the event that any one or more of the provisions of
------------
this Amended Agreement shall be or become invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby.
(f) Notices. Any notice or other communication required or permitted to be
-------
delivered under this Amended Agreement shall be (i) in writing, (ii) delivered
- --
personally, by courier service or by certified or registered mail, first-class
postage prepaid and return receipt requested, (iii) deemed to have been received
---
on the date of delivery or, if so mailed, on the third business day after the
mailing thereof, and (iv) addressed as follows (or to such other address as the
--
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
(A) If to Employer, to it at:
Dynatech Corporation
Corporate Headquarters
3 New England Executive Park
Burlington, MA 01803
Attention: General Counsel
---------
20
<PAGE>
(C) if to Executive, to him at his residential address as currently
on file with Employer.
Copies of any notices or other communications given under this Amended Agreement
shall also be given to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention:
---------
Joseph L. Rice, III
and
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention:
---------
Franci J. Blassberg, Esq.
and
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention:
---------
Peter Tarr, Esq.
(g) Voluntary Agreement. Executive represents that he is entering
-------------------
into this Amended Agreement voluntarily and that his employment hereunder and
compliance with the terms and conditions of this Amended Agreement will not
conflict with or result in the breach by him of any agreement to which he is a
party or by which he may be bound.
(h) Counterparts. This Amended Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
21
<PAGE>
(i) Headings. The section and other headings contained in this
--------
Amended Agreement are for the convenience of the parties only and are not
intended to be a part hereof or to affect the meaning or interpretation hereof.
(k) Certain Definitions.
-------------------
"Affiliate": with respect to any Person, means any other Person that,
---------
directly or indirectly through one or more intermediaries, Controls, is
Controlled by, or is under common Control with the first Person, including but
not limited to a Subsidiary of the first Person, a Person of which the first
Person is a Subsidiary, or another Subsidiary of a Person of which the first
Person is also a Subsidiary.
"Control": with respect to any Person, means the possession, directly
-------
or indirectly, severally or jointly, of the power to direct or cause the
direction of the management policies of such Person, whether through the
ownership of voting securities, by contract or credit arrangement, as trustee or
executor, or otherwise.
"Person": any natural person, firm, partnership, limited liability
------
company, association, corporation, company, trust, business trust, governmental
authority or other entity.
"Subsidiary": with respect to any Person, each corporation or other
----------
Person in which the first Person owns or Controls, directly or indirectly,
capital stock or other ownership interests representing 50% or more of the
combined voting power of the outstanding voting stock or other ownership
interests of such corporation or other Person.
22
<PAGE>
"Successor": of a Person means a Person that succeeds to the first
---------
Person's assets and liabilities by merger, liquidation, dissolution or otherwise
by operation of law, or a Person to which all or substantially all the assets
and/or business of the first Person are transferred.
IN WITNESS WHEREOF, Employer has duly executed this Amended Agreement
by its authorized representative, and Executive has hereunto set his hand, in
each case effective as of the date first above written.
DYNATECH CORPORATION
By: /s/ Allan M. Kline
----------------------
Name: Allan M. Kline
Title: Chief Financial Officer
Executive:
/s/ John F. Reno
-------------------------
Name: John F. Reno
23
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into this
1st day of November, 1998, by and between Dynatech Corporation, a Massachusetts
corporation ("Employer"), and Allan M. Kline ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by Employer as its Corporate
Vice President-Chief Financial Officer;
WHEREAS, pursuant and subject to the terms of the Agreement and Plan
of Merger, dated as of December 20, 1997 (the "Merger Agreement"), by and
between Employer and CDRD Merger Corporation, a Delaware corporation
("MergerCo"), Employer will be merged with and into MergerCo (the "Merger") and
Employer will be the surviving corporation to the Merger;
WHEREAS, Executive and Employer are currently parties to an Amended
and Restated Employment Agreement, dated as of May 21, 1998 (the "Prior
Agreement") which sets forth the terms and conditions of Executive's employment
with Employer following the Merger;
WHEREAS, Employer wishes to secure the continued services of Executive
and Executive desires to accept such continued employment, in each case, on the
terms and conditions set forth herein;
WHEREAS, Employer and Executive wish to amend and restate the Prior
Agreement in its entirety, as set forth herein (as so amended and restated, the
"Amended Agreement");
WHEREAS, Employer and Executive acknowledge and agree that Executive
has had and will continue to have a prominent role in the management of the
business, and the development of the goodwill, of Employer and its Affiliates
(as defined below) and has established and developed and will continue to
establish and develop relations and contacts with the principal customers and
suppliers of Employer and its Affiliates in the United States, Europe, the
Pacific Rim and the rest of the world, all of which constitute valuable goodwill
of, and could be used by Executive to compete unfairly with, Employer and its
Affiliates;
<PAGE>
WHEREAS, (i) in the course of his employment with Employer, Executive
-
has obtained and will continue to obtain confidential and proprietary
information and trade secrets concerning the business and operations of Employer
and its Affiliates in the United States, Europe, the Pacific Rim and the rest of
the world that could be used to compete unfairly with Employer and its
Affiliates; (ii) the covenants and restrictions contained in Sections 8 through
--
13, inclusive, are intended to protect the legitimate interests of Employer and
its Affiliates in their respective goodwill, trade secrets and other
confidential and proprietary information; and (iii) Executive desires to be
---
bound by such covenants and restrictions;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises contained herein and for other good and valuable
consideration, Employer and Executive hereby agree to amend and restate the
Employment Agreement as follows:
1. Agreement to Continue Employment. Upon the terms and subject to
---------------------------------
the conditions of this Amended Agreement, Employer hereby continues the
employment of Executive, and Executive hereby accepts such continued employment
by Employer.
2. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless Executive's employment shall sooner
------------------
terminate pursuant to Section 7, Employer shall employ Executive for a term
commencing on the date of the consummation of the Merger (the "Commencement
Date") and ending on the fifth anniversary of the Commencement Date (the
"Initial Term"). Effective upon the expiration of the Initial Term and of each
Additional Term (as defined below), Executive's employment hereunder shall be
deemed to be automatically extended, upon the same terms and conditions, for an
additional period of one year (each, an "Additional Term"), in each such case,
commencing upon the expiration of the Initial Term or the then current
Additional Term, as the case may be, unless Employer, at least 60 days prior to
the expiration of the Initial Term or such Additional Term, shall give written
notice (a "Non-Extension Notice") to Executive of its intention not to extend
the Employment Period (as defined below) hereunder, provided that a Non-
--------
Extension Notice shall not constitute a notice to Executive of the termination
of his employment by Employer unless such notice specifically provides for such
termination of employment and the specific date thereof. The period during
which Executive is employed pursuant to this Amended Agreement, including any
extension thereof in accordance with the preceding sentence, shall be referred
to as the "Employment Period".
2
<PAGE>
(b) Position and Responsibilities. During the Employment Period,
-----------------------------
Executive shall serve as Corporate Vice President-Chief Financial Officer of
Employer and have such duties and responsibilities as are customarily assigned
to individuals serving in such position and such other duties consistent with
Executive's title and position as the Board of Directors of Employer (the
"Board") specifies from time to time. Executive shall devote all of his skill,
knowledge and working time (except for (i) vacation time as set forth in Section
-
6(c) and absence for sickness or similar disability and (ii) to the extent that
--
it does not interfere with the performance of Executive's duties hereunder, (A)
-
such reasonable time as may be devoted to service on boards of directors of
other corporations and entities, subject to the provisions of Section 9, and the
fulfillment of civic responsibilities and (B) such reasonable time as may be
-
necessary from time to time for personal financial matters) to the conscientious
performance of the duties and responsibilities of such position. During the
Employment Period, Employer shall use its reasonable best efforts to cause
Executive to be nominated and elected to serve as a member of the Board of
Directors, without additional compensation.
3. Base Salary. As compensation for the services to be performed by
-----------
Executive during the Employment Period, Employer shall pay Executive a base
salary at an annualized rate of $225,000, payable in installments on Employer's
regular payroll dates. The Board shall review Executive's base salary annually
during the period of his employment hereunder and, in its sole discretion, the
Board may increase (but may not decrease) such base salary from time to time
based upon the performance of Executive, the financial condition of Employer,
prevailing industry salary levels and such other factors as the Board shall
consider relevant. (The annual base salary payable to Executive under this
Section 3, as the same may be increased from time to time and without regard to
any reduction therefrom in accordance with the next sentence, shall hereinafter
be referred to as the "Base Salary".) The Base Salary payable under this
Section 3 shall be reduced to the extent that Executive elects to defer such
Base Salary under the terms of any deferred compensation, savings plan or other
voluntary deferral arrangement that may be maintained or established by
Employer.
4. Incentive Compensation Arrangements.
-----------------------------------
(a) Annual Incentive Compensation. During the Employment Period,
-----------------------------
Employer shall maintain an annual incentive compensation program for its senior
executives in which Executive shall be entitled to participate in accordance
with the terms thereof as in effect from time to time, at a level commensurate
with his position and duties with Employer, which program shall be operated in
accordance with Employer's customary corporate practices and shall provide for
an annual bonus based on such performance targets as may be established from
time to time by the Compensation Committee of the Board.
3
<PAGE>
(b) Roll-Over of Certain Options; Retention of Equity.
-------------------------------------------------
(i) Prior to the Merger, Executive was the beneficial owner of
2,338 shares (together with the rights associated therewith pursuant to the
Shareholders' Rights Agreement, dated as of February 16, 1989, as amended and
restated as of March 12, 1990, the "Previously Owned Shares") of the common
stock, par value $.20 per share, of Employer (the "Prior Common Stock") and held
options (the "Prior Options") to purchase 66,000 additional shares of Prior
Common Stock.
(ii) At the effective time of the Merger (the "Effective Time"), all
of the Previously Owned Shares were converted into the right to receive the
Merger Consideration, within the meaning and in accordance with the terms of the
Merger Agreement.
(iii) At the Effective Time, each Prior Option was automatically
converted into a fully vested and exercisable option (the "Recapitalized
Option") to purchase a number of shares (such shares, the "Recapitalized Option
Shares") of common stock, par value $.20 per share, of the corporation surviving
the Merger (the "Recapitalized Common Stock") equal to the sum of:
(x) the quotient of
(I) the product of (A) the number of shares of Prior Common
-
Stock subject to such Prior Option immediately prior to the
Effective Time, multiplied by (B) the cash consideration per
-
share of Prior Common Stock paid pursuant to the Merger Agreement
to holders of Prior Common Stock, divided by
(II) the price per share of Recapitalized Common Stock paid by
the CD&R Fund (as defined below) for the shares of MergerCo which
were exchanged for the shares of the Company's Recapitalized
Common Stock upon the consummation of the Merger, and
(y) the product of (I) the number of shares of Prior Common Stock
-
subject to such Prior Option immediately prior to the Effective Time,
multiplied by (II) the number of shares of Recapitalized Common Stock
--
transferred pursuant to the Merger Agreement to holders of Prior
Common Stock for each such share of Prior Common Stock.
4
<PAGE>
Each Recapitalized Option shall have an exercise price per Recapitalized Option
Share equal to the quotient of:
(x) the aggregate exercise price for all shares of Prior Common Stock
subject to the corresponding Prior Option, divided by
(y) the number of Recapitalized Option Shares subject to such
Recapitalized Option immediately following the conversion thereof
contemplated hereby.
Each of the Company and Executive agree that the foregoing adjustment in the
number of shares and the exercise prices applicable in respect of Recapitalized
Options is intended to comply with the procedures for adjusting the number of
shares subject to stock options (and the corresponding exercise prices) in a
corporate transaction under Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code") and the regulations thereunder, regardless of whether such
Section is applicable to such Recapitalized Options. The method used to
determine fair market value of the Company's stock for purposes of such
adjustment as a result of the Merger was the arm's length negotiated value
assigned to the Recapitalized Common Stock in connection with the Merger (the
"Merger Method"), which is one of several acceptable valuation methods expressly
set forth in Treas. Reg. '1.425-1(b)(7).
