<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------------------------------------------
MTS SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 3826 41-0908057
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
</TABLE>
14000 TECHNOLOGY DRIVE
EDEN PRAIRIE, MINNESOTA 55344-9763
TELEPHONE: (612) 937-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------------------------------------------
DR. SIDNEY W. EMERY, JR.
CHIEF EXECUTIVE OFFICER
MTS SYSTEMS CORPORATION
14000 TECHNOLOGY DRIVE
EDEN PRAIRIE, MINNESOTA 55344-9763
TELEPHONE: (612) 937-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------------------------------------------------------
COPIES TO:
JEFFREY N. SAUNDERS DIANE HOLT FRANKLE
LINDQUIST & VENNUM P.L.L.P. DIANNE B. SALESIN
4200 IDS CENTER GRAY CARY WARE & FREIDENRICH LLP
80 SOUTH 8TH STREET 400 HAMILTON AVENUE
MINNEAPOLIS, MINNESOTA 55402-2205 PALO ALTO, CALIFORNIA 94301-1825
(612) 371-3211 (650) 328-6561
---------------------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement and the
effective time of the proposed merger of Badger Merger Corp. with and into DSP
Technology Inc., as described in the Agreement and Plan of Merger, dated as of
March 23, 1999, attached as Appendix A to the Proxy Statement/Prospectus forming
a part of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING OF REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(2)(3)
<S> <C> <C> <C> <C>
Common Stock, Par Value $0.25 per share.... 2,077,000 Not applicable Not applicable $5,437.68
</TABLE>
(1) Represents the number of shares of common stock of the Registrant which may
be issued to the stockholders and optionholders of DSP Technology Inc.
("DSPT") pursuant to the merger described herein.
(2) Each share of common stock of DSPT (and each net option share of DSPT) will
be converted into the right to receive a fraction of a share of common stock
of the Registrant pursuant to the merger described herein. Pursuant to Rule
457(f)(1) under the Securities Act, the registration fee has been calculated
based on the average of the high and low prices per share of the DSPT common
stock as reported on the Nasdaq National Market on April 22, 1999 and the
estimated number of shares of DSPT common stock and net option shares to be
acquired by the Registrant pursuant to the merger.
(3) Pursuant to Rule 457(b) under the Securities Act, $3,957 of the registration
fee is offset by the filing fee previously paid by DSPT in connection with
the filing of preliminary proxy materials on Schedule 14A on April 16, 1999.
Accordingly, a registration fee of $1,480.68 is being paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
DSP TECHNOLOGY INC.
48500 KATO ROAD
FREMONT, CALIFORNIA 94538
Dear DSPT Stockholder:
You are cordially invited to attend a special meeting of the stockholders of
DSP Technology Inc. on Friday, May 28, 1999 at the offices of DSPT located at
48500 Kato Road, Fremont, California, at 2:00 p.m., local time. At the special
meeting, you will be asked to vote on a proposal to approve the merger agreement
among DSPT, MTS Systems Corporation and Badger Merger Corp., a wholly-owned
subsidiary of MTS. As a result of the merger, DSPT will become a wholly-owned
subsidiary of MTS and you will become a shareholder of MTS.
The merger will combine MTS' global presence in computer-based mechanical
design and system integration skills with DSPT's expertise in state-of-the-art
software, data acquisition and control systems.
Upon the closing of the merger, the holders of the outstanding shares of
DSPT common stock and outstanding options to purchase DSPT common stock will
receive a total of 2,077,000 shares of MTS common stock. As a result, each
outstanding DSPT share and each net option share represented by outstanding DSPT
options will be exchanged for a fraction, the exchange ratio, of a share of MTS
common stock. The exchange ratio will be determined at closing by dividing the
2,077,000 MTS common shares to be issued in the merger by the sum of the total
number of DSPT shares outstanding plus the net option shares, calculated as
follows:
- DSPT's net option shares will represent DSPT shares issuable upon exercise
of outstanding options less a number of DSPT shares with a value, based
upon the implied DSPT share value at closing, equal to the aggregate
exercise price of such options.
- The implied DSPT share value at closing will be determined by dividing the
market value of the MTS shares issued in the merger plus the aggregate
exercise price of the DSPT options by the total number of DSPT shares
outstanding and subject to outstanding options.
For example, based on an assumed price of $13.00 for MTS common stock at the
closing of the merger and assuming all currently outstanding stock options
remain unexercised at the time of closing, each of DSPT's common shares and each
of its net option shares would receive approximately 0.8037 of a share of MTS
common stock. The actual exchange ratio will be determined at closing.
The exact exchange ratio will depend upon the market price of MTS common
stock, the number of outstanding shares of DSPT common stock, the number of DSPT
shares subject to outstanding options and the exercise prices of such options.
Therefore, the actual exchange ratio for the merger, the aggregate value of the
2,077,000 MTS shares of common stock issued in the merger, and the allocation of
the aggregate merger consideration between DSPT stockholders and optionholders
could be affected by:
- increases or decreases in the market price of MTS common stock;
- exercises of DSPT options and their related exercise prices; and
- grants of additional DSPT options.
MTS common stock is traded on the Nasdaq National Market under the symbol
"MTSC." DSPT common stock is traded on the Nasdaq National Market under the
symbol "DSPT." DSPT stockholders
<PAGE>
should obtain recent market quotations for MTS common stock and DSPT common
stock and understand the exchange ratio being offered in the merger.
If you would like information regarding the exchange ratio and, if you hold
options, the implied DSPT share value used to determine the number of net option
shares represented by your options, you may call DSPT's proxy solicitor,
MacKenzie Partners, Inc., at (800) 322-2885. MacKenzie Partners will provide to
you an estimate of the exchange ratio and the implied DSPT share value as of any
date prior to and including the date on which the exchange ratio is finally
determined. MacKenzie Partners will also provide instructions on how to submit
proxies in a timely manner, including instructions if you wish to wait until the
exchange ratio is finally determined before voting. If you wish to change your
vote, you may do so by transmitting the request by facsimile to MacKenzie
Partners at (212) 929-0308 or by attending the special meeting.
DSPT'S BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO YOU AND IN
YOUR BEST INTERESTS. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMENDS THAT YOU VOTE TO APPROVE THE MERGER AGREEMENT AND THE
MERGER.
Because of the significance of the merger, your participation in the special
meeting, either in person or by proxy, is especially important. We hope you will
be able to attend the special meeting. However, even if you anticipate attending
in person, we urge you to mark, sign and return the enclosed proxy card promptly
in the enclosed postage-paid envelope to ensure that your shares of common stock
will be represented at the special meeting. If you do attend, you will, of
course, be able to vote your shares in person.
Thank you, and we look forward to seeing you at the special meeting.
<TABLE>
<CAPTION>
<S> <C>
/s/ Howard O. Painter, Jr. /s/ F. Gil Troutman, Jr.
Howard O. Painter, Jr. F. Gil Troutman, Jr.
Chairman of the Board President and Chief Executive Officer
</TABLE>
THE MERGER INVOLVES CERTAIN RISKS TO DSPT STOCKHOLDERS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED APRIL 30, 1999 AND IS FIRST BEING
MAILED TO
STOCKHOLDERS ON OR ABOUT APRIL 30, 1999.
<PAGE>
[LOGO]
DSP TECHNOLOGY INC.
48500 KATO ROAD
FREMONT, CALIFORNIA 94538
(510) 657-7555
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 28, 1999
TO THE STOCKHOLDERS OF DSP TECHNOLOGY INC.:
A special meeting of the stockholders of DSP Technology Inc., a Delaware
corporation, will be held on May 28, 1999, at 2:00 p.m., local time, at the
offices of DSPT located at 48500 Kato Road, Fremont, California for the
following purposes:
1. To consider and vote upon a proposal to adopt and approve the
Agreement and Plan of Merger dated as of March 23, 1999, among DSPT, MTS
Systems Corporation, a Minnesota corporation, and Badger Merger Corp., a
Delaware corporation and wholly-owned subsidiary of MTS, and to approve the
merger of Badger with and into DSPT pursuant to which DSPT will become a
wholly-owned subsidiary of MTS; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of that meeting.
THE BOARD OF DIRECTORS OF DSPT UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER.
The close of business on April 15, 1999 has been fixed by the board of
directors of DSPT as the record date for determination of the stockholders of
DSPT entitled to notice of, and to vote at, the special meeting or any
postponement or adjournment thereof. A list of DSPT stockholders entitled to
vote at the special meeting will be available for examination during ordinary
business hours at DSPT's offices at 48500 Kato Road, Fremont, California for 10
days prior to the special meeting.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign and return the enclosed proxy card in the enclosed postage-paid
envelope. You may revoke your proxy at any time before it is voted by delivering
a written notice of such revocation or a duly executed, later-dated proxy to
DSPT at 48500 Kato Road, Fremont, California 94538, Attention: Secretary, or by
attending the special meeting and voting in person.
By order of the Board of Directors,
/s/ Jose M. Millares, Jr.
Jose M. Millares, Jr., Secretary
Fremont, California
April 30, 1999
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
HOLDERS OF DSPT COMMON STOCK SHOULD NOT
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 1
WHO CAN HELP ANSWER YOUR QUESTIONS......................................................................... 2
SUMMARY.................................................................................................... 3
The Companies............................................................................................ 3
Exchange Ratio........................................................................................... 4
Ownership of MTS following the Merger.................................................................... 4
Reasons for the Merger................................................................................... 5
DSPT's Recommendation to You............................................................................. 5
The Special Meeting...................................................................................... 5
Record Date and Voting Power............................................................................. 5
Required Vote............................................................................................ 6
Share Ownership of Management and Certain Stockholders................................................... 6
Exchange of Stock Certificates........................................................................... 6
Interests of DSPT's Officers and Directors in the Merger................................................. 6
Comparative Per Common Share Market Price Information.................................................... 6
Tax Matters.............................................................................................. 6
Treatment of Options..................................................................................... 6
Anticipated Accounting Treatment......................................................................... 7
Fairness Opinion of Financial Advisor.................................................................... 7
Regulatory Requirements.................................................................................. 7
No Appraisal Rights...................................................................................... 7
Conditions to the Merger................................................................................. 7
Limitation on Discussing or Negotiating Other Transaction Proposals...................................... 8
Termination of the Merger Agreement...................................................................... 8
Termination Fee.......................................................................................... 8
RISK FACTORS............................................................................................... 9
Risks Relating to the Merger............................................................................. 9
Risks Relating to MTS' and the Combined Company's Business............................................... 10
MTS SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION................................................. 13
DSPT SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION................................................ 14
MARKET PRICE DATA AND DIVIDEND POLICY...................................................................... 15
COMPARATIVE PER SHARE DATA................................................................................. 17
THE DSPT SPECIAL MEETING................................................................................... 19
Date Time and Place of Meeting........................................................................... 19
Purpose of the DSPT Special Meeting...................................................................... 19
Record Date and Outstanding Shares....................................................................... 19
Voting of Proxies........................................................................................ 19
Vote Required............................................................................................ 19
Quorum; Abstentions; Broker Non-Votes.................................................................... 20
Solicitation of Proxies; Expenses........................................................................ 20
Exchange of Stock Certificates........................................................................... 20
Other Matters............................................................................................ 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS............................................................ 21
Background of the Merger................................................................................. 21
Reasons for the Merger................................................................................... 27
Recommendation of the DSPT Board......................................................................... 30
Opinion of DSPT Financial Advisor........................................................................ 31
Interests of Certain Persons in the Merger............................................................... 35
Affiliate Agreements..................................................................................... 36
Treatment of Options..................................................................................... 36
Material Federal Income Tax Consequences................................................................. 37
Anticipated Accounting Treatment......................................................................... 39
Governmental Approvals................................................................................... 39
Absence of Appraisal Rights.............................................................................. 39
Resale of MTS Common Stock............................................................................... 39
MATERIAL TERMS OF THE MERGER AGREEMENT..................................................................... 40
Effective Time of the Merger............................................................................. 40
Merger Consideration..................................................................................... 40
Conditions to the Merger................................................................................. 41
Representations and Warranties........................................................................... 43
Covenants; Conduct of Business Prior to the Merger....................................................... 43
Limitation on Discussing or Negotiating Other Transaction Proposals...................................... 46
Termination of the Merger Agreement...................................................................... 47
Expenses and Termination Fee............................................................................. 48
INFORMATION WITH RESPECT TO DSPT........................................................................... 49
Business of DSPT......................................................................................... 49
Market for DSPT's Common Equity and Related Stockholder Matters.......................................... 55
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 56
Principal Stockholders................................................................................... 61
Executive Compensation and Other Matters................................................................. 63
INFORMATION WITH RESPECT TO MTS............................................................................ 65
Agreement with FEV....................................................................................... 65
Backlog.................................................................................................. 65
COMPARISON OF RIGHTS OF HOLDERS OF MTS COMMON STOCK AND HOLDERS OF DSPT COMMON STOCK....................... 66
Description of MTS Capital Stock......................................................................... 66
Comparative Rights of MTS and DSPT Stockholders.......................................................... 66
EXPERTS.................................................................................................... 69
LEGAL MATTERS.............................................................................................. 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
Report of Independent Certified Public Accountants....................................................... F-2
DSP Technology Inc. and Subsidiaries Consolidated Balance Sheets......................................... F-3
DSP Technology Inc. and Subsidiaries Consolidated Statements of Income................................... F-4
DSP Technology Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity..................... F-5
DSP Technology Inc. and Subsidiaries Consolidated Statements of Cash Flows............................... F-6
DSP Technology Inc. and Subsidiaries Notes to Consolidated Financial Statements.......................... F-7
APPENDICES:
Appendix A: Agreement and Plan of Merger Among MTS Systems Corporation, Badger Merger Corp., and DSP
Technology Inc. dated as of March 23, 1999............................................................. A-1
Appendix B: Opinion of Hambrecht & Quist LLC dated March 23, 1999........................................ B-1
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
MTS and DSPT each file annual, quarterly and special reports, proxy
statements and other information with the United States Securities and Exchange
Commission. MTS common stock is traded on the Nasdaq National Market under the
symbol "MTSC." DSPT common stock is traded on the Nasdaq National Market under
the symbol "DSPT." You may read and copy any document filed by MTS or DSPT at
the SEC's public reference facilities. Please call the SEC at 1-800-SEC-0330 for
further information about its public reference facilities. The SEC filings are
also available to the public at the SEC's website at http://www.sec.gov.
Reports, proxy statements and other information concerning MTS and DSPT can also
be inspected at the Nasdaq National Market, Operations, 1735 K Street, N.W.,
Washington, D.C.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows MTS and DSPT to "incorporate by reference" the information we
file with the SEC, which means that we can disclose important information to you
by referring you to documents we have previously filed with the SEC. The
information incorporated by reference is considered a part of this proxy
statement/prospectus, and any later information that we file with the SEC will
automatically update and supersede this information. This proxy
statement/prospectus is part of a registration statement on Form S-4 filed by
MTS with the SEC (Registration No. 333- ).
MTS incorporates by reference the documents listed below, and any additional
documents filed by MTS with the SEC between the date of this proxy
statement/prospectus and the date of the special meeting. The documents MTS
incorporates by reference are:
- MTS' annual report on Form 10-K for the fiscal year ended September 30,
1998;
- MTS' amendment number one to its annual report on Form 10-K/A for the
fiscal year ended September 30, 1998; and
- MTS' quarterly report on Form 10-Q for the quarter ended December 31,
1998.
DSPT incorporates by reference the document listed below and any documents
that DSPT may file with the SEC between the date of this proxy
statement/prospectus and the date of the special meeting. The document DSPT
incorporates by reference is:
- DSPT's current report on Form 8-K filed on March 26, 1999.
Documents incorporated by reference are available without charge, excluding
all exhibits unless such exhibits have been specifically incorporated by
reference in this proxy statement/prospectus. You may obtain documents
incorporated by reference by requesting them in writing or by telephone from the
appropriate company as follows:
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, Minnesota 55344-9763
Attention: Investor Relations
Phone Number: (612) 937-4000
DSP Technology Inc.
48500 Kato Road
Fremont, California 94538
Attention: Joe Millares
Phone Number: (510) 657-7555
In order to ensure timely delivery of the documents, any requests should be made
by May 21, 1999.
1
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have additional questions about the merger, you should contact:
DSP TECHNOLOGY INC.
48500 Kato Road
Fremont, California 94538
Attention: Joe Millares
Phone Number: (510) 657-7555
MTS SYSTEMS CORPORATION
14000 Technology Drive
Eden Prairie, Minnesota 55344-9763
Attention: Investor Relations
Phone Number: (612) 937-4000
If you have additional questions about DSPT's solicitation of your proxy, you
should contact:
MACKENZIE PARTNERS, INC.
156 5th Avenue
New York, New York 10010
Phone Number: (800) 322-2885 or call collect at
(212) 929-5500
DSP Technology Inc., SDPT, RedLine and ACAP are registered trademarks of DSP
Technology Inc. ADAPT-CAS, ADAPT-DAC, CONNECT and DYNO are trademarks of DSP
Technology Inc. Other product and brand names are trademarks or registered
trademarks of their respective holders.
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER AVAILABLE
INFORMATION REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1. THE
MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS.
WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT
GOVERNS THE MERGER.
WE HAVE INCLUDED PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE
COMPLETE DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
MTS HAS PROVIDED THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS ABOUT
MTS AND DSPT HAS PROVIDED THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS
ABOUT DSPT.
THE FACTORS BEGINNING ON PAGE 9 SHOULD BE CONSIDERED CAREFULLY BY THE DSPT
STOCKHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE THE
MERGER. THESE FACTORS SHOULD BE CONSIDERED ALONG WITH ANY ADDITIONAL RISK
FACTORS IN DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS AND ANY OTHER INFORMATION INCLUDED OR INCORPORATED BY
REFERENCE HEREIN, INCLUDING IN CONJUNCTION WITH FORWARD-LOOKING STATEMENTS MADE
HEREIN. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1.
THE COMPANIES
MTS Systems Corporation (SEE PAGE 1)
14000 Technology Drive
Eden Prairie, MN 55344-2290
(612) 937-4000
Organized in 1966, MTS is a technology-based company providing engineering
services, equipment and software for applications in materials and product
research, product development, quality control and factory automation.
MTS bases its business on a set of building-block technologies and business
processes. Technologies include sensors for measuring machine and process
parameters, control technologies for test and process automation, hydraulic and
electric servodrives for precise actuation, and application software to tailor
the test or automation system to the customer's needs and to analyze results.
Business processes include project and product styles of operations on a
worldwide basis. In combination, they offer solutions to customers in a variety
of markets.
MTS' operations are organized into two business sectors: (1) mechanical
testing and simulation, and (2) factory automation. In the mechanical testing
and simulation sector, customers use MTS' products and services in research,
product development and quality control to determine the mechanical properties
and performance of materials, products and structures. Many of MTS' products and
services support customers' mechanical design automation processes. In the
factory automation sector, customers use MTS' measurement and control
instrumentation to measure process variables and to automate production
processes. The operational alignment of the mechanical testing and simulation
and factory automation sectors allows MTS to maintain a strategic focus on
markets with different applications of its technologies and with different
competitors.
3
<PAGE>
DSP Technology Inc. (SEE PAGE 49)
48500 Kato Road
Fremont, CA 94538
(510) 657-7555
DSPT designs, develops, manufactures, markets and integrates high-speed
computer-automated instrumentation for measurement and control applications.
DSPT has two divisions, the transportation group, which focuses on powertrain
testing, and the lab group, which focuses on vehicle safety and component
testing, general data acquisition and signal analysis. Powertrain testing is
currently DSPT's largest market and major focus.
EXCHANGE RATIO (SEE PAGE 40)
The exchange ratio will be determined at closing by dividing the 2,077,000
MTS common shares to be issued in the merger by the sum of the total number of
shares of DSPT common stock outstanding plus the net option shares represented
by outstanding DSPT stock options, calculated as follows:
- DSPT's net option shares will represent DSPT shares issuable upon exercise
of outstanding options less a number of DSPT shares with a value, based
upon the implied DSPT share value at closing, equal to the aggregate
exercise price of such options.
- The implied DSPT share value at closing will be determined by dividing the
market value of the MTS common shares issued in the merger plus the
aggregate exercise price of the DSPT options by the total number of DSPT
shares outstanding and subject to outstanding options.
For example, based on an assumed price of $13.00 for MTS common stock at the
closing of the merger and assuming all currently outstanding stock options
remain unexercised at the time of closing, each of DSPT's common shares and each
of its net option shares would receive approximately 0.8037 of a share of MTS
common stock.
The exact exchange ratio will be determined at closing and will depend upon
the market price of MTS common stock, the number of outstanding shares of DSPT
stock, the number of DSPT shares subject to outstanding options and the exercise
prices of such options. Therefore, the actual exchange ratio for the merger, the
aggregate value of the 2,077,000 MTS shares issued in the merger, and the
allocation of the aggregate merger consideration between DSPT stockholders and
optionholders could be affected by:
- increases or decreases in the market price of MTS common stock;
- exercises of DSPT options and their related exercise prices; and
- grants of additional DSPT options.
DSPT has agreed in the merger agreement that it will not grant options for
more than 28,000 shares prior to the closing of the merger.
OWNERSHIP OF MTS FOLLOWING THE MERGER
DSPT stockholders and optionholders will receive a total of 2,077,000 shares
of MTS common stock in the merger. Based on the number of shares of MTS common
stock outstanding on April 1, 1999, existing DSPT stockholders and optionholders
will own approximately 10% of MTS common stock after the merger.
4
<PAGE>
REASONS FOR THE MERGER (SEE PAGE 27)
MTS. The board of directors of MTS approved the merger based on a number of
factors including, among other things, the following:
- the merger will further MTS' commitment to customers to provide a broader
and more integrated analysis, simulation and testing process that will
enable customers to lower development costs and move products to market
faster;
- DSPT has unique expertise, technologies and customer recognition in the
market for test, analysis and validation of engine designs; and
- the combined firms would be a stronger force in the global powertrain
testing market because they complement each other in technology, customer
base and geographic presence.
DSPT. The board of directors of DSPT believes that the merger should result
in a number of benefits to DSPT and its stockholders including, among other
benefits, the following:
- the potential to obtain contracts for larger system integration projects
due to the lower perceived risk to customers as a result of the larger
relative size of the combined company compared to DSPT;
- the potential for increased sales to MTS' powertrain unit customers,
primarily as a result of combining the product lines of the powertrain
unit and DSPT to offer diesel customers broader test capabilities and
complementary product lines;
- the potential for increased sales of DSPT products to MTS powertrain
component test product customers;
- the opportunity for increased DSPT international sales, leveraging MTS'
international business;
- the potential for increased sales in the powertrain testing market as a
result of integrating MTS' noise and vibration capability into DSPT
products; and
- the greater liquidity and diversification of risk offered to DSPT
stockholders by an investment in MTS instead of DSPT.
DSPT'S RECOMMENDATION TO YOU (SEE PAGE 30)
The DSPT board of directors believes that the merger is fair to you and in
your best interests. The DSPT board of directors unanimously recommends that you
vote "FOR" adoption of the merger agreement and approval of the merger.
THE SPECIAL MEETING (SEE PAGE 19)
A special meeting of the stockholders of DSPT will be held on May 28, 1999,
at the offices of DSPT located at 48500 Kato Road, Fremont, California at 2:00
p.m. local time to consider and vote upon a proposal to adopt the merger
agreement and to approve the merger.
RECORD DATE AND VOTING POWER (SEE PAGE 19)
You are entitled to vote at the special meeting if you owned shares of DSPT
common stock on the close of business on April 15, 1999, the record date for the
special meeting. You will have one vote at the special meeting for each share of
DSPT common stock you owned on the record date. DSPT optionholders will not be
entitled to vote at the special meeting. There are 2,351,076 shares of DSPT
common stock entitled to be voted at the special meeting.
5
<PAGE>
REQUIRED VOTE (SEE PAGE 19)
The adoption of the merger agreement and approval of the merger requires the
affirmative vote of a majority of the shares of DSPT common stock outstanding on
the record date.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS (SEE PAGE 66)
The directors and executive officers of DSPT own approximately 8.1% of the
shares entitled to vote at the special meeting. All of them have agreed to vote
their shares for the adoption of the merger agreement and approval of the
merger.
EXCHANGE OF STOCK CERTIFICATES (SEE PAGE 20)
If you are a DSPT stockholder, you should not send in your stock
certificates now. After the merger is completed, MTS will send DSPT stockholders
and optionholders written instructions for receiving shares of MTS common stock
in exchange for their stock certificates and options. MTS shareholders will keep
their current certificates, and will continue to hold the same number of shares
of MTS common stock after the merger.
INTERESTS OF DSPT'S OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 35)
You should be aware that a number of DSPT's officers and directors have
employment contracts, stock options and severance packages that give them
interests in the merger that are different from other DSPT stockholders. In
addition, MTS will cause indemnification and insurance arrangements to be
maintained for the DSPT officers and directors.
COMPARATIVE PER COMMON SHARE MARKET PRICE INFORMATION (SEE PAGE 17)
MTS common stock is traded on the Nasdaq National Market under the symbol
"MTSC." On March 23, 1999, the last trading day before the announcement that MTS
and DSPT entered into the merger agreement, the closing sale price of MTS common
stock was reported at $10.313 per share. Following the merger, MTS common stock
will continue to be traded on the Nasdaq National Market under the symbol
"MTSC." On April 27, 1999, the closing sale price of MTS common stock was
reported at $11.50.
DSPT common stock is traded on the Nasdaq National Market under the symbol
"DSPT." On March 23, 1999, the last trading day before the announcement that MTS
and DSPT entered into the merger agreement, the closing sale price of DSPT
common stock was reported at $5.75 per share. On April 27, 1999, the closing
sale price of DSPT common stock was reported at $7.625. Following the merger,
DSPT common stock will cease to be traded on the Nasdaq National Market because
all of the outstanding shares of DSPT common stock will be converted into MTS
common stock.
TAX MATTERS (SEE PAGE 37)
The exchange of shares of DSPT common stock for shares of MTS common stock
in the merger will be tax-free to you for federal income tax purposes. You will,
however, have to pay taxes with respect to any cash received for any fractional
share. Your tax basis in the shares of MTS common stock that you will receive in
the merger will equal your current tax basis in your DSPT common stock. However,
your tax basis will be reduced by the basis allocated to any fractional share
interest for which you receive cash.
TREATMENT OF OPTIONS (SEE PAGE 36)
In the merger, unexercised options representing "net option shares" will be
exchanged for MTS common stock. DSPT intends to treat the conversion of
incentive stock options into MTS common stock as a deemed exercise of the
incentive stock options, resulting in income recognition for U.S. federal
alternative minimum tax purposes, but not for federal regular income tax
purposes. Withholding
6
<PAGE>
taxes will not be withheld with respect to the conversion of incentive stock
options into MTS common stock.
Holders of nonqualified stock options to acquire DSPT common stock who have
their unexercised options converted into MTS common stock will recognize
ordinary income for income tax purposes which will be reported on their 1999
Form W-2 (for employees) or Form 1099 (for former employees and independent
contractors), in an amount equal to the value of the MTS common stock on the
merger closing date. Withholding taxes will apply with respect to wage income
recognized by employees and former employees.
TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
ANTICIPATED ACCOUNTING TREATMENT (SEE PAGE 39)
The merger is expected to be accounted for as a "pooling of interests" for
financial accounting purposes.
FAIRNESS OPINION OF FINANCIAL ADVISOR (SEE PAGE 31)
In deciding to approve the merger, DSPT's board of directors considered the
opinion of its financial advisor as to the fairness of the merger to you from a
financial point of view. This opinion is attached as Appendix B to this proxy
statement/prospectus. We encourage you to read this opinion carefully.
DSPT's financial advisor performed several analyses in connection with
delivering its opinion. These analyses included comparing DSPT's and MTS'
historical stock prices, comparing DSPT and MTS to other publicly-traded
companies, and estimating the relative values and contributions of DSPT and MTS
based on past performance.
REGULATORY REQUIREMENTS (SEE PAGE 39)
We are prohibited by U.S. antitrust laws from completing the merger until
after we have furnished revenue and market information and materials to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and a required waiting period has ended. MTS and DSPT have each filed the
required notification and report forms with the Department of Justice and the
Federal Trade Commission, and the waiting period for those filings has not yet
expired. In letters dated April 20, 1999, the U.S. Department of Justice
requested that MTS and DSPT voluntarily supply information concerning the
merger. Both parties have supplied some of the requested information and expect
to supply further information on a voluntary basis. Assuming the Department of
Justice does not extend the waiting period, it will expire on May 6, 1999. After
the waiting period expires, the Department of Justice and the Federal Trade
Commission continue to have the authority to challenge the merger on antitrust
grounds before or after the merger is completed.
NO APPRAISAL RIGHTS (SEE PAGE 39)
DSPT is organized under Delaware law. Under Delaware law, stockholders of
DSPT have no rights to an appraisal of the value of their shares in connection
with the merger.
CONDITIONS TO THE MERGER (SEE PAGE 41)
MTS and DSPT will not complete the merger unless several conditions are
satisfied or waived, including the following:
- the adoption of the merger agreement and approval of the merger by the
DSPT stockholders;
7
<PAGE>
- the absence of any legal action making the merger illegal or prohibiting
the merger or that would materially limit the ability of MTS to own and
operate the assets and business of DSPT;
- the receipt of all material approvals and consents of third parties
necessary to consummate the merger;
- the receipt of all permits or other authorizations required by applicable
state securities laws for the MTS common stock to be issued in connection
with the merger;
- the expiration or termination of the applicable waiting period under
antitrust laws;
- the compliance by MTS and DSPT with their obligations under the merger
agreement and the representations and warranties made by MTS and DSPT,
respectively, in the merger agreement being true in all material respects;
- the delivery by counsel for each company of its tax and legal opinions to
the other company; and
- the delivery by the accounting firm for MTS of a letter stating that the
firm concurs with MTS management's conclusion that the merger may be
accounted for as a pooling of interests and delivery by the accounting
firm for DSPT of a letter stating that the firm is not aware of any fact
concerning DSPT that would preclude the merger from being treated as a
pooling of interests for financial accounting purposes.
LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS (SEE PAGE
46)
Subject to certain exceptions, DSPT has agreed not to pursue an alternative
transaction with another party while the merger is pending unless such party has
made a proposal to the DSPT board of directors for a superior transaction with
DSPT.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 47)
MTS and DSPT can agree by mutual written consent to terminate the merger
agreement at any time, whether before or after the receipt of stockholder
approval. In addition, either company can terminate the merger agreement under
various circumstances, including if:
- the merger is not completed on or before July 31, 1999;
- the merger is prohibited by a final court order;
- the stockholders of DSPT do not vote to approve the merger and adopt the
merger agreement;
- DSPT breaches its obligation not to pursue a business combination, the
board of directors recommends an alternative transaction, materially
modifies in a manner adverse to MTS, or withdraws its recommendation or
fails to recommend against acceptance of or takes no position regarding a
third party's tender offer or exchange offer;
- the DSPT board of directors authorizes DSPT to enter into a letter of
intent or a binding written agreement that constitutes a superior proposal
to the merger agreement with MTS and MTS does not make at least as
favorable as the proposal within ten days after notice an offer; or
- either party breaches its representations or obligations under the merger
agreement, subject to certain exceptions.
TERMINATION FEE (SEE PAGE 48)
In connection with the termination of the merger agreement under certain
circumstances, DSPT would be required to pay MTS a termination fee of $400,000.
8
<PAGE>
RISK FACTORS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF MTS
AND DSPT. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES,"
"BELIEVES," "FUTURE," "INTENDS," "ESTIMATES," "PREDICTS," "POTENTIAL," OR
"CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE
STATEMENTS ONLY REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES. ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF COMPETITION, TECHNOLOGICAL CHANGE AND THE RISKS
OUTLINED BELOW. THESE FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANY FORWARD-LOOKING STATEMENTS. WE ARE NOT UNDERTAKING ANY OBLIGATIONS TO UPDATE
ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS TO
REFLECT ANY FUTURE EVENTS OR DEVELOPMENTS.
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY DSPT STOCKHOLDERS IN
EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER. THESE
FACTORS SHOULD BE CONSIDERED ALONG WITH ANY ADDITIONAL RISK FACTORS IN DOCUMENTS
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS AND ANY OTHER
INFORMATION INCLUDED OR INCORPORATED BY REFERENCE, INCLUDING IN CONJUNCTION WITH
FORWARD-LOOKING STATEMENTS. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1.
RISKS RELATING TO THE MERGER
INTEGRATING THE TWO BUSINESSES MAY BE DIFFICULT TO ACHIEVE AND THIS MAY
ADVERSELY AFFECT OPERATIONS
After the merger, MTS and DSPT will have to integrate their operations. In
particular, DSPT's transportation group and MTS' Detroit-based powertrain unit
will be combined in DSPT's Ann Arbor, Michigan facility. The integration will
require significant efforts from each company, including the coordination of
their research and development and sales and marketing efforts. DSPT may find it
difficult to integrate the operations of the powertrain unit. DSPT personnel may
leave DSPT because of the merger. DSPT customers, distributors or suppliers may
terminate their arrangements with DSPT, or demand amended terms to those
arrangements. MTS management, including DSPT management who will become part of
the MTS management team, may have their attention diverted while trying to
integrate the two companies. Such diversion of management's attention or
difficulties in the transition process could have an adverse impact on the
combined operations. If MTS is not able to successfully integrate the operations
of DSPT, MTS' expectations for its future results of operations may not be met.
THE COMBINATION MAY FAIL TO ACHIEVE BENEFICIAL SYNERGIES
Achieving anticipated synergies and the potential benefits underlying the
two companies' reasons for the merger will depend on a number of factors, some
of which include:
- the risk that MTS' and DSPT's customers may defer purchasing decisions
following the announcement of the merger;
- the risk that it may be more difficult to retain DSPT's key management,
marketing and technical personnel after the merger;
- the ability of DSPT to timely develop and market new products and product
enhancements;
- the ability of the combined company to increase sales of DSPT's products;
- the ability of the combined company to increase sales of MTS' products;
- the competitive conditions in the engine and powertrain design and testing
markets; and
- DSPT's and MTS' completion of their Year 2000 efforts to ensure that the
products offered to their customers, as well as software, systems and
products received from suppliers and used internally, are Year 2000
compliant by December 31, 1999.
9
<PAGE>
There can be no assurance that the anticipated synergies will be achieved.
The failure to achieve such synergies could have a material adverse effect on
the business, results of operations and financial condition of the combined
company.
THE EXCHANGE RATIO, THE VALUE OF THE MERGER CONSIDERATION AND THE ALLOCATION OF
THE MERGER CONSIDERATION BETWEEN DSPT STOCKHOLDERS AND OPTIONHOLDERS WILL
FLUCTUATE PRIOR TO CLOSING
In the merger, MTS will issue a total of 2,077,000 shares of its common
stock in exchange for all outstanding shares of DSPT common stock and
outstanding options to purchase DSPT common stock. The holders of DSPT common
stock and the holders of options to purchase DSPT common stock will receive a
fraction of a share of MTS common stock, the exchange ratio, which will be
calculated based on the market price of MTS common stock, the number of
outstanding shares of DSPT common stock, the number of DSPT shares subject to
outstanding options and the exercise price of those options. The actual exchange
ratio will not be determined until the closing. Therefore, the actual exchange
ratio for the merger, the aggregate value of the 2,077,000 MTS shares to be
issued in the merger and the allocation of the aggregate merger consideration
between DSPT stockholders and optionholders could also be affected by:
- increases or decreases in the market price of MTS common stock;
- exercises of DSPT options and their related exercise prices; and
- grants of additional DSPT options.
See "Material Terms of the Merger Agreement--Merger Consideration" on page
40.
THE COSTS OF COMPLETING THE MERGER ARE SUBSTANTIAL AND MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS
MTS and DSPT estimate that they will incur aggregate, direct transaction
costs of approximately $1,300,000 associated with the merger, which will be
charged to operations in the quarter in which the merger is consummated. This
estimate primarily includes fees for investment bankers, attorneys, accountants,
financial printing and other related charges. In addition, it is expected that
the combined company will incur additional significant charges to operations
after the merger, estimated to be between $200,000 and $300,000 and which have
already been reserved for, to reflect costs of integrating the two companies.
These amounts are only preliminary estimates and are subject to change. Although
MTS expects that the elimination of duplicative expenses as well as other
efficiencies related to the integration of the businesses may offset the direct
transaction and integration expenses over time, it is possible that such a net
benefit will not be achieved in the near term or at all.
HOLDERS OF DSPT COMMON STOCK AND OPTIONS WILL HAVE DIFFERENT RIGHTS AS HOLDERS
OF MTS COMMON STOCK FOLLOWING THE MERGER
Following the merger, holders of DSPT common stock and options to purchase
DSPT common stock outstanding on the date of the merger will become holders of
MTS common stock. Certain differences exist between the rights of DSPT
stockholders under DSPT's certificate of incorporation, as amended, and DSPT's
bylaws and the rights of MTS shareholders under MTS' articles of incorporation,
as amended, and MTS' bylaws. See "Comparison of Rights of Holders of MTS Common
Stock and Holders of DSPT Common Stock" on page 66.