(iv) Each Nonqualified Recapitalized Option (as defined below) and
each Disqualified Recapitalized Option (as defined below) shall provide that it
shall expire on the normal expiration date specified in the option award
agreement evidencing the corresponding Prior Option that applies if Executive's
employment continues at least until such date (such date, the "Original
Termination Date"), provided that (x) in the event of the termination of
-
Executive's employment with Employer prior to an applicable Original Termination
Date as a result of Executive's death, Executive's Disability (as defined
below), a termination of Executive's employment by Employer Without Cause (as
defined below) or a termination of Executive's employment by Executive for Good
Reason (as defined below), each then outstanding Nonqualified Recapitalized
Option and Disqualified Recapitalized Option shall expire on the earlier of (I)
-
its Original Termination Date and (II) the later of (A) the six month
-- -
anniversary of the date of the expiration of any initial lock-up period imposed
on sales of Recapitalized Common Stock in connection with the first underwritten
public offering of any shares of Recapitalized Common Stock led by one or more
underwriters, at least one of which is of nationally
5
<PAGE>
recognized standing (such expiration date, the "Lock-Up Expiration Date"), and
(B) the first anniversary of the applicable Date of Termination (as defined
-
below) and (y) in the event of the termination of Executive's employment with
-
Employer prior to such Original Termination Date for any reason other than the
reasons described in the immediately preceding clause (x), each then outstanding
Nonqualified Recapitalized Option and Disqualified Recapitalized Option shall
expire on the earliest of (I) its Original Termination Date, (II) the later of
- --
(1) the 90th day following the Lock-Up Expiration Date and (2) the 30th day
- -
following the applicable Date of Termination and (III) the first anniversary of
---
the applicable Date of Termination.
Each Recapitalized Vested ISO and each Recapitalized Accelerated ISO
that is not a Disqualified Recapitalized Option shall provide that it shall
expire on the expiration date specified in the option award agreement evidencing
the corresponding Prior ISO, including without limitation, any such early
expiration date applicable in the case of a termination of Executive's
employment.
For purposes of this Section 4(b)(iv), the following terms shall have
the meanings set forth below.
(A) "Disqualified Recapitalized Option" means those Recapitalized
Accelerated ISOs having an aggregate exercise price exceeding the
excess of
(1) $100,000 over
-
(2) the aggregate exercise price of all Recapitalized Vested
-
ISOs, the corresponding Prior ISO of which became vested and
exercisable in calendar year 1998 prior to the Effective Time
(B) "Nonqualified Recapitalized Option" means each Recapitalized
Option that is a successor option to a Prior Option that, immediately
prior to the Effective Time, is intended to be a nonqualified stock
option.
(C) "Prior ISO" means each Prior Option that, immediately prior to
the Effective Time, is intended to qualify as an "incentive stock
option" under section 422 of the Code.
6
<PAGE>
(D) "Recapitalized Accelerated ISO" means each Recapitalized Option
that is a successor option to a Prior ISO that becomes vested solely
as a result of the acceleration of the vesting of Prior Options in
connection with, and as of the Effective Time of, the Merger.
(E) "Recapitalized Vested ISO" means each Recapitalized Option that
is a successor option to a Prior ISO that became vested and
exercisable prior to the Effective Time and not in connection with the
Merger.
(v) Executive, Employer and Clayton, Dubilier & Rice Fund V Limited
Partnership (the "CD&R Fund") shall enter into a separate agreement (the
"Ancillary Agreement"), to become effective as of the Effective Time, that will
provide, among other things, that:
(A) during the Employment Period, the CD&R Fund will vote its shares of
Recapitalized Common Stock in favor of the election of Executive to serve
as a member of the Board;
(B) Executive shall not be permitted, at any time during his employment
with Employer, to sell, transfer or otherwise dispose of any shares of
Recapitalized Common Stock beneficially owned by him (including any
Recapitalized Option Shares), other than (I) transfers upon death to
-
Executive's estate, (II) transfers to family trusts or partnerships for
--
estate planning purposes or (III) de minimis transfers during the
---
Employment Period not exceeding, in the aggregate, 25% of the sum of the
aggregate shares of Recapitalized Common Stock beneficially owned by
Executive as of the Commencement Date and the aggregate Recapitalized
Option Shares subject to the Recapitalized Options held by Executive as of
the Commencement Date, provided, in the case of any transfer pursuant to
--------
the foregoing clause (I) or (II), that the executor of Executive's estate
or the trustee or general partner of any such trust or partnership, as
applicable, shall agree, in form and substance reasonably satisfactory to
Employer, to be bound by all of the provisions of the Ancillary Agreement;
(C) following any termination of Executive's employment with Employer,
Employer and the CD&R Fund shall have successive rights to repurchase any
Recapitalized Options and/or Recapitalized Option Shares then beneficially
owned or held by Executive for a purchase price equal to the then fair
market value of the Recapitalized Option Shares or the Recapitalized Option
Shares then subject to the Recapitalized Options, as applicable (reduced by
the option exercise price in the case of a purchase of Recapitalized
Options), such fair market value to be determined in good faith by the
Board on the basis of an independent valuation
7
<PAGE>
of the Recapitalized Common Stock, provided, that the determination of such
--------
fair market value will not give effect to (x) any restrictions on transfer
-
of such shares, (y) the fact that such shares are not registered for resale
-
by Executive under the Securities Act of 1933, as amended, or (z) the fact
-
that such shares would represent a minority interest in Employer;
(D) in the event of certain qualifying sales of Recapitalized Common Stock
by the CD&R Fund, Executive shall have the right to sell a pro rata portion
of the shares of Recapitalized Common Stock then owned by him, on the same
terms and conditions as the CD&R Fund; and
(E) in the event of the sale by the CD&R Fund of substantially all of the
Recapitalized Common Stock then beneficially owned by it (other than any
such sale to an Affiliate of the CD&R Fund), the CD&R Fund shall have the
right to require Executive to sell the same percentage of the Recapitalized
Common Stock then beneficially owned by him as will be sold by the CD&R
Fund, on the same terms and conditions as the CD&R Fund, and Employer shall
have the right to cause any Recapitalized Options then held by Executive to
be canceled in exchange for a payment in respect of each Recapitalized
Option Share covered by such Recapitalized Options equal to the excess, if
any, of the price per share of Recapitalized Common Stock paid to holders
of Recapitalized Common Stock in connection with such sale over the
applicable option exercise price.
(F) The transfer restrictions described in the foregoing subparagraph (B)
shall terminate on the earlier of (I) the fifth anniversary of the
-
Commencement Date and (II) the Lock-Up Expiration Date. The rights and
--
obligations of Executive and Employer under the foregoing subparagraphs
(C), (D) and (E) of this Section 4(b)(v) shall terminate on the closing
date following the effective date of the first registration statement filed
under the Securities Act by Employer after the Commencement Date with
respect to an underwritten public offering of any shares of Employer's
capital stock led by one or more underwriters, at least one of which is of
nationally recognized standing.
(c) In the event that, due to the adjustment provided in this Section
4 with respect to the number of shares of the Recapitalized Common Stock subject
to Recapitalized Options, the amount of Covered Federal Taxes (as defined below)
payable by Executive solely in respect of the Recapitalized Options exceeds the
amount of such Covered Federal Taxes that would have been incurred by Executive
solely in respect of the Recapitalized Options had the proper adjustment
applicable to such Recapitalized Options been finally determined for Federal
income tax purposes to be a method of
8
<PAGE>
adjustment other than the Merger Method and, as a result, the amount of Covered
Federal Taxes payable by Executive exceeds the amount of such Covered Federal
Taxes otherwise payable by Executive, to be determined after first taking into
account the provisions of Section 7(i)(i)-(v) hereof (such excess hereinafter
referred to as the "Excess Liability"), the Company shall, in addition to any
other amounts payable to Executive under this Agreement, pay to Executive an
amount equal to the sum of (i) such Excess Liability and (ii) any and all
- --
Covered Federal Taxes and any other Federal taxes and any state or local income
and employment taxes, if any, incurred by Executive by reason of the payment
required to be made under this Section 4(c). For purposes of this Section 4(c),
Covered Federal Taxes shall mean any tax imposed on Executive under any
provision of the Code as in effect on the date hereof (or any successor
provision thereto), other than any income, employment, estate or gift tax.
5. Employee Benefits. During the Employment Period, Executive shall
-----------------
be entitled to participate in all of Employer's profit sharing, pension,
savings, deferred compensation, supplemental savings, life, medical, dental and
disability insurance plans, as the same may be amended and in effect from time
to time, applicable to senior executives of Employer, provided that Executive
--------
shall not be entitled to participate in any severance plan of Employer or
otherwise receive any severance benefits under any other type of plan. The
benefits referred to in this Section 5 shall be provided to Executive on a basis
that is commensurate with Executive's position and duties with Employer
hereunder and shall be substantially comparable, in the aggregate, to the
benefits (exclusive of severance and equity or other incentive compensation
benefits) provided to Executive immediately prior to the Commencement Date.
6. Perquisites and Expenses.
------------------------
(a) General. During the Employment Period, Executive shall be
-------
entitled to participate in all special benefit or perquisite programs generally
available from time to time to senior executives of Employer, including
Employer's programs providing for reimbursement of certain automobile expenses,
club social dues and fees for tax return preparation, financial planning and
investment advisory services, on the terms and conditions in effect from time to
time under each such program.
(b) Business Travel, Lodging, etc. Employer shall reimburse
------------------------------
Executive for reasonable travel, lodging, meal and other reasonable expenses
incurred by him in connection with his performance of services hereunder upon
submission of evidence, satisfactory to Employer, of the incurrence and purpose
of each such expense and otherwise in accordance with Employer's business travel
reimbursement policy applicable to its senior executives as in effect from time
to time.
9
<PAGE>
(c) Vacation. During the Employment Period, Executive shall be
--------
entitled to a number of weeks of paid vacation, without carryover accumulation,
determined in accordance with the terms of Employer's vacation policy applicable
to senior executives as in effect from time to time. As soon as reasonably
practicable following the Commencement Date, Employer shall pay Executive a cash
amount equal to $8,222, which shall be in full and complete satisfaction of all
then unpaid vacation pay accrued by Executive with respect to periods of
employment completed prior to November 30, 1997.
7. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that
--------------------------------------
Executive's employment hereunder terminates due to death or is terminated by
Employer due to Executive's Disability (as defined below), no termination
benefits shall be payable to or in respect of Executive except as provided in
Section 7(f)(ii). For purposes of this Amended Agreement, "Disability" shall
mean a physical or mental disability that prevents the performance by Executive
of his duties hereunder lasting (or likely to last, based on competent medical
evidence presented to the Board) for a continuous period of six months or
longer. The reasoned and good faith judgment of the Board as to Executive's
Disability shall be based on such competent medical evidence as shall be
presented to it by Executive or by any physician or group of physicians or other
competent medical experts employed by Executive or Employer to advise the Board.
(b) Termination by Employer for Cause. Executive's employment with
---------------------------------
Employer may be terminated by Employer for Cause (as defined below), provided
--------
that Executive shall be permitted to attend a meeting of the Board within 30
days after delivery to him of a Notice of Termination (as defined below)
pursuant to this Section 7(b) to explain why he should not be terminated for
Cause and, if following any such explanation by Executive, the Board determines
that Employer does not have Cause to terminate Executive's employment, any such
prior Notice of Termination delivered to Executive shall thereupon be withdrawn
and of no further force or effect. "Cause" shall mean (i) the willful failure
-
of Executive substantially to perform his duties hereunder (other than any such
failure due to Executive's physical or mental illness) or other willful and
material breach by Executive of any of his obligations hereunder, after a
written demand for substantial performance has been delivered, and a reasonable
opportunity to cure has been given, to Executive by the Board, which demand
identifies in reasonable detail the manner in which the Board believes that
Executive has not substantially performed his duties or has breached his
obligations, (ii) Executive's dishonesty or engaging in willful and serious
--
misconduct, which misconduct has caused or is reasonably expected to result in
direct or indirect material injury to Employer or any of its Affiliates or (iii)
---
Executive's conviction of, or entering a plea of guilty or nolo contendere to, a
---- ----------
crime that constitutes a felony.
10
<PAGE>
(c) Termination Without Cause. A termination "Without Cause" shall
-------------------------
mean a termination of Executive's employment by Employer other than due to
Disability as described in Section 7(a) or for Cause as described in Section
7(b).