RISKS RELATING TO MTS' AND THE COMBINED COMPANY'S BUSINESS
MTS' COMMON STOCK PRICE IS EXPECTED TO CONTINUE TO BE VOLATILE
As with most technology stocks, MTS' stock price is based largely on current
expectations of sustained future revenue and earnings growth rates and has been
volatile during the past year. Any failure to meet expected revenue and earnings
levels in any period, or any negative change in perceived
10
<PAGE>
growth prospects of MTS after the merger, would likely have a significant
adverse effect on MTS' stock price.
MTS' BACKLOG AND QUARTERLY OPERATING RESULTS MAY BE VOLATILE
Possible significant volatility in both backlog and quarterly operating
results for the combined company after the merger may result with respect to
larger, individual fixed price orders currently being pursued by MTS and DSPT.
In addition, delays in realization of backlog orders may occur due to technical
difficulties, inability to obtain export licensing approval or delays in
customers' preparation of installations sites. Any downturn in backlog or timing
of orders would likely have a significant adverse effect on MTS' operating
results and earnings.
FAILURE TO ADAPT TO TECHNOLOGICAL CHANGE COULD HAVE AN ADVERSE EFFECT ON MTS'
REVENUES AND EARNINGS
If MTS is not able to keep pace with technological change in the industries
in which it competes, its revenues and earnings would be adversely effected. MTS
operates in a highly competitive industry characterized by rapid technological
change. MTS' ability to compete effectively and its growth prospects depend upon
many factors, including the success of its existing products and services and
the timely introduction and commercial acceptance of future products and
services, as well as its ability to introduce new products and to enhance its
existing products with features that meet changing end user requirements.
EXPORT AND IMPORT CONTROLS COULD HAVE AN ADVERSE EFFECT ON ORDERS FOR MTS
PRODUCTS
Export controls imposed by the U.S. government and import controls imposed
by foreign governments may cause delays in shipments or rejection of orders by
MTS. Delays or rejection could cause material fluctuations in operating results
and earnings.
WEAK ECONOMIC CONDITIONS ABROAD COULD HAVE AN ADVERSE EFFECT ON MTS' RESULTS
MTS' operating and financial results could be significantly adversely
impacted by changes in foreign currency exchange rates and sluggish regional
economic conditions, particularly in Europe and the Pacific Rim.
YEAR 2000 PROBLEMS COULD RESULT IN A LOSS OF CUSTOMERS
The impact of Year 2000 issues on future MTS revenues is difficult to
assess, but is a risk that should be considered in evaluating MTS' future growth
potential. MTS believes the current versions of its products are Year 2000
compliant. MTS has been informed by DSPT that current versions of DSPT's
products are Year 2000 compliant. MTS does not intend to make all prior versions
of its products Year 2000 compliant and has notified its customers as to which
versions will and will not be Year 2000 compliant. MTS believes that its
internal information systems are Year 2000 compliant and does not expect
material liabilities or operational difficulties with respect to such systems,
although any material failure of such systems could have a material adverse
effect on MTS' operating results and earnings. See "Information With Respect to
DSPT--Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 56 and MTS' annual report on Form 10-K for the fiscal year
ended September 30, 1998 incorporated by reference in this proxy
statement/prospectus.
DSPT NEEDS TO DEVELOP AND MANAGE ITS SYSTEMS INTEGRATION SERVICES
DSPT believes that the successful marketing and expansion of its
transportation products will be increasingly dependent on its ability to offer
systems integration services. Success depends on DSPT's ability to attract and
retain qualified technical personnel, market acceptance of these services,
timing of service revenues, and the ability to manage customer projects
profitably. The successful management of these projects depends on the timely
availability and quality of key products, the availability of key
11
<PAGE>
personnel, the ability to integrate different products from a variety of vendors
effectively, and the management of difficult scheduling and delivery problems.
Most of DSPT's systems integration projects use fixed price contracts. The
pricing of fixed price contracts requires accurate cost estimates in order to be
profitable.
DSPT'S QUARTERLY RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY
FLUCTUATE SIGNIFICANTLY IN THE FUTURE
DSPT's quarterly operating results have varied significantly depending on a
number of factors. These factors include:
- timing of receipt of system orders from and shipments to major customers;
- variations in product mix and component costs;
- economic conditions prevailing within geographic markets and in the
worldwide transportation industry;
- market acceptance of new products and services;
- timing and levels of operating expenditures;
- exchange rate fluctuations;
- DSPT's sales being concentrated in only a few customers; and
- DSPT's net sales being sporadic and typically generated in the last month
of the quarter.
DSPT IS HIGHLY DEPENDENT ON ITS SALES OVERSEAS
A significant part of DSPT's revenue growth in the past few years has been
due to increases in DSPT's international sales, particularly in Western Europe
and Asia. International sales accounted for approximately 20%, 35% and 32% of
net sales in fiscals 1999, 1998 and 1997, respectively. DSPT's international
sales are subject to the following risks:
- political and economic changes and disruptions;
- foreign regulation;
- tariffs or other barriers; and
- exchange rate fluctuations.
DSPT PURCHASES SEVERAL KEY COMPONENTS FROM LIMITED SOURCES AND SALES COULD BE
LOST OR DELAYED IF THESE COMPONENTS ARE UNAVAILABLE
DSPT currently purchases several key components used in the manufacture of
its products from a single or limited sources and is dependent on supply from
these sources to meet DSPT's needs. DSPT may encounter shortages and delays in
obtaining such components in the future. Shortages and delays could have an
adverse effect on DSPT's ability to meet customer orders and could result in
lost or delayed sales and revenues.
12
<PAGE>
MTS SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
information for MTS for each of the fiscal years ended September 30, 1994
through 1998 and for the unaudited three months ended December 31, 1997 and
1998. The information has been derived from MTS' consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants for each of the fiscal years ended September 30, 1994 through 1998.
For additional information regarding plans and objectives of management for
future operations and financial condition and results of operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in MTS' annual report on Form 10-K for the fiscal year
ended September 30, 1998 and its quarterly report on Form 10-Q for the quarter
ended December 31, 1998 incorporated by reference in this proxy
statement/prospectus. The information set forth below has been derived from and
is qualified by reference to and should be read in conjunction with the
consolidated financial statements and related notes included in MTS' annual
report on Form 10-K for the fiscal year ended September 30, 1998 and its
quarterly report on Form 10-Q for the quarter ended December 31, 1998
incorporated by reference in this proxy statement/prospectus.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED DECEMBER 31,
---------------------------------------------------------- ----------------------
1998 1997 1996 1995 1994 1998 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA (FOR THE
PERIOD):
Net revenues...................... $ 339,682 $ 303,480 $ 261,029 $ 234,131 $ 200,550 $ 87,733 $ 73,938
Income from operations............ $ 33,275 $ 30,865 $ 22,888 $ 16,764 $ 14,162 $ 5,915 $ 8,124
Net income........................ $ 20,766 $ 20,863(1) $ 14,109 $ 10,461 $ 8,659 $ 2,827 $ 4,312
Net income per share, basic
basis........................... $ 1.13 $ 1.15(1) $ 0.76 $ 0.58 $ 0.47 $ 0.15 $ 0.24
Shares used in computing net
income per share, basic basis... 18,441 18,207 18,669 18,116 18,313 18,594 18,290
Net income per share, diluted
basis........................... $ 1.08 $ 1.10(1) $ 0.74 $ 0.58 $ 0.46 $ 0.15 $ 0.22
Shares used in computing net
income per share, diluted
basis........................... 19,252 18,956 19,106 18,180 18,672 19,095 19,260
Dividends declared................ $ 4,429 $ 3,645 $ 2,991 $ 2,523 $ 2,558 $ 1,116 $ 1,099
Dividend declared per share....... $ 0.24 $ 0.20 $ 0.16 $ 0.14 $ 0.14 $ 0.06 $ 0.06
BALANCE SHEET DATA (AT PERIOD END):
Working capital................... $ 88,379 $ 73,326 $ 69,548 $ 64,575 $ 56,845 $ 90,051 $ 73,329
Total assets...................... $ 298,448 $ 216,132 $ 187,396 $ 189,500 $ 175,708 $ 303,836 $ 224,220
Interest bearing debt............. $ 74,682 $ 12,865 $ 11,836 $ 22,965 $ 23,851 $ 70,427 $ 22,649
Shareholders' investment.......... $ 143,036 $ 124,619 $ 112,814 $ 106,677 $ 100,046 $ 146,289 $ 126,957
</TABLE>
- ------------------------
(1) Includes an after-tax gain of $2,654,000 from sale of land in May 1997,
which is equal to $.14 per share.
13
<PAGE>
DSPT SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected historical financial data for DSPT
derived from the audited financial statements of DSPT is qualified by reference
to and should be read in conjunction with "Information With Respect to
DSPT--Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes,
included elsewhere in this proxy statement/prospectus.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA (FOR THE YEAR):
Net sales................................................ $ 25,396 $ 22,038 $ 17,987 $ 15,538 $ 12,977
Operating income......................................... 2,277 2,543 1,234 1,956 1,416
Net income............................................... 1,582 1,646 914 1,277 874
Net income per common share (basic)...................... .70 .74 .42 .60 .42
Weighted average shares used
in computing basic net income per share................ 2,253 2,211 2,168 2,131 2,079
Net income per common share (diluted).................... .64 .68 .40 .55 .40
Weighted average shares and equivalents used in computing
diluted net income per share........................... 2,479 2,437 2,304 2,331 2,189
BALANCE SHEET DATA (AT YEAR END):
Working capital.......................................... $ 8,276 $ 8,173 $ 5,726 $ 5,472 $ 4,190
Total assets............................................. 17,068 16,730 11,799 10,294 8,744
Long-term obligations.................................... -- -- -- -- --
Stockholders' equity..................................... 12,016 10,657 8,687 7,698 6,268
</TABLE>
14
<PAGE>
MARKET PRICE DATA AND DIVIDEND POLICY
MTS common stock and DSPT common stock are included in the National
Association of Securities Dealers Automated Quotations System and designated on
the Nasdaq National Market under the symbols "MTSC" and "DSPT" respectively.
This table sets forth, for the calendar quarters indicated, the range of high
and low per share sales prices for MTS common stock and DSPT common stock as
reported by Nasdaq. The per share price of MTS reflects two stock splits and
related retroactive restatements by quarter. For market price information for
DSPT common stock on a fiscal quarter basis, see page 55.
<TABLE>
<CAPTION>
MTSC DSPT
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996
First Quarter........................................................ $ 9.688 $ 7.000 $ 7.250 $ 4.250
Second Quarter....................................................... 11.250 8.750 6.750 5.125
Third Quarter........................................................ 10.750 9.250 6.125 4.750
Fourth Quarter....................................................... 10.750 9.625 5.376 4.250
1997
First Quarter........................................................ 11.313 9.750 6.625 4.625
Second Quarter....................................................... 15.250 10.250 6.125 5.375
Third Quarter........................................................ 19.625 14.375 11.875 4.875
Fourth Quarter....................................................... 20.000 17.375 11.750 8.000
1998
First Quarter........................................................ 19.000 13.500 10.750 7.375
Second Quarter....................................................... 19.250 15.500 10.750 7.250
Third Quarter........................................................ 17.750 11.563 10.125 6.250
Fourth Quarter....................................................... 15.438 10.875 8.250 5.250
1999
First Quarter........................................................ 14.375 9.625 7.813 5.625
Second Quarter (through April 27, 1999).............................. 13.188 10.875 8.000 7.438
</TABLE>
The following table sets forth the closing per share sales price of MTS
common stock and DSPT common stock, as reported on Nasdaq, and the estimated
equivalent per share price, as explained below, of DSPT common stock on March
23, 1999, the last trading day before the public announcement of the proposed
merger, and on April 27, 1999:
<TABLE>
<CAPTION>
DSPT ESTIMATED EQUIVALENT
DATE MTS COMMON STOCK DSPT COMMON STOCK PER SHARE PRICE
- ---------------------------------------- ------------------ ------------------- ---------------------------------
<S> <C> <C> <C>
March 23, 1999.......................... $ 10.313 $ 5.75 $ 8.62
April 27, 1999.......................... $ 11.50 $ 7.625 $ 9.39
</TABLE>
The estimated equivalent per share price of a share of DSPT common stock
based on MTS share price of $10.313 equals an assumed exchange ratio of 0.8355
multiplied by the price of a share of MTS common stock. If the merger had
occurred on April 27, 1999, you would have received a fraction of a share of MTS
common stock worth approximately $9.39 per share for each share of DSPT common
stock you owned. The actual equivalent per share price of a share of DSPT common
stock that you will receive if the merger closes may be different from this
price because the actual exchange ratio will not be determined until closing and
because the per share price of MTS common stock on the Nasdaq National Market
fluctuates continuously.
Following the merger, MTS common stock will continue to be quoted on the
Nasdaq National Market, and there will be no further market for the DSPT common
stock.
15
<PAGE>
MTS' dividend policy is to maintain a payout ratio which allows dividends to
increase with the long-term growth of earnings per share, while sustaining
dividends in down years. MTS' dividend payout ratio target is approximately 25%
of earnings per share. The current quarterly dividend of $0.06 per share equates
to 26% of MTS' fiscal 1996 through fiscal 1998 average net earnings per share.
DSPT has never declared or paid a dividend. DSPT's policy is to retain
earnings for use in its business.
16
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are the net income and book value per common share data for
MTS on a historical basis and on a combined pro forma basis, and certain
equivalent pro forma per share data for DSPT. The MTS combined pro forma data
was derived by combining historical consolidated financial information of MTS
and DSPT using the pooling of interests method of accounting for business
combinations. The equivalent combined pro forma per share data for DSPT was
calculated by multiplying the MTS combined pro forma per common share data by an
assumed exchange ratio of .8037. The equivalent historical per common share data
for DSPT was calculated by dividing the DSPT historical per common share data by
.8037.
The information in the table below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes of MTS and DSPT either incorporated by reference in this proxy
statement/prospectus or included elsewhere in this proxy statement/ prospectus.
MTS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED DECEMBER
31,
--------------------------------- ---------------
1998 1997(1) 1996 1998
--------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations
Basic................................................................ $ 1.13 $ 1.15 $ 0.76 $ 0.15
Diluted.............................................................. $ 1.08 $ 1.10 $ 0.74 $ 0.15
Dividends Declared................................................... $ 0.24 $ 0.20 $ 0.16 $ 0.06
Book Value............................................................. $ 7.70 N/A N/A $ 7.86
COMBINED PRO FORMA PER COMMON SHARE DATA:
Income from continuing operations
Basic................................................................ $ 1.05 $ 1.08 $ 0.73 $ 0.18
Diluted.............................................................. $ 1.01 $ 1.04 $ 0.72 $ 0.18
Book Value............................................................. $ 7.39 N/A N/A $ 7.60
</TABLE>
- ------------------------
(1) Includes an after-tax gain of $2,654,000 from sale of land in May 1997.
17
<PAGE>
DSPT
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, ADJUSTED THREE
ADJUSTED YEAR MONTHS ENDED
ENDED SEPTEMBER ------------------------ DECEMBER 31,
30, 1998 1997 1996 1998
--------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
EQUIVALENT HISTORICAL PER COMMON SHARE DATA:
Income from continuing operations
Basic......................................................... $ 0.43 $ 0.52 $ 0.75 $ 0.50
Diluted....................................................... $ 0.38 $ 0.49 $ 0.68 $ 0.46
Book Value...................................................... $ 5.34 N/A N/A $ 6.07
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED DECEMBER
31,
--------------------------------- ---------------
1998 1997(1) 1996 1998
--------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
EQUIVALENT COMBINED PRO FORMA COMMON SHARE DATA:
Income from continuing operations
Basic............................................................... $ 0.84 $ 0.87 $ 0.59 $ 0.14
Diluted............................................................. $ 0.81 $ 0.84 $ 0.58 $ 0.14
Book Value............................................................ $ 5.94 N/A N/A $ 6.11
</TABLE>
- ------------------------
(1) Includes an after-tax gain of $2,654,000 from sale of land in May 1997.
18
<PAGE>
THE DSPT SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The DSP Technology Inc. special meeting will be held at DSPT's offices
located at 48500 Kato Road, Fremont, California, on Friday, May 28, 1999 at 2:00
p.m. local time.
PURPOSE OF THE DSPT SPECIAL MEETING
The purpose of the DSPT special meeting is to approve and adopt the merger
agreement and the merger. DSPT stockholders may also consider and vote upon such
other matters as may properly come before the DSPT special meeting or any
adjournments or postponements of the meeting.
RECORD DATE AND OUTSTANDING SHARES
The DSPT board of directors has fixed April 15, 1999 as the record date for
the DSPT special meeting. Only stockholders of record of DSPT common stock on
the record date are entitled to notice of, and to vote at, the DSPT special
meeting. As of the record date, there were 90 stockholders of record holding an
aggregate of 2,351,076 shares of DSPT common stock. Except for the stockholders
identified under "Information with Respect to DSPT--Principal Stockholders" on
page 61, to the knowledge of DSPT, no other person beneficially owned more than
5% of the outstanding DSPT common stock as of the record date.
This proxy statement/prospectus was mailed to all DSPT stockholders of
record as of the record date and constitutes notice of the DSPT special meeting
in conformity with the requirements of the Delaware General Corporation Law.
VOTING OF PROXIES
All properly executed proxies that are not revoked will be voted at the DSPT
special meeting in accordance with the instructions contained in the proxy. If a
stockholder signs and returns a proxy without indicating any voting
instructions, the shares of DSPT common stock that the proxy represents will be
voted "FOR" the proposal to adopt and approve the merger agreement and approve
the merger under the recommendation of the DSPT board of directors or "FOR"
adjournment or postponement of the DSPT special meeting if an adjournment or
postponement, in the discretion of the proxy holders, is determined to be
necessary or desirable. A stockholder who has executed and returned a proxy may
revoke it at any time before it is voted at the DSPT special meeting by:
- executing and returning a proxy bearing a later date;
- filing written notice of such revocation with the secretary of DSPT
stating that the proxy is being revoked; or
- attending the DSPT special meeting and voting in person.
All written notices of revocation and other communications with respect to
revocation of DSPT proxies should be sent to: DSP Technology Inc., 48500 Kato
Road, Fremont, CA 94538, Attention: Secretary. Attendance at the DSPT special
meeting, in and of itself, will not constitute a revocation of a proxy.
VOTE REQUIRED
Adoption and approval of the merger agreement and approval of the merger
require the affirmative vote of holders of a majority of the shares of DSPT
common stock outstanding as of the record date. Each stockholder of record of
DSPT common stock on the record date is entitled to cast
19
<PAGE>
one vote per share, exercisable in person or by properly executed proxy, on each
matter properly submitted for the vote of the stockholders of DSPT at the DSPT
special meeting.
At the record date for the special meeting, the directors and executive
officers of DSPT owned approximately 8.1% of the outstanding shares of DSPT
common stock entitled to vote at such meeting. All of them have agreed to vote
their shares for the adoption of the merger agreement and approval of the
merger.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of DSPT common stock entitled to vote at the
DSPT special meeting is necessary to constitute a quorum. Abstentions will be
counted for purposes of determining a quorum, but will have the effect of a vote
against approval of the matters being voted upon. If a broker holding shares in
street name returns an executed proxy that indicates that the broker does not
have discretionary authority as to those shares to vote on one or more matters,
those shares will be considered represented at the DSPT special meeting for
purposes of determining a quorum, but will have the effect of a vote against
approval of the matters being voted upon.
SOLICITATION OF PROXIES; EXPENSES
DSPT will bear the cost of the solicitation of proxies and all related
costs. In addition, DSPT may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Certain directors, officers or
other employees of DSPT may supplement original solicitation of proxies by mail
with telephone, facsimile or personal solicitation, without payment of
additional compensation. DSPT has engaged the services of Mackenzie Partners,
Inc. to distribute proxy solicitation materials to brokers, banks and other
nominees and to assist in the solicitation of proxies from DSPT stockholders for
a fee of approximately $5,000 plus reasonable out-of-pocket expenses.
EXCHANGE OF STOCK CERTIFICATES
If you are a DSPT stockholder, you should not send in your stock
certificates now. After the merger is completed, MTS will send DSPT stockholders
and optionholders written instructions for receiving shares of MTS common stock
in exchange for their stock certificates and options. MTS stockholders will keep
their current certificates, and will continue to hold the same number of shares
of MTS common stock after the merger.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the DSPT board of
directors does not know of any business to be presented at the special meeting
other than as set forth in the notice accompanying this proxy
statement/prospectus. If any other matters should properly come before the
special meeting, it is intended that the shares represented by proxies will be
voted with respect to such matters in accordance with the judgment of the
persons voting such proxies.
20
<PAGE>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
The terms and conditions of the merger agreement and the merger are the
result of arms' length negotiations between representatives of MTS and
representatives of DSPT. A summary of those negotiations follows:
During late 1997 and throughout 1998, the DSPT board considered various
strategic relationships and other alternatives to increase stockholder value. On
August 17, 1998, the DSPT board of directors approved the engagement of Douglas
Hajjar, an experienced financial advisor, to assist the board in evaluating
DSPT's strategic alternatives.
In August of 1998, MTS identified DSPT as a possible acquisition candidate
in connection with MTS' product line extension strategy. MTS concluded that
DSPT's transportation group products would constitute a strategic extension of
MTS' existing powertrain product line.
On October 22, 1998, Mr. Troutman, President and Chief Executive Officer of
DSPT, received a letter dated October 15, 1998 from Hal Galvin, MTS' Vice
President, Corporate Business Development, proposing a strategic business
combination between the two companies. On October 26, 1998, after conferring
with Gray Cary Ware & Freidenrich LLP, DSPT's outside legal counsel, DSPT's
financial advisor, Mr. Hajjar, and the individual DSPT directors, Mr. Troutman
advised Mr. Galvin that DSPT could not respond to MTS without a specific
proposal, that DSPT was executing on its strategic plan, and that its current
stock price did not reflect DSPT's value. Mr. Galvin expressed MTS' interest in
engaging in a dialogue with DSPT about a possible strategic business
combination, but no specific proposal was advanced. Mr. Galvin invited Mr.
Troutman to visit MTS headquarters to permit representatives of the two
companies to learn more about each other's business and possible synergies from
a strategic business combination.
In a regularly scheduled meeting of the DSPT board of directors on November
16, 1998 at Webers Inn, Ann Arbor, Michigan, at which all DSPT directors were
present, Mr. Troutman reviewed with the DSPT board his conversation with Mr.
Galvin and possible risks and benefits of a strategic business combination with
MTS. The board of directors authorized Mr. Troutman to explore a possible
relationship with MTS and to consider other possible strategic alternatives.
Mr. Troutman visited MTS headquarters on November 19, 1998, and met with Dr.
Sidney W. Emery, Jr., Chairman and Chief Executive Officer of MTS, Keith Zell,
Executive Vice President of MTS, Steven Cohoon, MTS Vice President of Vehicle
Dynamics Division, and Hal Galvin. The representatives of the two companies
discussed their respective businesses and possible synergies which might be
achieved in a strategic business combination.
At a regularly scheduled meeting of DSPT's board of directors at Clubsport,
Fremont, California, on December 4, 1998 at which all directors were present,
Mr. Troutman updated the board on various strategic alternatives, including his
meeting at MTS. The directors discussed publicly available information
concerning MTS and other possible strategic alternatives.
On December 7, 1998, in a telephone conversation between Mr. Galvin and Mr.
Troutman, Mr. Galvin expressed MTS' continuing interest in a possible business
combination between the two companies, but no specific terms were discussed. On
December 21, 1998, Mr. Galvin advised Mr. Troutman in a telephone conversation
that MTS was interested in a business combination and the two had preliminary
discussions regarding possible structures and valuation. On December 22, 1998,
Mr. Troutman advised Mr. Galvin in a telephone conversation that the DSPT board
would consider, in early January, the possibility of a business combination with
MTS, but that the preliminary sense of individual directors was that while the
strategic fit between the companies appeared promising, MTS' proposed valuation
range was too low.
21
<PAGE>
In a January 5, 1999 telephone meeting of the DSPT board of directors at
which all DSPT directors were present, Mr. Troutman updated the board regarding
the late December 1998 contact by MTS. The directors reviewed DSPT's strategic
direction, business and synergies, as well as its prospects and risks in
achieving the operating plan. The directors also considered other strategic
alternatives, and DSPT's obligations to notify FEV Motorentechnik GmbH, DSPT's
strategic alliance partner, of certain offers constituting a transfer of
control. The DSPT board instructed Mr. Troutman and Mr. Hajjar to continue
discussions with MTS to determine if an acceptable offer would likely be
forthcoming.
From January 6, 1999 through January 8, 1999, Messrs. Troutman and Galvin
exchanged information concerning capitalization and possible structures for a
strategic business combination. From January 8, 1999 through January 18, 1999,
the parties reviewed publicly available information concerning the respective
companies.
On Monday, January 18, 1999, at a regularly scheduled meeting of the DSPT
board of directors at Clubsport, Fremont, California, at which all directors and
outside legal counsel were present, Mr. Troutman updated the directors on
discussions with MTS. At that same meeting, the board of directors approved a
transition plan for DSPT under which DSPT's principal executive offices and
transportation group would be consolidated in Ann Arbor, Michigan. DSPT
announced the planned consolidation and an estimate of an associated accounting
charge in a press release on January 21, 1999. On the same date, following the
announcement of the consolidation, Mr. Troutman advised Mr. Galvin of the
announcement. Mr. Galvin reviewed with Mr. Troutman MTS' current proposal on
valuation and structure.
At a telephonic meeting of the DSPT board of directors on January 21, 1999
at which all DSPT directors and outside legal counsel were present, Mr. Troutman
reviewed his discussions with Mr. Galvin, including MTS' initial proposal on
valuation, with the board. The board of directors considered advice from DSPT's
financial advisor, Mr. Hajjar, and DSPT's outside counsel and discussed
strategies for further discussions with MTS. The board of directors also
instructed Mr. Troutman to advise DSPT's strategic alliance partner, FEV, that a
transaction by a third party to acquire DSPT might be proposed in the near term
and determine FEV's possible interest in a strategic business combination with
DSPT. The directors considered the tax effects of a cash transaction, which the
directors believed would be the most likely proposal by FEV.
On January 22, 1999, Mr. Troutman advised Professor Franz Pischinger,
President and Chief Executive Officer of FEV, that DSPT had been approached by a
possible acquiror and that an acquisition proposal might be forthcoming in the
near term. Professor Pischinger advised Mr. Troutman that he would consider
FEV's possible interest in acquiring DSPT.
In a telephone conversation on January 25, 1999, Mr. Troutman, Mr. Hajjar
and Mr. Galvin discussed possible valuations and structure. However, no
agreement was reached.
At a telephonic meeting of the DSPT board of directors on January 25, 1999
at which all DSPT directors were present, Mr. Troutman and Mr. Hajjar summarized
the parties' discussions regarding structure and valuation, the treatment of
options, the possible accounting treatment for a proposed transaction, and
business conditions expected for DSPT in 1999. The board of directors authorized
Mr. Troutman and Mr. Hajjar to pursue negotiations with MTS to determine if a
transaction on acceptable terms to DSPT was possible. Later on January 25, 1999,
Messrs. Troutman, Hajjar and Galvin discussed possible synergies in a business
combination between the two companies, as well as the parties' respective views
on valuation and structure, but no agreement on valuation or structure was
reached.
On January 26, 1999, the MTS board of directors considered a presentation by
MTS management regarding a possible acquisition of DSPT. The MTS board
authorized management to continue discussions regarding a possible acquisition
of DSPT.
22
<PAGE>
On January 27, 1999, Mr. Galvin advised Mr. Troutman that the proposed
business combination had been discussed at the MTS board of directors meeting,
but that no valuation or terms had been approved.
At a telephonic meeting of the DSPT board of directors on January 28, 1999
at which all DSPT directors were present, Mr. Troutman and Mr. Hajjar reviewed
the parties' discussions regarding valuation and the DSPT board of directors
discussed strategies for further discussions regarding valuation and deal
structure. The board then authorized Messrs. Troutman and Hajjar to have further
discussions with MTS representatives.
Later on January 28, 1999, Messrs. Troutman, Hajjar, Galvin, and Robert
Clobes, Controller of MTS, had a telephone conversation regarding valuation and
structure. The parties agreed that a transaction would be proposed as a tax-free
stock-for-stock exchange, accounted for as a pooling of interests. Messrs.
Galvin and Clobes advised that no DSPT stock options would be assumed, and that
MTS would provide a fixed number of shares of MTS common stock representing a
valuation proposed by MTS. The parties discussed the possibility of a "collar,"
pursuant to which if the MTS stock price went above or below agreed upon prices
the parties would have a right to renegotiate. Messrs. Troutman and Hajjar
advised that DSPT intended to provide for the outstanding options by a cashless
exercise if an agreement on valuation and structure could be reached. The
parties discussed a possible due diligence process. Mr. Galvin advised that MTS
would not proceed without a letter of intent that contained a binding "no shop"
provision, under which DSPT would be restricted from seeking alternative
transactions. He also indicated that the valuation proposed by MTS was MTS' best
and final offer.
At a telephonic meeting of the DSPT board of directors on January 29, 1999
at which all DSPT directors and outside legal counsel were present, Messrs.
Troutman and Hajjar reviewed MTS' oral proposal, including the proposed
valuation and the fixed share amount, subject to a collar to be negotiated, and
reviewed the parties' negotiation on valuation and structure. Messrs. Troutman
and Hajjar advised that MTS' proposal on valuation was represented as MTS' best
and final offer. Outside legal counsel reviewed with the directors their
fiduciary duties in considering an acquisition proposal, including their duties
in considering a "no shop" agreement. The board of directors discussed the
cashless exercise of options and its effect on merger consideration per common
share and net option share. The board of directors also considered the effect of
a "collar" on the value to DSPT stockholders and the risks of a collar. The
directors also reviewed with counsel DSPT's obligations under the strategic
alliance agreement with FEV and the notice required if DSPT were to receive a
"serious, credible offer" for a transfer of control transaction. Counsel advised
on the possible adverse effects of a transfer of control involving a
"competitor" of FEV as such term was used in the strategic alliance agreement.
The board of directors concluded that MTS was not a "competitor" of FEV under
that agreement. The board of directors then reviewed other strategic
alternatives. After this review, the DSPT board of directors instructed Mr.
Troutman to advise FEV that DSPT expected an offer which would result in a
transfer of control in the next few days in the form of a nonbinding letter of
intent, while not revealing the identity of the possible offeror.
On February 1, 1999, Mr. Troutman advised Professor Pischinger and Dr.
Schaffrath, Executive Vice President of FEV, that DSPT expected a nonbinding
letter of intent with an offer in the next few days, and that the offeror was
not a "competitor" of FEV as such term was defined in the strategic alliance
agreement between DSPT and FEV. Mr. Troutman did not identify the possible
acquiror. Professor Pischinger indicated that FEV was not in a position to make
an offer to purchase DSPT.
At a telephonic meeting of the DSPT board of directors on February 1, 1999
at which all DSPT directors were present, outside legal counsel reviewed a
memorandum regarding the fiduciary duties of the board in considering an
acquisition proposal. Messrs. Troutman and Millares, DSPT's Chief Financial
Officer, reviewed the accounting treatment for the proposed acquisition and the
consequences
23
<PAGE>
of treatment of options with DSPT's independent accountants. Mr. Troutman
reviewed his conversation with FEV representatives. The directors reviewed
financial information concerning MTS and the trading prices for MTS common
stock. The board of directors discussed with counsel the advisability of a
fairness opinion in connection with any binding agreement on valuation and the
board of directors requested that Mr. Hajjar identify investment bankers who
might be willing to serve in such an engagement. The board of directors
discussed the possible effect of a "collar" on the valuation to stockholders.
The board of directors discussed business and legal due diligence with counsel,
management and the board's financial advisor. The board also discussed the
relative liquidity and volatility of MTS common stock and DSPT common stock,
relative trading volumes and analyst coverage and DSPT's growth prospects. The
board of directors authorized management to continue discussions with MTS.
Later on February 1, 1999, Mr. Galvin advised Messrs. Troutman and Hajjar in
a telephone conversation that a nonbinding letter of intent was being prepared.
The representatives discussed a possible due diligence process.
On February 2, 1999, MTS released its quarterly results for the quarter
ended December 31, 1998. On February 2 and February 3, 1999, representatives of
DSPT and MTS discussed MTS' proposal for a collar around an agreed upon
valuation, which would operate to adjust the number of MTS shares to be issued
in the merger depending on the MTS stock price on closing. No agreement was
reached on the proposal. Later on February 3, 1999, MTS faxed a nonbinding
letter of intent to Mr. Troutman.
At a telephonic meeting of the DSPT board of directors on February 3, 1999
at which all DSPT directors and outside legal counsel were present, management,
outside legal counsel and Mr. Hajjar provided a preliminary review of the terms
of the nonbinding letter of intent to the directors. Messrs. Troutman and Hajjar
reviewed the representative's recent negotiations on valuation and the "collar,"
and the financial terms proposed in the letter, as well as the proposed
treatment of stock options. The board of directors discussed the effect of the
proposed collar, as well as the termination, "no shop" and breakup fee
provisions. The board of directors directed management and outside legal counsel
to negotiate the terms of the letter of intent.
On February 3, 1999, DSPT and MTS entered into a mutual nondisclosure and
standstill agreement under which each company agreed not to disclose
confidential information that it had learned about the other and not to take any
action to acquire capital stock of the other party for a period of one year
without the prior consent of the other party.
On February 4, 1999, at a telephonic meeting of the DSPT board of directors
at which all directors and outside legal counsel were present, outside legal
counsel and Mr. Hajjar reviewed with the board of directors in detail the terms
of the proposed letter of intent. The board of directors discussed the possible
engagement of Hambrecht & Quist LLC to provide a fairness opinion on the
transaction. On February 6, 1999, DSPT provided comments to MTS regarding the
proposed letter of intent.
Also on February 6, 1999, DSPT notified FEV of the receipt of the letter of
intent, identifying MTS as the offeror, providing the proposed financial terms
of the transaction, noting that DSPT intended to negotiate the terms and
advising that MTS was not a "competitor" of FEV under the strategic alliance
agreement. DSPT also notified MTS on that same date of certain provisions of the
strategic alliance agreement relating to transfers of control. Each notice was
made as required by the strategic alliance agreement. On that same date in
response to the notice, Professor Pischinger called to discuss the transaction
with Mr. Troutman and advised Mr. Troutman that FEV considered MTS a
"competitor" under the strategic alliance agreement.
On February 8, 1999, representatives of MTS and DSPT, together with their
respective outside counsel, negotiated the terms of the proposed nonbinding
letter of intent.
24
<PAGE>
On February 8, 1999, at a telephonic meeting of the DSPT board of directors
at which all DSPT directors and outside legal counsel were present, outside
legal counsel and Mr. Hajjar reviewed with the board of directors the results of
the representatives' negotiations on the nonbinding letter of intent. The DSPT
board of directors authorized the officers to enter into the nonbinding letter
of intent on substantially the terms presented. On February 9, 1999, MTS and
DSPT entered into a nonbinding letter of intent.
Also on February 9, 1999, Professor Pischinger and Dr. Schaffrath advised
Mr. Troutman that Professor Pischinger had discussed the strategic alliance
agreement with Dr. Emery of MTS and believed that MTS was a "competitor" under
the strategic alliance agreement. Following this conversation, representatives
of DSPT and FEV continued to discuss the issue. On February 12, 1999, Professor
Pischinger telecopied a formal written request that MTS be added to the
"competitor list" under the strategic alliance agreement. After consultation
with outside legal counsel, on February 12, 1999, Mr. Troutman responded in
writing and by telephone to FEV indicating that DSPT did not agree that MTS was
a competitor of FEV.
On February 10, 1999, MTS and DSPT made due diligence requests of each
other. From February 11, 1999 through the date of signing the definitive
acquisition agreement, representatives of MTS and DSPT conducted due diligence
investigations of each other's businesses.
On February 11, 1999, DSPT engaged Hambrecht & Quist LLC to advise on the
fairness of the merger to DSPT stockholders from a financial point of view.
On February 14, 1999, FEV again asserted in writing that MTS was a
"competitor" of FEV under the agreement, but proposed that a business resolution
was possible. Representatives of DSPT and FEV discussed possible business
resolutions to FEV's concerns through February 19, 1999.
On February 17, 1999, outside legal counsel for MTS delivered to outside
legal counsel for DSPT an initial draft of the definitive merger agreement. From
February 17, 1999 through March 23, 1999, MTS and DSPT and their respective
outside legal counsel negotiated the terms of the merger agreement and related
agreements.
On February 23, 1999, Mr. Galvin and Mr. Troutman met with Professor
Pischinger and Dr. Schaffrath in Aachen, Germany regarding a possible business
relationship among the parties. Professor Pischinger and a representative of
each of MTS and DSPT had additional meetings regarding a proposed business
relationship on February 28, 1999, March 3 and March 5, 1999 in Ann Arbor and
Detroit, Michigan and Eden Prairie, Minnesota. On March 9, 1999, counsel for MTS
delivered to counsel for FEV a draft agreement regarding the proposed business
relationship between the parties if the merger were consummated and MTS and FEV
and their respective legal counsel negotiated the terms of this agreement from
March 12, 1999 through March 20, 1999.