(d) Termination by Executive. Executive may terminate his employment
------------------------
for any reason. A termination of employment by Executive for "Good Reason"
shall mean a termination by Executive of his employment with Employer within 30
days following the occurrence, without Executive's consent, of any of the
following events: (i) the assignment to Executive of (x) a title that is
- -
different from, and a diminution from, the title specified in Section 2 or (y)
-
duties that are significantly different from, and that result in a substantial
diminution of, the duties that he is to assume on the Commencement Date, (ii)
--
the failure of Employer to obtain the assumption of this Amended Agreement by
any Successor (as defined below) to Employer as contemplated by Section 14,
(iii) a reduction in the rate of Executive's Base Salary, (iv) a material
--- --
reduction in the aggregate level of employee and executive benefits provided to
Executive pursuant to Section 5 hereof, (v) Employer's delivery to Executive of
-
a Non-Extension Notice or (vi) a relocation of Executive's principal place of
--
business to a location beyond a radius of 30 miles from the location of such
place of business on the Commencement Date, provided that, within 30 days
--------
following the occurrence of any of the events set forth therein, Executive shall
have delivered written notice to Employer of his intention to terminate his
employment for Good Reason, which notice specifies in reasonable detail the
circumstances claimed to give rise to Executive's right to terminate his
employment for Good Reason, and Employer shall not have cured such circumstances
to the reasonable satisfaction of Executive.
(e) Notice of Termination. Any termination of Executive's employment
---------------------
hereunder by Employer pursuant to Section 7(a), 7(b) or 7(c), or by Executive
pursuant to Section 7(d), shall be communicated by a written Notice of
Termination addressed to the other. A "Notice of Termination" shall mean a
notice stating that Executive's employment with Employer has been or will be
terminated and setting forth the provisions hereof pursuant to which such
employment has or will be terminated.
(f) Payments Upon Certain Terminations.
----------------------------------
11
<PAGE>
(i) In the event of a termination of Executive's employment by
Employer Without Cause or a termination by Executive of his employment for Good
Reason during the Employment Period, Employer shall pay to Executive his full
Base Salary through the Date of Termination and an amount equal to the pro rata
amount of annual incentive compensation for the portion of the fiscal year
preceding the Date of Termination that would have been payable to Executive
pursuant to Section 4(a) if he had remained employed for the entire fiscal year,
determined on the basis of the actual performance achieved by Employer through
the Date of Termination and the performance objectives established for such
fiscal year, pro rated to reflect the calculation of such annual incentive
compensation for the portion of the fiscal year preceding the Date of
Termination. In addition, in the event of any such termination, Employer shall
pay or, in the case of the Continued Benefits (as defined below), provide to
Executive (or, following his death, to Executive's designated beneficiary or
beneficiaries), as liquidated damages,
(A) his Average Base Salary (as defined below), which shall be payable
in installments on Employer's regular payroll dates, for the period
beginning on the Date of Termination (as defined below) and ending on the
second anniversary of the Date of Termination (such period, the "Severance
Period") and
(B) on the last day of each calendar month included in the Severance
Period, an amount equal to one-twelfth of the Average Annual Bonus (as
defined below); and
(C) continued coverage for Executive and his eligible dependents under
Employer's medical insurance plans referred to in Section 5 (the "Continued
Benefits") during the period commencing on the Termination Date and ending
on the earlier of (i) Executive's 65th birthday and (ii) the date of
- --
Executive's death, subject to timely payment by Executive of all premiums,
contributions and other co-payments required to be paid by senior
executives of Employer under the terms of such plans as in effect from time
to time;
provided that Employer may, at any time, pay to Executive, in a single lump sum
- --------
and in satisfaction of Employer's obligations under clauses (A) and (B) of this
Section 7(f)(i), an amount equal to the present value (as determined by Employer
using a discount rate equal to the then prevailing applicable federal short-term
rate under section 1274(d) of the Internal Revenue Code of 1986, as amended) of
the sum of the installments of the Average Base Salary and Average Annual Bonus
then remaining to be paid to Executive pursuant to clauses (A) and (B) above.
12
<PAGE>
Executive shall not have a duty to mitigate the costs to Employer
under this Section 7(f)(i), except that (i) payments of Base Salary and Average
-
Annual Bonus will be reduced, but not below zero, by the amount of any
compensation earned by Executive (whether paid currently or deferred) during any
portion of the Severance Period from any subsequent employer or other Person (as
defined in Section 17(k) below) for which Executive performs services, including
but not limited to consulting services, and (ii) Continued Benefits shall be
--
reduced or canceled if comparable medical benefit coverage is provided or
offered to Executive by any subsequent employer or other Person for which
Executive performs services, including but not limited to consulting services,
at any time after the Date of Termination.
The term "Average Annual Bonus" means the average of the annual
bonuses paid to Executive pursuant to Employer's annual incentive compensation
plan for each of the three fiscal years of Employer ending immediately prior to
the Date of Termination or, if fewer, each of such fiscal years during which
Executive was at any time employed by Employer and the term "Average Base
Salary" means the average of the annual base salary rate of Executive in effect
immediately prior to the Date of Termination and as of the last day of each of
the two fiscal years of Employer ending immediately prior to the Date of
Termination or, if fewer, each of such fiscal years during which Executive was
at any time employed by Employer; provided that if Executive's employment is
--------
terminated by Executive pursuant to clause (iii) of the definition of Good
Reason, Executive's annual base salary rate in effect immediately prior to any
reduction thereof shall be substituted for Executive's annual base salary rate
in effect immediately prior to the Date of Termination in calculating the
Average Base Salary.
(ii) If Executive's employment shall terminate upon his death or
Disability or if Employer shall terminate Executive's employment for Cause or
Executive shall terminate his employment without Good Reason during the
Employment Period, Employer shall pay Executive his full Base Salary through the
Date of Termination and, in the case of any such termination upon Executive's
death or Disability, Executive shall be entitled to receive (x) a cash payment
-
equal to the pro rata amount of annual incentive compensation for the portion of
the fiscal year preceding the Date of Termination (exclusive of any time between
the onset of a physical or mental disability that prevents the performance by
Executive of his duties hereunder and the resulting Date of Termination) that
would have been payable to Executive pursuant to Section 4(a) if he had remained
employed for the entire fiscal year, determined on the basis of the actual
performance achieved by Employer through the Date of Termination and the
performance objectives established for such fiscal year, pro rated to reflect
the calculation of such annual incentive compensation for the portion of the
fiscal year preceding the Date of Termination and (y) such death or Disability
-
benefits, as applicable, as are provided under the terms of any employee and
executive death benefit and disability plans and programs referred to in Section
5 or 6(a).
13
<PAGE>
(iii) Except as specifically set forth in this Section 7(f), Executive
shall be entitled to receive all amounts payable and benefits accrued under any
otherwise applicable plan, policy, program or practice of Employer in which
Executive was a participant during his employment with Employer (including,
without limitation, Employer's 401(k) Savings Plan and Supplemental 401(k)
Savings Plan) in accordance with the terms thereof, provided that Executive
shall not be entitled to receive any payments or benefits under any such plan,
policy, program or practice providing any bonus or incentive compensation or
severance compensation or benefits (and the provisions of this Section 7(f)
shall supersede the provisions of any such plan, policy, program or practice).
(g) Date of Termination. As used in this Amended Agreement, the term
-------------------
"Date of Termination" shall mean (i) if Executive's employment is terminated by
-
his death, the date of his death, (ii) if Executive's employment is terminated
--
by Employer for Cause, the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if later, the date of termination specified in
such Notice, and (iii) if Executive's employment is terminated by Employer
---
Without Cause, due to Executive's Disability or by Executive for any reason, the
date that is 30 days after the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if no such Notice is given, immediately upon
the termination of Executive's employment.
(h) Resignation upon Termination. Effective as of any Date of
----------------------------
Termination under this Section 7 or otherwise as of the date of Executive's
termination of employment with Employer, Executive shall resign, in writing,
from all Board memberships and other positions then held by him with Employer
and its Affiliates.
(i) Limit on Payments by the Company.
--------------------------------
(i) Notwithstanding any provision of this Amended Agreement other than
Section 7(i)(vi) below, in the event that any amount or benefit paid, payable or
distributed to Executive pursuant to this Amended Agreement which is a parachute
payment as defined in Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), taken together with any amounts or benefits otherwise
paid, payable or distributed to Executive by Employer or any Affiliate thereof
which are parachute payments as defined in Section 280G of the Code
(collectively, the "Covered Payments"), would be an "excess parachute payment"
as defined in Section 280G of the Code, and would thereby subject Executive to
the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any
similar tax that may hereafter be imposed), the provisions of this Section 7(i)
shall apply to determine the amounts payable to Executive pursuant to Section
7(f) of this Amended Agreement.
14
<PAGE>
(ii) Immediately following delivery of any Notice of Termination, the
Company shall notify Executive of the aggregate present value of all termination
benefits to which he would be entitled under this Amended Agreement and any
other plan, program or arrangement as of the projected Date of Termination,
together with the projected maximum payments, determined as of such projected
Date of Termination that could be paid without Executive being subject to the
Excise Tax.
(iii) If the aggregate value of all parachute payments to be paid or
provided to Executive under this Amended Agreement and any other plan, agreement
or arrangement with Employer or any Affiliate thereof exceeds the amount of
parachute payments which can be paid to Executive without Executive incurring an
Excise Tax, then the amounts payable to Executive under Section 7(f) shall be
reduced (but not below zero) to the maximum amount which may be paid hereunder
without Executive becoming subject to such an Excise Tax (such amount to be
referred to as the "Payment Cap"). In the event that Executive receives reduced
payments and benefits hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided for in Section 7(f) of
this Amended Agreement he will receive in connection with the application of the
Payment Cap.
(iv) For purposes of determining whether any of the Covered Payments
will be subject to the Excise Tax and the amount of such Excise Tax,
(A) (x) whether any amount or benefit paid, payable or distributed to
Executive is a "parachute payment" within the meaning of Section 280G
of the Code, and (y) whether there are "parachute payments" in excess
of the "base amount" (as defined under Section 280G(b)(3) of the Code)
shall be determined in good faith by Employer's independent certified
public accountants or tax counsel selected by such accountants (the
"Accountants"), provided however that payments or benefits made or
provided to Executive pursuant to Sections 3 through 6 of this Amended
Agreement in respect of periods of Executive's employment with
Employer (other than any amount attributable to the acceleration of
any Prior Options) shall not be treated as parachute payments, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance with the
principles of Section 280G of the Code.
15
<PAGE>
(v) If Executive receives reduced payments and benefits as a result
of the provisions of this Section 7(i) (or this Section 7(i) is determined not
to be applicable to Executive because the Accountants conclude that Executive is
not subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a "Final
Determination") that, notwithstanding the good faith of Executive and Employer
in applying the terms of this Amended Agreement, the aggregate "parachute
payments" within the meaning of Section 280G of the Code paid to Executive or
for his benefit are in an amount that would result in Executive's being subject
to an Excise Tax, then any amounts actually paid to or on behalf of Executive
which are treated as excess parachute payments shall be deemed for all purposes
to be a loan to Executive made on the date of receipt of such excess payments,
which Executive shall have an obligation to repay to Employer on demand,
together with interest on such amount at the applicable Federal rate (as defined
in Section 1274(d) of the Code) from the date of the payment hereunder to the
date of repayment by Executive. If Executive receives reduced payments and
benefits by reason of this Section 7(i) and it is established pursuant to a
Final Determination that Executive could have received a greater amount without
exceeding the Payment Cap, then Employer shall promptly thereafter pay Executive
the aggregate additional amount which could have been paid without exceeding the
Payment Cap, together with interest on such amount at the applicable Federal
rate (as defined in Section 1274(d) of the Code) from the original payment due
date to the date of actual payment by Employer.
(vi) Notwithstanding anything else contained in this Section 7(i) to
the contrary, nothing in this Section 7(i) shall be construed to limit the
Company's obligation to make any payment to Executive with respect to any
Excess Liability determined pursuant to Section 4(c) above.