On February 22, 1999, the MTS board of directors met to discuss the terms of
the merger agreement and the merger. On February 24, 1999, the MTS board of
directors by written action ratified the letter of intent with DSPT and
authorized MTS management to proceed with the negotiation and execution of the
definitive merger agreement and consummation of the merger.
On March 1, 1999, at a regularly scheduled meeting of the DSPT board of
directors at the Webers Inn, Ann Arbor, Michigan, all directors were present in
person. Also in attendance were DSPT's outside legal counsel and members of
management. The board of directors ratified the engagement of Hambrecht & Quist
LLC to advise on the fairness of the merger consideration to the DSPT
stockholders. Representatives of Hambrecht & Quist LLC then joined the meeting
by telephone. Mr. Troutman reviewed the strategic rationale for the merger, and
possible risks and benefits of the merger. Outside legal counsel reviewed the
negotiations to date on the merger agreement and the proposed merger agreement,
including the termination provisions and the timing of any payment of breakup
fees, the no-shop provision, the conditions to the merger, the treatment of
options and the
25
<PAGE>
representations and covenants. The board of directors considered legal and
business due diligence relating to MTS, and management reviewed possible
synergies in connection with the proposed business combination. Mr. Troutman
summarized the status of discussions among FEV, DSPT and MTS.
On March 1, 1999, the directors of DSPT had a dinner meeting with Messrs.
Emery and Zell, to discuss the businesses of the respective companies, the
strategic rationale for the merger and the possible synergies and risks of the
transaction.
On March 15, 1999, Dr. Emery advised Mr. Troutman by telephone that MTS was
not willing to proceed with the proposed transaction unless the terms of the
merger agreement were revised to remove the collar and eliminate any adjustment
in the number of shares of MTS common stock to be issued to DSPT stockholders as
a result of the price of MTS common stock at the closing. Dr. Emery explained
that the MTS board of directors was concerned about possible dilution to MTS
stockholders.
On March 16, 1999, a special meeting of the DSPT board of directors was held
telephonically and all DSPT directors were present. Also in attendance were
DSPT's financial advisor, Doug Hajjar, representatives of Hambrecht & Quist LLC
and Gray Cary Ware & Freidenrich LLP. The directors discussed with their
financial and legal advisors the effect of the removal of the collar on the
merger consideration to be received by the DSPT stockholders and holders of net
option shares, and possible implications of the request regarding MTS' future
operating results. After discussion, the board of directors requested that Mr.
Troutman and Mr. Hajjar engage in further discussions with MTS concerning this
request and the directors' concerns.
Later on March 16, 1999, Messrs. Troutman and Hajjar discussed with Dr.
Emery DSPT's concerns. Dr. Emery advised that MTS would not proceed with the
merger if more than 2,077,000 shares of MTS common stock would be issued in the
transaction.
On March 17, 1999, a special meeting of the DSPT board of directors was held
telephonically, and all directors were present. Also present were Mr. Hajjar,
and representatives of Hambrecht & Quist LLC and Gray Cary Ware & Freidenrich
LLP. Mr. Troutman reviewed DSPT's operating plan and the risks of achieving the
plan as well as business and growth prospects. Messrs. Troutman and Hajjar then
summarized their discussions with Dr. Emery and advised that MTS was unwilling
to issue more than 2,077,000 shares of MTS common stock, and therefore would not
proceed if the number of shares was adjusted as a result of a lower stock price.
The DSPT board of directors discussed with their financial and legal advisors
the effect of the removal of the collar on the merger consideration for DSPT
stockholders, the risks and benefits of the proposed merger, and other
alternatives available to DSPT. After discussion, the DSPT board of directors
unanimously authorized management and outside legal counsel to proceed with the
finalization of the merger agreement and related documents.
On March 19, 1999, the MTS board of directors ratified its prior approval of
the merger and the merger agreement.
On March 20, 1999, MTS and FEV entered into an agreement establishing a
reciprocal distributorship and licensing arrangement effective on the merger,
subject to DSPT's execution of the agreement.
On March 23, 1999, a special meeting of the DSPT board of directors was held
at the Embassy Suites, Burlingame, California, at which all directors were
present. Also present were representatives of Hambrecht & Quist LLC and Gray
Cary Ware & Freidenrich LLP. Mr. Troutman reviewed the strategic rationale for
the merger. Outside legal counsel reviewed the negotiations relating to the
merger agreement and the final terms of the agreement. Representatives of
Hambrecht & Quist LLC then reviewed their financial analyses with respect to the
final terms of the proposed merger agreement and delivered an oral opinion
(subsequently confirmed in writing) that the merger consideration was fair to
the DSPT stockholders from a financial point of view. There followed a general
discussion of the risks and benefits of the merger. The DSPT board of directors
concluded, by the unanimous vote of the
26
<PAGE>
directors, that the merger was fair to and in the best interests of DSPT and its
stockholders and approved the merger agreement and related agreements, and
authorized DSPT management to proceed with the merger.
On March 23, 1999, after the closing of trading on the Nasdaq National
Market and following the approval of the merger agreement by the DSPT board of
directors, representatives of both companies executed and delivered the merger
agreement and related documents. Also on March 23, 1999, a representative of
DSPT executed the agreement among FEV, MTS and DSPT, which among other matters,
resolved that MTS was not a competitor of FEV for purposes of the merger.
On March 23, 1999, after the closing of trading on the Nasdaq National
Market, MTS issued a press release announcing the execution of the merger
agreement and the agreement among FEV, MTS and DSPT, and DSPT issued a press
release announcing the execution of the merger agreement.
REASONS FOR MERGER
JOINT REASONS FOR THE MERGER
MTS and DSPT have identified several potential benefits of the merger that
they believe will contribute to the success of the combined company. These
potential benefits include:
- the ability to integrate MTS' powertrain unit operations with DSPT's
transportation group, providing the opportunity to leverage the respective
operations, engineering and sales and support organizations;
- the potential to leverage research and development capabilities of each
company, including mechanical engineering, electronic and software
development skills and to share technology;
- the ability to achieve economies of scale in corporate infrastructure; and
- the potential to exploit further the strategic alliance relationship among
MTS, FEV and DSPT.
MTS' REASONS FOR THE MERGER
MTS' board of directors has determined the merger is in the best interests
of MTS and its shareholders. In reaching its determination, the MTS board of
directors considered a number of factors, including the matters discussed above
under "Joint Reasons for the Merger" and the following:
- the technical, engineering, management and sales expertise of DSPT;
- the judgment, advice and analysis of MTS' management with respect to the
potential strategic, financial and operational benefits of the merger,
including MTS management's favorable recommendation of the merger, based
in part on the business, technical, financial accounting and legal due
diligence investigations performed with respect to DSPT;
- the results of operations and financial condition of MTS and DSPT, and the
anticipated accretive effect, in MTS' operating results for fiscal year
2000, taken as a whole, of the merger on MTS' common stock;
- the complementary fit between MTS' and DSPT's products, cultures, market
segments and distribution channels, which are expected to facilitate
integration of the two companies;
- the terms of the merger agreement and related agreements, including price
and structure, which were considered by both the board and management of
MTS to provide a fair and equitable basis for the merger;
- the ability of MTS to account for the merger as a pooling of interests for
financial accounting purposes;
27
<PAGE>
- the fact that the merger will further MTS' commitment to customers to
provide a broader and more integrated analysis, simulation and testing
process that will enable customers to lower development costs and move
products to market faster;
- DSPT's unique expertise, technologies and customer recognition in the
market for test, analysis and validation of engine designs; and
- the belief that the combined firms would be a stronger force in the global
powertrain development and testing market because they complement each
other in technology, customer base and geographic presence.
The MTS board of directors also considered certain potentially negative
factors that may result from the merger, including:
- the potential dilutive effect on MTS' common stock price if revenue and
earnings expectations of the combined company are not achieved;
- the dilutive effect on MTS' earnings per share in MTS' fiscal 1999 which
will principally result from one time charges relating primarily to costs
of the transaction;
- the potential loss of key DSPT employees critical to the ongoing success
of the DSPT products and product development and to the successful
integration of MTS' and DSPT's powertrain product lines;
- the general difficulties of integrating product lines, technologies,
research and development efforts, and companies; and
- the other risks and uncertainties discussed above under "Risk Factors" on
page 9.
In analyzing the proposed merger, the MTS board did not view any single
factor as determinative and did not quantify or assign weight to any of the
factors. Rather, the MTS board made its determination based upon the total mix
of information available to it.
DSPT'S REASONS FOR THE MERGER
The DSPT board of directors believes that its ability to grow DSPT's
business as a relatively small independent company, competing with larger
companies with substantially greater resources and broader, integrated product
offerings, is challenged. DSPT's management considered the alternatives of
either acquiring smaller companies that could extend its product and service
offerings or enhance the distribution of its products and services, or merging
with a larger company. In this environment, the DSPT board of directors
identified several potential benefits for the DSPT stockholders and customers
that it believes would result from the merger. These potential benefits include
the benefits discussed above under "Joint Reasons for the Merger" and the
following:
- the potential to obtain contracts for larger system integration projects
due to the lower perceived risk to customers as a result of the larger
relative size of the combined company compared to DSPT;
- the potential for increased sales to MTS' powertrain unit customers,
primarily as a result of combining product lines of the powertrain unit
and DSPT to offer diesel customers broader test capabilities and
complementary product lines;
- the potential for increased sales of DSPT products to MTS powertrain
component test product customers;
- the opportunity for increased DSPT international sales as a result of
leveraging MTS' international business;
28
<PAGE>
- the potential for increased sales in the powertrain testing market as a
result of integrating MTS' noise and vibration capability into DSPT
products; and
- the greater liquidity and diversification of risk offered to DSPT
stockholders by an investment in MTS instead of DSPT.
In the course of its deliberations, the DSPT board of directors reviewed
with DSPT's management a number of additional factors relevant to the merger,
including, among others:
- the information concerning MTS' and DSPT's respective businesses,
prospects, financial performance and condition, operations, technology,
product and service lines, management and competitive position, current
market conditions and historical market prices, volatility and trading
information with respect to MTS common stock and DSPT common stock;
- the consideration that DSPT stockholders will receive in the merger and
the fact that at the time the parties signed the merger agreement, the
market value of the MTS common stock to be issued in exchange for the DSPT
common stock represented a significant premium over the recent price range
of the DSPT common stock;
- the fact that although MTS was not assuming DSPT stock options, DSPT
stockholders and holders of net option shares would receive the pro rata
benefit of the aggregate exercise price for stock options outstanding on
the closing of the merger;
- the greater liquidity of the MTS common stock as compared with DSPT common
stock;
- the larger size, relative stability and greater investor visibility of MTS
as compared with DSPT;
- the current industry and economic conditions;
- the implications for continued independent operation of DSPT in light of
market and competitive conditions, including the potential for increased
competition from companies having significantly greater resources than
DSPT;
- the complementary products and services, channels, partners, technology
and critical skills of MTS and DSPT;
- the alternatives available to DSPT compared to the consideration proposed
to be paid to stockholders pursuant to the merger agreement;
- the belief that the terms of the merger agreement are reasonable,
including the provisions allowing DSPT to respond to certain unsolicited
inquiries regarding an acquisition of DSPT, and the provisions that permit
DSPT to terminate the merger agreement upon payment to MTS of a break-up
fee under certain circumstances;
- a comparison of selected recent acquisition and merger transactions in the
industry;
- the view of the DSPT board of directors, based in part on the
presentations of management and DSPT's financial advisors, regarding the
likelihood of a superior offer arising;
- the expected tax and accounting treatment of the merger;
- the opinion of Hambrecht & Quist LLC rendered at the March 23, 1999
meeting of the DSPT board of directors that, based upon and subject to the
various assumptions and conditions set forth in the opinion, the merger
consideration was fair to the holders of DSPT common stock from a
financial point of view;
- the impact of the merger on the customers and employees of DSPT; and
- the reports from management, financial advisors and legal advisors as to
the results of their due diligence investigation of MTS.
29
<PAGE>
The DSPT board of directors also considered a number of potentially negative
factors in its deliberations concerning the merger, including, but not limited
to:
- the risk that the benefits sought to be achieved in the merger will not be
achieved;
- the fact that the number of shares of MTS common stock is fixed at
2,077,000 and that there is no guarantee as to the market value of a
fraction of a share of MTS common stock to be received for each share of
DSPT common stock and each net option share or that such market value will
represent at closing a premium over the price range of DSPT common stock
prior to the announcement of the merger agreement;
- the fact that the fraction of a share of MTS common stock to be received
by a holder of DSPT common stock or net option shares will fluctuate based
on the number of options which remain unexercised at the closing of the
merger and the exercise prices of such options, and that in general the
more options which are exercised prior to the closing, the smaller the
fraction of a share of MTS common stock each holder of DSPT common stock
and net option shares will receive;
- the fact that the higher the price of MTS common stock on the closing, the
higher the percentage of total merger consideration that will be paid to
holders of net option shares compared to stockholders;
- the fact that the future growth of MTS revenues, earnings or stock price
may not equal or exceed the growth experienced by a small independent
technology company;
- the loss of control over the future operations of DSPT following the
merger;
- the effect of the public announcement of the merger on DSPT's sales,
customer relations and operating results and DSPT's ability to attract and
retain key management, marketing and technical personnel;
- the risk of market confusion and potential delay or reduction in orders
for products and services; and
- the other risks described above in "Risk Factors" on page 9.
The DSPT board of directors believed that certain of these risks were
unlikely to occur or unlikely to have a material impact on the stockholders or
the combined company, while others could be avoided or mitigated by DSPT or MTS,
and that overall the risks associated with the merger were outweighed by the
potential benefits of the merger.
The foregoing discussion of information and factors considered by the DSPT
board of directors is not intended to be all inclusive, but is believed to
include all material factors considered by the DSPT board of directors. In view
of the wide variety of factors considered by the DSPT board of directors, the
DSPT board of directors did not find it practicable to quantify or otherwise
assign relative weight to the specific factors considered. However, after taking
into account all the factors set forth above, the DSPT board of directors
unanimously agreed that the merger agreement and the consummation of the merger
were fair to, and in the best interests of DSPT and its stockholders, and that
DSPT should proceed with the merger.
RECOMMENDATION OF THE DSPT BOARD
The DSPT board of directors has unanimously adopted and approved the merger
agreement and approved the merger, and recommends a vote "FOR" the adoption and
approval of the merger agreement and approval of the merger by the DSPT
stockholders.
30
<PAGE>
OPINION OF DSPT FINANCIAL ADVISOR
DSPT engaged Hambrecht & Quist LLC to act as its financial advisor in
connection with the merger and, in such capacity, to render an opinion as to the
fairness from a financial point of view to the holders of the outstanding shares
of common stock of DSPT of the consideration to be received by such stockholders
in the merger. Hambrecht & Quist LLC was selected by the DSPT board of directors
based on its qualifications, expertise and reputation. Hambrecht & Quist LLC
rendered its oral opinion, subsequently confirmed in writing, on March 23, 1999
to the DSPT board of directors that, as of such date, the consideration to be
received by the holders of the DSPT common stock in the merger was fair to the
holders of the DSPT common stock from a financial point of view.
A COPY OF HAMBRECHT & QUIST LLC'S OPINION DATED MARCH 23, 1999, WHICH SETS
FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATIONS OF THE
REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST LLC IS
ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT/PROSPECTUS. DSPT STOCKHOLDERS ARE
ADVISED TO READ THE OPINION IN ITS ENTIRETY.
The assumptions made, matters considered and limits of review contained in
Hambrecht & Quist LLC's written opinion delivered March 23, 1999 were
substantially the same as those contained in the opinion attached to this proxy
statement/prospectus. No limitations were placed on Hambrecht & Quist LLC by the
DSPT board with respect to the investigation made or the procedures followed in
preparing and rendering its opinion.
In its review of the merger, and in arriving at its opinion, Hambrecht &
Quist LLC, among other things:
- reviewed the publicly available consolidated financial statements of MTS,
for recent years and interim periods to date and certain other relevant
financial and operating data of MTS, including its capital structure, made
available to Hambrecht & Quist LLC from published sources;
- discussed the business, financial condition and prospects of MTS with
certain members of its senior management;
- reviewed the consolidated financial statements of DSPT for recent years
and interim periods to date and certain other relevant financial and
operating data of DSPT made available to Hambrecht & Quist LLC from
published sources and from the internal records of DSPT;
- reviewed certain internal financial and operating information, including
certain projections, relating to DSPT prepared by the management of DSPT;
- discussed the business, financial condition and prospects of DSPT with
certain members of its senior management;
- reviewed the recent reported prices and trading activity for the common
stocks of MTS and DSPT and compared such information and certain financial
information for MTS and DSPT with similar information for certain other
companies engaged in businesses Hambrecht & Quist LLC considered
comparable;
- reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions;
- reviewed the merger agreement; and
- performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and financial,
economic and market data as Hambrecht & Quist LLC deemed relevant.
31
<PAGE>
Hambrecht & Quist LLC did not independently verify any of the information
concerning DSPT or MTS considered in connection with its review of the merger
and, for purposes of its opinion, Hambrecht & Quist LLC assumed and relied upon
the accuracy and completeness of all information considered. In connection with
its opinion, Hambrecht & Quist LLC did not prepare or obtain any independent
evaluation or appraisal of any of the assets or liabilities of DSPT or MTS, nor
did it conduct a physical inspection of the properties and facilities of DSPT or
MTS. With respect to the financial forecasts and projections used in its
analysis, Hambrecht & Quist LLC assumed that they reflected the best currently
available estimates and judgments of the expected future financial performance
of MTS and DSPT. For the purposes of its opinion, Hambrecht & Quist LLC also
assumed that neither DSPT nor MTS was a party to any pending transactions,
including external financings, recapitalizations or other material merger
discussions, other than the merger and those activities undertaken in the
ordinary course of conducting their respective businesses. For purposes of its
opinion, Hambrecht & Quist LLC assumed that the merger will qualify as a
tax-free reorganization under the Internal Revenue Code of 1986, as amended, for
the stockholders of DSPT and that the merger will be accounted for as a pooling
of interests. Hambrecht & Quist LLC's opinion was necessarily based upon market,
economic, financial and other conditions as they existed and could be evaluated
as of the date of the opinion and any subsequent change in the conditions would
require a reevaluation of the opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist LLC analyses set forth below does not purport to be a
complete description of the presentation by Hambrecht & Quist LLC to the DSPT
board. In arriving at its opinion, Hambrecht & Quist LLC did not attribute any
particular weight to any analysis or factor it had considered, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Hambrecht & Quist LLC believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, or of the following
summary, without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the
Hambrecht & Quist LLC presentation to the DSPT board and its opinion. In
performing its analyses, Hambrecht & Quist LLC made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of DSPT and MTS. The
analyses performed by Hambrecht & Quist LLC, and summarized below, are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be
acquired.
The following is a brief summary of financial analyses performed by
Hambrecht & Quist LLC in connection with providing its written opinion to the
DSPT board on March 23, 1999:
PRO FORMA MERGER ANALYSIS
Hambrecht & Quist LLC analyzed the pro forma impact of the merger on the
projected results of MTS for the fiscal years ending September 30, 1999 and
2000. Hambrecht & Quist LLC prepared financial projections for MTS based on Dain
Rauscher Wessels analyst estimates. Hambrecht & Quist LLC prepared financial
projections for DSPT based on DSPT management estimates. Hambrecht & Quist LLC
observed that based upon these forecasts, the merger resulted in greater
earnings for the pro forma combined company in the fiscal year ending September
30, 2000 than for MTS as a stand-alone company. The foregoing analysis did not
assume any adjustments to projected revenues or costs resulting from potential
operating synergies that may be realized from the merger. The actual results and
savings achieved by the combined company as a result of the merger may vary from
the projected results and such variations may be material.
32
<PAGE>
CONTRIBUTION ANALYSIS
Hambrecht & Quist LLC analyzed the contribution of each of DSPT and MTS to
material financial statement categories of the pro forma combined company,
assuming no revenue or expense adjustments. The financial statement categories
compared included revenues, gross profit, operating income and pretax income.
This contribution analysis was then compared to the respective pro forma
ownership percentages of DSPT and MTS stockholders in the pro forma combined
company. Hambrecht & Quist LLC observed that, calculated on a fully-diluted
basis using the treasury stock method, DSPT shareholders are expected to own
approximately 10% of the combined company equity at the close of the merger and
MTS stockholders are expected to own approximately 90% of the combined company
equity at the close of the merger. For the fiscal year ending September 30,
1999, it was estimated that DSPT would contribute approximately 7% of revenues,
9% of gross profit, 7% of operating income, and 8% of pretax income of the
combined company. For the fiscal year ending September 30, 2000, it was
estimated that DSPT would contribute approximately 8% of revenues, 10% of gross
profit, 12% of operating income, and 13% of pretax income of the combined
company.
PREMIUM ANALYSIS
Based on the closing price of MTS common stock of $10.813 on March 22, 1999,
the implied value per share of DSPT common stock was approximately $8.93. This
represented a one day premium over the closing price for DSPT common stock on
March 22, 1999 of approximately 46%. Hambrecht & Quist LLC also analyzed the
implied premiums to average historical closing prices for the 1 week, 1 month, 3
months, 6 months and 1 year ending March 22, 1999 and determined that the
implied premiums were approximately 51%, 52%, 39%, 35% and 18%, respectively. In
addition, the implied premiums to the 52-week high and low closing prices of
DSPT common stock were approximately 66% and 16%, respectively.
ANALYSIS OF PUBLICLY-TRADED COMPARABLE COMPANIES
Hambrecht & Quist LLC compared selected historical and projected financial
information of DSPT to publicly-traded companies that Hambrecht & Quist LLC
deemed to be comparable to DSPT. This information included the ratios of market
value to historical net income, market value to projected calendar year 1999 net
income, and market value to book value. Hambrecht & Quist LLC also examined the
ratios of enterprise value, market value plus debt less cash, to historical
revenue, historical EBITDA, earnings before interest, taxes, depreciation and
amortization, and historical EBIT, earnings before interest and taxes. Companies
deemed comparable on the basis of their business activity and other factors such
as market capitalization and projected growth rates included Aero Systems
Engineering, Faro Technologies, Instron, Larson Davis, Modern Controls, MTS, and
Transmation. Hambrecht & Quist LLC determined average trading multiples for the
above companies of 0.9 times LTM, latest twelve months revenues, 6.4 times LTM
EBITDA, 9.1 times LTM EBIT, 13.0 times LTM net income, 9.5 times projected
calendar year 1999 net income, and 1.4 times book value.
The foregoing multiples were applied to historical financial results of DSPT
for the twelve-month period ended January 31, 1999 and projected financial
results for DSPT. Based on the analysis of publicly-traded comparable companies,
Hambrecht & Quist LLC calculated a range of implied equity values ranging from
$7.41 per share to $11.56 per share. This compared with an implied value in the
proposed merger of approximately $8.93, based on the closing price of MTS common
stock on March 22, 1999.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS
Hambrecht & Quist LLC compared the proposed merger with selected comparable
merger and acquisition transactions. This analysis included 11 transactions
involving companies that provide
33
<PAGE>
instrumentation, measurement and control products. These transactions included
Liberty Technologies/ Crane, Satec Systems/Instron, Impact Systems/Voith Sulzer
Paper Technology, Waekon Industries/ Hickok, Computational Systems/Emerson
Electric, Chatillon & Lloyd/AMETEK, Petrotech/Roper Industries,
Measurex/Honeywell, Data Measurement/Meaurex, Uson/Roper Industries, and
Powertek/ MTS. In examining these transactions, Hambrecht & Quist LLC analyzed
certain income statement and balance sheet parameters of the acquired company
relative to the consideration offered. The multiples determined included
consideration offered as a multiple of LTM revenues, LTM EBITDA, LTM EBIT, LTM
net income, and book value. In addition, Hambrecht & Quist LLC determined the
one trading-day and twenty trading-day premiums paid in the above transactions
which involved the acquisitions of public companies. The consideration offered
in the above transactions was an average multiple of 1.2 times LTM revenue, 8.1
times LTM EBITDA, 9.0 times LTM EBIT, 13.9 times LTM net income, and 2.2 times
book value. The average one- and twenty-day premiums paid were 38.3% and 41.1%,
respectively.
These multiples were applied to the historical financial results of DSPT for
the twelve-month period ended January 31, 1999. The foregoing premiums were
applied to the closing price of DSPT common stock for the one day and twenty
trading-days prior to March 23, 1999. Based on the analysis of selected merger
and acquisition transactions, Hambrecht & Quist LLC calculated a range of
implied equity values ranging from $8.47 per share to $13.71 per share. This
compared with an implied value in the proposed merger of approximately $8.93,
based on the closing price of MTS common stock on March 22, 1999.
No company or transaction used in the above analyses is identical to DSPT or
the proposed merger. Accordingly, an analysis of the results of the foregoing is
not purely mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the values of the companies or
transactions to which they are compared.
DISCOUNTED CASH FLOW ANALYSIS
Hambrecht & Quist LLC analyzed the theoretical valuation of DSPT based on
the discounted free cash flow projected for DSPT using management's assumptions
regarding long-term growth and margins. To estimate the total present value of
DSPT's business, before giving effect to its capital structure, Hambrecht &
Quist LLC discounted to present value the projected stream of after-tax cash
flows produced by DSPT through the fiscal year ending January 31, 2004 and the
hypothetical value of selling the entire business at the end of this period (the
terminal value). The terminal value was based upon multiples of 5.0 to 7.0 times
projected EBITDA for the fiscal year ending January 31, 2004. In this analysis
Hambrecht & Quist LLC used discount rates ranging from 17.5% to 22.5%. Hambrecht
& Quist LLC calculated a range of present equity values ranging from $7.74 per
share to $12.95 per share. This compared with an implied value in the proposed
merger of approximately $8.93, based on the closing price of MTS common stock on
March 22, 1999.
This description of Hambrecht & Quist LLC's opinion is qualified in its
entirety by reference to the full text of the opinion which is attached as
Appendix B to this proxy statement/prospectus.
Hambrecht & Quist LLC, as part of its investment banking services, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, corporate restructurings, strategic
transactions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Pursuant to an engagement letter dated February 11, 1999, DSPT agreed to pay
Hambrecht & Quist LLC a fee of $150,000 in connection with the delivery of a
fairness opinion. DSPT also has agreed to reimburse Hambrecht & Quist LLC for
its reasonable out-of-pocket expenses and to indemnify Hambrecht & Quist LLC
against certain liabilities, including liabilities under federal
34
<PAGE>
securities laws or relating to or arising out of Hambrecht & Quist LLC's
engagement as financial advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
INDEMNIFICATION
The merger agreement provides that after the effective time, all rights to
indemnification existing in favor of any person who is a current or prior
officer or director of DSPT for acts and omissions occuring prior to the
effective time shall survive the merger and shall be fulfilled and honored by
MTS and its wholly-owned subsidiary DSPT. MTS has agreed to maintain DSPT's
policy or policies of directors' and officers' liability insurance for not less
than six years following the effective time of the merger. Further, MTS has
agreed to provide capital to the extent DSPT lacks sufficient capital to pay the
premiums for this coverage.
EMPLOYMENT ARRANGEMENTS
DSPT has entered into retention agreements dated as of January 18, 1999 with
F. Gil Troutman, Jr., DSPT's President and Chief Executive Officer, and Larry
Moulton, DSPT's General Manager of the Transportation Group. If Mr. Troutman or
Mr. Moulton resigns for "good reason" or is terminated without "cause" within 12
months after the date of a merger or acquisition of DSPT, each officer is
entitled to all salary, accrued but unused vacation and his pro rata target
bonus for the year each through the date of his termination or resignation and
an additional 18 months (12 months for Mr. Moulton) of salary and bonus,
reimbursement of any expenses incurred in connection with DSPT's business,
reimbursement of his health insurance premiums for 18 months (12 months for Mr.
Moulton) and any benefits under DSPT's 401(k) plan or other benefit plans.
In connection with the merger agreement, MTS has entered into separate
employment agreements with Mr. Troutman and Mr. Moulton which will become
effective upon the closing of the merger. Under the employment agreements, MTS
has agreed to employ Messrs. Troutman and Moulton after the merger becomes
effective and the retention agreements described above will have no effect.
Mr. Troutman's employment agreement provides for a 36 month term of
employment after the merger becomes effective and yearly base compensation of
$200,000, subject to review annually by MTS. In addition, under the agreement,
Mr. Troutman is eligible for MTS' Management Variable Compensation Bonus Plan
and will be guaranteed a bonus of $9,250 for MTS' fiscal year 1999.
Other benefits and compensation provided to Mr. Troutman under the agreement
are:
- the use of an automobile;
- participation in MTS' 401(k) and Profit Sharing Retirement plans;
- the grant of an option to purchase 10,000 shares of MTS common stock
priced at fair market value as of the effective time of the merger and an
option to purchase at least 5,500 shares of common stock in subsequent
years;
- consideration for option grants when options are granted to other
executives at MTS; and
- the benefits under any other benefit or compensation plans that are
adopted by MTS.
If Mr. Troutman's employment is terminated by MTS during the first 36 months
of the agreement other than for death, disability or for "cause," as defined in
the employment agreement, he will be entitled to payment of his monthly base
salary of $16,666 and 1/24th of the bonus he has earned during the two most
recent fiscal years prior to the termination per month for the remainder of the
36-month term of the agreement and for a minimum of nine months. However, if Mr.
Troutman's employment is terminated during MTS' fiscal year ended September 30,
2000, the bonus payment will be 1/12th of the
35
<PAGE>
bonus earned during the previous fiscal year. If his employment is terminated
during MTS' fiscal year ending September 30, 1999, the bonus payment will be
1/12th of the bonus that would have been earned that year based on actual
achievement of the established targets.
In addition, for nine months after termination, MTS will continue Mr.
Troutman's health and life insurance benefits and pay the employer portion of
the premiums and his options will continue to be exercisable.
Mr. Troutman has also agreed to non-compete, confidentiality and trade
secret provisions in the employment agreement.
Mr. Moulton's employment agreement with MTS provides for substantially the
same terms as Mr. Troutman's, except that Mr. Moulton's yearly base salary shall
be $150,000. Mr. Moulton's compensation under the MTS Management Variable
Compensation Plan is also calculated at a lower rate than Mr. Troutman's.
Furthermore, Mr. Moulton will be granted an option to purchase 5,000 shares of
MTS common stock priced at fair market value as of the effective time of the
merger and an option to purchase at least 3,650 shares of MTS common stock in
subsequent years.
Michael Ford and MTS have orally agreed that if Mr. Ford is terminated by
MTS other than for death, disability or cause, Mr. Ford will receive a severance
payment equal to at least six months of his base salary.
STOCK OPTION ACCELERATION
All options under the DSPT 1991 Directors' Stock Option Plan and 1991 Stock
Option Plan, the "Plans", and certain options issued outside the Plans contain
terms that provide that vesting of all such options will accelerate thirty days
prior to a transfer of control if the options are not assumed by the acquiror,
except that vesting with respect to options for 39,000 shares granted outside
the Plans do not accelerate upon a transfer of control. Under the terms of the
merger agreement, MTS has not assumed any outstanding options under the Plans or
otherwise. Accordingly, vesting with respect to all outstanding options other
than the unvested portion of options for 39,000 shares will accelerate thirty
days prior to the effective time of the merger.
AFFILIATE AGREEMENTS
Each of the directors and executive officers of DSPT have entered into
agreements restricting sales, transfers, pledges, dispositions or other
transactions reducing their risk of investment relative to shares of DSPT common
stock and the shares of MTS common stock received by them in the merger, or
options to purchase common stock, during the period commencing 30 days prior to
the effective time of the merger and ending on the date on which financial
results covering at least 30 days of post-merger combined operations of MTS and
DSPT have been published by MTS. The agreements also restrict the sale, transfer
or other disposition of shares of MTS common stock received by them in the
merger except pursuant to an effective registration statement or in compliance
with Rule 145 or another exemption from the registration requirements of the
Securities Act. These agreements are intended to help ensure compliance with the
requirements of applicable federal securities and tax laws and to help ensure
that the merger will be treated as a pooling of interests for accounting
purposes.
TREATMENT OF OPTIONS
In the merger, unexercised options representing "net option shares" will be
exchanged for MTS common stock. DSPT intends to treat the conversion of
incentive stock options into MTS common stock as a deemed exercise of the
incentive stock options, resulting in income recognition for U.S. federal
alternative minimum tax purposes, but not for federal regular income tax
purposes. Withholding
36
<PAGE>
taxes will not be withheld with respect to the conversion of incentive stock
options into MTS common stock.
Holders of nonqualified stock options to acquire DSPT common stock who have
their unexercised options converted into MTS common stock will recognize
ordinary income for income tax purposes which will be reported on their 1999
Form W-2, for employees, or Form 1099, for former employees and independent
contractors, in an amount equal to the value of the MTS common stock on the
merger closing date. Withholding taxes will apply with respect to wage income
recognized by employees and former employees.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following contains a description of the material federal income tax
consequences of the merger to the holders of common stock. This summary relies
upon the opinions of Lindquist & Vennum P.L.L.P. and Gray Cary Ware &
Freidenrich LLP, and is based upon current provisions of the Internal Revenue
Code of 1986, existing regulations and current administrative rulings and court
decisions, all of which are subject to change. Any change, which may or may not
be retroactive, could alter the tax consequences to MTS, DSPT or the
stockholders of DSPT. No attempt has been made to comment on all federal income
tax consequences of the merger that may be relevant to particular holders,
including holders who are subject to special tax rules such as dealers in
securities, foreign persons, mutual funds, insurance companies, tax-exempt
entities, holders who are subject to the alternative minimum tax provisions of
the Internal Revenue Code, holders who acquired their shares in connection with
stock option or stock purchase plans or in other compensatory transactions,
holders who hold their shares as a hedge or as part of a hedging, straddle or
other risk reduction strategy, and holders who do not hold their shares as
capital assets. In addition, the following discussion does not address the tax
consequences of the merger under state, local and foreign tax laws or the tax
consequences of transactions effectuated prior to or after the merger, whether
or not such transactions are in connection with the merger. Accordingly, holders
of DSPT common stock are advised and expected to consult their own tax advisers
regarding the federal income tax consequences of the merger in light of their
personal circumstances and the consequences under state, local and foreign tax
laws.
As a condition to the consummation of the merger, Lindquist & Vennum
P.L.L.P. and Gray Cary Ware & Freidenrich LLP must render tax opinions that the
merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. The tax opinions discussed in this section are
included as an exhibit to the registration statement of which this proxy
statement/prospectus is a part. Those opinions assume and are conditioned upon
the following:
- the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the tax representations
received from MTS, Badger and DSPT to support the tax opinions and in all
other instruments and documents related to the formation, organization and
operation of MTS, Badger and DSPT, and that no actions have been or will
be taken which are inconsistent with such statements, descriptions and
representations;
- that original documents submitted to counsel are authentic, documents
submitted to counsel as copies conform to the original documents, and that
all of those documents have been, or will be by the effective time, duly
and validly executed and delivered where due execution and delivery are a
prerequisite to the effectiveness of those documents;
- that all covenants contained in the merger agreement and the tax
representations described above are performed without waiver or breach of
any material provision of those covenants;
- that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without those qualifications; and
37
<PAGE>
- that the merger will be consummated in accordance with the merger
agreement, and without any waiver, breach or amendment of any of the
material provisions of the merger agreement, will be effective under the
applicable state law, and will be reported by MTS and DSPT on their
respective federal income tax returns in a manner consistent with
treatment of the merger as a reorganization.
No ruling from the Internal Revenue Service has been or will be requested in
connection with the merger. In addition, stockholders of DSPT should be aware
that the tax opinions discussed in this section are not binding on the IRS and
no assurance can be given that the IRS will not adopt a contrary position or
that a contrary position would not be sustained by a court.
Subject to these assumptions and limitations, it is the opinion of Lindquist
& Vennum P.L.L.P., tax counsel to MTS, and Gray Cary Ware & Freidenrich LLP, tax
counsel to DSPT that:
(1) the merger will be treated for federal income tax purposes as a
reorganization;
(2) MTS, Badger and DSPT will each be a party to the reorganization;
(3) MTS, Badger and DSPT will not recognize any gain or loss solely as a
result of the merger;
(4) stockholders of DSPT will not recognize any gain or loss upon the
receipt of solely MTS common stock for their common stock, other than
with respect to cash received in lieu of fractional shares of common
stock;
(5) the aggregate basis of the shares of MTS common stock received by a
stockholder in the merger, including any fractional share deemed
received, will be the same as the aggregate basis of the shares of DSPT
common stock surrendered in exchange;
(6) the holding period of the shares of MTS common stock received by a DSPT
stockholder in the merger will include the holding period of the shares
of DSPT common stock surrendered in exchange, provided that those shares
of DSPT common stock are held as capital assets at the effective time of
the merger; and
(7) a stockholder of DSPT who receives cash in lieu of a fractional share
will recognize gain or loss equal to the difference, if any, between a
stockholder's basis in the fractional share and the amount of cash
received. The gain or loss will be a capital gain or loss if the DSPT
common stock is held by the stockholder as a capital asset at the
effective time of the merger.
DSPT stockholders should attach to their federal income tax returns for the
year of the merger a statement of all facts pertinent to the nonrecognition of
gain or loss upon the exchange of DSPT common stock for MTS common stock,
including the stockholder's tax basis in the stockholder's DSPT common stock and
a description of the MTS common stock received.
Regardless of whether or not the merger qualifies as a reorganization, a
DSPT stockholder receiving MTS common stock would recognize income or gain to
the extent those shares are considered to be received in exchange for services
or property other than solely DSPT common stock. Gain would also be recognized
to the extent a DSPT stockholder is treated as receiving consideration other
than MTS common stock in exchange for the stockholder's DSPT common stock.
A successful IRS challenge to the status of the merger as a reorganization
would result in a DSPT stockholder recognizing gain or loss with respect to each
share of DSPT common stock in an amount equal to the difference between the
stockholder's basis in such share and the fair market value, as of the effective
time of the merger, of the MTS common stock received in exchange. A
stockholder's aggregate basis in the MTS common stock received would equal its
fair market value, and the stockholder's holding period for the MTS common stock
would begin the day after the merger.
38
<PAGE>
ANTICIPATED ACCOUNTING TREATMENT
The merger is expected to be accounted for using the "pooling of interests"
method of accounting pursuant to Opinion No. 16 of the Accounting Principles
Board. The pooling of interests method of accounting assumes that the combining
companies have been merged from inception, and the historical consolidated
financial statements for periods prior to consummation of the merger are
restated as though the companies had been combined from inception. Either MTS or
DSPT may terminate the merger agreement if the merger cannot be accounted for as
a pooling of interests.
GOVERNMENTAL APPROVALS
The merger is subject to review by the Department of Justice and the Federal
Trade Commission to determine whether it complies with applicable antitrust
laws. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, the merger may not be consummated until the waiting period specified
under the act has expired. MTS and DSPT filed notification reports, together
with requests for early termination of the waiting period, with the Department
of Justice and the Federal Trade Commission on April 6, 1999. These filings
commenced the 30-day waiting period. In letters dated April 20, 1999, the U.S.
Department of Justice, Antitrust Division requested that MTS and DSPT
voluntarily supply supplemental information concerning the merger. This request
is not a formal "second request" for additional information or documentary
materials under the Hart-Scott-Rodino Antitrust Improvements Act, but there can
be no assurance that a "second request" will not be issued. MTS and DSPT have
supplied some of the requested information and expect to supply further
information on a voluntary basis. If additional information or documents is
requested by these agencies, consummation of the merger could be delayed.
ABSENCE OF APPRAISAL RIGHTS
Under Section 262 of the Delaware General Corporation Law, stockholders who
do not vote in favor of or consent to a merger are not entitled to appraisal
rights if the stock subject to such merger is listed on a national exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. and the
consideration to be received in such merger consists of stock listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. Because the Nasdaq National Market is designated as such a system
and the DSPT common stock and MTS common stock are quoted on the Nasdaq National
Market, holders of DSPT common stock are not entitled to appraisal rights with
respect to the merger.
RESALE OF MTS COMMON STOCK
The MTS common stock to be issued in connection with the merger will be
freely transferable, except that shares issued to any DSPT stockholder or
optionholder who is an affiliate of DSPT or who becomes an affiliate of MTS are
subject to restrictions on resale. An affiliate is defined generally as
including, without limitation, directors, executive officers and other persons
who control a company. Stockholders of DSPT who may be deemed to be affiliates
have executed agreements that prohibit the sale, transfer or other disposition
of their DSPT common stock or MTS common stock received by stockholders in the
merger, except in compliance with the requirements of federal securities laws
and pooling of interests requirements. See "Approval of the Merger and Related
Transactions--Affiliate Agreements" on page 36.
39
<PAGE>
MATERIAL TERMS OF THE MERGER AGREEMENT
The following description of the merger agreement describes the material
terms of the merger agreement. The full text of the merger agreement is attached
as Appendix A to this proxy statement/ prospectus and is incorporated by
reference. We encourage you to read the entire merger agreement.
EFFECTIVE TIME OF THE MERGER
The merger will become effective when a certificate of merger is filed with
the Secretary of State of the State of Delaware. If all the conditions to the
merger contained in the merger agreement are satisfied or waived, we anticipate
the effective time will occur on the date of the special meeting or as soon as
practicable following the special meeting.
MERGER CONSIDERATION
At the effective time of the merger, MTS will issue a total of 2,077,000
shares of its common stock in exchange for all outstanding shares of DSPT common
stock and outstanding options to purchase DSPT common stock. As a result, each
outstanding share of DSPT common stock and each "net option share" will be
exchanged for a fraction, the exchange ratio, of a share of MTS common stock
equal to 2,077,000 divided by the sum of outstanding DSPT shares and DSPT "net
option shares."
- "Net option shares" will represent the number of DSPT shares subject to
outstanding options less a number of shares with a value, based upon the
implied DSPT "share value" at the time of the merger, equal to the
aggregate exercise price. Unvested shares will be discounted using a
method mutually agreeable to the companies. As of April 14, 1999, DSPT had
options for 663,468 shares outstanding with a weighted average exercise
price of $5.446.
- The implied "DSPT share value" at the time of the merger will be
determined by dividing (a) the market value of the 2,077,000 MTS shares of
common stock issued in the merger plus the aggregate exercise price of the
DSPT options by (b) the total number of DSPT shares outstanding plus DSPT
shares subject to outstanding options.
- Example. For example, assuming at the time of the merger that the market
value of MTS' common stock is $13.00 and all of DSPT's outstanding options
as of April 14, 1999 remain unexercised, each DSPT share outstanding and
each "net option share" will receive 0.8037 of a share of MTS common
stock. If the market value of MTS' common stock is $11.00 at the time of
the merger, each "net option share" will receive 0.8209 of a share of MTS
common stock.
The exact exchange ratio will not be determined until closing and will
depend upon the market price of MTS common stock, the number of outstanding
shares of DSPT common stock, the number of DSPT shares subject to outstanding
options and the exercise prices of such options. Therefore, the actual exchange
ratio for the merger, the aggregate value of the 2,077,000 MTS shares of common
stock issued in the merger, and the allocation of the aggregate merger
consideration between DSPT stockholders and optionholders could be affected by:
- increases or decreases in the market price of MTS common stock;
- exercises of DSPT options and their related exercise prices; and
- grants of additional DSPT options.
DSPT has agreed in the merger agreement that it will not grant options for
more than 28,000 shares prior to the closing of the merger.
The following table shows, for certain MTS stock prices at closing, the
exchange ratio for the merger, the implied value of a share of DSPT common
stock, the value of the aggregate merger consideration to be received by DSPT
stockholders and optionholders and the allocation of such
40
<PAGE>
merger consideration between DSPT stockholders and optionholders. The amounts
shown in the table below are calculated assuming that the number of outstanding
shares of DSPT stock, the number of shares subject to outstanding options and
the related exercise prices of such options remain constant at April 14, 1999
levels prior to closing.
<TABLE>
<CAPTION>
% MERGER % MERGER
AGGREGATE CONSIDERATION CONSIDERATION TO
MTS SHARE EXCHANGE IMPLIED DSPT MERGER TO DSPT DSPT
PRICE RATIO SHARE VALUE CONSIDERATION STOCKHOLDERS OPTIONHOLDERS
- ----------- ----------- ------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 7.00 .8850 $ 6.20 $ 14,539,000 96.6% 3.4%
8.00 .8360 6.90 16,616,000 94.2 5.8
9.00 .8458 7.61 18,693,000 92.3 7.7
10.00 .8321 8.32 20,770,000 90.8 9.2
11.00 .8209 9.03 22,847,000 89.6 10.4
12.00 .8116 9.74 24,924,000 88.6 11.4
13.00 .8037 10.45 27,001,000 87.7 12.3
14.00 .7969 11.16 29,078,000 86.7 13.0
15.00 .7910 11.86 31,155,000 86.3 13.7
16.00 .7859 12.57 33,232,000 85.8 14.2
17.00 .7814 13.28 35,309,000 85.3 14.7
18.00 .7773 13.99 37,386,000 84.8 15.2
</TABLE>
The following table shows, at an MTS share price of $13.00, the effect on
the merger consideration if DSPT options for varying amounts of shares are
exercised with a weighted average exercise price of $5.446, which is the
weighted average exercise price of all options outstanding on April 14, 1999.
The actual values will depend on the actual exercise prices of the options, if
any, that are exercised. It is not possible to predict what the weighted average
exercise prices of such options will be. DSPT optionholders may exercise options
at any time until the effective time of the merger.
<TABLE>
<CAPTION>
NUMBER SHARES % MERGER % MERGER
SUBJECT TO AGGREGATE CONSIDERATION CONSIDERATION
EXERCISED EXCHANGE IMPLIED DSPT MERGER TO DSPT TO DSPT
OPTIONS RATIO SHARE VALUE CONSIDERATION STOCKHOLDERS OPTIONHOLDERS
- -------------- ----------- --------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
50,000 .7966 10.36 $ 27,001,000 88.9% 11.1%
100,000 .7896 10.30 $ 27,001,000 90.0% 10.0%
200,000 .7756 10.08 $ 27,001,000 92.1% 7.9%
</TABLE>
The value of MTS common stock at the time of the special meeting, the date
of the completion of the merger, the date that stockholders eventually sell
shares of MTS common stock, or at any other time, may be significantly different
than the price of MTS common stock today. See "Market Price Data and Dividend
Policy" on page 15 and "Material Terms of the Merger Agreement--Merger
Consideration" on page 40. On April 27, 1999, the closing sale price of MTS
common stock was $11.50. DSPT stockholders should obtain recent market
quotations for MTS common stock and DSPT common stock and understand the
exchange ratio being offered in the merger.
CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY
The obligations of MTS and DSPT to complete the merger are subject to the
following conditions:
- adoption of the merger agreement and approval of the merger by the DSPT
stockholders;
- the absence of any legal action making the merger illegal or prohibiting
the merger or that would materially limit the ability of MTS to own and
operate the assets and business of DSPT;
- receipt of all material approvals and consents of third parties necessary
to consummate the merger;
41
<PAGE>
- authorization for listing by the Nasdaq National Market of the MTS common
stock to be issued in the merger to the DSPT stockholders;
- receipt of all permits or other authorizations required by applicable
state securities laws for the MTS common stock to be issued in connection
with the merger;
- expiration or termination of the applicable waiting period under antitrust
laws; and
- the registration statement of which this proxy statement/prospectus is a
part being declared effective under the Securities Act.
CONDITIONS TO THE OBLIGATION OF DSPT
The obligation of DSPT to complete the merger is subject to the following
additional conditions:
- compliance by MTS with its obligations under the merger agreement and the
representations and warranties made by MTS in the merger agreement being
true as of the effective time of the merger as if made at that time. Any
inaccuracies in the representations and warranties will be disregarded if
the circumstances giving rise to all inaccuracies considered collectively
do not constitute a material adverse effect on MTS;
- Gray Cary Ware & Freidenrich LLP delivering to DSPT its tax opinion;
- Grant Thornton LLP delivering to DSPT and Arthur Andersen LLP letters
stating that such accounting firm is not aware of any fact concerning DSPT
that would preclude the merger from being treated as a pooling of
interests for financial accounting purposes;
- Arthur Andersen LLP delivering to MTS a letter stating that such
accounting firm concurs in MTS management's conclusion that the merger may
be accounted for as a pooling of interests; and
- Lindquist & Vennum P.L.L.P. delivering to DSPT its legal opinion.
CONDITIONS TO THE OBLIGATION OF MTS
The obligation of MTS to complete the merger is subject to the following
additional conditions:
- compliance by DSPT with its obligations under the merger agreement and the
representations and warranties made by DSPT in the merger agreement being
true as of the effective time of the merger as if made at that time. Any
inaccuracies in representations and warranties will be disregarded if the
circumstances giving rise to all inaccuracies considered collectively do
not constitute a material adverse effect on DSPT;
- Lindquist & Vennum P.L.L.P. delivering to MTS its tax opinion;
- Grant Thornton LLP delivering to DSPT letters stating that such accounting
firm is not aware of any fact concerning DSPT that would preclude the
merger from being treated as a pooling of interests for financial
accounting purposes;
- Gary Cary Ware & Freidenrich LLP delivering to MTS its legal opinion;
- Arthur Andersen LLP delivering to MTS a letter stating that such
accounting firm concurs in MTS management's conclusion that the merger may
be accounted for as a pooling of interests; and
- execution of employment agreements by F. Gil Troutman and Larry Moulton.
Messrs. Troutman and Moulton delivered signed employment agreements satisfying
this condition on the date the merger agreement was signed.
42
<PAGE>
"Material Adverse Effect" means an effect that is, or at the time of the
effect it is probable that the effect will be, materially adverse (1) to the
company's business, results of operation or financial condition, (2) to the
ability of the company to conduct its business, as presently conducted,
following the effective time or, with respect to DSPT, to the ability of MTS to
derive the benefits of owning all of the stock of the surviving corporation, or
(3) to the company's ability to perform any of its material obligations under
the merger agreement or to consummate the merger. The following events are not
material adverse effects:
- changes in the market price or trading volume of the DSPT common stock or
the MTS common stock;
- DSPT or MTS failing to meet any published securities analyst estimates of
revenue or earnings for any period ending or for which earnings are
released on or after the date of the merger agreement and prior to the
merger;
- an event, violation, inaccuracy, circumstance or other matter that results
from conditions affecting the U.S. or world economy;
- an event, violation, inaccuracy, circumstance or other matter that results
from conditions affecting the powertrain testing or instrumentation
industry generally;
- an event, violation, inaccuracy, circumstance or other matter that results
primarily from the announcement or the pendency of the merger or the
transactions contemplated by the merger agreement; or
- an event, violation, inaccuracy, circumstance or other matter that results
from the taking of any action required or permitted by the merger
agreement.
There can be no assurance that all of the conditions to the merger will be
satisfied.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties of
DSPT and MTS relating to, among other things, aspects of the respective
businesses of the companies and other matters. The representations and
warranties expire at the effective time of the merger.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
AFFIRMATIVE COVENANTS OF DSPT
DSPT has agreed that, prior to the effective time, except to the extent MTS
shall consent in writing, DSPT will:
- conduct its operations, to the extent commercially reasonable, according
to its ordinary and usual course of business and consistent with past
practice; and
- use commercially reasonable efforts to preserve substantially intact its
business organization, to keep the services of its officers and employees
available and to maintain satisfactory relationships with licensors,
licensees, suppliers, contractors, distributors, consultants, customers
and others having business dealings with it.
NEGATIVE COVENANTS OF DSPT
DSPT has agreed that, prior to the effective time, except to the extent MTS
shall consent in writing and subject to certain exceptions, DSPT will not:
- amend its certificate of incorporation or bylaws;
43
<PAGE>
- subject to the continuation of its normal stock option program, issue or
sell, or issue options, warrants, commitments, subscriptions, rights to
purchase or otherwise any stock of any class;
- split, combine or reclassify any shares of its capital stock or declare,
set aside or pay any dividend or other distribution;
- incur or assume any debt except for borrowing incurred in the ordinary
course of business and consistent with past practice;
- increase the compensation or pay, modify or accelerate the benefits,
including but not limited to pension, severance, retirement, change of
control and stock option benefits, of any DSPT director, officer, employee
or consultant other than in the ordinary course or business or consistent
with past practice or consistent with existing contractual commitments or
as required by applicable law;
- sell, transfer, mortgage, dispose of or encumber any assets material to
DSPT taken as a whole, other than liens that would not materially
adversely affect DSPT, except in the ordinary course of business and
consistent with past practice or pursuant to contractual obligations
existing on the date of the merger agreement;
- acquire or agree to acquire any other business or any material assets or
make new capital expenditures in excess of $50,000, except purchases of
inventory in the ordinary course of business and consistent with past
practice;
- enter into, amend or terminate any material contracts;
- make any material changes in credit policies or inventory consignment
practices;
- remove or permit the removal of any material assets of DSPT from any of
its facilities except in the ordinary course or business or unless the
removed asset is replaced with a similar item of equal quality;
- alter or revise any accounting methods in any material respect, except as
required by law or by a change in generally accepted accounting
principles;
- institute, settle or compromise any legal or governmental action pending
or threatened against DSPT involving amounts in excess of $50,000; or
- knowingly take any action that would render any representation, warranty,
covenant or agreement of DSPT in the merger agreement inaccurate or
breached such that the conditions to the obligation of MTS to close the
merger will not be satisfied at closing.
AFFIRMATIVE COVENANTS OF MTS
MTS has agreed that, prior to the effective time, it will:
- conduct its operations, to the extent commercially reasonable, according
to its ordinary and usual course of business and consistent with past
practice; and
- use commercially reasonable efforts to preserve substantially intact its
business organization, to keep the services of its officers and employees
available and to maintain satisfactory relationships with licensors,
licensees, suppliers, contractors, distributors and others having business
dealings with it.
44
<PAGE>
NEGATIVE COVENANTS OF MTS
MTS has agreed that, prior to the effective time, except to the extent DSPT
shall consent in writing and subject to certain exceptions, MTS will not:
- amend its articles of incorporation or bylaws;
- subject to the continuance of normal stock option programs and other
exceptions, issue or sell, or issue options, warrants, commitments,
subscriptions, rights to purchase or otherwise any stock of any class;
- combine or reclassify any shares of its capital stock or declare, set
aside or pay any extraordinary dividend or other distribution;
- acquire or agree to acquire or dispose of any business or assets which
could reasonably be expected to materially delay the consummation or
materially increase the risk of non-consummation of the transactions
contemplated by the merger agreement;
- sell, transfer, mortgage or otherwise dispose of or encumber any assets or
properties material to MTS taken as a whole, other than liens that would
not materially adversely affect MTS, except in the ordinary course of
business and consistent with past practice or pursuant to contractual
obligations existing on the date of the merger agreement;
- alter or revise any accounting methods in any material respect, except as
required by law or by a change in generally accepted accounting
principles;
- knowingly take any action that would result in a failure to maintain the
quotation of MTS common stock on the Nasdaq National Market; or
- knowingly take any action that would render any representation, warranty,
covenant or agreement of MTS in the merger agreement inaccurate or
breached such that the conditions to the obligation of DSPT to close the
merger will not be satisfied at closing.
MUTUAL COVENANTS OF MTS AND DSPT
MTS and DSPT have each agreed that, prior to the effective time, they will:
- permit the other company to inspect its records and to consult with its
officers, employees, consultants, advisors, distributors, customers,
suppliers and other companies having business with DSPT during normal
business hours;
- notify the other company of the occurrence of any event that will or could
reasonably be expected to result in a failure to satisfy certain
conditions of the merger;
- use commercially reasonable efforts to have declared effective or approved
all documents and notifications with any governmental or regulatory
bodies;
- use reasonable best efforts to cause the merger to be treated as a pooling
of interests for financial accounting purposes;
- use commercially reasonable efforts to cause the merger to qualify, and
not take any action which would prevent the merger from qualifying, as a
tax-free reorganization; and
- use commercially reasonable efforts to take all action necessary to
consummate the transactions in the merger agreement.
In addition, DSPT will:
- use commercially reasonable efforts to obtain all material approvals and
consents of third parties necessary to consummate the transactions
contemplated by the merger agreement;
45
<PAGE>
- call and hold a meeting of its stockholders for the purpose of considering
and acting upon a proposal to consummate the transactions contemplated by
the merger agreement;
- cooperate with MTS and use reasonable best efforts to cause to be
delivered to MTS a letter from Grant Thornton LLP regarding pooling
issues; and
- use commercially reasonable efforts to cause all outstanding shares of any
subsidiary to be transferred for no or nominal consideration to a person
designated by MTS.
In addition, MTS shall:
- prepare and submit an application to the Nasdaq National Market to list
the MTS common stock to be issued in connection with the merger;
- take all action necessary to cause the merger subsidiary to perform its
obligations under the merger agreement;
- from and after the effective time, to the extent practicable and
commercially reasonable and subject to certain exceptions, provide
employee benefits and programs to the employees of DSPT that, in the
aggregate, are substantially comparable to or more favorable than those in
existence as of the date of the merger agreement and disclosed to MTS in
writing; and
- maintain DSPT's directors' and officers' liability insurance for the
directors and officers of DSPT for a minimum period of six years following
the effective time of the merger.
LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS
DSPT has agreed not to, directly or indirectly:
- solicit, knowingly encourage, initiate, or participate in any way in
discussions or negotiations with, or knowingly provide any nonpublic
information to, a third party concerning an alternative transaction. An
alternative transaction includes any tender offer, exchange offer, merger,
consolidation, share exchange, business combination or similar
transaction, an acquisition of more than 50% of the DSPT common stock or a
sale, lease, exchange, license, transfer or other disposition of more than
50% of DSPT's assets in a single or series of related transactions; or
- otherwise knowingly facilitate any effort or attempt to propose, make or
implement an alternative transaction.
These clauses and the other provisions of the merger agreement, however,
will not prohibit DSPT from, prior to the vote of the DSPT stockholders in the
merger, furnishing nonpublic information to or entering into discussions or
negotiations with any third party that makes an unsolicited superior proposal,
defined below, if, and only to the extent that
- DSPT's board of directors reasonably and in good faith determines that
failure to take that action would be inconsistent with its fiduciary
duties to DSPT's stockholders;
- prior to furnishing nonpublic information to or entering into discussions
or negotiations with the third party, DSPT (1) provides written notice to
MTS that it intends to furnish information to or enter into discussions or
negotiations with a third party making a superior proposal, naming the
person or entity making the superior proposal, and (2) receives from such
third party an executed confidentiality agreement with terms no less
favorable to DSPT than the confidentiality agreement with MTS; and
- DSPT provides MTS with all nonpublic information to be provided to the
third party and keeps MTS informed, on a daily or more regular basis of
the status, terms and conditions and all other material information with
respect to any discussions or negotiations.
46
<PAGE>
For purposes of the merger agreement, the term "superior proposal" means a
proposal for an alternative transaction that the DSPT board of directors
determines, reasonably and in good faith to be more favorable to DSPT's
stockholders than the merger. This determination must be made after consultation
with DSPT's financial advisors, taking into account the likelihood of
consummation of the alternative transaction, including, but not limited to, the
conditions to consummation and the consequences under the alternative
transaction of any material adverse effects or changes in DSPT.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective
time as follows:
- by mutual written consent of MTS and DSPT duly authorized by the board of
directors of each MTS and DSPT;
- by MTS or DSPT if the merger has not been consummated by July 31, 1999;
however, such right to terminate will not be available for any company
that breached in any material respect its obligations under the merger
agreement in a manner that proximately contributed to the failure to
consummate the merger by such date, and if there is a request for
additional information from the Department of Justice or the Federal Trade
Commission pursuant to the HSR Act the date for consummating the merger
shall be extended to October 31, 1999;
- by MTS or DSPT if a court or an administrative, governmental or regulatory
authority has issued a final nonappealable order, decree or ruling, or
taken any other action having the effect of permanently restraining,
enjoining or prohibiting the merger;
- by MTS or DSPT if DSPT's stockholders do not approve and adopt the merger
agreement and the merger; however, such right to terminate will not be
available to any company that breached in any material respect its
obligations under the merger agreement in a manner that proximately
contributed to the failure to obtain that stockholder approval;
- by MTS if
-- DSPT has breached its obligations with respect to alternative
transactions as discussed above;
-- DSPT's board of directors recommends, approves or authorizes DSPT's
acceptance or execution of a letter of intent or definitive agreement
providing for an alternative transaction;
-- DSPT's board of directors has modified in a manner materially adverse
to MTS, or withdrawn, its recommendation of the merger agreement; or
-- a tender offer or exchange offer for any outstanding shares of DSPT
common stock is commenced and the DSPT board of directors fails to
recommend against acceptance or the tender offer by its stockholders
or exchange offer or takes no position with respect to the acceptance
of the tender or exchange offer by DSPT's stockholders.
- by MTS or DSPT prior to the approval by the stockholders of DSPT if
-- DSPT's board of directors has authorized DSPT to enter into a letter
of intent or binding written agreement concerning a superior proposal
and has provided written notice to MTS of the proposal;
-- MTS does not make, within 10 business days after receipt of DSPT's
written notice of its intention to enter into the letter of intent or
binding agreement, an offer that the DSPT board determines is at least
as favorable to DSPT's stockholders as the superior proposal; and
47
<PAGE>
-- upon a termination under these circumstances, DSPT pays to MTS the
termination fee described below, DSPT agrees not to enter into such a
letter of intent until at least the eleventh business day after MTS
has received written notice from DSPT and to notify MTS if its
intention to enter into such a letter of intent or binding agreement
changes.
- by MTS if MTS is not in material breach of its obligations under the
merger agreement and there has been a material breach by DSPT of any of
DSPT's representations, warranties or obligations under the merger
agreement so that the conditions of the obligations of MTS to close the
merger cannot be satisfied and the breach cannot be cured by DSPT through
the exercise of reasonable efforts; or
- by DSPT if DSPT is not in material breach of its obligations under the
merger agreement and there has been a material breach by MTS of any of
MTS' representations, warranties or obligations under the merger agreement
so that the conditions to the obligations of DSPT to close the merger
cannot be satisfied and the breach cannot be cured by MTS through the
exercise of reasonable efforts.
EXPENSES AND TERMINATION FEE
If the merger is abandoned because the merger agreement is terminated, all
expenses will be paid by the party incurring them.
DSPT will pay to MTS a termination fee equal to $400,000 if the merger
agreement is terminated:
- by MTS if DSPT has breached its obligations with respect to alternative
transactions as discussed above;
- by MTS if
-- DSPT's board of directors recommends, approves or authorizes DSPT's
acceptance or execution of a letter of intent or definitive agreement
providing for an alternative transaction;
-- DSPT's board of directors has modified in a manner materially adverse
to MTS, or withdrawn, its recommendation of the merger agreement; or
-- a tender offer or exchange offer for any outstanding shares of DSPT
common stock is commenced and the DSPT board of directors fails to
recommend against acceptance or takes no position with respect to the
acceptance by DSPT's stockholders, and within twelve months after the
date of such termination DSPT enters into a letter of intent or a
definitive agreement with a third party for an alternative
transaction.
- by MTS or DSPT if the DSPT board authorizes DSPT to accept a superior
proposal and MTS does not make an offer that is at least as favorable to
DSPT's stockholders as the superior proposal within 10 business days after
DSPT's written notice.
48
<PAGE>
INFORMATION WITH RESPECT TO DSPT
BUSINESS OF DSPT
INTRODUCTION
DSPT designs, develops, manufactures, markets and integrates high-speed
computer-automated instrumentation for measurement and control applications.
DSPT has two divisions, the transportation group, which focuses on powertrain
testing, and the lab group, which focuses on vehicle safety and component
testing, general data acquisition and signal analysis. Powertrain testing is
currently DSPT's largest market and major focus.
On January 21, 1999, DSPT announced its strategic decision to relocate its
corporate headquarters to, and consolidate its transportation group operations
in Ann Arbor, Michigan in order to allow efficient operation of the
transportation group, its largest and most profitable business segment. DSPT
recorded a one-time pre-tax restructuring charge of $496,000 in the fourth
quarter of 1999 which consists of $306,000 in severance pay and $190,000 in
estimated idle facility and winding down costs in connection with the
restructuring.
DSPT's products are used to gather and measure analog signals generated by
transducers and/or detectors which measure physical properties such as
temperature, pressure and acceleration. These products have been used primarily
in the transportation industry, in powertrain testing such as dynamometer
control and automotive combustion research, and vehicle impact and simulation
testing. Aerospace companies, universities and government-funded agencies use
DSPT's products in ultrasonics, chemical kinetics, plasma diagnostics,
spectroscopy, fusion research, explosives testing and vibration analysis.
DSPT was incorporated in California in July 1982 and began operations in May
1984. DSPT reincorporated in Delaware in September 1997.
STRATEGY
DSPT's strategy is to focus its resources on the transportation market as
DSPT's largest market. DSPT defines the transportation market as including the
following industries and segments:
- major vehicle manufacturers and their suppliers;
- the diesel industry, e.g., manufacturers of heavy trucks, farm and
construction equipment and large stationary engines;
- the fuels and lubricants industry;
- small engine manufacturers; and
- racing engine technology.
DSPT believes that the fundamental factors of government environmental
regulation, global competition among vehicle manufacturers, and rapid
technological progress are expanding the demand for advanced turnkey powertrain
test solutions. Large domestic and international customers demand more custom
turnkey solutions that require more complex services. DSPT believes that
investments in this area are necessary and logical steps towards expanding its
share of the transportation market.
To address its customers' needs in the transportation market, DSPT announced
its strategic decision in early fiscal 1997 to focus more heavily and expand its
capabilities on the services side of the business, continue development of new
products with higher levels of capability and integration, and take a more
aggressive approach to marketing with the goal of becoming a full-service
company capable of manufacturing and providing turnkey integration of DSPT's
products.
49
<PAGE>
DSPT also continues to invest in the development of data acquisition
products. In fiscal 1999, DSPT introduced ADAPT-CAS, its new combustion analysis
system, BaseLine ADAPT, its new, low-cost dynamometer control system, and
software enhancements to ADAPT-DAC, DSPT's primary dynamometer control system.
DSPT entered into a Strategic Alliance Agreement dated February 26, 1995
with FEV Motorentechnik GmbH & Co. KG. As of February 26, 1999, FEV beneficially
owned approximately 12.5% of DSPT outstanding common stock. DSPT entered into
the strategic relationship with FEV in order to combine resources, technology
and distribution for joint product development and distribution within certain
territories. Under the terms of the agreement, DSPT and FEV have agreed to
jointly develop and manufacture certain products as well as act as sole
distributors of each other's pre-existing products within certain respective
territories, and to act as strategic partners with respect to distribution for
other parts of the world. DSPT, MTS and FEV have entered into an agreement which
will supersede this agreement effective upon the merger. See "Information with
Respect to MTS" on page 65.
PRODUCTS AND CUSTOMERS
DSPT manufactures and markets data acquisition and control products in the
form of integrated systems, modules and proprietary software developed by DSPT.
The transportation group provides powertrain testing and the lab group provides
vehicle safety and component testing and general data acquisition and signal
analysis.
POWERTRAIN TESTING PRODUCTS
DSPT supplies a wide range of products and services for powertrain test
cells. DSPT's RedLine and BaseLine products are accepted as standards by leading
automakers around the world. These systems help its customers develop more cost
effective, fuel efficient engines. By integrating hardware, software, services
and expertise into a cost-effective system, DSPT creates solutions that focus on
its customers' specific needs. These solutions, based on industry standards,
provide long-term flexibility for changing test requirements. The following is a
list of DSPT's major customers in the transportation market:
<TABLE>
<S> <C>
- - Engelhard Corporation - John Deere
- - FEV - Lubrizol Corporation
- - General Motors Corporation - Sverdrup Technology, Inc.
</TABLE>
REDLINE ADAPT-DAC. The data acquisition and control system is a crucial
component in a powertrain test cell. RedLine ADAPT-DAC offers real-time control
over the engine being tested. Multi-processor architecture allows the system to
acquire data on hundreds of pre-set parameters simultaneously as the engine
responds to test conditions. It can interface with and control a wide variety of
other test instruments and systems, including emission benches, combustion
analyzers and other devices. With its networking capabilities, ADAPT-DAC can
provide centralized, remote control of an entire suite of test cells. It
features innovative graphics and runs on a personal computer in the Windows
environment. The systems sell from $60,000 for a base model up to $500,000 with
accessory products, hardware spares, custom software, integration, installation
and training.
REDLINE ADAPT-CAS. DSPT introduced the RedLine ADAPT-CAS at the SAE show in
February 1998. It is the third generation combustion analysis product of RedLine
ACAP which was introduced in 1991. ADAPT-CAS incorporates years of feedback from
industry leaders around the world. Designed for seamless integration with
ADAPT-DAC or with VME-bus or VMX-bus systems from other vendors, it enhances the
usefulness and quality of test data, raises the efficiency of test cell
50
<PAGE>
operations and increases test safety. It is easy to use and features dynamic
graphic displays. Integrated with ADAPT-DAC, the combined system offers a single
user interface for operation, display of data, and system configuration. The
systems range in price from approximately $30,000 for a base system to over
$150,000.
REDLINE DYNO. DSPT offers a line of dynamometers called RedLine DYNO. These
dynamometers are low-inertia, high-response units designed for the quick
transient conditions of sophisticated powertrain testing. They interface
directly with RedLine ADAPT-DAC and provide another element in the complete
solution for powertrain testing. The systems range in price from approximately
$25,000 to $125,000.
REDLINE CONNECT. As test cell electronics proliferate, test-cell wiring
becomes more complex, time-consuming and error-prone. The RedLine CONNECT system
provides a fast, simple, modular solution for interfacing test cell
instrumentation and signals. It combines the flexibility of individual signal
connections with the speed and convenience of single-point mass termination.
These systems range in price from approximately $15,000 to $25,000.
BASELINE ADAPT. BaseLine ADAPT is a self-contained data acquisition and
control system needing only a PC workstation and test cell interfaces to
implement an operational test system. It is the lower cost alternative to
RedLine ADAPT and offers space savings of approximately 70%, a significant
advantage in the equipment-crammed environment of today's test cell. Typical
systems range in price from approximately $35,000 to $45,000.
TEST CELL INSTRUMENTATION AND ACCESSORY PRODUCTS. DSPT provides a
comprehensive array of test cell accessories (e.g., engine supports, coolant
control systems, containerized powertrain test cells) as integral parts of
RedLine installations.
TEST CELL SERVICES. DSPT provides test cell services to its customers as
part of a turnkey solution. These services are provided with sales of the
powertrain testing products described above. DSPT provides services in the areas
of custom manufacturing, system integration, project engineering and management,
installation and commissioning. Test cell services personnel work in close
partnership with customers to design, install and service a wide variety of
powertrain test facilities. In the planning phase, project and applications
engineers work closely with customers' selected contractors to design and
integrate complex systems and facilities that will meet their needs. During
installation, DSPT's installers and commissioning engineers work with the
customer to ensure timely completion and thorough testing of all equipment.
VEHICLE SAFETY AND COMPONENT TESTING PRODUCTS
IMPAX data acquisition systems are systems typically used in collecting and
processing data from full-scale vehicle crash tests, sled simulators and
component test stands. In addition, they have been used for investigating
lift-off dynamics for space launch vehicles. Systems prices range from about
$150,000 to $400,000 depending on the configuration. Major customers for this
product are General Motors Corporation, Autoliv, Lockheed-Martin and Morton
International.
GENERAL DATA ACQUISITION AND SIGNAL ANALYSIS PRODUCTS
SIGNAL ACQUISITION PRODUCTS. SigLab high-performance signal acquisition
products are subsystems for personal computers and workstations in the
electronic and electro-mechanical device analysis market. SigLab products
provide a cost-effective, portable technology for measurement applications like
computer hard disk head positioning or acoustic noise suppression systems in
automobiles. The products are controlled by and integrated with the MATLAB
software from The MathWorks Inc. of Natick, Massachusetts. The products range in
price from $5,000 for a base 2-channel unit to $30,000 for a 6-channel system
with optional software and additional memory. Major customers for these products
51
<PAGE>
are distributors such as Signaltech, Sigmatest and Accoutionies, and customers
such as G-Tech Instrument, Inc. and Phase Metrics.
CUSTOM DATA ACQUISITION SYSTEMS. DSPT also designs custom systems for
customer-specific measurement or control applications. These systems are
configured from DSPT's line of modules, such as signal conditioners, transient
recorders, analog-to-digital converters and interface modules. These systems are
typically sold to universities, government-funded labs and research and
development labs. The typical selling price of a system ranges from about
$25,000 to about $300,000 for a complex installation. Major customers for these
products are Boeing Commercial Airplane, Naval Air Warfare Center, Telogy,
Stanford Linear Accelerator and Ethyl Corporation.
MANUFACTURING AND SUPPLIERS
DSPT manufactures its products from components and prefabricated parts such
as integrated circuits, printed circuit boards, power supplies and enclosures
manufactured by others. Manufacturing operations consist of assembly of printed
circuit boards, power supplies and crates, system integration and final testing.
Materials and components used by DSPT in manufacturing are available primarily
from domestic sources. Where possible, DSPT buys from multiple sources to avoid
dependence on any single supplier. However, certain custom analog devices are
only available from a limited number of suppliers.
MARKETING AND SALES
In the United States, DSPT primarily sells and services its products through
its own sales and service organizations located in Michigan and California. In
Canada, Western Europe, Korea and Japan, DSPT sells its products through
independent distributors through whom DSPT provides technical and administrative
assistance. For its transportation market products, DSPT distributes its
products through FEV in Europe except for the United Kingdom. In the United
Kingdom, DSPT operates a sales and customer support subsidiary for its
powertrain testing products. DSPT's standard terms of sale generally require
payment within 30 days of shipment.