8. Unauthorized Disclosure. During the period of Executive's
-----------------------
employment with Employer and the ten year period following any termination of
such employment, without the prior written consent of the Board or its
authorized representative, except to the extent required by an order of a court
having jurisdiction or under subpoena from an appropriate government agency, in
which event, Executive shall use his best efforts to consult with the Board
prior to responding to any such order or subpoena, and except as required in the
performance of his duties hereunder, Executive shall not disclose any
confidential or proprietary trade secrets, customer lists, drawings, designs,
information regarding product development, marketing plans, sales plans,
manufacturing plans, management organization information (including but not
limited to data and other information relating to members of the Board or the
Board of Directors of any of Employer's Affiliates or to management of Employer
or any of its Affiliates),
16
<PAGE>
operating policies or manuals, business plans, financial records, packaging
design or other financial, commercial, business or technical information (a)
-
relating to Employer or any of its Affiliates or (b) that Employer or any of its
-
Affiliates may receive belonging to suppliers, customers or others who do
business with Employer or any of its Affiliates (collectively, "Confidential
Information") to any third person unless such Confidential Information has been
previously disclosed to the public or is in the public domain (other than by
reason of Executive's breach of this Section 8).
9. Non-Competition. During the period of Executive's employment with
---------------
Employer and, following any termination thereof, the period ending on the second
anniversary of the Date of Termination (such periods, collectively, the
"Restriction Period"), Executive shall not, directly or indirectly, become
employed in an executive capacity by, engage in business with, serve as an agent
or consultant to, or become a partner, member, principal or stockholder (other
than a holder of less than 5% of the outstanding voting shares of any publicly
held company) of, any Person that competes or has a reasonable potential for
competing, anywhere in the world, with any part of the business of Employer or
any of its Subsidiaries (as defined below). For purposes of this Section 9, the
phrase employment "in an executive capacity" shall mean employment in any
position in connection with which Executive has or reasonably would be viewed as
having powers and authorities with respect to any other Person or any part of
the business thereof that are substantially similar, with respect thereto, to
the powers and authorities assigned to the Corporate Vice President-Chief
Financial Officer or any superior executive officer of Employer in the By-Laws
of Employer as in effect on the date hereof, a copy of the relevant portions of
which has been delivered to Executive on or before the date hereof, and which
Executive hereby confirms that he has reviewed.
Notwithstanding the foregoing, in the event that, as a result of the
operation of the provisions of Section 7(i), payments of Average Base Salary and
Average Annual Bonus otherwise required to be paid to Executive for the entire
Severance Period are paid to Executive for a period of less than two years
following the applicable Date of Termination, the Restriction Period shall
expire as of the later of (i) the date such payments of Average Base Salary and
-
Average Annual Bonus cease (or, if Employer elects to pay Executive a lump sum
amount pursuant to Section 7(f)(i), the date such payments would have ceased had
such payments continued to be made in installments) and (ii) the first
--
anniversary of the Date of Termination.
10. Non-Solicitation of Employees. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, (i) solicit for employment,
-
employ or otherwise interfere with the relationship of Employer or any of its
Affiliates with any natural person
17
<PAGE>
throughout the world who is or was employed by or otherwise engaged to perform
services for Employer or any of its Affiliates at any time during which
Executive was employed by Employer (in the case of any such activity during such
time) or during the six-month period preceding such solicitation, employment or
interference (in the case of any such activity after the Date of Termination),
other than any such solicitation or employment on behalf of Employer or any of
its Affiliates during Executive's employment with Employer, or (ii) induce any
--
employee of Employer or any of its Affiliates who is a member of management to
engage in any activity which Executive is prohibited from engaging in under any
of Sections 8, 9, 10 or 11 or to terminate his employment with Employer.
11. Non-Solicitation of Customers. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, solicit or otherwise attempt
to establish any business relationship of a nature that is competitive with the
business or relationship of Employer or any of its Affiliates with any Person
throughout the world which is or was a customer, client or distributor of
Employer or any of its Affiliates at any time during which Executive was
employed by Employer (in the case of any such activity during such time) or
during the twelve-month period preceding the Date of Termination (in the case of
any such activity after the Date of Termination), other than any such
solicitation on behalf of Employer or any of its Affiliates during Executive's
employment with Employer.
12. Return of Documents. In the event of the termination of
-------------------
Executive's employment for any reason, Executive shall deliver to Employer all
of (a) the property of each of Employer and its Affiliates and (b) the non-
- -
personal documents and data of any nature and in whatever medium of each of
Employer and its Affiliates, and he shall not take with him any such property,
documents or data or any reproduction thereof, or any documents containing or
pertaining to any Confidential Information.
13. Injunctive Relief with Respect to Covenants; Forum, Venue and
-------------------------------------------------------------
Jurisdiction. Executive acknowledges and agrees that the covenants, obligations
- ------------
and agreements of Executive contained in Sections 8, 9, 10, 11, 12 and 13 relate
to special, unique and extraordinary matters and that a violation of any of the
terms of such covenants, obligations or agreements will cause Employer
irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that Employer shall be entitled to an injunction,
restraining order or such other equitable relief (without the requirement to
post bond) as a court of competent jurisdiction may deem necessary or
appropriate to restrain Executive from committing any violation of such
covenants, obligations or agreements. These injunctive remedies are cumulative
and in addition to any other rights and remedies Employer may have. Employer
and Executive hereby
18
<PAGE>
irrevocably submit to the exclusive jurisdiction of the courts of Massachusetts
and the Federal courts of the United States of America, in each case located in
Boston, Massachusetts, in respect of the injunctive remedies set forth in this
Section 13 and the interpretation and enforcement of Sections 8, 9, 10, 11, 12
and 13 insofar as such interpretation and enforcement relate to any request or
application for injunctive relief in accordance with the provisions of this
Section 13, and the parties hereto hereby irrevocably agree that (a) the sole
-
and exclusive appropriate venue for any suit or proceeding relating solely to
such injunctive relief shall be in such a court, (b) all claims with respect to
-
any request or application for such injunctive relief shall be heard and
determined exclusively in such a court, (c) any such court shall have exclusive
-
jurisdiction over the person of such parties and over the subject matter of any
dispute relating to any request or application for such injunctive relief, and
(d) each hereby waives any and all objections and defenses based on forum, venue
-
or personal or subject matter jurisdiction as they may relate to an application
for such injunctive relief in a suit or proceeding brought before such a court
in accordance with the provisions of this Section 13.
Notwithstanding any other provision hereof, (i) Executive's
-
obligations under Sections 9, 10 and 11 are subject to timely payment by
Employer of the amounts, if any, required to be paid to Executive pursuant to
Section 7(f) (taking into account any reduction in such amounts permitted under
Section 7(i)) and (ii) Employer's obligations to pay Executive any amount
--
pursuant to Section 7(f) is subject to Executive's compliance with his
obligations under Sections 9, 10 and 11.
14. Assumption of Agreement. Employer shall require any Successor
-----------------------
thereto, by agreement in form and substance reasonably satisfactory to
Executive, to expressly assume and agree to perform this Amended Agreement in
the same manner and to the same extent that Employer would be required to
perform it if no such succession had taken place.
15. Entire Agreement; Termination of Prior Agreement. This Amended
------------------------------------------------
Agreement constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof. All prior correspondence and proposals (including
but not limited to summaries of proposed terms) and all prior promises,
representations, understandings, arrangements and agreements relating to such
subject matter (including but not limited to those made to or with Executive by
any other Person and those contained in the Employment Agreement, the Prior
Agreement or any other prior employment, consulting or similar agreement entered
into by Executive and Employer or any predecessor thereto or Affiliate thereof)
are merged herein and superseded hereby.
19
<PAGE>
Executive and Employer each acknowledges and agrees that, subject to
the consummation of, and effective as of effective time of, the Merger, the
Prior Agreement is hereby terminated in its entirety and shall be of no further
force or effect, without any payment or other consideration to or in respect of
Executive.
16. Indemnification. Employer hereby agrees that, notwithstanding
---------------
the fact that Employer is a Massachusetts corporation, Employer shall indemnify
and hold harmless Executive to the fullest extent permitted by Delaware law, as
if Employer were a Delaware corporation, from and against any and all
liabilities, costs, claims and expenses, including all costs and expenses
incurred in defense of litigation (including attorneys' fees), arising out of
the employment of Executive hereunder, it being understood that there shall be
no indemnification in respect of any claim arising out of or based upon
Executive's gross negligence or willful misconduct. Costs and expenses incurred
by Executive in defense of such litigation (including attorneys' fees) shall be
paid by Employer in advance of the final disposition of such litigation upon
receipt by Employer of (a) a written request for payment, (b) appropriate
- -
documentation evidencing the incurrence, amount and nature of the costs and
expenses for which payment is being sought, and (c) an undertaking adequate
-
under Massachusetts law made by or on behalf of Executive to repay the amounts
so paid if it shall ultimately be determined that Executive is not entitled to
be indemnified by Employer under this Amended Agreement, including but not
limited to as a result of such exception.
17. Miscellaneous.
-------------
(a) Binding Effect; Assignment. This Amended Agreement shall be
--------------------------
binding on and inure to the benefit of Employer, and its successors and
permitted assigns. This Amended Agreement shall also be binding on and inure to
the benefit of Executive and his heirs, executors, administrators and legal
representatives. This Amended Agreement shall not be assignable by any party
hereto without the prior written consent of the other, except as provided
pursuant to this Section 17(a). Employer may effect such an assignment without
prior written approval of Executive upon the transfer of all or substantially
all of its business and/or assets (by whatever means), provided that the
--------
Successor to Employer shall expressly assume and agree to perform this Amended
Agreement in accordance with the provisions of Section 14.
(b) Governing Law. This Amended Agreement shall be governed by and
-------------
construed in accordance with the laws of Massachusetts without reference to
principles of conflicts of laws.
20
<PAGE>
(c) Taxes. Employer may withhold from any payments made under this
-----
Amended Agreement all applicable taxes, including but not limited to income,
employment and social insurance taxes, as shall be required by law.
(d) Amendments. No provision of this Amended Agreement may be
----------
modified, waived or discharged unless such modification, waiver or discharge is
approved by the Board or a Person authorized thereby and is agreed to in writing
by Executive. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Amended Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No waiver of any provision of this Amended Agreement shall be
implied from any course of dealing between or among the parties hereto or from
any failure by any party hereto to assert its rights hereunder on any occasion
or series of occasions.
(e) Severability. In the event that any one or more of the provisions
------------
of this Amended Agreement shall be or become invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not be affected thereby.
(f) Notices. Any notice or other communication required or permitted
-------
to be delivered under this Amended Agreement shall be (i) in writing, (ii)
- --
delivered personally, by courier service or by certified or registered mail,
first-class postage prepaid and return receipt requested, (iii) deemed to have
---
been received on the date of delivery or, if so mailed, on the third business
day after the mailing thereof, and (iv) addressed as follows (or to such other
--
address as the party entitled to notice shall hereafter designate in accordance
with the terms hereof):
(A) If to Employer, to it at:
Dynatech Corporation
Corporate Headquarters
3 New England Executive Park
Burlington, MA 01803
Attention: General Counsel
---------
(C) if to Executive, to him at his residential address as currently
on file with Employer.
21
<PAGE>
Copies of any notices or other communications given under this Amended Agreement
shall also be given to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention:
---------
Joseph L. Rice, III
and
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention:
---------
Franci J. Blassberg, Esq.
and
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention:
---------
Peter Tarr, Esq.
(g) Voluntary Agreement. Executive represents that he is entering
-------------------
into this Amended Agreement voluntarily and that his employment hereunder and
compliance with the terms and conditions of this Amended Agreement will not
conflict with or result in the breach by him of any agreement to which he is a
party or by which he may be bound.
(h) Counterparts. This Amended Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(i) Headings. The section and other headings contained in this
--------
Amended Agreement are for the convenience of the parties only and are not
intended to be a part hereof or to affect the meaning or interpretation hereof.
(k) Certain Definitions.
-------------------
22
<PAGE>
"Affiliate": with respect to any Person, means any other Person that,
---------
directly or indirectly through one or more intermediaries, Controls, is
Controlled by, or is under common Control with the first Person, including but
not limited to a Subsidiary of the first Person, a Person of which the first
Person is a Subsidiary, or another Subsidiary of a Person of which the first
Person is also a Subsidiary.
"Control": with respect to any Person, means the possession, directly
-------
or indirectly, severally or jointly, of the power to direct or cause the
direction of the management policies of such Person, whether through the
ownership of voting securities, by contract or credit arrangement, as trustee or
executor, or otherwise.
"Person": any natural person, firm, partnership, limited liability
------
company, association, corporation, company, trust, business trust, governmental
authority or other entity.
"Subsidiary": with respect to any Person, each corporation or other
----------
Person in which the first Person owns or Controls, directly or indirectly,
capital stock or other ownership interests representing 50% or more of the
combined voting power of the outstanding voting stock or other ownership
interests of such corporation or other Person.
23
<PAGE>
"Successor": of a Person means a Person that succeeds to the first
---------
Person's assets and liabilities by merger, liquidation, dissolution or otherwise
by operation of law, or a Person to which all or substantially all the assets
and/or business of the first Person are transferred.
IN WITNESS WHEREOF, Employer has duly executed this Amended Agreement
by its authorized representative, and Executive has hereunto set his hand, in
each case effective as of the date first above written.
DYNATECH CORPORATION
By: /s/ John F. Reno
-----------------------------------
Name: John F. Reno
Title: Chief Executive Officer
Executive:
/s/ Allan M. Kline
-----------------------------------------
Name: Allan M. Kline
24
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT is entered into as of
this 1st day of November, 1998 by and between Dynatech Corporation, a
Massachusetts corporation ("Employer"), and John R. Peeler ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by Employer as its Corporate
Vice President and has been employed by Telecommunications Technics Corporation,
a wholly-owned subsidiary of Employer ("TTC"), as its President and Chief
Executive Officer;
WHEREAS, pursuant and subject to the terms of the Agreement and Plan
of Merger, dated as of December 20, 1997 (the "Merger Agreement"), by and
between Employer and CDRD Merger Corporation, a Delaware corporation
("MergerCo"), Employer will be merged with and into MergerCo (the "Merger") and
Employer will be the surviving corporation to the Merger;
WHEREAS, Executive and Employer are currently parties to an Amended
and Restated Employment Agreement, dated as of May 21, 1998 (the "Prior
Agreement") which sets forth the terms and conditions of Executive's employment
with Employer following the Merger;
WHEREAS, Employer wishes to secure the continued services of Executive
and Executive desires to accept such continued employment, in each case, on the
terms and conditions set forth herein;
WHEREAS, Employer and Executive wish to amend and restate the Prior
Agreement in its entirety, as set forth herein (as so amended and restated, the
"Amended Agreement");
WHEREAS, Employer and Executive acknowledge and agree that Executive
has had and will continue to have a prominent role in the management of the
business, and the development of the goodwill, of Employer and its Affiliates
(as defined below) and has established and developed and will continue to
establish and develop relations and contacts with the principal customers and
suppliers of Employer and its Affiliates in the United States, Europe, the
Pacific Rim and the rest of the world, all of which constitute valuable goodwill
of, and could be used by Executive to compete unfairly with, Employer and its
Affiliates;
<PAGE>
WHEREAS, (i) in the course of his employment with Employer, Executive
-
has obtained and will continue to obtain confidential and proprietary
information and trade secrets concerning the business and operations of Employer
and its Affiliates in the United States, Europe, the Pacific Rim and the rest of
the world that could be used to compete unfairly with Employer and its
Affiliates; (ii) the covenants and restrictions contained in Sections 8 through
--
13, inclusive, are intended to protect the legitimate interests of Employer and
its Affiliates in their respective goodwill, trade secrets and other
confidential and proprietary information; and (iii) Executive desires to be
---
bound by such covenants and restrictions;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and promises contained herein and for other good and valuable
consideration, Employer and Executive hereby agree to amend and restate the
Employment Agreement as follows:
1. Agreement to Continue Employment. Upon the terms and subject to
--------------------------------
the conditions of this Amended Agreement, Employer hereby continues the
employment of Executive, and Executive hereby accepts such continued employment
by Employer.
2. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless Executive's employment shall sooner
------------------
terminate pursuant to Section 7, Employer shall employ Executive for a term
commencing on the date of the consummation of the Merger (the "Commencement
Date") and ending on the fifth anniversary of the Commencement Date (the
"Initial Term"). Effective upon the expiration of the Initial Term and of each
Additional Term (as defined below), Executive's employment hereunder shall be
deemed to be automatically extended, upon the same terms and conditions, for an
additional period of one year (each, an "Additional Term"), in each such case,
commencing upon the expiration of the Initial Term or the then current
Additional Term, as the case may be, unless Employer, at least 60 days prior to
the expiration of the Initial Term or such Additional Term, shall give written
notice (a "Non-Extension Notice") to Executive of its intention not to extend
the Employment Period (as defined below) hereunder, provided that a Non-
--------
Extension Notice shall not constitute a notice to Executive of the termination
of his employment by Employer unless such notice specifically provides for such
termination of employment and the specific date thereof. The period during
which Executive is employed pursuant to this Amended Agreement, including any
extension thereof in accordance with the preceding sentence, shall be referred
to as the "Employment Period".
2
<PAGE>
(b) Position and Responsibilities. During the Employment Period,
-----------------------------
Executive shall serve as Corporate Vice President of Employer and President and
Chief Executive Officer of all of Employer's communications test businesses and
have such duties and responsibilities as are customarily assigned to individuals
serving in such position and such other duties consistent with Executive's title
and position as the Board of Directors of Employer (the "Board") specifies from
time to time. For purposes of the preceding sentence, Itronix Corporation shall
not be deemed to be a communications test business. Executive shall devote all
of his skill, knowledge and working time (except for (i) vacation time as set
-
forth in Section 6(c) and absence for sickness or similar disability and (ii) to
--
the extent that it does not interfere with the performance of Executive's duties
hereunder, (A) such reasonable time as may be devoted to service on boards of
-
directors of other corporations and entities, subject to the provisions of
Section 9, and the fulfillment of civic responsibilities and (B) such reasonable
-
time as may be necessary from time to time for personal financial matters) to
the conscientious performance of the duties and responsibilities of such
position. During the Employment Period, Employer shall use its reasonable best
efforts to cause Executive to be nominated and elected to serve as a member of
the Board of Directors, without additional compensation.
3. Base Salary. As compensation for the services to be performed by
-----------
Executive during the Employment Period, Employer shall pay Executive a base
salary at an annualized rate of $280,000, payable in installments on Employer's
regular payroll dates. The Board shall review Executive's base salary annually
during the period of his employment hereunder and, in its sole discretion, the
Board may increase (but may not decrease) such base salary from time to time
based upon the performance of Executive, the financial condition of Employer,
prevailing industry salary levels and such other factors as the Board shall
consider relevant. (The annual base salary payable to Executive under this
Section 3, as the same may be increased from time to time and without regard to
any reduction therefrom in accordance with the next sentence, shall hereinafter
be referred to as the "Base Salary".) The Base Salary payable under this
Section 3 shall be reduced to the extent that Executive elects to defer such
Base Salary under the terms of any deferred compensation, savings plan or other
voluntary deferral arrangement that may be maintained or established by
Employer.
4. Incentive Compensation Arrangements.
-----------------------------------
(a) Annual Incentive Compensation. During the Employment Period,
-----------------------------
Employer shall maintain an annual incentive compensation program for its senior
executives in which Executive shall be entitled to participate in accordance
with the terms thereof as in effect from time to time, at a level commensurate
with his position and duties with Employer, which program shall be operated in
accordance with Employer's customary corporate practices and shall provide for
an annual bonus based on such per-
3
<PAGE>
formance targets as may be established from time to time by the Compensation
Committee of the Board.
(b) Roll-Over of Certain Options; Retention of Equity.
-------------------------------------------------
(i) Prior to the Merger, Executive was the beneficial owner of
22,344 shares (together with the rights associated therewith pursuant to the
Shareholders' Rights Agreement, dated as of February 16, 1989, as amended and
restated as of March 12, 1990, the "Previously Owned Shares") of the common
stock, par value $.20 per share, of Employer (the "Prior Common Stock") and held
options to purchase 166,400 additional shares of Prior Common Stock, of which
the options to purchase 28,800 shares of Prior Common Stock listed on Exhibit A
hereto were treated as described in Section 2.3 of the Merger Agreement and the
remaining options (such remaining options, the "Prior Options") to purchase
137,600 shares of Prior Common Stock were treated as described in Section
4(b)(iii) below.
(ii) At the effective time of the Merger (the "Effective Time"), all
of the Previously Owned Shares were converted into the right to receive the
Merger Consideration, within the meaning and in accordance with the terms of the
Merger Agreement.
(iii) At the Effective Time, each Prior Option was automatically
converted into a fully vested and exercisable option (the "Recapitalized
Option") to purchase a number of shares (such shares, the "Recapitalized Option
Shares") of common stock, par value $.20 per share, of the corporation surviving
the Merger (the "Recapitalized Common Stock") equal to the sum of:
(x) the quotient of
(I) the product of (A) the number of shares of Prior Common
-
Stock subject to such Prior Option immediately prior to the
Effective Time, multiplied by (B) the cash consideration per
-
share of Prior Common Stock paid pursuant to the Merger
Agreement to holders of Prior Common Stock, divided by
(II) the price per share of Recapitalized Common Stock paid
by the CD&R Fund (as defined below) for the shares of
MergerCo which were exchanged for the shares of the
Company's Recapitalized Common Stock upon the consummation
of the Merger, and
(y) the product of (I) the number of shares of Prior Common Stock
-
subject to such Prior Option immediately prior to the Effective Time,
multiplied by (II) the number of shares of Recapitalized Common Stock
--
transferred
4
<PAGE>
pursuant to the Merger Agreement to holders of Prior Common Stock for
each such share of Prior Common Stock.
Each Recapitalized Option shall have an exercise price per Recapitalized Option
Share equal to the quotient of:
(x) the aggregate exercise price for all shares of Prior Common Stock
subject to the corresponding Prior Option, divided by
(y) the number of Recapitalized Option Shares subject to such
Recapitalized Option immediately following the conversion thereof
contemplated hereby.
Each of the Company and Executive agree that the foregoing adjustment in the
number of shares and the exercise prices applicable in respect of Recapitalized
Options is intended to comply with the procedures for adjusting the number of
shares subject to stock options (and the corresponding exercise prices) in a
corporate transaction under Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code") and the regulations thereunder, regardless of whether such
Section is applicable to such Recapitalized Options. The method used to
determine fair market value of the Company's stock for purposes of such
adjustment as a result of the Merger was the arm's length negotiated value
assigned to the Recapitalized Common Stock in connection with the Merger (the
"Merger Method"), which is one of several acceptable valuation methods expressly
set forth in Treas. Reg. (S)1.425-1(b)(7).
(iv) Each Nonqualified Recapitalized Option (as defined below) and
each Disqualified Recapitalized Option (as defined below) shall provide that it
shall expire on the normal expiration date specified in the option award
agreement evidencing the corresponding Prior Option that applies if Executive's
employment continues at least until such date (such date, the "Original
Termination Date"), provided that (x) in the event of the termination of
-
Executive's employment with Employer prior to an applicable Original Termination
Date as a result of Executive's death, Executive's Disability (as defined
below), a termination of Executive's employment by Employer Without Cause (as
defined below) or a termination of Executive's employment by Executive for Good
Reason (as defined below), each then outstanding Nonqualified Recapitalized
Option and Disqualified Recapitalized Option shall expire on the earlier of (I)
-
its Original Termination Date and (II) the later of (A) the six month
-- -
anniversary of the date of the expiration of any initial lock-up period imposed
on sales of Recapitalized Common Stock in connection with the first underwritten
public offering of any shares of Recapitalized Common Stock led by one or more
underwriters, at least one of which is of nationally recognized standing (such
5
<PAGE>
expiration date, the "Lock-Up Expiration Date"), and (B) the first anniversary
-
of the applicable Date of Termination (as defined below) and (y) in the event of
-
the termination of Executive's employment with Employer prior to such Original
Termination Date for any reason other than the reasons described in the
immediately preceding clause (x), each then outstanding Nonqualified
Recapitalized Option and Disqualified Recapitalized Option shall expire on the
earliest of (I) its Original Termination Date, (II) the later of (1) the 90th
- -- -
day following the Lock-Up Expiration Date and (2) the 30th day following the
-
applicable Date of Termination and (III) the first anniversary of the applicable
---
Date of Termination.