The following customers accounted for over 10% of fiscal 1999 net sales:
General Motors accounted for 15%, Sverdrup for 14% and Engelhard for 12%. In
fiscal 1998, General Motors accounted for 21% of net sales and Hyundai Motor
accounted for 14% of net sales. General Motors accounted for 18% of net sales in
fiscal 1997. No other customer accounted for 10% or more of DSPT's net sales in
fiscal years 1999, 1998 or 1997. Sales of DSPT products through DSPT's
relationship with FEV during fiscal 1999 were approximately $1,248,000 or
approximately 5% of DSPT's total net sales.
Export sales, primarily to the United Kingdom, Western Europe, and the Far
East, accounted for approximately 20%, 35% and 32% of sales in 1999, 1998 and
1997, respectively.
At January 31, 1999, DSPT had an order backlog of approximately $4,800,000
compared to a backlog of approximately $11,500,000 at January 31, 1998, and
approximately $9,500,000 at January 31, 1997. Backlog consists of orders
believed by management to be firm and scheduled for delivery within twelve
months. However, most orders can be rescheduled or canceled by customers without
significant penalty. In addition, backlog is dependent on the timing of orders,
particularly large orders, and on seasonal spending for capital requirements.
Accordingly, backlog at January 31, 1999, or at any other date, may not be
indicative of prospective sales.
SERVICE AND WARRANTY
DSPT maintains a telephone hotline staffed with qualified technicians to
respond to service calls. Most servicing is performed at its facilities in
Fremont, California and Ann Arbor, Michigan.
52
<PAGE>
DSPT generally extends a one-year warranty for its products. Warranty costs
have been nominal to date.
RESEARCH AND DEVELOPMENT
DSPT's ability to compete successfully in an industry subject to rapid
technological change depends on, among other things, its ability to anticipate
and respond to such change. Accordingly, DSPT is committed to a high level of
research and development activity. In 1999, the principal products introduced
were the transportation group's RedLine ADAPT-CAS, its new combustion analysis
system, BaseLine ADAPT, a lower cost dynamometer controller and several software
enhancements and upgrades to ADAPT-DAC system, its primary dynamometer control
system. In 1999, the lab group introduced several new software add-ons which
have helped broaden the market for its signal acquisition products. DSPT expects
that in 2000 research and development activities will focus primarily on
software development for new products and product enhancements.
DSPT incurred expenditures for research and development of $2,765,000 in
fiscal 1999, $2,352,000 in fiscal 1998 and $2,203,000 in fiscal 1997,
representing 11%, 11%, and 12% of total sales in each such period. In accordance
with the Statement of Financial Accounting Standards No. 86 which requires the
capitalization of software development costs incurred subsequent to establishing
the technological feasibility of producing the finished software product. DSPT
capitalized $522,000, $517,000, and $630,000 in fiscal 1999, 1998 and 1997,
respectively.
COMPETITION
Competition, from both U.S. and foreign competitors, is strong and active.
Some of these competitors are substantially larger companies with greater
resources. DSPT management believes that these companies include AVL located in
Graz, Austria, and Sverdrup, a system integrator based in Tennessee.
DSPT competes primarily on the basis of product diversity, features and
functions, price/ performance, flexibility, and technical support. In addition,
DSPT believes that an additional competitive factor in the automotive market is
its installed base in the United States. DSPT believes that it competes
favorably with respect to all these factors. Systems integration experience and
ability is increasingly a factor in large system orders and DSPT believes that
it has the personnel and the resources to compete in this area, although many of
its competitors are substantially larger with greater resources.
PROPRIETARY RIGHTS
DSPT relies upon a combination of copyright, trade secret laws and
non-disclosure and licensing agreements to establish and maintain its
proprietary rights to its products. The laws of foreign countries may not
protect DSPT's proprietary rights to the same extent as do the laws of the
United States. Although DSPT continues to implement protective measures and
intends to defend its proprietary rights, these measures may not be successful.
DSPT believes, however, that, because of the rapid pace of technological change
in the automated test, measurement and control industries, the legal protections
for its products are less significant factors in DSPT's success than the
knowledge, ability, and experience of DSPT's employees, the frequency of product
enhancements and the timeliness and quality of support services provided by
DSPT.
DSPT is subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights. Technology used in DSPT's products
is licensed from third parties on a non-exclusive basis. These license
agreements generally require DSPT to pay royalties and to fulfill
confidentiality obligations in order to maintain the licenses. The termination
of any of these licenses may have a material adverse effect on DSPT's
operations. While it may be necessary or desirable in the future to
53
<PAGE>
obtain other licenses relating to one or more of its products or relating to
current or future technologies, DSPT may not be able to do so on commercially
reasonable terms.
EMPLOYEES
DSPT had 158 employees at January 31, 1999. Of these employees, 107 worked
in manufacturing and engineering, 29 in marketing and sales and 22 in
administration. None of DSPT's employees is represented by a labor union and
there has never been a disruption of operations due to labor dispute.
PROPERTIES
DSPT's facilities consist of approximately 28,000 square feet of space in
Fremont, California and approximately 26,000 square feet of space in Ann Arbor,
Michigan which are leased under operating leases. The Fremont facility lease
provides for monthly rent payments of $15,146 through October 1998 and $35,388
from November 1998 through lease expiration on July 1999. DSPT plans to move its
lab group to a smaller location when the lease expires.
The Ann Arbor facility leases consist of:
- A seven-year lease for one building which expires in January 2000,
providing for annually increasing monthly rental payments reaching $10,257
during the seventh year. DSPT expects to move out of this facility when
the lease expires.
- A 31-month lease for another building which expires in June 1999, with
monthly rental payments of $4,308 from December 1996 through May 1998 and
increasing to $4,602 per month thereafter. DSPT plans to extend its lease
on this facility until it is able to move into its new facility.
- A facility sublease commencing October 1998, providing for monthly rental
payments of $4,696, and renewable annually each June until June 2002. If
DSPT does not renew the lease, DSPT is responsible to pay the lessor a
one-time payment to cover the unamortized costs of the tenant
improvements. DSPT expects to renew its lease for another year in June
1999.
DSPT is obligated to pay real estate taxes, insurance and maintenance
expenses associated with the leased facilities.
DSPT is in the process of constructing a new 57,200 square foot facility
located in Ann Arbor, Michigan, which will house its corporate headquarters and
transportation group. Under the terms of the construction contract, DSPT is
obligated to pay the contractor $3,750,000 for the construction of the new
facility which is expected to be completed sometime during the fall of 1999.
Management believes that the new facilities will be adequate for the company
over the next two to three years.
DSPT also owns a condominium located in Ann Arbor, Michigan.
54
<PAGE>
MARKET FOR DSPT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
DSPT's common stock is currently traded on the Nasdaq National Market under
the symbol "DSPT." The following table sets forth, for the periods indicated,
the high and low closing sales prices of the common stock as reported by the
Nasdaq market.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, 1999 JANUARY 31, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
--------- --------- --------- ---------
First Quarter............................................ 10.625 8.000 6.375 5.375
Second Quarter........................................... 10.000 7.500 6.000 4.875
Third Quarter............................................ 9.375 5.375 11.625 5.625
Fourth Quarter........................................... 7.938 6.50 11.938 8.000
</TABLE>
HOLDERS
The approximate number of holders of record of DSPT's common stock at March
31, 1999 was 90. DSPT believes that these recordholders represent approximately
1,050 beneficial owners.
DIVIDEND POLICY
DSPT has never declared or paid dividends on its common stock. There are no
dividend restrictions in DSPT's bank line of credit.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, the percentages
that certain items in the consolidated statements of income bear to net sales.
The table and subsequent discussion should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales.............................................. 100% 100% 100%
Gross profit........................................... 53 54 56
Research and development expenses...................... 11 11 12
Marketing, general and administrative expenses......... 32 31 37
Restructuring costs.................................... 2 -- --
Operating income....................................... 9 12 7
Net income............................................. 6 7 5
</TABLE>
For accounting purposes, DSPT changed to a 52/53 week convention with the
fiscal year ending on the Sunday nearest the end of January effective on the
fiscal year beginning February 1, 1997. However, for financial reporting
purposes, each fiscal quarter or year is presented as if it ended on the last
day of such period. The number of days covered in each year used in the
period-to-period comparisons are essentially the same with 1999 and 1998 having
364 days and 1997 having 366 days.
OVERVIEW. One of the major trends occurring in the transportation industry,
DSPT's largest market, is that large customers are demanding custom turnkey
solutions that require more complex integration services. DSPT believes that
investments in this area are necessary to expand its share of the transportation
market. Starting in 1997, DSPT invested heavily in developing significant
service capabilities in the areas of custom manufacturing, system integration,
project engineering/management, installation and commissioning with the goal of
becoming a full-service company capable of manufacturing and providing turnkey
integration of its products. DSPT's turnkey solutions, which combine our
products and integration services, have provided DSPT's growth in the last three
years.
REVENUES AND SALES BACKLOG. Revenues were $25,396,000, $22,038,000 and
$17,987,000 in 1999, 1998 and 1997, respectively, with annual revenue growth of
15% from 1998 to 1999 and 23% from 1997 to 1998. Revenue growth during 1999 and
1998 was principally driven by several large orders, contracts greater than
$1,000,000, for the transportation group turnkey RedLine data acquisition and
control systems that increased sales backlogs to $9,500,000 at January 31, 1997
and to $11,500,000 at January 31, 1998. In addition, the introduction of new
products in the lab group slowed the decline in revenues for the lab group from
1997 to 1998 and resulted in a slight increase from 1998 to 1999.
Overall revenue growth slowed in 1999 and sales backlog decreased to
$4,800,000 at January 31, 1999, as the total dollar amount of large orders for
transportation group products dropped significantly in 1999 compared to 1998,
primarily due to delays in budgetary approvals from several major customers, as
well as the delay in the introduction of DSPT's new RedLine combustion product,
Redline ADAPT-CAS. In addition, revenues and sales bookings from the Asian
market for Transportation Group products fell dramatically, reflecting the
economic conditions in that region.
The revenue increase in 1997 compared to 1996 was principally due to
continued increase in demand for the transportation group products and services
associated with RedLine ADAPT-DAC.
Product revenues amounted to $21,349,000, $19,114,000 and $16,154,000 in
1999, 1998 and 1997, respectively. Product revenues grew by 12% in 1999 from
1998, and by 18% in 1998 and 1997. Product
56
<PAGE>
revenue growth in 1999 and 1998 was primarily due to the large orders received
for its turnkey solutions in 1998 and 1997. The decrease in the rate of product
revenue growth experienced in 1999 is attributable to the factors described
above.
Service revenues amounted to $4,047,000, $2,924,000 and $1,833,000 in 1999,
1998 and 1997, respectively. Service revenues grew by 38% in 1999 from 1998, and
by 59% in 1998 from 1997. Service revenues amounted to 16%, 13% and 10% of total
revenues in 1999, 1998 and 1997, respectively. The growth in service revenues in
all periods reflects an increase in integration services revenues as part of
turnkey system solutions introduced in 1997 to fill the growing need from DSPT's
large transportation group customers. In addition, maintenance contracts and
training services also increased as product revenues increased.
GROSS PROFIT. Gross profit percentage decreased to 53% in 1999 compared to
54% in 1998 and 56% in 1997. Gross profit percentage is subject to change due to
various factors, including variation in product mix, changes in component costs
and revenue levels. As anticipated in 1999 and 1998, the decrease in gross
profit percentages is a result of product mix shift towards lower margin
transportation group turnkey RedLine systems. This shift in product mix
decreased the gross profit percentage in the transportation group segment from a
high of 56% in 1997 to 52% in 1998 and 51% in 1999. These percentages were
offset partially by the increasing gross profit margins for the lab group that
went from 58% in 1997 to 62% in 1998 and 68% in 1999. The increase in margins in
the lab group was primarily due to a shift in product mix to higher margin new
products.
Information regarding gross margins related to product sales and service
sales are not provided separately as such information is not readily available
from DSPT's management information system.
RESEARCH AND DEVELOPMENT. DSPT invests in new product and application
developments in both the transportation group and lab group. The majority of the
research and development expenses in all the periods presented were for the
transportation group which introduced several new products and enhancements
during the last three years.
Research and development expenses during the last three years remained at
11-12% of revenues. The increase in absolute dollars in 1999 compared to 1998
was primarily due to the addition of engineering consultants in the short term
to accelerate the completion of certain product development projects, including
RedLine which was behind schedule. DSPT anticipates research and development
expenses to continue to increase in absolute dollars as it continues to add
personnel to staff its development projects. However, it is expected that
research and development expenses will remain at approximately 11% of net sales.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased in absolute dollar amounts by $1,095,000, or
16% in 1999 from $6,916,000 in 1998. As a percentage of sales, these expenses
increased slightly to 32% in 1999 compared to 31% in 1998. The increase in
spending in 1999 compared to 1998 was due to increased sales and marketing
expenses, including the hiring of additional marketing personnel and increased
advertising and sales collateral budgets. These expenses were primarily incurred
to permit increased focus on industrial manufacturers and a broad range of
transportation industry equipment suppliers. DSPT also increased trade show
expenses to introduce new products and incurred higher administrative support
costs in 1999.
Marketing, general and administrative expenses increased in absolute dollar
amounts by 3% in 1998 compared to 1997, and decreased as a percentage of sales
to 31% in 1998 from 37% in 1997. The increase in absolute dollars was a result
of DSPT hiring additional sales and applications personnel to address the
increased level of sales opportunities primarily for turnkey systems. The
decrease in the percentage of sales was a result of increased revenues.
RESTRUCTURING COSTS. On January 21, 1999, DSPT announced its strategic
decision to relocate its corporate headquarters to, and consolidate its
transportation group operations in, Ann Arbor, Michigan
57
<PAGE>
in order to allow efficient operation of the transportation group, its largest
and most profitable business segment. DSPT recorded a one-time, pre-tax
restructuring charge of $496,000 in the fourth quarter of 1999 which consists of
$306,000 in severance pay and $190,000 in estimated idle facility and winding
down costs.
DSPT expects that after the move and consolidation is complete sometime in
fiscal 2000, earnings will benefit from a lower cost structure and improved
operating efficiencies. Manufacturing, sales and service for the transportation
group will be consolidated with corporate headquarters into a single,
company-owned facility in Ann Arbor.
OTHER INCOME. Other income, net of interest expense in 1999 was essentially
unchanged at $221,000 compared to $225,000 in 1998, and increased from $123,000
in 1997. On average, DSPT had much higher available cash to invest or to take
advantage of vendor early payment discounts in 1999 and 1998 than in 1997.
INCOME TAXES. The effective tax rate computed for 1999 was 37% compared to
40% in 1998 and 33% in 1997. The lower tax rate in 1999 versus 1998 reflect
primarily the higher research and development credits and lower state tax rates.
The higher tax rate in 1998 compared to 1997 reflect 1998's higher domestic
income contribution, higher state income taxes and lower research and
development tax credits compared to 1997. Domestic tax rates historically have
been higher than DSPT's foreign subsidiary's tax rates.
Factors that may affect the tax rates include research and development tax
credits, differences in state tax rates, software capitalization levels and
foreign income contributions.
NET INCOME. As a result of the factors discussed above, net income
decreased in absolute dollars to $1,582,000, or $.64 per diluted share in 1999,
from $1,646,000, or $.68 per diluted share in 1998. 1997 net income was
$914,000, or $.40 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. During 1999, operating activities used $724,000 of cash,
compared with cash generated of $3,915,000 and $929,000 in 1998 and 1997,
respectively. The cash used in 1999 for operating activities was largely due to
the application of customer prepayments against receivables and to increased
accounts receivable brought about primarily by high shipments in the last month
of the year end. The major uses of cash in investing and financing activities
included additions to property and equipment, investment in software development
and the repurchase of DSPT's common stock on the open market.
Capital expenditures for property and equipment additions totaled $1,743,000
in 1999, $407,000 in 1998, and $1,015,000 in 1997. Major capital expenditures in
1999 included the purchase of land for the Ann Arbor building site and
construction-in-progress costs for the new 57,200 square foot facility. DSPT
purchased the land late in the second quarter of 1999 in anticipation of growth
over the next three to five years. Due to the rising building lease costs in the
Ann Arbor, Michigan area, DSPT found that it would cost less to own its own
facility. Building construction costs along with furniture, fixtures and
equipment is currently estimated at $4,600,000. DSPT anticipates that the
construction and eventual mortgage of the building will be financed through the
Michigan Strategic Fund industrial bond financing. In August 1998, the Michigan
Strategic Fund adopted an inducement resolution for a loan not to exceed
$5,900,000 for DSPT. The bond issuance is pending negotiations between DSPT,
Michigan Strategic Fund and DSPT's bank. As part of the financing, DSPT's bank
will be expected to issue a letter of credit and will require a guarantee from
MTS. DSPT expects the financing to be completed in May 1999.
58
<PAGE>
DSPT has secured a building contractor to build the first phase on the
property, and began construction of the first phase in February 1999. Based on
DSPT's current growth plans, DSPT believes that the building site is sufficient
to allow DSPT to grow over the next three to five years.
SHARE REPURCHASE PLAN. In May 1998, DSPT announced plans to repurchase up
to 225,000 shares of its outstanding common stock, which represents
approximately 10% of its shares, at prevailing market prices because it deemed
the repurchase a good investment. DSPT terminated the repurchase plan in March
1999 in connection with the board of directors' approval of the proposed merger
between DSPT and MTS. As of January 31, 1999, the DSPT had repurchased
approximately 51,000 shares on the open market for an aggregate amount of
$397,000, or $7.72 per share. As a result of the small number of shares of
repurchased common stock through January 31, 1999, the repurchase had minimal
effect on net income per share. DSPT made no further common stock repurchases
after January 31, 1999.
FOREIGN CURRENCIES. DSPT denominates substantially all of its transactions
in U.S. currency other than transactions by its foreign subsidiary. The assets
and liabilities of the Company's foreign subsidiary is denominated in the
country's local currency and translated at the year-end rate of exchange. The
related income statement items are translated at the average rate of exchange
for the year. The resulting translation adjustments are excluded from income and
reflected as a separate component of shareholders' equity. Realized and
unrealized exchange gains or losses arising from transaction adjustments are
reflected in operations and are not material.
WORKING CAPITAL. Working capital at January 31, 1999 was $8,276,000
compared to $8,173,000 at the beginning of the fiscal year, while the current
ratios stood at 2.8 to 1.0 at January 31, 1999 and at 2.5 to 1.0 at January 31,
1998. DSPT has a $4,000,000 secured bank line of credit with no balance
outstanding at January 31, 1999. DSPT currently anticipates that internally
generated funds, bank borrowings and anticipated revenue bonds will be
sufficient to satisfy its anticipated operating needs over the foreseeable
future.
Management believes that inflation has not had a material effect on DSPT's
operations or financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DSPT management believes that the market risk associated with DSPT's market
risk sensitive instruments as of January 31, 1999 is not material, and
therefore, disclosure is not required.
YEAR 2000 COMPLIANCE
DSPT has an informal initiative in place to address Year 2000 issues and
risks. The five elements of the initiative can be summarized as follows:
- product readiness;
- internal infrastructure readiness;
- facilities readiness;
- supplier and vendor readiness; and
- DSPT's contingency plan.
PRODUCT READINESS. DSPT's products perform functions related to acquiring
data from tests of other companies' products and do not perform date
calculations and, therefore DSPT does not consider Year 2000 issues and risks
related to its products to be significant. All products sold by DSPT since the
beginning of calendar 1998 have been tested by DSPT and determined to be Year
2000 compliant. DSPT has contacted all of its significant customers and informed
them that prior versions of
59
<PAGE>
DSPT products may not be Year 2000 compliant. Customers with earlier versions of
DSPT products, other than some former DSPT products which are obsolete, may
upgrade at the cost of an annual maintenance contract to assure compliance.
INTERNAL INFRASTRUCTURE READINESS. DSPT has also reviewed its internal
management information systems, billing, outside payroll and other information
service functions critical to its operations and determined the nature and
extent of any Year 2000 issues related to such functions. DSPT's management
information systems, billing and outside payroll systems are run on software
provided by third party vendors. DSPT has obtained certifications from each of
such vendors that those systems have been tested and are Year 2000 compliant.
DSPT has a small number of noncompliant personal computers which will be phased
out of use during DSPT's consolidation of the transportation group to Ann Arbor.
FACILITIES READINESS. DSPT has conducted a limited review of its
facilities, including air conditioning, heating and other facilities related
systems, and has determined that its facilities are not Year 2000 compliant.
DSPT's California lease expires at the end of July 1999 and DSPT will relocate
the remaining operations being conducted in Fremont, California to a new
facility in the same area. DSPT expects to consolidate all of its operations in
Michigan into a new company-owned facility before the end of calendar 1999. As a
term and condition to entering into any new lease or building construction, DSPT
is requiring its lessor/building contractor to certify that the premises are
Year 2000 compliant.
SUPPLIER AND VENDOR READINESS. DSPT does not have any formal plan for
addressing Year 2000 compliance with its suppliers and vendors. DSPT has
received voluntary certification of Year 2000 compliance from many of its
existing suppliers and vendors who are critical to DSPT's operations. DSPT is in
the process of selecting new suppliers of most components and new assembly
houses for transportation group products as a result of the consolidation of its
transportation group operations in Ann Arbor, Michigan. DSPT has made the
receipt of Year 2000 compliance certification a term and condition of entering
into any new relationship with suppliers and vendors. DSPT intends to seek
certification of Year 2000 compliance from any remaining existing suppliers and
vendors critical to its operations beginning in May or June, 1999. DSPT expects
to concentrate on its suppliers of circuit boards, limited source vendors and
outside assembly houses for such third party products. DSPT expects to have the
supplier/vendor certification project complete by the fall of 1999.
CONTINGENCY PLANNING. DSPT does not consider the risks associated with Year
2000 issues to be significant to DSPT. DSPT has begun outlining the measures
that it can take in January 2000 to minimize any Year 2000 related problems.
Such measures include the following:
- developing alternate supplier relationships;
- stocking critical inventory items; and
- stocking critical alternate parts and components.
DSPT has also done the following with respect to Year 2000 issues and
compliance: notified its significant customers regarding the need to update
DSPT's older products for Year 2000 compliance; determined a course of action
for phasing out noncompliant end user computers; and implemented policies
regarding Year 2000 compliance with new suppliers and vendors and new landlords.
DSPT also expects to implement a more formal policy with respect to existing
suppliers and vendors who are critical to its operations. DSPT's costs to date
in addressing Year 2000 issues have not been significant, and DSPT expects that
any future costs will be immaterial.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 26, 1999,
with respect to the beneficial ownership of DSPT's common stock by (1) all
persons known by DSPT to be the beneficial owners of more than 5% of the
outstanding common stock of DSPT, (2) each director of DSPT, (3) the Chief
Executive Officer and the three other executive officers of DSPT as of January
31, 1999 whose salary and bonus for the year ended January 31, 1999 exceeded
$100,000, and (4) all executive officers and directors of DSPT as a group:
<TABLE>
<CAPTION>
SHARES OWNED(2)
------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES OF CLASS
- ------------------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
FEV Motorentechnik GmbH & Co. KG.......................................................... 285,000(3) 12.71%
Neuenhostrasse 181
52078 Aachen, Germany
FMR Corp.................................................................................. 224,100(4) 9.99%
82 Devonshire Street
Boston, MA 02109
Kennedy Capital Management, Inc........................................................... 138,000(5) 6.15%
10829 Olive Blvd.
St. Louis, MO 63141
F. Gil Troutman, Jr....................................................................... 116,666(6) 5.09%
Alan S. Broad............................................................................. 96,868(7) 4.27%
J. Scott Kamsler.......................................................................... 61,200(8) 2.72%
Howard O. Painter, Jr..................................................................... 79,000(9) 3.49%
Jose M. Millares, Jr...................................................................... 38,666(10) 1.70%
Michael Ford.............................................................................. 21,000(11) *
Larry Moulton............................................................................. 19,032(12) *
Executive officers and directors as a group (seven persons)............................... 432,432(13) 17.88%
</TABLE>
- ------------------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
DSP Technology Inc., 48500 Kato Road, Fremont, California 94538-7338.
(2) Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(3) According to a Schedule 13D filed with the Securities and Exchange
Commission on June 8, 1998, FEV has sole voting power and sole dispositive
power with respect to the 285,000 shares of the DSPT's common stock.
(4) According to a Schedule 13G/A filed with the Securities and Exchange
Commission on January 7, 1999, all 224,100 shares are beneficially owned by
FMR Corp. through its wholly-owned subsidiary, Fidelity Management &
Research Company, "Fidelity", which is deemed to beneficially own such
shares as a result of acting as an investment advisor to various investment
companies registered under Section 8 of the Investment Company Act of 1940,
the "Funds". The ownership of one investment company, Fidelity Low-Priced
Stock Fund, amounts to 224,100 shares of DSPT's common stock. Edward C.
Johnson 3d, Chairman of FMR Corp., FMR Corp., through its control
61
<PAGE>
of Fidelity, and the Funds each has the sole power to dispose of the 224,100
shares owned by the Funds. Neither FMR Corp. nor Edward C. Johnson 3d has
the sole power to vote or direct the voting of the shares owned directly by
the Funds, which power resides with the Funds' board of trustees. Fidelity
carries out the voting of the shares under written guidelines established by
the Funds' board of trustees. Members of the Edward C. Johnson 3d family,
through their ownership of voting common stock of FMR Corp. and their
execution of a stockholder's voting agreement, may be deemed, under the
Investment Company Act of 1940, to form a controlling group with respect to
FMR Corp., and may therefore be deemed to beneficially own the shares of
DSPT's stock beneficially owned by FMR Corp.
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 5, 1999, all 138,000 shares are beneficially owned by
Kennedy Capital Management, Inc. which is deemed to beneficially own such
shares as a result of acting as an investment advisor to various companies
registered under Section 203 of the Investment Advisers Act of 1940. Kennedy
Capital is deemed to have the sole power to vote or to direct the vote of
126,100 of the 138,000 shares beneficially owned. Kennedy Capital has the
sole power to dispose or to direct the disposition of 138,000 shares.
(6) Includes 51,666 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(7) Includes 24,832 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(8) Includes 9,000 shares subject to stock options exercisable within 60 days of
February 26, 1999.
(9) Includes 24,000 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(10) Includes 28,166 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(11) Includes 21,000 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(12) Includes 17,832 shares subject to stock options exercisable within 60 days
of February 26, 1999.
(13) Includes 176,496 shares subject to stock options exercisable within 60 days
of February 26, 1999.
62
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation of
Mr. F. Gil Troutman, Jr., the President and Chief Executive Officer of DSPT, for
services in all capacities to the company, during the fiscal years ended January
31, 1999, 1998 and 1997. Mr. Troutman will serve as a Vice President of MTS
following the merger.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
--------------------- SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- -------------------------------------------------------------------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
F. Gil Troutman, Jr................................................. 1999 $ 192,046 $ 0 5,000
Chief Executive Officer and President 1998 $ 173,076 $ 51,000
1997 $ 175,448 $ 0
</TABLE>
STOCK OPTION INFORMATION
The following table sets forth certain information with respect to grants of
options to purchase DSPT's common stock made during the fiscal year ended
January 31, 1999 to Mr. Troutman:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED(1) YEAR ($/SH)(2) DATE 5% 10%
- ------------------------------------------- ------------- ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
F. Gil Troutman............................ 5,000 5.6% $ 8.125 2/22/08 $ 25,548 $ 64,746
</TABLE>
- ------------------------
(1) Options granted during fiscal 1999 under DSPT's 1991 Stock Option Plan
generally vest in equal annual amounts over a three-year period; provided,
however, no option may be exercised in whole or in part until six months
after the date of grant.
(2) The option was granted at fair market value on the date of grant.
(3) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on the Securities and Exchange Commission rules. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the common stock, overall market conditions and the optionholder's continued
employment throughout the vesting period. The amounts reflected in the table
may not necessarily be achieved. One share of stock purchased at $8.125 in
fiscal 1999 would yield profits of approximately $5.11 per share at 5%
appreciation over ten years, or approximately $12.95 per share at 10%
appreciation over the same period.
63
<PAGE>
The following table provides specified information concerning unexercised
options held as of January 31, 1999 by Mr. Troutman. Mr. Troutman did not
exercise any options during the year ended January 31, 1999.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
---------------------------- ----------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- -------------------------------------------- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
F. Gil Troutman, Jr......................... 51,666 3,334 $ 219,400 $ 0
</TABLE>
- ------------------------
(1) Options granted during fiscal 1999 under DSPT's 1991 Stock Option Plan
generally vest in equal annual amounts over a three-year period; provided,
however, no option may be exercised in whole or in part until six months
after the date of grant.
(2) Based on the closing price of $6.938, as reported on the Nasdaq National
Market, on January 29, 1999, less the exercise price.
64
<PAGE>
INFORMATION WITH RESPECT TO MTS
AGREEMENT WITH FEV
On March 21, 1999, MTS entered into a reciprocal distribution and licensing
agreement with FEV Motorentechnik GmbH, DSPT's strategic alliance partner, and
DSPT. This agreement will become effective only upon the closing of the merger
and will supersede the current strategic alliance agreement between FEV and DSPT
if the merger is consummated. It provides for the reciprocal distribution by MTS
and DSPT, as a group, and FEV of engine testing instruments and systems
developed and produced by the other party within certain designated geographical
territories. The agreement also provides for the licensing of specified products
by each party to the other for manufacture and distribution by the licensee
within its territory. In addition, FEV agreed that, pending the consummation of
the merger, it will not be deemed a "competitor" for purposes of the existing
strategic alliance agreement.
MTS considers this new agreement with FEV to be an important alliance which
will provide an opportunity to increase the speed of customers' engine design
processes. It also believes that the agreement will link MTS' mechanical and
systems skills, DSPT's data acquisition and analysis strengths and FEV's engine
design capabilities.
BACKLOG
On January 25, 1999, MTS issued a press release announcing that, due to the
timing of customer deliveries in its backlog, MTS is projecting lower revenue
than planned in the near term. MTS expects that this projection is likely to
reduce net income in MTS' second fiscal quarter of 1999 to a level only slightly
better than the results of its first fiscal quarter for the same year. MTS
expects, however, to recover this projected earnings shortfall in the second
half of its current fiscal year.
65
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF MTS COMMON STOCK
AND HOLDERS OF DSPT COMMON STOCK
DESCRIPTION OF MTS CAPITAL STOCK
The following describes of the material provisions of the articles of
incorporation and bylaws of MTS. MTS' articles of incorporation and bylaws are
included as exhibits to the documents incorporated by reference registration
statement of which this proxy statement/prospectus is a part.
MTS COMMON STOCK
MTS is authorized to issue 64,000,000 shares of common stock, par value $.25
per share. As of December 31, 1998, there were 18,626,853 shares of MTS common
stock issued and outstanding and approximately 1,760 holders of record of MTS
common stock. The holders of MTS common stock are entitled to one vote for each
share of common stock held on all matters submitted to a vote of shareholders
and have cumulative voting rights in the election of directors. The holders of
MTS common stock are entitled to receive ratably such dividends, if any, as may
be declared by the MTS board of directors out of legally available funds. In the
event of liquidation, dissolution or winding up of MTS, the holders of MTS
common stock are entitled to share ratably in all assets of MTS. The holders of
MTS common stock have no preemptive, subscription, redemptive or conversion
rights. The outstanding shares are fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the MTS common stock is Norwest Bank
Minnesota, N.A.
COMPARATIVE RIGHTS OF MTS AND DSPT STOCKHOLDERS
If the merger is consummated, the stockholders of DSPT will become
shareholders of MTS. The rights of the shareholders of MTS are governed by MTS'
amended and restated articles of incorporation, as amended, its bylaws and the
Minnesota Business Corporation Act. The rights of the stockholders of DSPT are
governed by DSPT's certificate of incorporation, its bylaws and the Delaware
General Corporation Law. The following is a brief summary of the primary
differences between the rights of MTS shareholders and the rights of DSPT
stockholders.
CLASSIFICATION, REMOVAL AND ELECTION OF DIRECTORS
The bylaws of MTS and DSPT provide that the number of directors of both
companies is determined by resolution of their respective boards of directors.
Newly created MTS directorships resulting from an increase in the authorized
number of directors may be filled by a two-thirds vote of the directors then in
office and any vacant directorships may be filled by a majority of the directors
then in office. Newly created and vacant DSPT directorships may be filled by a
majority of the directors then in office. Any director of either company may be
removed, with or without cause, by the holders of a majority of the shares
entitled to vote at an election of directors. Neither MTS' articles of
incorporation nor DSPT's certificate of incorporation provide for a classified
board of directors.
VOTING RIGHTS
MTS' and DSPT's governing documents both provide for cumulative voting
rights in the election of directors.
Cumulative voting permits the holder of each share of stock entitled to vote
in the election of directors to cast that number of votes which equal the number
of directors to be elected. The holder may allocate all votes represented by a
share to a single candidate or may allocate those votes among
66
<PAGE>
as many candidates as he chooses. Thus, a shareholder with a significant
minority percentage of the outstanding shares may be able to elect one or more
directors if voting is cumulative.
PREFERRED STOCK
DSPT's certificate of incorporation provides that shares of preferred stock
may be issued with terms, preferences and rights determined by DSPT's board of
directors without stockholder approval. MTS is not authorized to issue preferred
stock.
STOCKHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
Neither MTS' nor DSPT's governing documents contain any provisions that
would require greater than a majority of its respective stockholders to approve
mergers, consolidations, sales of a substantial amount of assets or other
similar transactions.
RIGHT TO CALL SPECIAL MEETING OF STOCKHOLDERS
Under MTS' and DSPT's bylaws, special meetings of stockholders may be called
by the board of directors, the chairman of the board, or holders of 10% or more
of the outstanding voting power. MTS' bylaws also require the secretary of the
company to call a special meeting upon the written request of two or more
directors.
ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Under MTS' and DSPT's bylaws, advance notice is required of stockholder
proposals or director nominations to be considered at a meeting of the
stockholders.
ACTION BY WRITTEN CONSENT
Minnesota law provides that any action of the shareholders of a Minnesota
corporation may be taken without a meeting if a written consent is signed by all
of the holders of outstanding voting stock of the corporation. DSPT's bylaws
provide that any action of its stockholders may be taken without a meeting,
without prior notice and without a vote, if a written consent is signed by the
holders of outstanding stock having the minimum number of votes that would be
necessary to authorize or take the action at a stockholder meeting. Prompt
notice of the taking of any corporate action without a meeting by less than
unanimous consent shall be given to those DSPT stockholders who have not
consented in writing.
AMENDMENT OF GOVERNING DOCUMENTS
Minnesota law provides that an amendment to the articles of incorporation
requires the affirmative vote of the holders of a majority of the shares present
and entitled to vote unless a larger affirmative vote is required by the
corporation's articles. MTS' articles of incorporation do not contain any
provisions that require a larger affirmative vote in order to amend its
articles.
Delaware law provides that an amendment to the certificate of incorporation
requires the affirmative vote of the holders of a majority of the shares
entitled to vote unless the corporation's certificate requires a greater or
lesser number for approval. DSPT's certificate of incorporation does not contain
any provision requiring a different number for approval.
The MTS bylaws provide that the MTS board of directors has the power to make
and alter the bylaws, subject to the power of the MTS shareholders to change or
repeal the bylaws.
67
<PAGE>
The DSPT bylaws provide that the DSPT board of directors have the power to
alter, amend or repeal the bylaws, subject to the power of the DSPT stockholders
to alter, amend repeal or replace the bylaws.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS
MTS is governed by Sections 302A.671 and 302A.673 of the Minnesota Business
Corporation Act. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved in a prescribed manner. A control share
acquisition is an acquisition, of beneficial ownership of shares that would,
when added to all other shares beneficially owned by the acquiring person,
entitle the acquiring person to have voting power of 20% or more in the election
of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combinations in approved in a prescribed manner. A business combination includes
any merger, asset sale or other transaction resulting in a financial benefit to
the interested shareholder. An interested shareholder is a person who is the
beneficial owner of 10% or more of the corporation's voting stock or who is an
affiliate or associate of the corporation and at any time within four years
prior to the date in question was the beneficial owner of 10% or more of the
corporation's voting stock. These provisions of the Minnesota law could delay,
defer or prevent a change in control of MTS.
Section 203 of the Delaware General Corporation Act provides that a
corporation may not engage in any business combination with any interested
stockholder for a period of three years following the date that such shareholder
became an interested stockholder unless
- prior to the date the stockholder became an interested stockholder the
board of directors approved the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding, those shares owned by persons who are
directors and also officers and shares owned by employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
- the business combination is approved by the board of directors and
authorized by 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder. An interested stockholder means any person
that is the owner of 15% or more of the outstanding voting stock; however,
the statute provides for certain exceptions to parties who otherwise would
be designated interested stockholders.
68
<PAGE>
EXPERTS
The audited consolidated financial statements and schedule incorporated by
reference in this proxy statement/prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports dated November 20, 1998 with respect
thereto and are included in this proxy statement/prospectus and registration
statement in reliance upon the authority of said firm as experts in giving said
reports.