Each Recapitalized Vested ISO and each Recapitalized Accelerated ISO
that is not a Disqualified Recapitalized Option shall provide that it shall
expire on the expiration date specified in the option award agreement evidencing
the corresponding Prior ISO, including without limitation, any such early
expiration date applicable in the case of a termination of Executive's
employment.
For purposes of this Section 4(b)(iv), the following terms shall have
the meanings set forth below.
(A) "Disqualified Recapitalized Option" means those Recapitalized
Accelerated ISOs having an aggregate exercise price exceeding the
excess of
(1) $100,000 over
-
(2) the aggregate exercise price of all Recapitalized Vested
-
ISOs, the corresponding Prior ISO of which became vested and
exercisable in calendar year 1998 prior to the Effective Time
(B) "Nonqualified Recapitalized Option" means each Recapitalized
Option that is a successor option to a Prior Option that, immediately
prior to the Effective Time, is intended to be a nonqualified stock
option.
(C) "Prior ISO" means each Prior Option that, immediately prior to
the Effective Time, is intended to qualify as an "incentive stock
option" under section 422 of the Code.
(D) "Recapitalized Accelerated ISO" means each Recapitalized Option
that is a successor option to a Prior ISO that becomes vested solely
as a result of the acceleration of the vesting of Prior Options in
connection with, and as of the Effective Time of, the Merger.
6
<PAGE>
(E) "Recapitalized Vested ISO" means each Recapitalized Option that
is a successor option to a Prior ISO that became vested and
exercisable prior to the Effective Time and not in connection with the
Merger.
(v) Executive, Employer and Clayton, Dubilier & Rice Fund V Limited
Partnership (the "CD&R Fund") shall enter into a separate agreement (the
"Ancillary Agreement"), to become effective as of the Effective Time, that will
provide, among other things, that:
(A) during the Employment Period, the CD&R Fund will vote its shares of
Recapitalized Common Stock in favor of the election of Executive to serve
as a member of the Board;
(B) Executive shall not be permitted, at any time during his employment
with Employer, to sell, transfer or otherwise dispose of any shares of
Recapitalized Common Stock beneficially owned by him (including any
Recapitalized Option Shares), other than (I) transfers upon death to
-
Executive's estate, (II) transfers to family trusts or partnerships for
--
estate planning purposes or (III) de minimis transfers during the
---
Employment Period not exceeding, in the aggregate, 25% of the sum of the
aggregate shares of Recapitalized Common Stock beneficially owned by
Executive as of the Commencement Date and the aggregate Recapitalized
Option Shares subject to the Recapitalized Options held by Executive as of
the Commencement Date, provided, in the case of any transfer pursuant to
--------
the foregoing clause (I) or (II), that the executor of Executive's estate
or the trustee or general partner of any such trust or partnership, as
applicable, shall agree, in form and substance reasonably satisfactory to
Employer, to be bound by all of the provisions of the Ancillary Agreement;
(C) following any termination of Executive's employment with Employer,
Employer and the CD&R Fund shall have successive rights to repurchase any
Recapitalized Options and/or Recapitalized Option Shares then beneficially
owned or held by Executive for a purchase price equal to the then fair
market value of the Recapitalized Option Shares or the Recapitalized Option
Shares then subject to the Recapitalized Options, as applicable (reduced by
the option exercise price in the case of a purchase of Recapitalized
Options), such fair market value to be determined in good faith by the
Board on the basis of an independent valuation of the Recapitalized Common
Stock, provided, that the determination of such fair market value will not
--------
give effect to (x) any restrictions on transfer of such shares,
-
7
<PAGE>
(y) the fact that such shares are not registered for resale by Executive
-
under the Securities Act of 1933, as amended, or (z) the fact that such
-
shares would represent a minority interest in Employer;
(D) in the event of certain qualifying sales of Recapitalized Common Stock
by the CD&R Fund, Executive shall have the right to sell a pro rata portion
of the shares of Recapitalized Common Stock then owned by him, on the same
terms and conditions as the CD&R Fund; and
(E) in the event of the sale by the CD&R Fund of substantially all of the
Recapitalized Common Stock then beneficially owned by it (other than any
such sale to an Affiliate of the CD&R Fund), the CD&R Fund shall have the
right to require Executive to sell the same percentage of the Recapitalized
Common Stock then beneficially owned by him as will be sold by the CD&R
Fund, on the same terms and conditions as the CD&R Fund, and Employer shall
have the right to cause any Recapitalized Options then held by Executive to
be canceled in exchange for a payment in respect of each Recapitalized
Option Share covered by such Recapitalized Options equal to the excess, if
any, of the price per share of Recapitalized Common Stock paid to holders
of Recapitalized Common Stock in connection with such sale over the
applicable option exercise price.
(F) The transfer restrictions described in the foregoing subparagraph (B)
shall terminate on the earlier of (I) the fifth anniversary of the
-
Commencement Date and (II) the Lock-Up Expiration Date. The rights and
--
obligations of Executive and Employer under the foregoing subparagraphs
(C), (D) and (E) of this Section 4(b)(v) shall terminate on the closing
date following the effective date of the first registration statement filed
under the Securities Act by Employer after the Commencement Date with
respect to an underwritten public offering of any shares of Employer's
capital stock led by one or more underwriters, at least one of which is of
nationally recognized standing.
(c) In the event that, due to the adjustment provided in this Section
4 with respect to the number of shares of the Recapitalized Common Stock subject
to Recapitalized Options, the amount of Covered Federal Taxes (as defined below)
payable by Executive solely in respect of the Recapitalized Options exceeds the
amount of such Covered Federal Taxes that would have been incurred by Executive
solely in respect of the Recapitalized Options had the proper adjustment
applicable to such Recapitalized Options been finally determined for Federal
income tax purposes to be a method of adjustment other than the Merger Method
and, as a result, the amount of Covered Federal Taxes payable by Executive
exceeds the amount of such Covered Federal Taxes otherwise
8
<PAGE>
payable by Executive, to be determined after first taking into account the
provisions of Section 7(i)(i)-(v) hereof (such excess hereinafter referred to as
the "Excess Liability"), the Company shall, in addition to any other amounts
payable to Executive under this Agreement, pay to Executive an amount equal to
the sum of (i) such Excess Liability and (ii) any and all Covered Federal Taxes
- --
and any other Federal taxes and any state or local income and employment taxes,
if any, incurred by Executive by reason of the payment required to be made under
this Section 4(c). For purposes of this Section 4(c), Covered Federal Taxes
shall mean any tax imposed on Executive under any provision of the Code as in
effect on the date hereof (or any successor provision thereto), other than any
income, employment, estate or gift tax.
5. Employee Benefits. During the Employment Period, Executive shall
-----------------
be entitled to participate in all of Employer's profit sharing, pension,
savings, deferred compensation, supplemental savings, life, medical, dental and
disability insurance plans, as the same may be amended and in effect from time
to time, applicable to senior executives of Employer, provided that Executive
--------
shall not be entitled to participate in any severance plan of Employer or
otherwise receive any severance benefits under any other type of plan. The
benefits referred to in this Section 5 shall be provided to Executive on a basis
that is commensurate with Executive's position and duties with Employer
hereunder and shall be substantially comparable, in the aggregate, to the
benefits (exclusive of severance and equity or other incentive compensation
benefits) provided to Executive immediately prior to the Commencement Date.
6. Perquisites and Expenses.
------------------------
(a) General. During the Employment Period, Executive shall be
-------
entitled to participate in all special benefit or perquisite programs generally
available from time to time to senior executives of Employer, including
Employer's programs providing for reimbursement of certain automobile expenses,
club social dues and fees for tax return preparation, financial planning and
investment advisory services, on the terms and conditions in effect from time to
time under each such program.
(b) Business Travel, Lodging, etc. Employer shall reimburse Executive
------------------------------
for reasonable travel, lodging, meal and other reasonable expenses incurred by
him in connection with his performance of services hereunder upon submission of
evidence, satisfactory to Employer, of the incurrence and purpose of each such
expense and otherwise in accordance with Employer's business travel
reimbursement policy applicable to its senior executives as in effect from time
to time.
9
<PAGE>
(c) Vacation. During the Employment Period, Executive shall be
--------
entitled to a number of weeks of paid vacation, without carryover accumulation,
determined in accordance with the terms of Employer's vacation policy applicable
to senior executives as in effect from time to time. As soon as reasonably
practicable following the Commencement Date, Employer shall pay Executive a cash
amount equal to $44,423, which shall be in full and complete satisfaction of all
then unpaid vacation pay accrued by Executive with respect to periods of
employment completed prior to November 30, 1997.
7. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that
--------------------------------------
Executive's employment hereunder terminates due to death or is terminated by
Employer due to Executive's Disability (as defined below), no termination
benefits shall be payable to or in respect of Executive except as provided in
Section 7(f)(ii). For purposes of this Amended Agreement, "Disability" shall
mean a physical or mental disability that prevents the performance by Executive
of his duties hereunder lasting (or likely to last, based on competent medical
evidence presented to the Board) for a continuous period of six months or
longer. The reasoned and good faith judgment of the Board as to Executive's
Disability shall be based on such competent medical evidence as shall be
presented to it by Executive or by any physician or group of physicians or other
competent medical experts employed by Executive or Employer to advise the Board.
(b) Termination by Employer for Cause. Executive's employment with
---------------------------------
Employer may be terminated by Employer for Cause (as defined below), provided
--------
that Executive shall be permitted to attend a meeting of the Board within 30
days after delivery to him of a Notice of Termination (as defined below)
pursuant to this Section 7(b) to explain why he should not be terminated for
Cause and, if following any such explanation by Executive, the Board determines
that Employer does not have Cause to terminate Executive's employment, any such
prior Notice of Termination delivered to Executive shall thereupon be withdrawn
and of no further force or effect. "Cause" shall mean (i) the willful failure
-
of Executive substantially to perform his duties hereunder (other than any such
failure due to Executive's physical or mental illness) or other willful and
material breach by Executive of any of his obligations hereunder, after a
written demand for substantial performance has been delivered, and a reasonable
opportunity to cure has been given, to Executive by the Board, which demand
identifies in reasonable detail the manner in which the Board believes that
Executive has not substantially performed his duties or has breached his
obligations, (ii) Executive's dishonesty or engaging in willful and serious
--
misconduct, which misconduct has caused or is reasonably expected to result in
direct or indirect material injury to Employer or any of its Affiliates or (iii)
---
Executive's conviction of, or entering a plea of guilty or nolo contendere to, a
---- ----------
crime that constitutes a felony.
10
<PAGE>
(c) Termination Without Cause. A termination "Without Cause" shall
-------------------------
mean a termination of Executive's employment by Employer other than due to
Disability as described in Section 7(a) or for Cause as described in Section
7(b).
(d) Termination by Executive. Executive may terminate his employment
------------------------
for any reason. A termination of employment by Executive for "Good Reason"
shall mean a termination by Executive of his employment with Employer within 30
days following the occurrence, without Executive's consent, of any of the
following events: (i) the assignment to Executive of (x) a title that is
- -
different from, and a diminution from, the title specified in Section 2 or (y)
-
duties that are significantly different from, and that result in a substantial
diminution of, the duties specified in Section 2 or that he is to assume on the
Commencement Date, (ii) the failure of Employer to obtain the assumption of this
--
Amended Agreement by any Successor (as defined below) to Employer as
contemplated by Section 14, (iii) a reduction in the rate of Executive's Base
---
Salary, (iv) a material reduction in the aggregate level of employee and
--
executive benefits provided to Executive pursuant to Section 5 hereof, (v)
-
Employer's delivery to Executive of a Non-Extension Notice or (vi) a relocation
--
of Executive's principal place of business to a location beyond a radius of 30
miles from the location of such place of business on the Commencement Date,
provided that, within 30 days following the occurrence of any of the events set
- --------
forth therein, Executive shall have delivered written notice to Employer of his
intention to terminate his employment for Good Reason, which notice specifies in
reasonable detail the circumstances claimed to give rise to Executive's right to
terminate his employment for Good Reason, and Employer shall not have cured such
circumstances to the reasonable satisfaction of Executive.
(e) Notice of Termination. Any termination of Executive's employment
---------------------
hereunder by Employer pursuant to Section 7(a), 7(b) or 7(c), or by Executive
pursuant to Section 7(d), shall be communicated by a written Notice of
Termination addressed to the other. A "Notice of Termination" shall mean a
notice stating that Executive's employment with Employer has been or will be
terminated and setting forth the provisions hereof pursuant to which such
employment has or will be terminated.