The consolidated financial statements of DSPT included herein as of January
31, 1999 and 1998 and for each of the three years in the period ended January
31, 1999 have been audited by Grant Thornton LLP, independent public
accountants, as set forth in their report thereon included in this proxy
statement/prospectus and registration statement.
LEGAL MATTERS
The validity of the MTS common stock to be issued in the merger has been
passed upon for MTS by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. The
tax consequences of the merger have been passed upon for MTS by Lindquist &
Vennum P.L.L.P., Minneapolis, Minnesota and for DSPT by Gray Cary Ware &
Freidenrich LLP, Palo Alto, California. Patrick Delaney, a partner in Lindquist
& Vennum P.L.L.P., is the Secretary of MTS.
69
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statement of Stockholders' Equity............................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of DSP Technology Inc.:
We have audited the accompanying consolidated balance sheets of DSP
Technology Inc. and subsidiaries as of January 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DSP Technology
Inc. and subsidiaries as of January 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended January 31, 1999, in conformity with generally
accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
San Jose, California
March 12, 1999, except for Note N as to
which the date is March 23, 1999
F-2
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 1,432 $ 4,701
Accounts receivable, net of allowance for doubtful accounts of $185 in
1999 and $150 in 1998................................................. 7,122 5,581
Inventories............................................................. 3,052 2,682
Deferred income taxes................................................... 808 577
Prepaid expenses and other.............................................. 334 216
--------- ---------
Total current assets.................................................. 12,748 13,757
Property and equipment, net............................................... 2,557 1,341
Other assets.............................................................. 1,763 1,632
--------- ---------
$ 17,068 $ 16,730
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 906 $ 687
Accrued liabilities..................................................... 2,621 3,755
Income taxes payable.................................................... 945 1,142
--------- ---------
Total current liabilities............................................. 4,472 5,584
Deferred income taxes..................................................... 580 489
Commitments............................................................... -- --
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued............... -- --
Common stock; 25,000,000 shares authorized, $.001 par value; shares
issued and outstanding: 2,241,579 in 1999 and 2,264,860 in 1998....... 3,057 3,301
Retained earnings....................................................... 8,920 7,338
Accumulated other comprehensive income.................................. 39 18
--------- ---------
Total stockholders' equity............................................ 12,016 10,657
--------- ---------
$ 17,068 $ 16,730
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
.
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales
Products....................................................... $ 21,349 $ 19,114 $ 16,154
Services....................................................... 4,047 2,924 1,833
--------- --------- ---------
25,396 22,038 17,987
Cost of sales.................................................... 11,847 10,227 7,842
--------- --------- ---------
Gross profit................................................... 13,549 11,811 10,145
Operating expenses:
Research and development....................................... 2,765 2,352 2,203
Marketing, general and administrative.......................... 8,011 6,916 6,708
Restructuring costs............................................ 496 -- --
--------- --------- ---------
11,272 9,268 8,911
--------- --------- ---------
Operating income............................................... 2,277 2,543 1,234
Other income, net................................................ 221 225 123
--------- --------- ---------
Income before income taxes..................................... 2,498 2,768 1,357
Income taxes..................................................... 916 1,122 443
--------- --------- ---------
Net income..................................................... $ 1,582 $ 1,646 $ 914
--------- --------- ---------
--------- --------- ---------
Net income per share:
Basic.......................................................... $ .70 $ .74 $ .42
--------- --------- ---------
--------- --------- ---------
Diluted........................................................ $ .64 $ .68 $ .40
--------- --------- ---------
--------- --------- ---------
Weighted average shares used in computing basic net income per
share.......................................................... 2,253 2,211 2,168
--------- --------- ---------
--------- --------- ---------
Weighted average shares and equivalents used in computing diluted
net income per share........................................... 2,479 2,437 2,304
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
-------------------- COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT INCOME EARNINGS EQUITY
--------- --------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996.......................... 2,154 $ 2,920 $ 4,778 $ 7,698
Comprehensive income:
Foreign currency translations...................... 7 7
Net income......................................... 914 914
------------
Comprehensive income................................. 921
Exercise of stock options............................ 26 68 68
--------- --------- --- ----------- ------------
Balance at January 31, 1997.......................... 2,180 $ 2,988 $ 7 $ 5,692 $ 8,687
---------
---------
Comprehensive income:
Foreign currency translations...................... 11 11
Net income......................................... 1,646 1,646
------------
Comprehensive income................................. 1,657
Exercise of stock options............................ 85 313 313
--------- --------- --- ----------- ------------
Balance at January 31, 1998.......................... 2,265 $ 3,301 $ 18 $ 7,338 $ 10,657
---------
---------
Comprehensive income:
Foreign currency translations...................... 21 21
Net income......................................... 1,582 1,582
------------
Comprehensive income................................. 1,603
Exercise of stock options............................ 28 99 99
Repurchase of common stock........................... (51) (397) (397)
Compensation charge from nonqualified stock
options............................................ 54 54
--------- --------- --- ----------- ------------
Balance at January 31, 1999.......................... 2,242 $ 3,057 $ 39 $ 8,920 $ 12,016
--------- --------- --- ----------- ------------
--------- --------- --- ----------- ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1999 1998 1997
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income....................................................................... $ 1,582 $ 1,646 $ 914
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.................................................. 975 1,107 847
Deferred income taxes.......................................................... (140) (80) 217
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (1,541) (797) (1,482)
Inventories.................................................................. (370) (667) 180
Prepaid expenses and other................................................... (118) (24) (149)
Accounts payable............................................................. 219 (112) 340
Accrued liabilities.......................................................... (1,134) 1,906 478
Income taxes payable......................................................... (197) 936 (416)
--------- --------- ---------
Net cash (used in) provided by operating activities........................ (724) 3,915 929
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.............................................. (1,743) (407) (1,015)
Redemptions of certificates of deposit, net of purchases......................... -- -- 199
Investment in software development............................................... (522) (517) (630)
Other............................................................................ 18 74 (44)
--------- --------- ---------
Net cash used in investing activities...................................... (2,247) (850) (1,490)
--------- --------- ---------
Cash flows from financing activities:
Repurchase of common stock....................................................... (397) -- --
Proceeds from issuance of common stock........................................... 99 313 68
--------- --------- ---------
Net cash (used in) provided by financing activities........................ (298) 313 68
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................... (3,269) 3,378 (493)
Cash and cash equivalents at beginning of period................................... 4,701 1,323 1,816
--------- --------- ---------
Cash and cash equivalents at end of period......................................... $ 1,432 $ 4,701 $ 1,323
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during year for income taxes........................................... $ 1,086 $ 23 $ 639
--------- --------- ---------
--------- --------- ---------
Cash paid during year for interest............................................... $ 18 $ 22 $ 22
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. The Company designs, develops, manufactures, markets and
integrates high-speed computer-automated instrumentation for measurement and
control applications. The Company has two groups, the Transportation Products
Group, which focuses on powertrain testing, and the Lab Products Group, which
focuses on vehicle safety and component testing and general data acquisition and
signal analysis. The Company's principal markets are in the United States,
United Kingdom, Western Europe, and the Far East. Powertrain testing is
currently the Company's largest market and major focus.
The Company's fiscal year ends on the Sunday nearest to January 31. However,
for financial statement purposes, each fiscal year is presented as if it ended
on January 31.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market. The Company periodically reviews its inventories for
potential slow-moving or obsolete items and writes down specific items to net
realizable value as appropriate.
REVENUE RECOGNITION. The Company recognizes revenue primarily upon shipment
when the product need only be manufactured and delivered. Revenue on contracts
requiring delivery, installation and integration and contracts requiring longer
delivery periods (long-term contracts) is recognized based on completed
milestones or deliverables. Long-term contracts typically run from 18 to 24
months. The Company evaluates profitability on long-term contracts on an ongoing
basis and recognizes losses when identified. Historically, no losses have been
incurred on long-term contracts and no losses are anticipated on contracts in
progress at January 31, 1999.
COST OF SALES. Information regarding cost of sales related to product sales
and service sales are not disaggregated as such information is not readily
available from the Company's management information system.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets or the lease term if shorter.
Building and improvements are depreciated over 40 years. Machinery, equipment,
and furniture are depreciated over three to five years.
INTANGIBLE ASSETS. Cost in excess of net assets of acquired business
("goodwill") is amortized on a straight line basis over 25 years. The Company
evaluates the realizability of goodwill periodically by comparing the carrying
value to the undiscounted future cash flows of the related assets. Purchased
technology, is included in other assets and amortized over five years. Effective
February 1, 1996, impairments, if any, are recognized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," if
applicable.
RESEARCH AND DEVELOPMENT. Expenditures for research and development are
expensed as incurred, except for certain costs incurred in developing computer
software to be sold, which have been capitalized in accordance with the
provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Such costs are capitalized once
technological feasibility of the product has been established based upon
completion of a detailed program design. Software costs capitalized amounted to
$522,000, $517,000 and $630,000 for the years ended
F-7
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
January 31, 1999, 1998 and 1997, respectively. Capitalized software is included
in other assets and is being amortized to Research and Development expenses on a
straight-line basis over the lesser of three years or the estimated economic
lives of the respective products, beginning when the products are offered for
sale. To date, the estimated useful lives of the products have always exceeded
three years. The Company evaluates the realizability of capitalized software on
an ongoing basis relying on a number of factors including operating results,
business plans, market trends and product development cycles.
TRANSLATION OF FOREIGN CURRENCIES. The Company denominates substantially
all of its transactions in U.S. currency, except for transactions by its foreign
subsidiary. The assets and liabilities of the Company's foreign subsidiary are
denominated in the country's local currency and translated at the year-end rate
of exchange. The related income statement items are translated at the average
rate of exchange for the year. The resulting translation adjustments are
excluded from income and reflected as a separate component of stockholders'
equity. Realized and unrealized exchange gains or losses arising from
transaction adjustments are reflected in operations and are not material.
INCOME TAXES. The Company accounts for income taxes using an asset and
liability approach for financial accounting and reporting purposes.
NET INCOME PER SHARE. The following table sets forth the computation of
basic and diluted earnings per shares ("EPS").
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1999 1998 1997
--------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Numerator
Net income....................................................... $ 1,582 $ 1,646 $ 914
--------- --------- ---------
--------- --------- ---------
Denominator
Number of shares on which basic EPS is calculated:
Average outstanding during the year............................ 2,253 2,211 2,168
Add: Incremental shares under stock option plans............... 226 226 136
--------- --------- ---------
Number of shares on which diluted EPS is calculated.............. 2,479 2,437 2,304
--------- --------- ---------
--------- --------- ---------
Basic EPS........................................................ $ .70 $ .74 $ .42
Diluted EPS...................................................... $ .64 $ .68 $ .40
</TABLE>
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. These instruments are recorded at their carrying values which
approximate fair values because of their short maturity.
USING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS. Certain reclassifications have been made in the prior
year financial statements to conform with the fiscal 1999 presentation.
COMPREHENSIVE INCOME. The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," effective February 1, 1998. SFAS No. 130 establishes new
rules for presenting comprehensive income and its components. The adoption had
no impact on the Company's net income or stockholder's equity. SFAS No. 130
requires foreign currency translation adjustments to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective February 1, 1998,
SFAS No. 131 establishes new rules for presenting reportable business segments.
The adoption had no effect on the Company's net income or stockholders' equity.
NOTE B--INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
<CAPTION>
(THOUSANDS)
<S> <C> <C>
Raw materials.............................................................. $ 1,607 $ 1,695
Work-in-process............................................................ 1,068 637
Finished goods............................................................. 377 350
--------- ---------
$ 3,052 $ 2,682
--------- ---------
--------- ---------
</TABLE>
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
<S> <C> <C>
1999 1998
--------- ---------
<CAPTION>
(THOUSANDS)
<S> <C> <C>
Building and improvements................................................ $ 111 $ --
Machinery and equipment.................................................. 805 734
Office furniture......................................................... 2,152 1,914
Computer equipment....................................................... 2,550 2,263
--------- ---------
5,618 4,911
Accumulated depreciation and amortization................................ (4,097) (3,570)
Land and construction in progress........................................ 1,036 --
--------- ---------
$ 2,557 $ 1,341
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1999 1998
--------- ---------
(THOUSANDS)
<S> <C> <C>
Capitalized software, net of accumulated amortization of $1,106 in 1999 and
$849 in 1998............................................................. $ 1,464 $ 1,199
Cost in excess of net assets of acquired business, net of accumulated
amortization of $759 in 1999 and $641 in 1998............................ 126 244
Other...................................................................... 173 189
--------- ---------
$ 1,763 $ 1,632
--------- ---------
--------- ---------
</TABLE>
NOTE E--BANK LINE OF CREDIT
At January 31, 1999, the Company has a $4,000,000 line of credit with a bank
renewable annually in May. Under the provisions of the line of credit agreement,
interest on borrowings is charged at the bank's prime rate of interest (7.75% at
January 31, 1999). Borrowings are collaterized by all unencumbered assets of the
Company and the Company must maintain certain financial ratios and be profitable
on an annual basis. There was no outstanding balance at January 31, 1999 or
1998. Funds were borrowed at a weighted average interest rate of 8.1% and 8.63%
during 1999 and 1998, respectively.
NOTE F--ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1999 1998
--------- ---------
(THOUSANDS)
<S> <C> <C>
Employee compensation and benefits......................................... $ 697 $ 755
Commissions................................................................ 47 112
Customer deposits.......................................................... 711 1,969
Restructuring costs........................................................ 496 --
Other...................................................................... 670 919
--------- ---------
$ 2,621 $ 3,755
--------- ---------
--------- ---------
</TABLE>
NOTE G--INCOME TAXES
Earnings before taxes consists of:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
U.S. operations.................................................. $ 1,927 $ 2,269 $ 962
Foreign operations............................................... 571 499 395
--------- --------- ---------
$ 2,498 $ 2,768 $ 1,357
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-10
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (CONTINUED)
Income tax expense consists of:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal income taxes.............................................. $ 720 $ 800 $ 67
State income taxes................................................ 176 227 43
Foreign taxes..................................................... 160 175 116
--------- --------- ---------
1,056 1,202 226
Deferred:
Federal income taxes.............................................. (110) (71) 184
State income taxes................................................ (30) (9) 33
--------- --------- ---------
(140) (80) 217
--------- --------- ---------
$ 916 $ 1,122 $ 443
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between income tax rates computed by applying the Federal
statutory income tax rate to income before income taxes and the actual effective
tax rate is reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate............................................... 34.0% 34.0% 34.0%
Goodwill............................................................. 1.6 .5 1.1
State income taxes, net of federal benefit........................... 4.6 5.4 2.7
Research and development credits..................................... (2.6) (1.8) (3.3)
Benefit of foreign sales corporation................................. (.4) (1.0) (3.8)
Other................................................................ (.5) 2.4 2.0
--- --- ---
Effective tax rate................................................. 36.7% 40.5% 32.7%
--- --- ---
--- --- ---
</TABLE>
At January 31, 1999 and 1998, respectively, the major components of deferred
tax assets are: inventory reserves and cost capitalization--$289,000 and
$284,000; receivable and warranty reserves-- $118,000 and $105,000;
restructuring accrual--$198,000 and none; and accrued compensation--$147,000 and
$126,000. The major item in non-current deferred tax liabilities is research and
development expenses of $580,000 at January 31, 1999 and $481,000 at January 31,
1998.
NOTE H--STOCK OPTION PLANS
The Company has two stock option plans, the 1991 Option Plan ("1991 Option
Plan") and the 1991 Directors Option Plan ("1991 Directors Option Plan")
accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The 1991 Option Plan provides for the granting of
incentive and non-statutory options to employees. The 1991 Directors Option Plan
provides for the granting of nonqualifed stock options to directors of the
Company who are not employees of the Company. The options, which have terms of
five or ten years when issued, typically vest over three years. The exercise
price of each option equals the market price of the Company's stock on the date
of grant or, in the case of those holding more than 10% of the
F-11
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK OPTION PLANS (CONTINUED)
Company's outstanding common stock, 110% of the market price. Accordingly, no
compensation cost has been recognized for grants from either plan. A total of
1,129,327 shares of the Company's common stock have been reserved for issuance
under the 1991 Option Plan, of which 255,182 shares are available for grant at
January 31, 1999. The 1991 Directors Option Plan has 75,000 common shares
reserved, of which 6,000 shares are available for grant at January 31, 1999.
Had compensation costs for the plans been determined based on the fair value
of the options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and income
per share would have been reduced to the pro forma amounts indicated below. Pro
forma results for 1999, 1998 and 1997 may not be indicative of pro forma results
in future periods because the pro forma amounts do not include pro forma
compensation cost for options granted prior to February 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (In thousands):
As reported...................................................... $ 1,582 $ 1,646 $ 914
Pro forma........................................................ $ 1,269 $ 1,310 $ 678
Net income per share:
As reported--Basic............................................... $ .70 $ .74 $ .42
As reported--Diluted............................................. $ .64 $ .68 $ .40
Pro forma--Basic................................................. $ .56 $ .59 $ .31
Pro forma--Diluted............................................... $ .51 $ .55 $ .30
</TABLE>
A summary of the status of the various stock option plans as of January 31,
1999, 1998 and 1997, and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 600 $4.81 602 $4.47 555 $4.29
Granted................................. 135 7.68 103 6.09 95 5.11
Exercised............................... (28) 3.53 (85) 3.69 (26) 2.67
Forfeited............................... (17) 6.07 (20) 5.83 (22) 4.81
------ ------ ------
Outstanding at end of year.............. 690 $5.39 600 $4.81 602 $4.47
------ ------ ------
------ ------ ------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model using the following weighted average
assumptions.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted-average fair value of options
granted during the year............... $5.56 4.27 $3.18
Expected term (years)................... 7 7 6
Volatility.............................. 77.0% 67.0% 60.0%
Risk free interest rate................. 5.2% 6.3% 6.8%
Dividend yield.......................... -- -- --
</TABLE>
F-12
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--STOCK OPTION PLANS (CONTINUED)
The following information applies to options outstanding at January 31,
1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE --------------- EXERCISE
PRICES LIFE PRICE PRICE
- ---------------------- --------------- ----------- (IN THOUSANDS) -----------
NUMBER
OUTSTANDING (IN YEARS)
---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.875 - $ 1.250...... 37 1 $ 1.23 37 $ 1.23
2.625 - 3.875...... 135 5 3.25 135 3.25
4.000 - 6.000...... 198 7 5.15 147 5.09
6.125 - 8.625...... 307 8 6.80 160 6.37
9.313 - 10.625...... 13 10 9.58 1 9.37
--- ---
690 480
--- ---
--- ---
</TABLE>
During 1999, the Company awarded options for 39,000 shares to certain
non-employees for services rendered or to be rendered. These stock options are
included in the stock option plan information above. The Company recognized a
charge to earnings of approximately $54,000 in connection with the option
grants.
NOTE I--COMMITMENTS
LEASES. The Company leases its facilities in Fremont, California and Ann
Arbor, Michigan under operating leases which expire at various times during
2000. Rental expenses were $433,000 in 1999, $350,000 in 1998, and $303,000 in
1997.
Future minimum rental commitments for all leases with initial non-cancelable
lease terms of more than one year are $382,000 in 2000.
The Company has entered into a construction contract to build a 57,200
square foot facility on its eight acre land in Ann Arbor, Michigan, which will
house all of its Ann Arbor, Michigan operations. The Company expects to vacate
all of its leased facilities in Ann Arbor, Michigan once the new building is
completed. Under the terms of the construction contract, DSPT is obligated to
pay the contractor $3,750,000 for the construction of the new facility which is
expected to be completed in the fall of 1999.
F-13
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--MAJOR CUSTOMERS AND FOREIGN SALES
Three separate customers accounted for 10% or more of net sales in 1999 as
follows: 15%, 14% and 12%. One customer accounted for 21% and 18% of net sales
for 1998 and 1997, respectively. One other customer accounted for 14% of net
sales in 1998.
Foreign sales were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
United Kingdom ("UK")............................................ $ 2,948 $ 2,640 $ 2,916
Asia/Pacific Rim................................................. 601 3,496 1,476
Western Europe, excluding UK..................................... 1,531 1,457 1,352
Other countries.................................................. 41 148 16
--------- --------- ---------
$ 5,121 $ 7,741 $ 5,760
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE K--BUSINESS SEGMENTS AND FOREIGN OPERATIONS
BUSINESS SEGMENTS. The Company operates in two business segments:
Transportation Products Group and Lab Products Group. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately based on the fundamental differences in
their operations.
The Transportation Products Group designs, manufactures and sells primarily
integrated systems and services for powertrain testing.
The Lab Products Group consists of the Company's SigLab Group and Advanced
Research Group. The SigLab Group provides high-performance signal acquisition
products used as subsystems for personal computers and workstations in the
electronic and electro-mechanical device analysis market. The Advanced Research
Group designs, manufactures and sells standard and custom systems to advanced
research laboratories conducting studies for defense and aerospace related data
acquisition and testing.
Information by industry segment is set forth below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales:
Transportation Products Group.............................. $ 21,661 $ 18,309 $ 13,354
Lab Products Group......................................... 3,735 3,729 4,633
--------- --------- ---------
$ 25,396 $ 22,038 $ 17,987
--------- --------- ---------
--------- --------- ---------
Income from operations:
Transportation Products Group.............................. $ 2,032 $ 2,467 $ 931
Lab Products Group......................................... 245 76 303
--------- --------- ---------
$ 2,277 $ 2,543 $ 1,234
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K--BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
TRANSPORTATION LAB
GROUP GROUP
-------------- -----------
<S> <C> <C>
1999
Identifiable assets............................................... $ 14,856 $ 2,212
Depreciation and amortization..................................... 758 217
Net capital expenditures.......................................... 1,700 43
1998
Identifiable assets............................................... $ 14,766 $ 1,964
Depreciation and amortization..................................... 878 229
Net capital expenditures.......................................... 385 22
1997
Identifiable assets............................................... $ 9,016 $ 2,783
Depreciation and amortization..................................... 692 155
Net capital expenditures.......................................... 978 37
</TABLE>
GEOGRAPHIC INFORMATION. A summary of the Company's operations by geographic
area is presented below:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Net Sales
United States.............................................. $ 22,488 $ 19,402 $ 15,083
United Kingdom............................................. 2,908 2,636 2,904
Operating Margin
United States.............................................. $ 1,799 $ 2,042 $ 839
United Kingdom............................................. 478 501 395
Identifiable Assets
United States.............................................. $ 14,642 $ 14,960 $ 10,408
United Kingdom............................................. 2,426 1,770 1,391
</TABLE>
NOTE L--EMPLOYEE BENEFIT PLAN
The Company has established the DSP Technology Inc. 401(k) Profit Sharing
Plan covering substantially all employees of the Company who have at least six
months of service and are at least twenty-one years of age. The amount
participants may voluntarily contribute in any year is established by law and
subject to cost of living adjustments. The Company has the option to make
matching contributions on a year to year basis. Contributions to the plan by the
Company in 1999, 1998, and 1997 aggregated $137,000, $85,000, and $69,000,
respectively.
NOTE M--RESTRUCTURING COSTS
On January 21, 1999, the Company announced its strategic decision to
relocate its corporate headquarters to, and consolidate its Transportation Group
operations in, Ann Arbor, Michigan, in order to focus on its largest and most
profitable business segment. The Company recorded a one-time
F-15
<PAGE>
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M--RESTRUCTURING COSTS (CONTINUED)
pre-tax restructuring charge of $496,000 ($314,000 after tax) in the fourth
quarter of 1999 which consist of: $306,000 in severance pay and $190,000 in
estimated idle facility and winding down costs.
Had one-time after-tax restructuring costs of $314,000 been excluded from
the 1999 results as reported, the Company's net income and net income per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
1999
-----------
<S> <C>
Net income (In thousands):
As reported.................................................................... $ 1,582
Pro forma...................................................................... 1,896
Net income per share:
As reported--Basic............................................................. $ .70
As reported--Diluted........................................................... $ .64
Pro forma--Basic............................................................... $ .84
Pro forma--Diluted............................................................. $ .76
</TABLE>
NOTE N--SUBSEQUENT EVENT
On March 23, 1999, the Company entered into a merger agreement with MTS
Systems Corporation ("MTS"). Pursuant to the agreement, the stockholders and
option holders of the Company will receive an aggregate consideration of
2,077,000 shares of MTS common stock in exchange for the outstanding shares and
net option shares of the Company.
NOTE O--RELATED PARTY
The Company has a strategic alliance agreement with FEV Motorentechnik GmbH
& Co. KG ("FEV"). The purpose of the alliance is to develop and distribute test
instrumentation and control products for the transportation industry. FEV is a
privately-held company based in Aachen, Germany, and is a leader in complete
engine and powertrain research and development and instrumentation for the
transportation industry. FEV owns approximately 12.7% of the Company's common
stock. During fiscal 1999, 1998, and 1997, the Company sales to FEV were
$1,249,000, $1,040,000, and $1,102,000, respectively.
F-16
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
MTS SYSTEMS CORPORATION,
BADGER MERGER CORP.,
AND
DSP TECHNOLOGY INC.
Dated as of March 23, 1999
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE 1 THE MERGER; CONVERSION OF SHARES.......................................................... A-5
1.1 THE MERGER................................................................................ A-5
1.2 EFFECTIVE TIME............................................................................ A-5
1.3 CONVERSION OF SHARES AND OPTIONS.......................................................... A-5
1.4 NO APPRAISAL RIGHTS....................................................................... A-6
1.5 EXCHANGE OF COMPANY COMMON STOCK.......................................................... A-6
1.6 EXCHANGE OF MERGER SUBSIDIARY COMMON STOCK................................................ A-8
1.7 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION................................. A-8
1.8 BYLAWS OF THE SURVIVING CORPORATION....................................................... A-9
1.9 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION....................................... A-9
ARTICLE 2 CLOSING................................................................................... A-9
2.1 TIME AND PLACE............................................................................ A-9
2.2 FILINGS AT THE CLOSING.................................................................... A-9
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................. A-9
3.1 ORGANIZATION.............................................................................. A-9
3.2 AUTHORIZATION............................................................................. A-10
3.3 CAPITALIZATION............................................................................ A-10
3.4 REPORTS AND FINANCIAL STATEMENTS.......................................................... A-11
3.5 ABSENCE OF UNDISCLOSED LIABILITIES........................................................ A-12
3.6 CONSENTS AND APPROVALS.................................................................... A-12
3.7 COMPLIANCE WITH LAWS...................................................................... A-12
3.8 LITIGATION................................................................................ A-13
3.9 ABSENCE OF MATERIAL ADVERSE CHANGES....................................................... A-13
3.10 OFFICERS, DIRECTORS AND EMPLOYEES......................................................... A-13
3.11 TAXES..................................................................................... A-13
3.12 CONTRACTS................................................................................. A-14
3.13 INTELLECTUAL PROPERTY RIGHTS.............................................................. A-14
3.14 BENEFIT PLANS............................................................................. A-15
3.15 MINUTE BOOKS.............................................................................. A-17
3.16 NO FINDERS................................................................................ A-17
3.17 PROXY STATEMENT........................................................................... A-17
3.18 FAIRNESS OPINION.......................................................................... A-17
3.19 STATE TAKEOVER LAWS....................................................................... A-17
3.20 MERGER FILINGS............................................................................ A-17
3.21 ENVIRONMENTAL LAWS........................................................................ A-17
3.22 ACCOUNTING MATTERS........................................................................ A-18
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBSIDIARY............................ A-18
4.1 ORGANIZATION.............................................................................. A-18
4.2 AUTHORIZATION............................................................................. A-19
4.3 CAPITALIZATION............................................................................ A-19
4.4 CONSENTS AND APPROVALS.................................................................... A-19
4.5 REPORTS; FINANCIAL STATEMENTS; ABSENCE OF CHANGES......................................... A-20
4.6 REGISTRATION STATEMENT.................................................................... A-20
4.7 NO FINDERS................................................................................ A-21
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
4.8 ABSENCE OF UNDISCLOSED LIABILITIES........................................................ A-21
4.9 COMPLIANCE WITH LAWS...................................................................... A-21
4.10 LITIGATION................................................................................ A-21
4.11 ABSENCE OF MATERIAL ADVERSE CHANGES....................................................... A-21
4.12 REORGANIZATION............................................................................ A-22
4.13 MERGER FILINGS............................................................................ A-22
4.14 ACCOUNTING MATTERS........................................................................ A-22
4.15 TAXES..................................................................................... A-22
4.16 CONTRACTS................................................................................. A-22
4.17 BENEFIT PLANS............................................................................. A-22
ARTICLE 5 COVENANTS................................................................................. A-24
5.1 CONDUCT OF BUSINESS OF THE COMPANY........................................................ A-24
5.2 CONDUCT OF BUSINESS OF PARENT............................................................. A-26
5.3 NO SOLICITATION........................................................................... A-27
5.4 ACCESS AND INFORMATION.................................................................... A-28
5.5 APPROVAL OF STOCKHOLDERS; PROXY STATEMENT; REGISTRATION STATEMENT......................... A-29
5.6 CONSENTS.................................................................................. A-30
5.7 AFFILIATES' LETTERS....................................................................... A-31
5.8 EXPENSES.................................................................................. A-31
5.9 FURTHER ACTIONS........................................................................... A-31
5.10 REGULATORY APPROVALS...................................................................... A-31
5.11 CERTAIN NOTIFICATIONS..................................................................... A-32
5.12 [INTENTIONALLY OMITTED]................................................................... A-33
5.13 NASDAQ LISTING APPLICATION................................................................ A-33
5.14 LETTERS OF THE COMPANY'S AND PARENT'S ACCOUNTANTS......................................... A-33
5.15 SUBSIDIARY SHARES......................................................................... A-33
5.16 BENEFIT PLANS AND EMPLOYEE MATTERS........................................................ A-33
5.17 OBLIGATIONS OF MERGER SUBSIDIARY.......................................................... A-34
5.18 PLAN OF REORGANIZATION.................................................................... A-34
5.19 POOLING................................................................................... A-34
5.20 TAX MATTERS............................................................................... A-34
5.21 INDEMNIFICATION OF OFFICERS AND DIRECTORS................................................. A-35
ARTICLE 6 CLOSING CONDITIONS........................................................................ A-35
6.1 CONDITIONS TO OBLIGATIONS OF PARENT, MERGER SUBSIDIARY AND THE COMPANY.................... A-35
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY................................. A-36
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY.................................................. A-36
ARTICLE 7 TERMINATION AND ABANDONMENT............................................................... A-37
7.1 TERMINATION............................................................................... A-37
7.2 EFFECT OF TERMINATION..................................................................... A-38
ARTICLE 8 MISCELLANEOUS............................................................................. A-39
8.1 AMENDMENT AND MODIFICATION................................................................ A-39
8.2 WAIVER OF COMPLIANCE; CONSENTS............................................................ A-39
8.3 INVESTIGATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES................................. A-40
8.4 NOTICES................................................................................... A-40
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
8.5 ASSIGNMENT................................................................................ A-41
8.6 GOVERNING LAW............................................................................. A-41
8.7 COUNTERPARTS.............................................................................. A-41
8.8 KNOWLEDGE................................................................................. A-41
8.9 INTERPRETATION............................................................................ A-41
8.10 PUBLICITY................................................................................. A-41
8.11 ENTIRE AGREEMENT.......................................................................... A-41
8.12 SEVERABILITY.............................................................................. A-42
8.13 SPECIFIC PERFORMANCE...................................................................... A-42
EXECUTION................................................................................................. A-43
EXHIBITS:
Exhibit A: Amended and Restated Certificate of Incorporation [not provided]
Exhibit B: Form of Affiliate's Letter [not provided]
Exhibit C: Key Executives [not provided]
Exhibit D: Employment Agreements [not provided]
Exhibit E: Gray Cary Ware & Freidenrich Opinion Matters [not provided]
Exhibit F: Lindquist & Vennum Opinion Matters [not provided]
</TABLE>
A-4
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT (the "Agreement") is dated as of March 23, 1999, by and among
MTS SYSTEMS CORPORATION, a Minnesota corporation ("Parent"), BADGER MERGER
CORP., a Delaware corporation and wholly-owned subsidiary of Parent ("Merger
Subsidiary"), and DSP TECHNOLOGY INC., a Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of Parent, Merger Subsidiary,
and the Company have each approved the merger of Merger Subsidiary with and into
the Company (the "Merger") upon the terms and subject to the conditions set
forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests" transaction within the meaning of
Accounting Principles Board Opinion No. 16 and the rules and regulations of the
Securities and Exchange Commission (the "SEC"); and
WHEREAS, the parties hereto desire to make certain representations,
warranties, and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
representations, warranties, covenants, and agreements contained herein, the
parties hereto agree as follows:
ARTICLE 1 THE MERGER; CONVERSION OF SHARES
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.2 hereof), Merger Subsidiary shall
be merged with and into the Company in accordance with the provisions of the
Delaware General Corporation Law (the "DGCL"), whereupon the separate corporate
existence of Merger Subsidiary shall cease. The Company shall continue as the
surviving corporation (the "Surviving Corporation") in the Merger. From and
after the Effective Time, the Surviving Corporation shall possess all the
rights, privileges, immunities, powers, and franchises and be subject to all the
restrictions, disabilities, and duties of the Company and Merger Subsidiary, all
as more fully described in the DGCL.
1.2 EFFECTIVE TIME. As soon as practicable after each of the conditions
set forth in Article 6 has been satisfied or waived on the Closing Date (as
defined in Section 2.1), the Company will file, or cause to be filed, with the
Secretary of State of the State of Delaware a Certificate of Merger for the
Merger, which Certificate shall be in the form required by and executed in
accordance with the applicable provisions of the DGCL. The Merger shall become
effective at the time such filing is made or, if agreed to by Parent and the
Company, such later time or date set forth in the Certificate of Merger (the
"Effective Time").
1.3 CONVERSION OF SHARES AND OPTIONS. At the Effective Time, by virtue of
the Merger and without any action on the part of the Company, Parent, Merger
Subsidiary or any holder of any share of capital stock, or holder of options to
purchase capital stock, of the Company or Merger Subsidiary:
(a) The holders of shares of common stock of the Company, $.001 par
value per share ("Company Common Stock") and holders of option(s) to
purchase Company Common Stock ("Company Option(s)") will receive an
aggregate of 2,077,000 shares of the common stock of Parent ("Parent Common
Stock"), $.25 par value per share (the "Merger Consideration"), such that
each share of Company Common Stock outstanding immediately prior to the
Effective Time and each Option Share (as defined in Section 1.3(b)) will
represent only the right to receive a fraction of a share of Parent Common
Stock equal to the Merger Consideration divided by the
A-5
<PAGE>
sum of (i) the total number of shares of Company Common Stock outstanding
immediately prior to the Effective Time and (ii) the total number of Option
Shares represented by the Company Options outstanding immediately prior to
the Effective Time (the "Per Share Merger Consideration").
(b) Each Company Option outstanding immediately prior to the Effective
Time shall represent the number of Option Shares ("Option Shares")
determined by (i) dividing the Option Value by the Final Company Value and
(ii) multiplying that result by the number of shares subject to each option.
The "Option Value" shall mean the Final Company Value less the option
exercise price, provided, that with respect to any portion of a Company
Option which is not vested immediately prior to the Effective Time, the
"Option Value" shall mean (i) the fair value of the unvested portion of the
Company Option (as determined pursuant to an appropriate discounting method
mutually agreed to by the parties), less (ii) the option exercise price for
such unvested portion of the option. The "Final Company Value" shall mean
the value obtained by adding (x) the Merger Consideration multiplied by the
Final Parent Price and (y) the aggregate exercise price of the Company
Options outstanding immediately prior to the Effective Time, and dividing
the sum of (x) and (y) by the sum of the aggregate number of shares of
Company Common Stock outstanding immediately prior to the Effective Time and
the aggregate number of shares of Company Common Stock subject to Company
Options outstanding immediately prior to the Effective Time. The "Final
Parent Price" shall mean the closing sale price of a share of Parent Common
Stock as reported by the Nasdaq National Market on the trading day
immediately prior to the Effective Time.
(c) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time that is held in the treasury of the
Company shall be canceled in accordance with applicable laws without payment
of any consideration therefor and without any conversion thereof.
(d) Each share of any other class of capital stock of the Company (other
than Company Common Stock) shall be canceled without payment of any
consideration therefor and without any conversion thereof.
(e) Each share of common stock of Merger Subsidiary, par value $.01 per
share ("Merger Subsidiary Common Stock"), issued and outstanding immediately
prior to the Effective Time shall be converted into one share of the common
stock of the Surviving Corporation, par value $.001 per share ("Surviving
Corporation Common Stock").
1.4 NO APPRAISAL RIGHTS. The parties acknowledge that, pursuant to Section
262(b)(1) of the DGCL, no holders of Company Common Stock shall have appraisal
rights in connection with the Merger.
1.5 EXCHANGE OF COMPANY COMMON STOCK.
(a) At or prior to the Effective Time, Parent shall cause the Company's
stock transfer agent, or such other agent as is mutually agreed to by the
parties, to act as exchange agent (the "Exchange Agent") hereunder. As
promptly as practicable after the Effective Time, Parent shall cause the
Exchange Agent to mail (i) to each holder of record (other than Parent,
Merger Subsidiary, the Company, or any wholly owned subsidiary of Parent or
the Company) of a certificate or certificates that immediately prior to the
Effective Time represented outstanding shares of Company Common Stock
("Company Certificates") a form letter of transmittal (which shall specify
that delivery shall be effective, and risk of loss and title to the Company
Certificate(s) shall pass, only upon delivery of the Company Certificate(s)
to the Exchange Agent) and instructions for such holder's use in effecting
the surrender of the Company Certificates in exchange for certificates
representing shares of Parent Common Stock and cash in lieu of any
fractional shares, and (ii) to each holder of Company Option(s) a form
letter of transmittal and
A-6
<PAGE>
instructions for such holder's use in effecting the receipt of certificates
representing shares of Parent Common Stock and cash in lieu of any
fractional shares in exchange for such Company Option(s).
(b) As soon as practicable after the Effective Time, the Exchange Agent
shall distribute to holders of shares of Company Common Stock, upon
surrender to the Exchange Agent of one or more Company Certificates for
cancellation, together with a duly-executed letter of transmittal, (i) one
or more certificates representing the number of whole shares of Parent
Common Stock into which the shares represented by the Company Certificate(s)
shall have been converted pursuant to Section 1.3(a), (ii) a bank check in
the amount of cash into which the shares represented by the Company
Certificate(s) shall have been converted pursuant to Section 1.5(f)
(relating to fractional shares), and (iii) any dividends or other
distributions to which such holder is entitled pursuant to Section 1.5(c),
and the Company Certificate(s) so surrendered shall be canceled. In the
event of a transfer of ownership of Company Common Stock that is not
registered in the transfer records of the Company, it shall be a condition
to the issuance of shares of Parent Common Stock that the Company
Certificate(s) so surrendered shall be properly endorsed or be otherwise in
proper form for transfer and that such transferee shall (i) pay to the
Exchange Agent any transfer or other taxes required or (ii) establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable. As soon as practicable after the Effective Time, the Exchange Agent
shall distribute to holders of Company Options, upon surrender to the
Exchange Agent of a duly-executed letter of transmittal, (i) one or more
certificates representing the number of whole shares of Parent Common Stock
into which the Option Shares represented by the Company Options shall have
been converted pursuant to Section 1.3(a), (ii) a bank check in the amount
of cash into which the Option Shares represented by the Company Options
shall have been converted pursuant to Section 1.5(f) (relating to fractional
shares), and (iii) any dividends or other distributions to which such holder
is entitled pursuant to Section 1.5(c).
(c) Holders of Company Common Stock or Company Options will be entitled
to any dividends or other distributions pertaining to the Parent Common
Stock received in exchange therefor that become payable to persons who are
holders of record of Parent Common Stock as of a record date that follows
the Effective Time, but only (i) for holders of Company Common Stock, after
they have surrendered their Company Certificates for exchange and (ii) for
holders of Company Options, after they have submitted a duly-executed letter
of transmittal. Subject to the effect, if any, of applicable law, the
Exchange Agent shall receive, hold, and remit any such dividends or other
distributions to each such record holder entitled thereto, without interest,
at the time that such Company Certificates are surrendered to the Exchange
Agent for exchange. Holders of Company Common Stock or Company Options will
not be entitled, however, to dividends or other distributions that become
payable before or after the Effective Time to persons who were holders of
record of Parent Common Stock as of a record date that is prior to the
Effective Time.
(d) All certificates evidencing shares of Parent Common Stock that are
issued (i) upon the surrender for exchange of Company Certificates or (ii)
in exchange for Company Options in accordance with the terms hereof,
together with any cash paid for fractional shares pursuant to Section 1.5(f)
hereof, shall be deemed to have been issued in full satisfaction of all
rights pertaining to the shares of Company Common Stock represented by the
surrendered Company Certificates or Option Shares represented by the Company
Options, respectively.
(e) After the Effective Time, there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the
shares of Company Common Stock that were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Company Certificates
representing such shares are presented to the Surviving Corporation, they
shall be canceled and exchanged as provided in this Article 1. As of the
Effective Time, the holders of Company Certificates representing shares of
Company Common Stock shall cease to have any
A-7
<PAGE>
rights as stockholders of the Company, except such rights, if any, as they
may have pursuant to the DGCL or this Agreement. Except as provided above,
until such Company Certificates are surrendered for exchange, each such
Company Certificate shall, after the Effective Time, represent for all
purposes only the right to receive a certificate or certificates evidencing
the number of whole shares of Parent Common Stock into which the shares of
Company Common Stock shall have been converted pursuant to the Merger as
provided in Section 1.3(a) hereof, the right to receive the cash value of
any fraction of a share of Parent Common Stock as provided in Section 1.5(f)
hereof and the right to receive any dividends or distributions as provided
in Section 1.5(c). As of the Effective Time, the holders of Company Options
shall cease to have any rights as optionholders of the Company, except such
rights, if any, as they may have pursuant to this Agreement.
(f) No fractional shares of Parent Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, shall be issued in
connection with the Merger, no dividend or other distribution of Parent
shall relate to any fractional share, and such fractional share interests
shall not entitle the owner thereof to vote or to any rights of a
shareholder of Parent. All fractional shares of Parent Common Stock to which
a holder of Company Common Stock or Company Option(s) immediately prior to
the Effective Time would otherwise be entitled, at the Effective Time, shall
be aggregated if and to the extent multiple Company Certificates of such
holder are submitted together to the Exchange Agent and/or multiple Company
Options are held by such holder. If a fractional share results from such
aggregation, then (in lieu of such fractional share) the Exchange Agent
shall pay to each holder of shares of Company Common Stock or Company
Options who otherwise would be entitled to receive such fractional share of
Parent Common Stock an amount of cash (without interest) determined by
multiplying (i) the closing sale price of a share of Parent Common Stock as
reported by the Nasdaq National Market on the Closing Date by (ii) the
fractional share of Parent Common Stock to which such holder would otherwise
be entitled. Parent will make available to the Exchange Agent any cash
necessary for this purpose.
(g) In the event any Company Certificates shall have been lost, stolen,
or destroyed, the Exchange Agent shall issue in respect of such lost,
stolen, or destroyed Company Certificates, upon the making of an affidavit
of that fact by the holder thereof, such shares of Parent Common Stock, cash
for fractional shares, if any, and dividends or other distributions, if any,
as may be required pursuant to this Article 1; provided, however, that
Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed Company
Certificate to deliver a bond in such sum as Parent may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to such Company Certificate alleged to have been lost,
stolen, or destroyed.
1.6 EXCHANGE OF MERGER SUBSIDIARY COMMON STOCK. From and after the
Effective Time, each outstanding certificate previously representing shares of
Merger Subsidiary Common Stock shall be deemed for all purposes to evidence
ownership of and to represent the number of shares of Surviving Corporation
Common Stock into which such shares of Merger Subsidiary Common Stock shall have
been converted, such conversion to be on the basis of one share of Surviving
Corporation Common Stock for each share of Merger Subsidiary Common Stock.
Promptly after the Effective Time, the Surviving Corporation shall issue to
Parent a stock certificate or certificates representing such shares of Surviving
Corporation Common Stock in exchange for the certificate or certificates that
formerly represented shares of Merger Subsidiary Common Stock, which shall be
canceled.
1.7 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION. The
Certificate of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be amended as set forth on EXHIBIT A attached hereto,
and shall, as amended, subject to Section
A-8
<PAGE>
5.21, be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended in accordance with applicable law.
1.8 BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of the Company, as in
effect immediately prior to the Effective Time, shall, subject to Section 5.21,
be the Bylaws of the Surviving Corporation until thereafter amended in
accordance with applicable law.
1.9 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and
officers of Merger Subsidiary immediately prior to the Effective Time shall be
the directors and officers, respectively, of the Surviving Corporation until
their respective successors shall be duly elected and qualified.
ARTICLE 2 CLOSING
2.1 TIME AND PLACE. Subject to the satisfaction or waiver of the
provisions of Article 6, the closing of the Merger (the "Closing") shall take
place at 1:00 p.m., local time, on the date that the Required Company
Stockholder Vote (as defined in Section 3.2) is obtained, or as soon thereafter
as, and in any event no later than the second business day after, all conditions
to Closing have been satisfied or waived, or on such other date and/or at such
other time as Parent and the Company may mutually agree. The date on which the
Closing actually occurs is herein referred to as the "Closing Date." The Closing
shall take place at the corporate headquarters offices of Parent, or at such
other place or in such other manner (e.g., by facsimile exchange of signature
pages with originals to promptly follow by overnight delivery) as the parties
hereto may agree.
2.2 FILINGS AT THE CLOSING. At the Closing, subject to the provisions of
Article 6, Parent, Merger Subsidiary, and the Company shall cause the
Certificate of Merger to be filed in accordance with the provisions of Section
252 of the DGCL, and take any and all other lawful actions and do any and all
other lawful things necessary to cause the Merger to become effective.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except: (i) as set forth in a document of even date herewith and
concurrently delivered herewith (the "Company Disclosure Schedule") or (ii) as
specifically described through express disclosure of current, specific facts set
forth in the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998 or in any other filing by the Company with the SEC (as defined
in Section 3.4) filed after the date of filing such Form 10-K and prior to the
date hereof (for purposes of clauses (i) and (ii) above, disclosures in the
Company Disclosure Schedule and such Company SEC filings shall be deemed to
qualify or limit only those particular representations and warranties set forth
in this Article 3 to which the relevancy of such disclosures is readily
apparent), the Company hereby makes the following representations and warranties
to Parent and Merger Subsidiary:
3.1 ORGANIZATION. The Company and each subsidiary (referred to herein with
respect to the Company or Parent, as applicable, as a "Subsidiary") of the
Company is an entity duly organized, validly existing, and in good standing
(where such concept is recognized) under the laws of its respective jurisdiction
of organization and has all requisite corporate power and authority to own,
lease, and operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such corporate power and authority would not, individually
or in the aggregate, have a Company Material Adverse Effect (as defined below).
The Company and each Subsidiary is duly qualified and in good standing to do
business in each jurisdiction in which the property owned, leased, or operated
by it or the nature of the business conducted by it makes such qualification
necessary, except where the failure to be so qualified or in good standing would
not have a Company Material Adverse Effect. "Company Material Adverse Effect"
means an effect that is, or at the time of such effect it is probable that the
effect will be, materially adverse: (i) to the business, results of operation,
or financial condition of the Company and its Subsidiaries,
A-9
<PAGE>
considered as a whole; (ii) to the ability of the Surviving Corporation to
conduct such business, as presently conducted, following the Effective Time or
the ability of Parent to derive the benefits of owning all of the stock of the
Surviving Corporation; or (iii) to the Company's ability to perform any of its
material obligations under this Agreement or to consummate the Merger; PROVIDED,
HOWEVER, that none of the following shall be deemed to have a Material Adverse
Effect on the Company: (A) a change in the market price or trading volume of the
Company Common Stock, (B) a failure by the Company to meet any published
securities analyst estimates of revenue or earnings for any period ending or for
which earnings are released on or after the date of this Agreement and prior to
the Closing, (C) an event, violation, inaccuracy, circumstance or other matter
that results from conditions affecting the U.S. or world economy, (D) an event,
violation, inaccuracy, circumstance or other matter that results from conditions
affecting the powertrain testing or instrumentation industry generally, (E) an
event, violation, inaccuracy, circumstance or other matter that results
primarily from the announcement or the pendency of the Merger or the
transactions contemplated by this Agreement or (F) an event violation,
inaccuracy, circumstance or other matter that results from the taking of any
action required or permitted by this Agreement. The jurisdictions in which the
Company and each Subsidiary are incorporated are listed in the Company
Disclosure Schedule. The Company has heretofore delivered or made available to
Parent or its advisers complete and accurate copies of the Certificate of
Incorporation and Bylaws of the Company, as currently in effect, and of the
organizational documents and agreements defining the rights of the Company or
any Subsidiary with respect to any material joint ventures, partnerships or
other business in which the Company owns less than substantially all of the
outstanding equity interest. As of the date hereof, neither the Company nor any
Subsidiary, directly or indirectly, owns or controls or has any material equity,
partnership, or other similar ownership interest in any corporation,
partnership, joint venture, or other business association or entity that is
material to the Company and its Subsidiaries, considered as a whole.
3.2 AUTHORIZATION. The Company has all necessary corporate power and
authority to execute and deliver this Agreement and, subject to obtaining the
necessary approval of its stockholders, to consummate the transactions
contemplated hereby. The execution and delivery by the Company of this Agreement
and the other agreements contemplated hereby to which the Company is a party,
and the consummation by the Company of the transactions contemplated hereby and
thereby, have been duly and validly authorized and approved by the Company's
Board of Directors, no other corporate proceedings on the part of the Company,
other than a meeting of the Company's stockholders (the "Company Stockholders'
Meeting"), are necessary to authorize this Agreement, and, subject to obtaining
the approval and adoption of this Agreement and approval of the Merger by a
majority of the shares of the Company Common Stock outstanding as of the record
date of the Company Stockholders' Meeting (the "Required Company Stockholder
Vote"), no other corporate action on the part of the Company is necessary to
consummate the transactions contemplated hereby. The Merger has been declared
advisable by the Board of Directors of the Company. This Agreement has been duly
and validly executed and delivered by the Company and, assuming due execution
and delivery by the other parties hereto, constitutes the valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to laws of general application relating to bankruptcy,
insolvency, and the relief of debtors and rules of law governing specific
performance, injunctive relief, or other equitable remedies.
3.3 CAPITALIZATION. As of the close of business on February 26, 1999, the
authorized capital stock of the Company consisted of (i) 25,000,000 shares of
Company Common Stock, $.001 par value per share, of which 2,242,179 were issued
and outstanding and 90,200 shares were held in the Company's treasury, and (ii)
2,500,000 shares of Company Preferred Stock, none of which were issued or
outstanding. All issued and outstanding shares of capital stock of each
Subsidiary are owned, beneficially and of record, by the Company, free and clear
of any mortgage, pledge, security interest, encumbrance, lien or other charge of
any kind ("Lien") that would materially affect the Company's interest in such
shares. All issued and outstanding shares of Company Common Stock have been
validly
A-10
<PAGE>
issued, are fully paid and nonassessable, and have not been issued in violation
of and are not currently subject to any preemptive rights. As of the close of
business on February 26, 1999, except for (i) Company Options to purchase an
aggregate total of 51,000 shares of Company Common Stock not granted pursuant to
the 1991 Stock Option Plan or 1991 Outside Directors Stock Option Plan
(collectively, the "Stock Option Plans") and that are listed, together with
their respective exercise prices, in the Company Disclosure Schedule, and (ii)
Company Options to purchase an aggregate total of 637,051 shares of Company
Common Stock that were granted pursuant to the Stock Option Plans and that are
listed, together with their respective exercise prices, in the Company
Disclosure Schedule, there were not any outstanding or authorized subscriptions,
options, warrants, calls, rights, convertible securities, commitments,
restrictions, arrangements, or any other agreements of any character to which
the Company or any Subsidiary was a party that, directly or indirectly, (a)
obligated the Company or any Subsidiary to issue any shares of capital stock or
any securities convertible into, or exercisable or exchangeable for, or
evidencing the right to subscribe for, any shares of capital stock, (b) called
for or related to the sale, pledge, transfer, or other disposition or
encumbrance by the Company or any Subsidiary of any shares of its capital stock,
or (c) related to the voting or control of such capital stock. The Company
Disclosure Schedule sets forth a complete and accurate list of all stock
options, warrants, and other rights to acquire Company Common Stock that were
outstanding as of February 26, 1999, including the name of the holder, the date
of grant, acquisition price, number of shares, exercisability schedule, and, in
the case of options, the type of option under the Code. No consent of holders or
participants under the Stock Option Plans is required to carry out the
provisions of Section 1.3. All actions, if any, required on the part of the
Company under the Stock Option Plans to allow for the treatment of Company
Options as is provided in Section 1.3, have been, or prior to the Closing will
be, validly taken by the Company.
3.4 REPORTS AND FINANCIAL STATEMENTS. The Company has filed all forms,
reports, registration statements, and other documents required to be filed by it
with the SEC since February 1, 1995 (such forms, reports, registration
statements, and documents, together with any amendments thereto, are referred to
as the "Company SEC Filings"). As of their respective dates, the Company SEC
Filings (i) complied as to form in all material respects with the applicable
requirements of the Securities Act of 1933, and the rules and regulations
thereunder (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934
Act"), as the case may be, and (ii) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. The audited financial statements
included or incorporated by reference or to be included or incorporated by
reference in the Company SEC Filings, including but not limited to the Company's
audited financial statements at and for the year ended January 31, 1999 (the
"Company January 31, 1999 Financials"), and the unaudited interim financial
statements at and for periods commencing on or after February 1, 1999, to be
included or incorporated by reference in the forms, reports, registration
statements and other documents filed by the Company with the SEC (i) were or
will be prepared in accordance with generally accepted accounting principles
(except, in the case of unaudited statements, as permitted by Form 10-Q filed
with the SEC) applied on a consistent basis during the periods involved (except
as may be indicated therein or in the notes thereto), subject, in the case of
unaudited interim financial statements, to the absence of notes and to year-end
adjustments, (ii) complied or will comply as of their respective dates in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, and (iii) fairly present
or will fairly present in all material respects the consolidated financial
position of the Company and its consolidated subsidiaries as of the dates
thereof and the consolidated income, cash flows, and changes in stockholders'
equity of the Company and its consolidated subsidiaries for the periods
involved, except as otherwise noted therein and subject, in the case of
unaudited statements, to normal year-end audit adjustments. The statements of
operations included in or to be included in the audited or unaudited interim
financial statements in the Company SEC Filings do not contain and will not
contain any items
A-11
<PAGE>
of special or nonrecurring income or any other income not earned in the ordinary
course of business required to be disclosed separately in accordance with
generally accepted accounting principles, except as expressly specified in the
applicable statement of operations or notes thereto.
3.5 ABSENCE OF UNDISCLOSED LIABILITIES. Neither the Company nor any
Subsidiary has any liabilities or obligations of any nature (whether absolute,
accrued, contingent or otherwise) of the type required to be reflected on or
reserved against in, or disclosed in the notes to, a balance sheet prepared in
accordance with U.S. generally accepted accounting principles except: (a)
liabilities or obligations that will be accrued or reserved against in the
audited consolidated balance sheet of the Company and its consolidated
subsidiaries as of January 31, 1999 contained in the Company January 31, 1999
Financials (the "Company Audited Balance Sheet") or referred to in the notes
thereto, (b) liabilities incurred in the ordinary course of business since
January 31, 1999, and (c) liabilities or obligations that would not have a
Company Material Adverse Effect.
3.6 CONSENTS AND APPROVALS. Except for: (i) any applicable requirements of
the 1933 Act, the 1934 Act, state securities laws, the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the regulations thereunder (the "HSR
Act"), and the antitrust, competition, foreign investment, or similar laws of
any foreign countries or supranational commissions or boards that require
pre-merger notifications or filings with respect to the Merger (collectively,
"Foreign Merger Laws"), (ii) obtaining the Required Company Stockholder Vote,
(iii) the filing and recordation of appropriate merger documents as required by
the DGCL, the execution and delivery by the Company of this Agreement and the
other agreements contemplated hereby to which the Company is a party and the
consummation by the Company of the transactions contemplated hereby and thereby
will not: (a) violate any provision of the Certificate or Articles of
Incorporation or Bylaws of the Company or any Subsidiary; (b) violate in any
material way any material statute, rule, regulation, order, or decree of any
federal, state, local, or foreign governmental or regulatory body or authority
(a "Governmental Body") or any nongovernmental self-regulatory agency by which
the Company or any Subsidiary, or any of their respective properties or assets
may be bound; (c) require any filing by the Company with or permit, consent, or
approval to be obtained by the Company from any Governmental Body or any
nongovernmental self-regulatory agency; or (d) result in any violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default under, result in the loss of any material benefit under, or give rise to
any right of termination, cancellation, increased payments, or acceleration
under, or result in the creation of any Lien (as defined in Section 3.3) on any
of the properties or assets of the Company or any Subsidiary under, any of the
terms, conditions, or provisions of any material note, bond, mortgage,
indenture, license, franchise, permit, authorization, agreement, or other
instrument or obligation to which the Company or any Subsidiary is a party, or
by which it or any of its properties or assets may be bound, except, in the case
of clauses (b), (c) and (d), for any such filings, permits, consents or
approvals or violations, breaches, defaults, or other occurrences that could not
reasonably be expected to prevent or delay consummation of any of the
transactions contemplated hereby in any material respect, or otherwise prevent
the Company from performing its obligations under this Agreement in any material
respect, and would not have a Company Material Adverse Effect.
3.7 COMPLIANCE WITH LAWS. Neither the Company nor any Subsidiary is in
default or violation in any material respect of any applicable federal, state,
local, or foreign laws, ordinances, regulations, published interpretations,
judgments, decrees, injunctions, permits, licenses, certificates, governmental
requirements, orders, or other similar items of any court or other Governmental
Body (and including those of any nongovernmental self-regulatory agency and
including environmental laws or regulations), except for such defaults or
violations that would not have a Company Material Adverse Effect.
A-12
<PAGE>
3.8 LITIGATION.
(a) As of the date of this Agreement, there is no Merger-Related
Proceeding (as defined below) pending, or to the knowledge of the Company,
threatened in writing against the Company. For purposes of this Agreement,
"Merger-Related Proceeding" shall mean any meritorious asserted claim,
action, suit, proceeding, governmental investigation or governmental review
of any kind: (i) challenging or seeking to prevent, enjoin or delay the
Merger or any of the other transactions contemplated by this Agreement, or
(ii) seeking material damages from the Company or any of its Subsidiaries or
from Parent or any of its subsidiaries in connection with the consummation
or anticipated consummation of the Merger.
(b) There are no asserted claims, actions, suits, proceedings or, to the
knowledge of the Company, governmental investigations or governmental
reviews of any kind pending, or to the knowledge of the Company, threatened
against the Company or any Subsidiary or any asset or property of the
Company or any Subsidiary, other than Merger-Related Proceedings and except
for such claims, actions, suits, proceedings, governmental investigations or
governmental reviews that would not have a Company Material Adverse Effect.
3.9 ABSENCE OF MATERIAL ADVERSE CHANGES. Between January 31, 1999 and the
date hereof, there has not been any (a) Company Material Adverse Effect; (b)
damage, destruction, or loss, not covered by insurance, that would have a
Company Material Adverse Effect; (c) material change by the Company or any
Subsidiary in accounting methods or principles used for financial reporting
purposes, except as required by a change in applicable law or generally accepted
accounting principles and concurred with by the Company's independent public
accountants; or (d) agreement, whether in writing or otherwise, to take any
action described or referenced in this Section 3.9.
3.10 OFFICERS, DIRECTORS AND EMPLOYEES. Prior to the date hereof, the
Company has provided to Parent a list that completely and accurately sets forth,
as of the date hereof, the name and current annual salary rate of each current
officer of the Company whose total remuneration for the last fiscal year was, or
for the current fiscal year has been set at, in excess of $100,000, together
with a summary of the bonuses, commissions, additional compensation, and other
like cash benefits, if any, paid or payable to such persons for the last fiscal
year and proposed for the current fiscal year. The Company Disclosure Schedule
completely and accurately sets forth (i) the names of all former officers of the
Company whose employment with the Company has terminated either voluntarily or
involuntarily during the 12-month period preceding the date of this Agreement;
and (ii) the names of the officers (with all positions and titles indicated) and
directors of the Company as of the date hereof. Except as would not have a
Company Material Adverse Effect: (i) no unfair labor practice complaint against
the Company or any Subsidiary is pending before the National Labor Relations
Board, and there is no labor strike, slowdown or stoppage pending or, to the
knowledge of the Company, threatened in writing against or involving the Company
or any Subsidiary; (ii) no unionizing efforts have, to the knowledge of the
Company, been made by employees of the Company or any Subsidiary; (iii) neither
the Company nor any Subsidiary is a party to or subject to any collective
bargaining agreement, and no collective bargaining agreement is currently being
negotiated by the Company or any Subsidiary; and (iv) there is no labor dispute
pending or, to the knowledge of the Company, threatened, between the Company or
any Subsidiary and its employees.
3.11 TAXES. Except for such matters that would not have a Company Material
Adverse Effect, (i) the Company and each Subsidiary have filed, or have obtained
extensions to file (which extensions have not expired without filing), all
state, local, United States, foreign, or other tax reports and returns required
to be filed by any of them, (ii) the Company and each Subsidiary have duly paid,
or accrued on their books of account, all taxes (including estimated taxes)
shown as due on such reports and returns (or such extension requests), or
assessed against them, other than taxes being contested in good faith in proper
proceedings, and (iii) the liabilities and reserves for taxes which will be
reflected on the
A-13
<PAGE>
Company Audited Balance Sheet will be adequate to cover all taxes payable by the
Company and its Subsidiaries for all taxable periods and portions thereof ending
on or before the dates thereof. To the Company's knowledge, no tax audits are
pending against and no claims for taxes have been received in writing by the
Company or any of its Subsidiaries, other than audits and claims that would not
have a Company Material Adverse Effect. Neither the Company nor any Subsidiary
has, with regard to any assets or property held, acquired or to be acquired by
any of them, filed a consent to the application of Section 341(f)(2) of the
Code. Neither the Company nor any of its Subsidiaries has taken or agreed to
take any action (other than actions contemplated by this Agreement) that would
prevent the Merger from constituting a reorganization qualifying under Section
368(a) of the Code. The Company is not aware of any agreement, plan or other
circumstance that would prevent the Merger from so qualifying under Section
368(a) of the Code.
For the purposes of this Agreement, "tax" shall mean and include taxes, duties,
withholdings, assessments, and charges assessed or imposed by any governmental
authority (together with any interest, penalties and additions to tax imposed
with respect thereto), including but not limited to all federal, state, county,
local, and foreign income, profits, gross receipts, import, ad valorem, real and
personal property, franchise, license, sales, use, value added, stamp, transfer,
withholding, payroll, employment, excise, custom, duty, and any other taxes,
obligations and assessments of any kind whatsoever; "tax" shall also include any
liability for taxes arising as a result of being (or ceasing to be) a member of
any affiliated, consolidated, combined, or unitary group as well as any
liability for taxes under any tax allocation, tax sharing, tax indemnity, or
similar agreement.
3.12 CONTRACTS. The Company Disclosure Schedule lists, and the Company has
heretofore furnished to Parent complete and accurate copies of (or, if oral, the
Company Disclosure Schedule states all material provisions of), every
employment, consulting, severance or change of control agreement or arrangement
for the benefit of any director, officer, employee, other person or stockholder
of the Company or any Subsidiary or any affiliate thereof in effect as of the
date of this Agreement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any of their properties or assets is
bound. Neither the Company nor any Subsidiary is in material violation of or in
default under any contract, plan, agreement, understanding, arrangement or
obligation that is material to the Company and its Subsidiaries, considered as a
whole, except for such violations or defaults that would not have a Company
Material Adverse Effect. As of the date of this Agreement, neither the Company
nor any Subsidiary is a party to any contract, plan, agreement, understanding,
arrangement or obligation (i) which materially restricts the Company's, or after
the Merger would materially restrict the Surviving Corporation's or Parent's,
ability to conduct any material line of business currently conducted by the
Company, (ii) which imposes on the Company or any Subsidiary material
obligations, the non-performance of which would have a Company Material Adverse
Effect, that are not reflected in the Company's financial statements included
within the Company's SEC Filings, or (iii) that would be required to be filed
with the SEC in a filing to which paragraph (b)(10) of Item 601 of Regulation
S-K of the Rules and Regulations of the SEC is applicable, which has not been so
filed.
3.13 INTELLECTUAL PROPERTY RIGHTS. For purposes of this Section,
"Intellectual Property" shall mean patents, mask works, trademarks, trade names,
service marks, copyrights, know-how, trade secrets and other proprietary
information, the loss, impairment or misappropriation of which, either
individually or in the aggregate, would have a Company Material Adverse Effect,
and all applications for or registrations of any of the foregoing. Except as set
forth in the Company Disclosure Schedule, the Company and its Subsidiaries own
or have a valid license to (or otherwise possess legally enforceable rights to
use) the Intellectual Property used in or necessary for the conduct of the
Company's business as conducted prior to the date of this Agreement ("Company
Intellectual Property"), free and clear of any Lien (as defined in Section 3.3,
but excluding licenses) that would have a Company Material Adverse Effect. As of
the date of this Agreement, the Company Disclosure
A-14
<PAGE>
Schedule contains a complete and accurate list of (i) all patents, mask works,
trademarks (with a separate listing of registered and unregistered trademarks),
trade names, service marks and registered copyrights in the Company Intellectual
Property, (ii) all applications and registrations therefor, and (iii) all
licenses or other agreements pursuant to which the Company grants any rights
relating to Company Intellectual Property to a third party (other than end-user
licenses). As of the date of this Agreement, the Company Disclosure Schedule
contains a list of all licenses or agreements from a third party to the Company
or any Subsidiary relating to any Intellectual Property that the Company is
licensed or otherwise authorized by such third parties to use, distribute or
otherwise exploit (other than any item of Intellectual Property generally
available on standard terms and conditions). To the knowledge of the Company, no
claim is being asserted and no person is threatening in a writing delivered to
the Company or a Subsidiary to assert a claim, with respect to the use of the
Company Intellectual Property owned by the Company or challenging or questioning
the validity or effectiveness of any license or agreement with respect to any
Company Intellectual Property, except for such claims that would not have a
Company Material Adverse Effect. To the knowledge of the Company, neither the
use by the Company or any Subsidiary of the Company Intellectual Property in the
present conduct of its business nor any product or service of the Company or any
Subsidiary infringes on the valid intellectual property rights of any person in
a manner that would have a Company Material Adverse Effect. Except as would not
have a Company Material Adverse Effect, (i) unless provided otherwise in the
Company Disclosure Schedule, all applications listed in the Company Disclosure
Schedule are still pending in good standing and have not been abandoned, and
(ii) to the knowledge of the Company, the Company Intellectual Property is not
being challenged in any judicial or administrative (excluding any patent-office
or registration) proceeding. To the knowledge of the Company, no person or
entity, nor such person's or entity's business or products has infringed, or
misappropriated any Company Intellectual Property, or currently is infringing,
or misappropriating any Company Intellectual Property, except as would not have
a Company Material Adverse Effect.
3.14 BENEFIT PLANS.
(a) Except as set forth on the Company Disclosure Schedule, neither the
Company nor any Subsidiary sponsors, maintains, contributes to, or has,
during the five year period ending on the date of this Agreement, sponsored,
maintained, or contributed to or been required to contribute to, any
"employee pension benefit plan" ("Pension Plan"), as such term is defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), including, solely for the purpose of this subsection, a
plan excluded from coverage by Section 4(b)(5) of ERISA. Each such Pension
Plan presently maintained by the Company or any Subsidiary is, in all
material respects, in compliance with applicable provisions of ERISA, the
Code, and other applicable law and the Company or such Subsidiary has
performed all of its obligations under such Pension Plan except for such
obligations that would not have a Company Material Adverse Effect.
(b) Neither the Company nor any Subsidiary sponsors, maintains,
contributes to, or has, during the five year period ending on the date of
this Agreement, sponsored, maintained, or contributed to or been required to
contribute to, any Pension Plan that is subject to Title IV of ERISA.
(c) Except as set forth on the Company Disclosure Schedule, neither the
Company nor any Subsidiary sponsors, maintains, or contributes to any
"employee welfare benefit plan" ("Welfare Plan"), as such term is defined in
Section 3(1) of ERISA, whether insured or otherwise, and any such Welfare
Plan presently maintained by the Company or any Subsidiary is, in all
material respects, in compliance with the provisions of ERISA, the Code, and
all other applicable laws, including, but not limited to, Section 4980B of
the Code and the regulations thereunder, and Part 6 of Title I of ERISA.
Neither the Company nor any Subsidiary has established or contributed to any
"voluntary employees' beneficiary association" within the meaning of Section
501(c)(9) of the Code.
A-15
<PAGE>
(d) Except as set forth on the Company Disclosure Schedule, neither the
Company nor any Subsidiary currently maintains or contributes to any
material oral or written bonus, profit-sharing, compensation (incentive or
otherwise), commission, stock option, or other stock-based compensation,
retirement, severance, change of control, vacation, sick or parental leave,
dependent care, deferred compensation, cafeteria, disability,
hospitalization, medical, death, retiree, insurance, or other benefit or
welfare or other similar plan, policy, agreement, trust, fund, or
arrangement providing for the remuneration or benefit of all or any
employees, directors or any other person, that is neither a Pension Plan nor
a Welfare Plan (collectively, the "Compensation Plans").
(e) With respect to the Pension Plans, Welfare Plans or Compensation
Plans, no event has occurred and, to the knowledge of the Company, there
exists no condition or set of circumstances, in connection with which the
Company or any of its Subsidiaries could be subject to any liability under
the terms of such Plans (other than the payment of benefits thereunder),
ERISA, the Code or any other applicable law which would have a Company
Material Adverse Effect.
(f) The Internal Revenue Service has issued favorable determination
letters with respect to all presently maintained Company and Subsidiary
Pension Plans that are intended to be qualified under Section 401(a) of the
Code, or has applied to the Internal Revenue Service for such a
determination letter prior to the expiration of the requisite period under
applicable Treasury Regulations or Internal Revenue Service pronouncements
in which to apply for such a determination and to make any amendments
necessary to obtain a favorable determination, or has been established under
a standardized prototype plan for which an Internal Revenue Service opinion
letter has been obtained by the plan sponsor and is valid as to the adopting
employer. The Company has made available to Parent the written documents
setting forth the terms of all Pension Plans, Welfare Plans, Compensation
Plans, and related agreements, and complete and accurate copies of the three
most recent annual reports (Form 5500), the most recent favorable
determination opinion or letters, current summary plan descriptions, and all
employee handbooks or manuals. The Company has provided to Parent (i) copies
of all employment agreements with officers of any of the Company, its U.S.
Subsidiaries or, to the extent reasonably available, the Company's non-U.S.
Subsidiaries (or copies of forms of agreements setting forth representative
employment terms and conditions); (ii) copies of all material severance,
bonus or incentive agreements, programs and policies of any of the Company,
any U.S. Subsidiary or, to the extent reasonably available, the Company's
non-U.S. Subsidiaries with or relating to any of its employees; and (iii)
copies of all plans, programs, agreements and other arrangements of any of
the Company, any U.S. Subsidiary or, to the extent reasonably available, the
Company's non-U.S. Subsidiaries with or relating to any of its employees
which contain change in control provisions. With respect to any items that
would be described in the immediately preceding sentence but for the fact
that such copies relate to non-U.S. Subsidiaries and are not reasonably
available to the Company, the Company (i) shall deliver copies thereof to
Parent prior to the Effective Time, and (ii) represents and warrants to
Parent that such items will not, individually or in the aggregate, be
material to the Company and its Subsidiaries.
(g) The execution by the Company of, and performance by the Company of
the transactions contemplated in, this Agreement will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an
event under any Pension Plan, Welfare Plan, Compensation Plan, or other
arrangement that will result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting,
distribution, increase in benefits, or obligation to fund benefits. No
amount that could be received (whether in cash or property or the vesting of
property) as a result of any of the transactions contemplated by this
Agreement by any employee, officer, or director of the Company or any of its
affiliates who is a "disqualified individual" (as such term is defined in
Prop. Treas. Reg. Section 1.280G-1) under any Pension Plan, Welfare Plan,
A-16
<PAGE>
or Compensation Plan currently in effect would be an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code).
3.15 MINUTE BOOKS. The Company has previously made available to Parent or
its representatives all of its minutes of meetings of and corporate actions or
written consents by the stockholders, Board of Directors, and committees of the
Board of Directors of the Company since January 1, 1996.
3.16 NO FINDERS. No act of the Company or any Subsidiary has given or will
give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein, except payments in the amounts specified in
the Company Disclosure Schedule to those parties identified thereon who have
acted as a finder for the Company or have been retained by the Company as
financial advisors pursuant to the agreements or other documents described in
the Company Disclosure Schedule, copies of which have been provided or made
available to Parent or its advisors prior to the date of this Agreement.
3.17 PROXY STATEMENT. The Proxy Statement/Prospectus (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to
form in all material respects with all applicable laws, and none of the
information supplied by the Company specifically for inclusion or incorporation
therein or in any amendments or supplements thereto, or in any schedules
required to be filed with the SEC in connection therewith, will, at the date the
Proxy Statement/Prospectus (or any amendment or supplement thereto) is first
mailed to stockholders, or at the time of the Company Stockholders' Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation or warranty is made by the
Company with respect to information supplied by Parent specifically for
inclusion in the Proxy Statement/Prospectus.