(f) Payments Upon Certain Terminations.
----------------------------------
(i) In the event of a termination of Executive's employment by
Employer Without Cause or a termination by Executive of his employment for Good
Reason during the Employment Period, Employer shall pay to Executive his full
Base Salary through the Date of Termination and an amount equal to the pro rata
amount of annual incentive compensation for the portion of the fiscal year
preceding the Date of Termination that would have been payable to Executive
pursuant to Section 4(a) if he had
11
<PAGE>
remained employed for the entire fiscal year, determined on the basis of the
actual performance achieved by Employer through the Date of Termination and the
performance objectives established for such fiscal year, pro rated to reflect
the calculation of such annual incentive compensation for the portion of the
fiscal year preceding the Date of Termination. In addition, in the event of any
such termination, Employer shall pay or, in the case of the Continued Benefits
(as defined below), provide to Executive (or, following his death, to
Executive's designated beneficiary or beneficiaries), as liquidated damages,
(A) his Average Base Salary (as defined below), which shall be
payable in installments on Employer's regular payroll dates, for the period
beginning on the Date of Termination (as defined below) and ending on the
second anniversary of the Date of Termination (such period, the "Severance
Period") and
(B) on the last day of each calendar month included in the Severance
Period, an amount equal to one-twelfth of the Average Annual Bonus (as
defined below); and
(C) continued coverage for Executive and his eligible dependents
under Employer's medical insurance plans referred to in Section 5 (the
"Continued Benefits") during the period commencing on the Termination Date
and ending on the earlier of (i) Executive's 65th birthday and (ii) the
- --
date of Executive's death, subject to timely payment by Executive of all
premiums, contributions and other co-payments required to be paid by senior
executives of Employer under the terms of such plans as in effect from time
to time;
provided that Employer may, at any time, pay to Executive, in a single lump sum
- --------
and in satisfaction of Employer's obligations under clauses (A) and (B) of this
Section 7(f)(i), an amount equal to the present value (as determined by Employer
using a discount rate equal to the then prevailing applicable federal short-term
rate under section 1274(d) of the Internal Revenue Code of 1986, as amended) of
the sum of the installments of the Average Base Salary and Average Annual Bonus
then remaining to be paid to Executive pursuant to clauses (A) and (B) above.
Executive shall not have a duty to mitigate the costs to Employer
under this Section 7(f)(i), except that (i) payments of Base Salary and Average
-
Annual Bonus will be reduced, but not below zero, by the amount of any
compensation earned by Executive (whether paid currently or deferred) during any
portion of the Severance Period from any subsequent employer or other Person (as
defined in Section 17(k) below) for which Executive performs services, including
but not limited to consulting services, and (ii) Continued Benefits shall be
--
reduced or canceled if comparable medical benefit
12
<PAGE>
coverage is provided or offered to Executive by any subsequent employer or other
Person for which Executive performs services, including but not limited to
consulting services, at any time after the Date of Termination.
The term "Average Annual Bonus" means the average of the annual
bonuses paid to Executive pursuant to Employer's annual incentive compensation
plan for each of the three fiscal years of Employer ending immediately prior to
the Date of Termination or, if fewer, each of such fiscal years during which
Executive was at any time employed by Employer and the term "Average Base
Salary" means the average of the annual base salary rate of Executive in effect
immediately prior to the Date of Termination and as of the last day of each of
the two fiscal years of Employer ending immediately prior to the Date of
Termination or, if fewer, each of such fiscal years during which Executive was
at any time employed by Employer; provided that if Executive's employment is
--------
terminated by Executive pursuant to clause (iii) of the definition of Good
Reason, Executive's annual base salary rate in effect immediately prior to any
reduction thereof shall be substituted for Executive's annual base salary rate
in effect immediately prior to the Date of Termination in calculating the
Average Base Salary.
(ii) If Executive's employment shall terminate upon his death or
Disability or if Employer shall terminate Executive's employment for Cause or
Executive shall terminate his employment without Good Reason during the
Employment Period, Employer shall pay Executive his full Base Salary through the
Date of Termination and, in the case of any such termination upon Executive's
death or Disability, Executive shall be entitled to receive (x) a cash payment
-
equal to the pro rata amount of annual incentive compensation for the portion of
the fiscal year preceding the Date of Termination (exclusive of any time between
the onset of a physical or mental disability that prevents the performance by
Executive of his duties hereunder and the resulting Date of Termination) that
would have been payable to Executive pursuant to Section 4(a) if he had remained
employed for the entire fiscal year, determined on the basis of the actual
performance achieved by Employer through the Date of Termination and the
performance objectives established for such fiscal year, pro rated to reflect
the calculation of such annual incentive compensation for the portion of the
fiscal year preceding the Date of Termination and (y) such death or Disability
-
benefits, as applicable, as are provided under the terms of any employee and
executive death benefit and disability plans and programs referred to in Section
5 or 6(a).
(iii) Except as specifically set forth in this Section 7(f), Executive
shall be entitled to receive all amounts payable and benefits accrued under any
otherwise applicable plan, policy, program or practice of Employer in which
Executive was a participant during his employment with Employer (including,
without limitation,
13
<PAGE>
Employer's 401(k) Savings Plan and Supplemental 401(k) Savings Plan) in
accordance with the terms thereof, provided that Executive shall not be entitled
to receive any payments or benefits under any such plan, policy, program or
practice providing any bonus or incentive compensation or severance compensation
or benefits (and the provisions of this Section 7(f) shall supersede the
provisions of any such plan, policy, program or practice).
(g) Date of Termination. As used in this Amended Agreement, the term
-------------------
"Date of Termination" shall mean (i) if Executive's employment is terminated by
-
his death, the date of his death, (ii) if Executive's employment is terminated
--
by Employer for Cause, the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if later, the date of termination specified in
such Notice, and (iii) if Executive's employment is terminated by Employer
---
Without Cause, due to Executive's Disability or by Executive for any reason, the
date that is 30 days after the date on which Notice of Termination is given as
contemplated by Section 7(e) or, if no such Notice is given, immediately upon
the termination of Executive's employment.
(h) Resignation upon Termination. Effective as of any Date of
----------------------------
Termination under this Section 7 or otherwise as of the date of Executive's
termination of employment with Employer, Executive shall resign, in writing,
from all Board memberships and other positions then held by him with Employer
and its Affiliates.
(i) Limit on Payments by the Company.
--------------------------------
(i) Notwithstanding any provision of this Amended Agreement other
than Section 7(i)(vi) below , in the event that any amount or benefit paid,
payable or distributed to Executive pursuant to this Amended Agreement which is
a parachute payment as defined in Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), taken together with any amounts or benefits
otherwise paid, payable or distributed to Executive by Employer or any Affiliate
thereof which are parachute payments as defined in Section 280G of the Code
(collectively, the "Covered Payments"), would be an "excess parachute payment"
as defined in Section 280G of the Code, and would thereby subject Executive to
the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any
similar tax that may hereafter be imposed), the provisions of this Section 7(i)
shall apply to determine the amounts payable to Executive pursuant to Section
7(f) of this Amended Agreement.
(ii) Immediately following delivery of any Notice of Termination, the
Company shall notify Executive of the aggregate present value of all termination
benefits to which he would be entitled under this Amended Agreement and any
other plan,
14
<PAGE>
program or arrangement as of the projected Date of Termination, together with
the projected maximum payments, determined as of such projected Date of
Termination that could be paid without Executive being subject to the Excise
Tax.
(iii) If the aggregate value of all parachute payments to be paid or
provided to Executive under this Amended Agreement and any other plan, agreement
or arrangement with Employer or any Affiliate thereof exceeds the amount of
parachute payments which can be paid to Executive without Executive incurring an
Excise Tax, then the amounts payable to Executive under Section 7(f) shall be
reduced (but not below zero) to the maximum amount which may be paid hereunder
without Executive becoming subject to such an Excise Tax (such amount to be
referred to as the "Payment Cap"). In the event that Executive receives reduced
payments and benefits hereunder, Executive shall have the right to designate
which of the payments and benefits otherwise provided for in Section 7(f) of
this Amended Agreement he will receive in connection with the application of the
Payment Cap.
(iv) For purposes of determining whether any of the Covered Payments
will be subject to the Excise Tax and the amount of such Excise Tax,
(A) (x) whether any amount or benefit paid, payable or distributed
to Executive is a "parachute payment" within the meaning of Section
280G of the Code, and (y) whether there are "parachute payments" in
excess of the "base amount" (as defined under Section 280G(b)(3) of
the Code) shall be determined in good faith by Employer's independent
certified public accountants or tax counsel selected by such
accountants (the "Accountants"), provided however that payments or
benefits made or provided to Executive pursuant to Sections 3 through
6 of this Amended Agreement in respect of periods of Executive's
employment with Employer (other than any amount attributable to the
acceleration of any Prior Options) shall not be treated as parachute
payments, and
(B) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Accountants in accordance with the
principles of Section 280G of the Code.
(v) If Executive receives reduced payments and benefits as a result
of the provisions of this Section 7(i) (or this Section 7(i) is determined not
to be applicable to Executive because the Accountants conclude that Executive is
not subject to any Excise Tax) and it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding (a "Final
Determination") that, notwithstanding the good
15
<PAGE>
faith of Executive and Employer in applying the terms of this Amended Agreement,
the aggregate "parachute payments" within the meaning of Section 280G of the
Code paid to Executive or for his benefit are in an amount that would result in
Executive's being subject to an Excise Tax, then any amounts actually paid to or
on behalf of Executive which are treated as excess parachute payments shall be
deemed for all purposes to be a loan to Executive made on the date of receipt of
such excess payments, which Executive shall have an obligation to repay to
Employer on demand, together with interest on such amount at the applicable
Federal rate (as defined in Section 1274(d) of the Code) from the date of the
payment hereunder to the date of repayment by Executive. If Executive receives
reduced payments and benefits by reason of this Section 7(i) and it is
established pursuant to a Final Determination that Executive could have received
a greater amount without exceeding the Payment Cap, then Employer shall promptly
thereafter pay Executive the aggregate additional amount which could have been
paid without exceeding the Payment Cap, together with interest on such amount at
the applicable Federal rate (as defined in Section 1274(d) of the Code) from the
original payment due date to the date of actual payment by Employer.
(vi) Notwithstanding anything else contained in this Section 7(i) to
the contrary, nothing in this Section 7(i) shall be construed to limit the
Company's obligation to make any payment to Executive with respect to any
Excess Liability determined pursuant to Section 4(c) above.
8. Unauthorized Disclosure. During the period of Executive's
-----------------------
employment with Employer and the ten year period following any termination of
such employment, without the prior written consent of the Board or its
authorized representative, except to the extent required by an order of a court
having jurisdiction or under subpoena from an appropriate government agency, in
which event, Executive shall use his best efforts to consult with the Board
prior to responding to any such order or subpoena, and except as required in the
performance of his duties hereunder, Executive shall not disclose any
confidential or proprietary trade secrets, customer lists, drawings, designs,
information regarding product development, marketing plans, sales plans,
manufacturing plans, management organization information (including but not
limited to data and other information relating to members of the Board or the
Board of Directors of any of Employer's Affiliates or to management of Employer
or any of its Affiliates), operating policies or manuals, business plans,
financial records, packaging design or other financial, commercial, business or
technical information (a) relating to Employer or any of its Affiliates or (b)
- -
that Employer or any of its Affiliates may receive belonging to suppliers,
customers or others who do business with Employer or any of its Affiliates
(collectively, "Confidential Information") to any third person unless such
Confidential Information has
16
<PAGE>
been previously disclosed to the public or is in the public domain (other than
by reason of Executive's breach of this Section 8).
9. Non-Competition. During the period of Executive's employment with
---------------
Employer and, following any termination thereof, the period ending on the second
anniversary of the Date of Termination (such periods, collectively, the
"Restriction Period"), Executive shall not, directly or indirectly, become
employed in an executive capacity by, engage in business with, serve as an agent
or consultant to, or become a partner, member, principal or stockholder (other
than a holder of less than 5% of the outstanding voting shares of any publicly
held company) of, any Person that competes or has a reasonable potential for
competing, anywhere in the world, with any part of the business of Employer or
any of its Subsidiaries (as defined below). For purposes of this Section 9, the
phrase employment "in an executive capacity" shall mean employment in any
position in connection with which Executive has or reasonably would be viewed as
having powers and authorities with respect to any other Person or any part of
the business thereof that are substantially similar, with respect thereto, to
the powers and authorities assigned to the Corporate Vice President or any
superior executive officer of Employer or to the President or Chief Executive
Officer of TTC in the By-Laws of Employer or TTC, as applicable, as in effect on
the date hereof, a copy of the relevant portions of which have been delivered to
Executive on or before the date hereof, and which Executive hereby confirms that
he has reviewed.
Notwithstanding the foregoing, in the event that, as a result of the
operation of the provisions of Section 7(i), payments of Average Base Salary and
Average Annual Bonus otherwise required to be paid to Executive for the entire
Severance Period are paid to Executive for a period of less than two years
following the applicable Date of Termination, the Restriction Period shall
expire as of the later of (i) the date such payments of Average Base Salary and
-
Average Annual Bonus cease (or, if Employer elects to pay Executive a lump sum
amount pursuant to Section 7(f)(i), the date such payments would have ceased had
such payments continued to be made in installments) and (ii) the first
--
anniversary of the Date of Termination.
10. Non-Solicitation of Employees. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, (i) solicit for employment,
-
employ or otherwise interfere with the relationship of Employer or any of its
Affiliates with any natural person throughout the world who is or was employed
by or otherwise engaged to perform services for Employer or any of its
Affiliates at any time during which Executive was employed by Employer (in the
case of any such activity during such time) or during the six-month period
preceding such solicitation, employment or interference (in the case of any such
activity after the Date of Termination), other than any such solicitation or
17
<PAGE>
employment on behalf of Employer or any of its Affiliates during Executive's
employment with Employer, or (ii) induce any employee of Employer or any of its
--
Affiliates who is a member of management to engage in any activity which
Executive is prohibited from engaging in under any of Sections 8, 9, 10 or 11 or
to terminate his employment with Employer.
11. Non-Solicitation of Customers. During the Restriction Period,
-----------------------------
Executive shall not, directly or indirectly, for his own account or for the
account of any other Person anywhere in the world, solicit or otherwise attempt
to establish any business relationship of a nature that is competitive with the
business or relationship of Employer or any of its Affiliates with any Person
throughout the world which is or was a customer, client or distributor of
Employer or any of its Affiliates at any time during which Executive was
employed by Employer (in the case of any such activity during such time) or
during the twelve-month period preceding the Date of Termination (in the case of
any such activity after the Date of Termination), other than any such
solicitation on behalf of Employer or any of its Affiliates during Executive's
employment with Employer.
12. Return of Documents. In the event of the termination of
-------------------
Executive's employment for any reason, Executive shall deliver to Employer all
of (a) the property of each of Employer and its Affiliates and (b) the non-
- -
personal documents and data of any nature and in whatever medium of each of
Employer and its Affiliates, and he shall not take with him any such property,
documents or data or any reproduction thereof, or any documents containing or
pertaining to any Confidential Information.
13. Injunctive Relief with Respect to Covenants; Forum, Venue and
-------------------------------------------------------------
Jurisdiction. Executive acknowledges and agrees that the covenants, obligations
- ------------
and agreements of Executive contained in Sections 8, 9, 10, 11, 12 and 13 relate
to special, unique and extraordinary matters and that a violation of any of the
terms of such covenants, obligations or agreements will cause Employer
irreparable injury for which adequate remedies are not available at law.
Therefore, Executive agrees that Employer shall be entitled to an injunction,
restraining order or such other equitable relief (without the requirement to
post bond) as a court of competent jurisdiction may deem necessary or
appropriate to restrain Executive from committing any violation of such
covenants, obligations or agreements. These injunctive remedies are cumulative
and in addition to any other rights and remedies Employer may have. Employer
and Executive hereby irrevocably submit to the exclusive jurisdiction of the
courts of Massachusetts and the Federal courts of the United States of America,
in each case located in Boston, Massachusetts, in respect of the injunctive
remedies set forth in this Section 13 and the interpretation and enforcement of
Sections 8, 9, 10, 11, 12 and 13 insofar as such interpretation and enforcement
relate to any request or application for injunctive relief in
18
<PAGE>
accordance with the provisions of this Section 13, and the parties hereto hereby
irrevocably agree that (a) the sole and exclusive appropriate venue for any suit
-
or proceeding relating solely to such injunctive relief shall be in such a
court, (b) all claims with respect to any request or application for such
-
injunctive relief shall be heard and determined exclusively in such a court, (c)
-
any such court shall have exclusive jurisdiction over the person of such parties
and over the subject matter of any dispute relating to any request or
application for such injunctive relief, and (d) each hereby waives any and all
-
objections and defenses based on forum, venue or personal or subject matter
jurisdiction as they may relate to an application for such injunctive relief in
a suit or proceeding brought before such a court in accordance with the
provisions of this Section 13.
Notwithstanding any other provision hereof, (i) Executive's
-
obligations under Sections 9, 10 and 11 are subject to timely payment by
Employer of the amounts, if any, required to be paid to Executive pursuant to
Section 7(f) (taking into account any reduction in such amounts permitted under
Section 7(i)) and (ii) Employer's obligations to pay Executive any amount
--
pursuant to Section 7(f) is subject to Executive's compliance with his
obligations under Sections 9, 10 and 11.
14. Assumption of Agreement. Employer shall require any Successor
-----------------------
thereto, by agreement in form and substance reasonably satisfactory to
Executive, to expressly assume and agree to perform this Amended Agreement in
the same manner and to the same extent that Employer would be required to
perform it if no such succession had taken place.
15. Entire Agreement; Termination of Prior Agreement. This Amended
------------------------------------------------
Agreement constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof. All prior correspondence and proposals (including
but not limited to summaries of proposed terms) and all prior promises,
representations, understandings, arrangements and agreements relating to such
subject matter (including but not limited to those made to or with Executive by
any other Person and those contained in the Prior Agreement or any other prior
employment, consulting or similar agreement entered into by Executive and
Employer or any predecessor thereto or Affiliate thereof) are merged herein and
superseded hereby.
Executive and Employer each acknowledges and agrees that the Prior
Agreement is hereby terminated in its entirety and shall be of no further force
or effect, without any payment or other consideration to or in respect of
Executive.
19
<PAGE>
16. Indemnification. Employer hereby agrees that, notwithstanding
---------------
the fact that Employer is a Massachusetts corporation, Employer shall indemnify
and hold harmless Executive to the fullest extent permitted by Delaware law, as
if Employer were a Delaware corporation, from and against any and all
liabilities, costs, claims and expenses, including all costs and expenses
incurred in defense of litigation (including attorneys' fees), arising out of
the employment of Executive hereunder, it being understood that there shall be
no indemnification in respect of any claim arising out of or based upon
Executive's gross negligence or willful misconduct. Costs and expenses incurred
by Executive in defense of such litigation (including attorneys' fees) shall be
paid by Employer in advance of the final disposition of such litigation upon
receipt by Employer of (a) a written request for payment, (b) appropriate
- -
documentation evidencing the incurrence, amount and nature of the costs and
expenses for which payment is being sought, and (c) an undertaking adequate
-
under Massachusetts law made by or on behalf of Executive to repay the amounts
so paid if it shall ultimately be determined that Executive is not entitled to
be indemnified by Employer under this Amended Agreement, including but not
limited to as a result of such exception.
17. Miscellaneous.
-------------
(a) Binding Effect; Assignment. This Amended Agreement shall be
--------------------------
binding on and inure to the benefit of Employer, and its successors and
permitted assigns. This Amended Agreement shall also be binding on and inure to
the benefit of Executive and his heirs, executors, administrators and legal
representatives. This Amended Agreement shall not be assignable by any party
hereto without the prior written consent of the other, except as provided
pursuant to this Section 17(a). Employer may effect such an assignment without
prior written approval of Executive upon the transfer of all or substantially
all of its business and/or assets (by whatever means), provided that the
--------
Successor to Employer shall expressly assume and agree to perform this Amended
Agreement in accordance with the provisions of Section 14.
(b) Governing Law. This Amended Agreement shall be governed by and
-------------
construed in accordance with the laws of Massachusetts without reference to
principles of conflicts of laws.
(c) Taxes. Employer may withhold from any payments made under this
-----
Amended Agreement all applicable taxes, including but not limited to income,
employment and social insurance taxes, as shall be required by law.
(d) Amendments. No provision of this Amended Agreement may be
----------
modified, waived or discharged unless such modification, waiver or discharge is
approved
20
<PAGE>
by the Board or a Person authorized thereby and is agreed to in writing by
Executive. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this Amended
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No waiver of any provision of this Amended Agreement shall be
implied from any course of dealing between or among the parties hereto or from
any failure by any party hereto to assert its rights hereunder on any occasion
or series of occasions.
(e) Severability. In the event that any one or more of the
------------
provisions of this Amended Agreement shall be or become invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
(f) Notices. Any notice or other communication required or permitted
-------
to be delivered under this Amended Agreement shall be (i) in writing, (ii)
- --
delivered personally, by courier service or by certified or registered mail,
first-class postage prepaid and return receipt requested, (iii) deemed to have
---
been received on the date of delivery or, if so mailed, on the third business
day after the mailing thereof, and (iv) addressed as follows (or to such other
--
address as the party entitled to notice shall hereafter designate in accordance
with the terms hereof):
(A) If to Employer, to it at:
Dynatech Corporation
Corporate Headquarters
3 New England Executive Park
Burlington, MA 01803
Attention: General Counsel
---------
(B) if to Executive, to him at his residential address as currently
on file with Employer.
Copies of any notices or other communications given under this Amended Agreement
shall also be given to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue
New York, New York 10152
Attention:
---------
21
<PAGE>
Joseph L. Rice, III
and
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention:
---------
Franci J. Blassberg, Esq.
and
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention:
---------
Peter Tarr, Esq.
(g) Voluntary Agreement. Executive represents that he is entering
-------------------
into this Amended Agreement voluntarily and that his employment hereunder and
compliance with the terms and conditions of this Amended Agreement will not
conflict with or result in the breach by him of any agreement to which he is a
party or by which he may be bound.
(h) Counterparts. This Amended Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
(i) Headings. The section and other headings contained in this
--------
Amended Agreement are for the convenience of the parties only and are not
intended to be a part hereof or to affect the meaning or interpretation hereof.
(k) Certain Definitions.
-------------------
"Affiliate": with respect to any Person, means any other Person that,
---------
directly or indirectly through one or more intermediaries, Controls, is
Controlled by, or is under common Control with the first Person, including but
not limited to a Subsidiary of the first Person, a Person of which the first
Person is a Subsidiary, or another Subsidiary of a Person of which the first
Person is also a Subsidiary.
22
<PAGE>
"Control": with respect to any Person, means the possession, directly
-------
or indirectly, severally or jointly, of the power to direct or cause the
direction of the management policies of such Person, whether through the
ownership of voting securities, by contract or credit arrangement, as trustee or
executor, or otherwise.
"Person": any natural person, firm, partnership, limited liability
------
company, association, corporation, company, trust, business trust, governmental
authority or other entity.
"Subsidiary": with respect to any Person, each corporation or other
----------
Person in which the first Person owns or Controls, directly or indirectly,
capital stock or other ownership interests representing 50% or more of the
combined voting power of the outstanding voting stock or other ownership
interests of such corporation or other Person.
23
<PAGE>
"Successor": of a Person means a Person that succeeds to the first
---------
Person's assets and liabilities by merger, liquidation, dissolution or otherwise
by operation of law, or a Person to which all or substantially all the assets
and/or business of the first Person are transferred.
IN WITNESS WHEREOF, Employer has duly executed this Amended Agreement
by its authorized representative, and Executive has hereunto set his hand, in
each case effective as of the date first above written.
DYNATECH CORPORATION
By: /s/ John F. Reno
-----------------------------------
Name: John F. Reno
Title: Chief Executive Officer
Executive:
/s/ John R. Peeler
--------------------------------------
Name: John R. Peeler*
24
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<PERIOD-START> APR-01-1998
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0
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