3.18 FAIRNESS OPINION. The Company has received an opinion from Hambrecht
& Quist to the effect that, as of the date of such opinion, the Per Share Merger
Consideration is fair, from a financial point of view, to the holders of Company
Common Stock or Company Options, and the Company will promptly deliver a copy of
such opinion to Parent.
3.19 STATE TAKEOVER LAWS. The Board of Directors of the Company has
approved the transactions contemplated by this Agreement, such that the
provisions of Section 203 (entitled "Business Combinations with Interested
Stockholders") of the DGCL will not apply to this Agreement or any of the
transactions contemplated hereby or thereby.
3.20 MERGER FILINGS. The information as to the Company or any of its
affiliates or stockholders included in the Company's filing, or submitted to
Parent and Merger Subsidiary for inclusion in their filing, if any, required to
be submitted under the HSR Act or under any Foreign Merger Laws shall be true,
correct, and complete in all material respects and shall comply in all material
respects with the applicable requirements of the HSR Act, the rules and
regulations issued by the Federal Trade Commission pursuant thereto, and Foreign
Merger Laws.
3.21 ENVIRONMENTAL LAWS. Except as set forth on the Company Disclosure
Schedule, the Company and its U.S. Subsidiaries are each in compliance in all
material respects with all Applicable Laws with respect to Hazardous Substances.
There is no pending or, to the knowledge of the Company, threatened
investigation or proceeding with respect to the operations of the Company or any
of its U.S. Subsidiaries as they pertain to Hazardous Substances. Except as set
forth on the Company Disclosure Schedule, to the knowledge of the Company, there
is and has been no current or past usage or practice of the Company or any of
its U.S. Subsidiaries with respect to any Hazardous Substances which may support
a claim or cause of action against the Company or any of its U.S. Subsidiaries
under Applicable Law. For purposes of this Section 3.21, "Applicable Law" means
all applicable laws, statutes,
A-17
<PAGE>
treaties, rules, codes, ordinances, regulations, permits, certificates, orders
and licenses of any governmental authority, interpretations of any of the
foregoing by a governmental authority having jurisdiction with respect thereto,
and judgments, decrees, injunctions, writs, orders or like action of any court,
arbitrator or other judicial or quasi-judicial tribunal (including without
limitation those pertaining to health, safety and the environment); and
"Hazardous Substances" means any substance, material or waste which is as of the
Closing Date regulated or, on or before the Closing Date, is proposed to be
regulated, by any governmental authority, as hazardous, polluting or toxic
pursuant to any Applicable Law.
3.22 ACCOUNTING MATTERS. To the knowledge of the Company, neither the
Company nor any affiliate (as such term is used in Rule 145 under the Securities
Act) of the Company has taken or agreed to take or plans to take any action that
could prevent Parent from accounting for the Merger as a "pooling of interests"
in accordance with generally accepted accounting principles, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBSIDIARY
Except (i) as set forth in a document of even date herewith and concurrently
delivered herewith (the "Parent Disclosure Schedule") or (ii) as specifically
described through express disclosure of current, specific facts set forth in
Parent's Annual Report on Form 10-K for the fiscal year ended September 30, 1998
or in any other filing by Parent with the SEC filed after the date of filing
such Form 10-K and prior to the date hereof (for purposes of clauses (i) and
(ii) above, disclosures in the Parent Disclosure Schedule and such Parent SEC
filings shall be deemed to qualify or limit only those particular
representations and warranties set forth in this Article 4 to which the
relevancy of such disclosures is readily apparent), Parent and Merger Subsidiary
hereby jointly and severally make the following representations and warranties
to the Company:
4.1 ORGANIZATION. Parent is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Minnesota. Merger
Subsidiary is a corporation duly organized and validly existing under the laws
of the State of Delaware. Each of Parent and Merger Subsidiary has all requisite
corporate power and authority to own, lease, and operate its properties and to
carry on its business as now being conducted, except where the failure to be so
organized, existing or in good standing or to have such corporate power and
authority would not, individually or in the aggregate, have a Parent Material
Adverse Effect (as defined below). Each of Parent and Merger Subsidiary is duly
qualified and in good standing to do business in each jurisdiction in which the
property owned, leased, or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified or in good standing would not have a Parent Material Adverse
Effect. "Parent Material Adverse Effect" means an effect that is, or at the time
of such effect it is probable that the effect will be, materially adverse (i) to
the business, results of operation, or financial condition of Parent and its
Subsidiaries, considered as a whole, (ii) to Parent's ability to conduct such
business, as presently conducted, following the Effective Time, or (iii) to
Parent's ability to perform any of its material obligations under this Agreement
or to consummate the Merger; provided, however, that none of the following shall
be deemed to have a Material Adverse Effect on Parent: (A) a change in the
market price or trading volume of the Parent Common Stock, (B) a failure by
Parent to meet any published securities analyst estimates of revenue or earnings
for any period ending or for which earnings are released on or after the date of
this Agreement and prior to the Closing, (C) an event, violation, inaccuracy,
circumstance or other matter that results from conditions affecting the U.S. or
world economy, (D) an event, violation, inaccuracy, circumstance or other matter
that results from conditions affecting the powertrain testing or instrumentation
industry generally, (E) an event, violation, inaccuracy, circumstance or other
matter that results primarily from the announcement or the pendency of the
Merger or the transactions contemplated by this Agreement or (F) an event,
violation, inaccuracy, circumstance or other matter that results from the taking
of any
A-18
<PAGE>
action required or permitted by this Agreement. Parent has heretofore delivered
or made available to Company or its advisers complete and accurate copies of the
Articles of Incorporation and Bylaws of Parent, as currently in effect, and of
the organizational documents and agreements defining the rights of Parent or any
Subsidiary with respect to any material joint ventures, partnerships or other
business in which Parent owns less than substantially all of the outstanding
equity interest. As of the date hereof, neither Parent nor any Subsidiary,
directly or indirectly, owns or controls or has any material equity,
partnership, or other similar ownership interest in any corporation,
partnership, joint venture, or other business association or entity that is
material to Parent and its Subsidiaries, considered as a whole.
4.2 AUTHORIZATION. Each of Parent and Merger Subsidiary has all necessary
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
Parent and Merger Subsidiary of this Agreement and the other agreements
contemplated hereby to which Parent or Merger Subsidiary is a party, and the
consummation by Parent and Merger Subsidiary of the transactions contemplated
hereby and thereby, have been duly and validly authorized and approved by the
Boards of Directors of Parent and Merger Subsidiary and by Parent as the sole
shareholder of Merger Subsidiary, and no other corporate proceedings on the part
of Parent and Merger Subsidiary, and no vote, consent or approval of Parent's
shareholders, are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. The Merger has been declared advisable by the
Board of Directors of Merger Subsidiary. This Agreement has been duly and
validly executed and delivered by each of Parent and Merger Subsidiary and,
assuming due execution and delivery by the Company, constitutes the valid and
binding obligation of Parent and Merger Subsidiary, enforceable against each of
them in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency, and the relief of debtors and rules of law
governing specific performance, injunctive relief, or other equitable remedies.
4.3 CAPITALIZATION. As of February 26, 1999, the authorized capital stock
of Parent consisted of 64,000,000 shares of Common Stock with a par value of
$.25 per share, of which there were 18,626,853 shares issued and outstanding.
The authorized capital stock of Merger Subsidiary consists of 2,500 shares of
Merger Subsidiary Common Stock, 1,000 of which are issued and outstanding and
owned by Parent. All issued and outstanding shares of Parent Common Stock and
Merger Subsidiary Common Stock are, and the shares of Parent Common Stock to be
issued and delivered in the Merger pursuant to Article 1 hereof shall be, at the
time of issuance and delivery, validly issued, fully paid, nonassessable, and
free of preemptive rights. The shares of Parent Common Stock to be issued and
delivered in the Merger pursuant to Article 1 hereof shall be registered under
the 1933 Act and duly listed for quotation on the Nasdaq National Market,
subject to official notice of issuance. All issued and outstanding shares of
capital stock of each Subsidiary of Parent are owned, beneficially and of
record, by Parent, free and clear of any Lien that would materially affect
Parent's interest in such shares. As of the close of business on February 25,
1999, except for options to purchase an aggregate total of 2,845,299 shares of
Parent Common Stock that were granted pursuant to Parent's 1990 Stock Option
Plan, 1994 Stock Option Plan or its 1997 Stock Option Plan and that are listed,
together with their respective exercise prices, in the Parent Disclosure
Schedule, there were not any outstanding or authorized subscriptions, options,
warrants, calls, rights, convertible securities, commitments, restrictions,
arrangements, or any other agreements of any character to which Parent or any
Subsidiary was a party that, directly or indirectly, (a) obligated Parent or any
Subsidiary to issue any shares of capital stock or any securities convertible
into, or exercisable or exchangeable for, or evidencing the right to subscribe
for, any shares of capital stock, (b) called for or related to the sale, pledge,
transfer, or other disposition or encumbrance by Parent or any Subsidiary of any
shares of its capital stock, or (c) related to the voting or control of such
capital stock.
4.4 CONSENTS AND APPROVALS. Except for (i) any applicable requirements of
the 1933 Act, the 1934 Act, state securities laws, the NASD, the HSR Act, and
Foreign Merger Laws, and (ii) the
A-19
<PAGE>
filing and recordation of appropriate merger documents as required by the DGCL,
the execution and delivery by Parent and Merger Subsidiary of this Agreement and
the other agreements contemplated hereby to which Parent and Merger Subsidiary
are parties, and the consummation of the transactions contemplated hereby and
thereby will not: (a) violate any provision of the Certificate or Articles of
Incorporation or Bylaws of Parent or Merger Subsidiary; (b) violate in any
material way any material statute, rule, regulation, order, or decree of any
Governmental Body or any nongovernmental self-regulatory agency by which Parent
or any of its Subsidiaries or any of their respective properties or assets may
be bound; (c) require any filing by Parent or Merger Subsidiary with or permit,
consent, or approval to be obtained by Parent or Merger Subsidiary from any
Governmental Body or any nongovernmental self-regulatory agency; or (d) result
in any violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default under, result in the loss of any material
benefit under, or give rise to any right of termination, cancellation, increased
payments, or acceleration under, or result in the creation of any Lien on any of
the properties or assets of Parent or its Subsidiaries under, any of the terms,
conditions, or provisions of any material note, bond, mortgage, indenture,
license, franchise, permit, agreement, or other instrument or obligation to
which Parent or any of its Subsidiaries is a party, or by which any of them or
any of their respective properties or assets may be bound, except, in the case
of clauses (b), (c) and (d), for any such filings, permits, consents or
approvals or violations, breaches, defaults, or other occurrences that could not
reasonably be expected to prevent or delay consummation of any of the
transaction contemplated hereby in any material respect, or otherwise prevent
Parent from performing its obligations under this Agreement in any material
respect, and would not have a Parent Material Adverse Effect.
4.5 REPORTS AND FINANCIAL STATEMENTS. Parent has filed all forms, reports,
registration statements, and other documents required to be filed by it with the
SEC since October 1, 1994 (such forms, reports, registration statements and
other documents, together with any amendments thereto, are referred to as the
"Parent SEC Filings"). As of their respective dates, the Parent SEC Filings (i)
complied as to form in all material respects with the applicable requirements of
the 1933 Act and the 1934 Act, as the case may be, and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading. The audited
financial statements included or incorporated by reference in the Parent SEC
Filings, including but not limited to Parent's audited financial statements at
and for the year ended September 30, 1998 (the "Parent September 30, 1998
Financials"), and the unaudited interim financial statements at and for periods
commencing on or after October 1, 1998 included or incorporated by reference in
the forms, reports, registration statements and other documents filed by Parent
with the SEC (i) were prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by Form
10-Q filed with the SEC) applied on a consistent basis during the periods
involved (except as may be indicated therein or in the notes thereto) subject,
in the case of unaudited interim financial statements, to the absence of notes
and to year-end adjustments, (ii) complied as of their respective dates in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, and (iii) fairly present
in all material respects the consolidated financial position of Parent and its
consolidated Subsidiaries as of the dates thereof and the consolidated income,
cash flows, and changes in shareholders' equity of Parent and its consolidated
Subsidiaries for the periods involved, except as otherwise noted therein and
subject, in the case of unaudited statements, to normal year-end audit
adjustments. The statements of operations included in the audited or unaudited
interim financial statements in the Parent SEC Filings do not contain any items
of special or nonrecurring income or any other income not earned in the ordinary
course of business required to be disclosed separately in accordance with
generally accepted accounting principles, except as expressly specified in the
applicable statement of operations or notes thereto.
4.6 REGISTRATION STATEMENT. The Registration Statement (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to
form in all material respects
A-20
<PAGE>
with the 1933 Act, and none of the information supplied by Parent specifically
for inclusion or incorporation therein or in any amendments or supplements
thereto, or in any schedules required to be filed with the SEC in connection
therewith, will, at the time the Registration Statement becomes effective, at
the date the Proxy Statement/Prospectus (or any amendment or supplement thereto)
is first mailed to the Company's stockholders or at the time of the Company
Stockholders' Meeting, or at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that no representation or warranty is made by Parent with respect to information
supplied by or on behalf of the Company or any affiliate of the Company
specifically for inclusion in the Registration Statement.
4.7 NO FINDERS. No act of Parent or Merger Subsidiary has given or will
give rise to any claim against any of the parties hereto for a brokerage
commission, finder's fee, or other like payment in connection with the
transactions contemplated herein.
4.8 ABSENCE OF UNDISCLOSED LIABILITIES. To the best of Parent's knowledge,
neither Parent nor any of its Subsidiaries has any liabilities or obligations of
any nature (whether absolute, accrued, contingent or otherwise) of the type
required to be reflected on or reserved against in, or disclosed in the notes
to, a balance sheet prepared in accordance with U.S. generally accepted
accounting principles except: (a) liabilities or obligations that are accrued or
reserved against in the audited consolidated balance of Parent as of September
30, 1998 contained in the Parent SEC Filings or in the unaudited consolidated
balance sheet of Parent as of December 31, 1998 contained in Parent's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 1998
(collectively, the "Parent Balance Sheets") or referred to in the notes thereto,
(b) liabilities incurred in the ordinary course of business since December 31,
1998 and (c) liabilities or obligations that would not have a Parent Material
Adverse Effect.
4.9 COMPLIANCE WITH LAWS. Neither Parent nor any of its Subsidiaries is in
default or violation in any material respect of any applicable federal, state,
local or foreign laws, ordinances, regulations, published interpretations,
judgments, decrees, injunctions, permits, licenses, certificates, governmental
requirements, orders or other similar items of any court or other Governmental
Body (and including those of any nongovernmental self-regulatory agency and
including environmental laws or regulations), except for such defaults or
violations that would not have a Parent Material Adverse Effect.
4.10 LITIGATION.
(a) As of the date of this Agreement, there is no Merger-Related
Proceeding pending, or to the knowledge of Parent, threatened in writing
against Parent.
(b) There are no asserted claims, actions, suits, proceedings or to the
knowledge of Parent, governmental investigations governmental reviews of any
kind pending, or to the knowledge of Parent, threatened in writing against
Parent or any of its Subsidiaries or any asset or property of Parent or any
of its subsidiaries, other than Merger-Related Proceedings and except for
such claims, actions, suits, proceedings, governmental investigations or
governmental reviews that would not have a Parent Material Adverse Effect.
4.11 ABSENCE OF MATERIAL ADVERSE CHANGES. Between September 30, 1998 and
the date hereof, there has not been any (a) Parent Material Adverse Effect, (b)
damage, destruction or loss, not covered by insurance, that would have a Parent
Material Adverse Effect, (c) material change by Parent or any of its
Subsidiaries in accounting methods or principles used for financial reporting
purposes, except as required by a change in applicable law or generally accepted
accounting principles and concurred with by Parent's independent public
accountants, or (d) agreement, whether in writing or otherwise, to take any
action described or referenced in this Section 4.11.
A-21
<PAGE>
4.12 REORGANIZATION. Neither Parent nor, to the knowledge of Parent, any
of its Subsidiaries has taken or agreed to take any action (other than actions
contemplated by this Agreement) that would prevent the Merger from constituting
a reorganization qualifying under Section 368(a) of the Code. Parent is not
aware of any agreement, plan or other circumstances that would prevent the
Merger from so qualifying under Section 368(a) of the Code.
4.13 MERGER FILINGS. The information as to Parent and Merger Subsidiary or
any of their affiliates or shareholders included in Parent's filing, or
submitted to the Company for inclusion in its filing, if any, required to be
submitted under the HSR Act or under any Foreign Merger Laws shall be true,
correct, and complete in all material respects and shall comply in all material
respects with the applicable requirements of the HSR Act, the rules and
regulations issued by the Federal Trade Commission pursuant thereto, and Foreign
Merger Laws.
4.14 ACCOUNTING MATTERS. To the knowledge of Parent, neither Parent nor
any affiliate (as such term is used in Rule 145 under the Securities Act) of
Parent has taken or agreed to take or plans to take any action that could
prevent Parent from accounting for the Merger as a "pooling of interests" in
accordance with generally accepted accounting principles, Accounting Principles
Board Opinion No. 16 and all published rules, regulations and policies of the
SEC.
4.15 TAXES. Except for such matters that would not have a Parent Material
Adverse Effect, (i) Parent and each Subsidiary have filed, or have obtained
extensions to file (which extensions have not expired without filing), all
state, local, United States, foreign, or other tax reports and returns required
to be filed by any of them, (ii) Parent and each Subsidiary have duly paid, or
accrued on their books of account, all taxes (including estimated taxes) shown
as due on such reports and returns (or such extension requests), or assessed
against them, other than taxes being contested in good faith in proper
proceedings, and (iii) the liabilities and reserves for taxes which are
reflected on the Parent Balance Sheets are adequate to cover all taxes payable
by Parent and its Subsidiaries for all taxable periods and portions thereof
ending on or before the dates thereof. To Parent's knowledge, no tax audits are
pending against and no claims for taxes have been received in writing by Parent
or any of its Subsidiaries, other than audits and claims that would not have a
Parent Material Adverse Effect. Neither Parent nor any Subsidiary has, with
regard to any assets or property held, acquired or to be acquired by any of
them, filed a consent to the application of Section 341(f)(2) of the Code.
Neither Parent nor any of its Subsidiaries has taken or agreed to take any
action (other than actions contemplated by this Agreement) that would prevent
the Merger from constituting a reorganization qualifying under Section 368(a) of
the Code. Parent is not aware of any agreement, plan or other circumstance that
would prevent the Merger from so qualifying under Section 368(a) of the Code.
4.16 CONTRACTS. Neither Parent nor any Subsidiary is in material violation
of or in default under any contract, plan, agreement, understanding, arrangement
or obligation that is material to Parent and its Subsidiaries, considered as a
whole, except for such violations or defaults that would not have a Parent
Material Adverse Effect. As of the date of this Agreement, neither Parent nor
any Subsidiary is a party to any contract, plan, agreement, understanding,
arrangement or obligation (i) which materially restricts Parent's, or after the
Merger would materially restrict the Surviving Corporation's or Parent's,
ability to conduct any material line of business currently conducted by Parent,
(ii) which imposes on Parent or any Subsidiary material obligations , the
non-performance of which would have a Parent Material Adverse Effect, that are
not reflected in Parent's financial statements included within the Parent SEC
Filings, or (iii) that would be required to be filed with the SEC in a filing to
which paragraph (b)(10) of Item 601 of Regulation S-K of the Rules and
Regulations of the SEC is applicable, which has not been so filed.
4.17 BENEFIT PLANS.
(a) Except as set forth on the Parent Disclosure Schedule, neither
Parent nor any subsidiary sponsors, maintains, contributes to, or has,
during the five year period ending on the date of this
A-22
<PAGE>
Agreement, sponsored, maintained, or contributed to or been required to
contribute to, any "employee pension benefit plan" ("Pension Plan"), as such
term is defined in Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), including, solely for the purpose of this
subsection, a plan excluded from coverage by Section 4(b)(5) of ERISA. Each
such Pension Plan presently maintained by Parent or any Subsidiary is, in
all material respects, in compliance with applicable provisions of ERISA,
the Code, and other applicable law and Parent or such Subsidiary has
performed all of its obligations under such Pension Plan except for such
obligations that would not have a Parent Material Adverse Effect.
(b) Neither Parent nor any Subsidiary sponsors, maintains, contributes
to, or has, during the five year period ending on the date of this
Agreement, sponsored, maintained, or contributed to or been required to
contribute to, any Pension Plan that is subject to Title IV of ERISA.
(c) Except as set forth on the Parent Disclosure Schedule, neither
Parent nor any Subsidiary sponsors, maintains, or contributes to any
"employee welfare benefit plan" ("Welfare Plan"), as such term is defined in
Section 3(1) of ERISA, whether insured or otherwise, and any such Welfare
Plan presently maintained by Parent or any Subsidiary is, in all material
respects, in compliance with the provisions of ERISA, the Code, and all
other applicable laws, including, but not limited to, Section 4980B of the
Code and the regulations thereunder, and Part 6 of Title I of ERISA. Neither
Parent nor any Subsidiary has established or contributed to any "voluntary
employees' beneficiary association" within the meaning of Section 501(c)(9)
of the Code.
(d) Except as set forth on the Parent Disclosure Schedule, neither
Parent nor any Subsidiary currently maintains or contributes to any material
oral or written bonus, profit-sharing, compensation (incentive or
otherwise), commission, stock option, or other stock-based compensation,
retirement, severance, change of control, vacation, sick or parental leave,
dependent care, deferred compensation, cafeteria, disability,
hospitalization, medical, death, retiree, insurance, or other benefit or
welfare or other similar plan, policy, agreement, trust, fund, or
arrangement providing for the remuneration or benefit of all or any
employees, directors or any other person, that is neither a Pension Plan nor
a Welfare Plan (collectively, the "Compensation Plans").
(e) With respect to the Pension Plans, Welfare Plans or Compensation
Plans, no event has occurred and, to the knowledge of Parent, there exists
no condition or set of circumstances, in connection with which Parent or any
of its Subsidiaries could be subject to any liability under the terms of
such Plans (other than the payment of benefits thereunder), ERISA, the Code
or any other applicable law which would have a Parent Material Adverse
Effect.
(f) The Internal Revenue Service has issued favorable determination
letters with respect to all presently maintained Parent and Subsidiary
Pension Plans that are intended to be qualified under Section 401(a) of the
Code, or has applied to the Internal Revenue Service for such a
determination letter prior to the expiration of the requisite period under
applicable Treasury Regulations or Internal Revenue Service pronouncements
in which to apply for such a determination and to make any amendments
necessary to obtain a favorable determination, or has been established under
a standardized prototype plan for which an Internal Revenue Service opinion
letter has been obtained by the plan sponsor and is valid as to the adopting
employer. Parent has made available to the Company the written documents
setting forth the terms, or with respect to those plans for which a written
document does not exist, a summary of the material terms, of all presently
maintained Pension Plans, Welfare Plans, Compensation Plans, and related
agreements, and complete and accurate copies of the three most recent annual
reports (Form 5500), the most recent favorable determination opinion or
letters, current summary plan descriptions, and all employee handbooks or
manuals.
A-23
<PAGE>
ARTICLE 5 COVENANTS
5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated by this
Agreement or as set forth in Section 5.1 of the Company Disclosure Schedule,
unless Parent shall otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), during the period from the date of this
Agreement to the Effective Time, the Company and each Subsidiary will (i)
conduct its respective operations, to the extent commercially reasonable,
according to its ordinary and usual course of business and consistent with past
practice, and (ii) use commercially reasonable efforts to preserve substantially
intact its respective business organization, to keep available the services of
its respective officers and employees and to maintain satisfactory relationships
with licensors, licensees, suppliers, contractors, distributors, consultants,
customers, and others having material business relationships with it. The
Company will promptly advise Parent of any material change in the management,
present or planned business, properties, liabilities, results of operations, or
financial condition of the Company or any Subsidiary. The Company will, prior to
distributing or otherwise circulating any notices, directives, or other
communications directed to all or groups of customers, vendors, employees,
distributors, or others associated with its business relating to the
transactions contemplated hereby or to the operation of business after
consummation of such transactions, consult with Parent and give Parent
reasonable opportunity to comment thereon. Without limiting the generality of
the foregoing, and except as otherwise expressly provided in or contemplated by
this Agreement or as set forth in Section 5.1 of the Company Disclosure
Schedule, from the date of this Agreement until the Effective Time, neither the
Company nor any Subsidiary will, without the prior written consent of Parent
(such consent not to be unreasonably withheld or delayed):
(a) amend its Certificate or Articles of Incorporation or, pursuant to
action by the Company's Board of Directors, amend its Bylaws;
(b) authorize for issuance, issue, sell, pledge, or deliver (whether
through the issuance or granting of additional options, warrants,
commitments, subscriptions, rights to purchase, or otherwise) any stock of
any class or any securities convertible into shares of stock of any class
(other than, so long as treatment of the Merger as a pooling of interests is
not reasonably expected by Parent's or the Company's independent accountants
to be jeopardized, the (i) issuance of shares of Company Common Stock
pursuant to the exercise of stock options outstanding on the date of this
Agreement or granted in accordance with this subsection (b) and (ii) the
issuance, in the ordinary course of business and consistent with past
practice, of stock options to purchase, at not less than the fair market
value on the date of grant, up to the number of shares specified in Section
5.1 of the Company Disclosure Schedule).
(c) split, combine, or reclassify any shares of its capital stock,
declare, set aside, or pay any dividend or other distribution (whether in
cash, stock, or property or any combination thereof) in respect of its
capital stock; or redeem or otherwise acquire any shares of its capital
stock or its other securities (other than, so long as treatment of the
Merger as a pooling of interests is not jeopardized, pursuant to contractual
agreements with employees, directors or consultants existing as of the date
of this Agreement); or amend or alter any material term of any of its
outstanding securities;
(d) other than indebtedness incurred in the ordinary course of business
and consistent with past practice and other than intercompany indebtedness
or as described in Section 5.1 of the Company Disclosure Schedule, create,
incur or assume any indebtedness for borrowed money, or assume, guarantee,
endorse, or otherwise agree to become liable or responsible for the
obligations of any other person, or make any loans, advances or capital
contributions to, or investments in, any other person; or create, incur or
assume any Lien on any material asset other than any Lien that would not
materially adversely affect the Company's or any Subsidiary's rights with
respect thereto;
A-24
<PAGE>
(e) (i) increase in any manner the compensation of any of its directors,
officers, employees, or consultants, or accelerate the payment of any such
compensation, except in each case in the ordinary course of business and
consistent with past practice (including, without limitation, annual year
end increases and accelerated payments customarily made upon termination of
employment) or consistent with existing contractual commitments or as
required by applicable law; (ii) pay or accelerate or otherwise modify in
any material respect the payment, vesting, exercisability, or other feature
or requirement of any pension, retirement allowance, severance, change of
control, stock option, or other employee benefit to any of its directors,
officers, employees or consultants except as required by any existing plan,
agreement, or arrangement, or as set forth in Section 5.1 of the Company
Disclosure Schedule; or (iii) except for normal increases in the ordinary
course of business in accordance with its customary past practices or
consistent with existing contractual commitments or as required by
applicable laws, commit itself to any additional or increased pension,
profit-sharing, bonus, incentive, deferred compensation, group insurance,
severance, change of control, retirement or other benefit, plan, agreement,
or arrangement, or to any employment or consulting agreement, with or for
the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof (except any amendment required by
law or that would not materially increase benefits under the relevant plan);
(f) except in the ordinary course of business and consistent with past
practice or pursuant to contractual obligations existing on the date hereof
or as described in Section 5.1 of the Company Disclosure Schedule, sell,
transfer, mortgage, or otherwise dispose of or encumber any assets or
properties material to the Company and its Subsidiaries, considered as a
whole other than any Lien that would not materially adversely affect the
Company's and its Subsidiaries' rights with respect to such assets or
properties;
(g) acquire or agree to acquire (i) by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business of any corporation, partnership, joint venture,
association, or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the Company
and its Subsidiaries, except as provided in subsection (h) below and except
purchases of inventory in the ordinary course of business consistent with
past practice;
(h) make or agree to make any new capital expenditure or expenditures,
except for up to $50,000 of capital expenditures pursuant to the Company's
budget previously provided to Parent or as described in Section 5.1 of the
Company Disclosure Schedule;
(i) enter into, amend in any material respect, or terminate any joint
ventures or any other agreements, commitments, or contracts that are
material to the Company and its Subsidiaries, considered as a whole (except
agreements, commitments, or contracts expressly provided for or contemplated
by this Agreement or for the purchase, sale, or lease of goods, services, or
properties in the ordinary course of business, consistent with past
practice), except as set forth in Section 5.1 of the Company Disclosure
Schedule;
(j) enter into or terminate, or amend, extend, renew, or otherwise
modify in any material respect (including, but not limited to, by default or
by failure to act) any material distribution, OEM, independent sales
representative, noncompetition, licensing, franchise, research and
development, supply, or similar contract, agreement, or understanding
(except agreements, commitments, or contracts expressly provided for or
contemplated by this Agreement or for the purchase, sale, or lease of goods,
services, or properties in the ordinary course of business, consistent with
past practice), or enter into any contract, plan, agreement, understanding,
arrangement or obligation which materially restricts the Company's, or after
the Merger would restrict the Surviving Corporation's or Parent's, ability
to conduct any material line of business, except as set forth in Section 5.1
of the Company Disclosure Schedule;
A-25
<PAGE>
(k) change in any material respect its credit policy as to sales of
inventories or collection of receivables or its inventory consignment
practices;
(l) remove or permit to be removed from any building, facility, or real
property any material machinery, equipment, fixture, vehicle, or other
personal property or parts thereof, except in the ordinary course of
business or unless the same is replaced with similar items of equal quality;
(m) alter or revise its accounting principles, procedures, methods, or
practices in any material respect, except as required by applicable law or
by a change in generally accepted accounting principles and concurred with
by the Company's independent public accountants;
(n) institute, settle, or compromise any claim, action, suit, or
proceeding pending or threatened by or against it involving amounts in
excess of $50,000 at law or in equity or before any Governmental Body or any
nongovernmental self-regulatory agency;
(o) knowingly take any action that would render any representation,
warranty, covenant, or agreement of the Company in this Agreement inaccurate
or breached such that the conditions in Section 6.2 will not be satisfied as
of the Closing Date; or
(p) agree, whether in writing or otherwise, to do any of the foregoing.
5.2 CONDUCT OF BUSINESS OF PARENT. Except as contemplated by this
Agreement or as set forth in Section 5.2 of the Parent Disclosure Schedule,
unless the Company shall otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), during the period from the date of this
Agreement to the Effective Time, Parent and each Subsidiary will (i) conduct its
respective operations, to the extent commercially reasonable, according to its
ordinary and usual course of business and consistent with past practice, and
(ii) use commercially reasonable efforts to preserve substantially intact its
respective business organization, to keep available the services of its
respective officers and employees and to maintain satisfactory relationships
with licensors, licensees, suppliers, contractors, distributors, consultants,
customers, and others having material business relationships with it. Without
limiting the generality of the foregoing, and except as contemplated by this
Agreement, from the date of this Agreement until the Effective Time, Parent will
not do, and will not permit any of its Subsidiaries to do, any of the following
without the prior written consent of the Company (such consent not to be
unreasonably withheld or delayed):
(a) amend its Certificate or Articles of Incorporation or, pursuant to
action by Parent's Board of Directors, amend its Bylaws;
(b) authorize for issuance, issue, sell, pledge, or deliver (whether
through the issuance or granting of additional options, warrants,
commitments, subscriptions, rights to purchase, or otherwise) any stock of
any class or any securities convertible into shares of stock of any class
(other than, so long as treatment of the Merger as a pooling of interests is
not reasonably expected by Parent's or the Company's independent accounts to
be jeopardized, the (i) issuance of shares of Parent Common Stock pursuant
to the exercise of stock options outstanding on the date of this Agreement
or granted in accordance with this subsection (b) and (ii) the issuance, in
the ordinary course of business and consistent with past practice, of stock
options to purchase, at not less than the fair market value on the date of
grant, up to the number of shares specified in Section 5.2 of the Parent
Disclosure Schedule).
(c) combine or reclassify any shares of its capital stock, declare, set
aside or pay any extraordinary dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeem or otherwise acquire any shares of its capital
stock or its other securities (other than, so long as treatment of the
Merger as a pooling of interests is not jeopardized, pursuant to Parent's
previously announced stock repurchase program,
A-26
<PAGE>
or contractual arrangements with employees, directors, or consultants
existing as of the date of this Agreement) or amend or alter any material
term of any of its outstanding securities;
(d) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner,
any business of any corporation, partnership, joint venture, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire, or dispose of or agree to dispose of, any assets of any
person, which, in each case, could reasonably be expected to delay
materially the consummation of, or increase materially the risk of
non-consummation of, the transactions contemplated by this Agreement;
(e) except in the ordinary course of business and consistent with past
practice or pursuant to contractual obligations existing on the date hereof
or as described in Section 5.2 of the Parent Disclosure Schedule, sell,
transfer, mortgage, or otherwise dispose of or encumber any assets or
properties material to the Parent and its Subsidiaries, considered as a
whole other than any Lien that would not materially adversely affect the
Parent's and its Subsidiaries' rights with respect to such assets or
properties;
(f) alter or revise its accounting principles, procedures, methods or
practices in any material respect, except as required by applicable law or
regulation or by a change in generally accepted accounting principles and
concurred with by Parent's independent public accountants;
(g) knowingly take any action that would result in a failure to maintain
the quotation of Parent Common Stock on the Nasdaq National Market.
(h) knowingly take any action, or knowingly fail to take any action,
that would render any representation, warranty, covenant or agreement of
Parent in this Agreement inaccurate or breached such that the conditions in
Section 6.3 will not be satisfied as of the Closing Date; or
(i) agree, whether in writing or otherwise, to do any of the foregoing.
5.3 NO SOLICITATION. The Company and its Subsidiaries shall not, and shall
cause their respective officers, directors, employees, representatives, agents,
or affiliates (including, but not limited to any investment banker, attorney or
accountant retained by the Company or any Subsidiary) not to, directly or
indirectly, solicit, knowingly encourage, initiate, or participate in any way in
discussions or negotiations with, or knowingly provide any nonpublic information
to, any corporation, partnership, person, or other entity or group (other than
Parent or any affiliate or agent of Parent) concerning any proposed Alternative
Transaction (as defined below), or otherwise knowingly facilitate any effort or
attempt to propose, make or implement an Alternative Transaction. For purposes
of this Agreement, "Alternative Transaction" shall mean any of the following
involving the Company or any Subsidiary: (i) any tender offer, exchange offer,
merger, consolidation, share exchange, business combination or similar
transaction; (ii) any transaction or series of related transactions pursuant to
which any person or entity (or its shareholders), other than Parent, Merger
Subsidiary or any of their affiliates (a "Third Party") acquires shares (or
securities exercisable for or convertible into shares) representing more than
50% of the outstanding shares of any class of capital stock of the Company or
any Subsidiary; or (iii) any sale, lease, exchange, licensing, transfer or other
disposition pursuant to which a Third Party acquires control of more than 50% of
the assets (including, but not limited to, Intellectual Property assets) of the
Company and its Subsidiaries taken as a whole (determined by reference to the
fair market value of such assets), in a single transaction or series of related
transactions. The Company will immediately terminate all discussions with Third
Parties concerning any proposed Alternative Transaction, and will request that
such Third Parties promptly return any confidential information furnished by the
Company in connection with any proposed Alternative Transaction. The Company
will not waive any provision of any confidentiality, standstill or similar
agreement entered into with any third party regarding any proposed Alternative
Transaction, and prior to the Closing shall enforce all
A-27
<PAGE>
such agreements in accordance with their terms. The Company will promptly
communicate to Parent the name of the person or entity submitting, and the terms
and conditions of, any proposal or inquiry that it receives after the date
hereof in respect of any proposed Alternative Transaction or a reasonably
detailed description of any such information requested from it after the date
hereof or of any such negotiations or discussions being sought to be initiated
or continued with the Company after the date hereof in respect of a proposed
Alternative Transaction.
The foregoing notwithstanding, this Agreement shall not prohibit the Board of
Directors of the Company from (i) prior to the Required Company Stockholder
Vote, furnishing nonpublic information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited Superior
Proposal (as defined below), if, and only to the extent that:
(a) the Board of Directors reasonably and in good faith determines that
failure to take such action would be inconsistent with the fiduciary duties
of the Board of Directors to its stockholders under applicable law;
(b) prior to first furnishing nonpublic information to, or first
entering into any substantive discussions and negotiations with, such person
or entity after the date hereof, the Company (i) provides written notice to
Parent to the effect that it intends to furnish information to, or enter
into discussions or negotiations with, a person or entity making a Superior
Proposal, and naming and identifying the person or entity making the
Superior Proposal, and (ii) receives from such person or entity an executed
confidentiality agreement with terms no less favorable to the Company than
the Confidentiality Agreement (as defined below) entered into with Parent;
and
(c) the Company provides Parent with all non-public information to be
provided to such person or entity which Parent has not previously received
from the Company, and the Company keeps Parent informed, on a daily or more
regular basis if the context requires or Parent so requests, of the status,
terms and conditions and all other material information with respect to any
such discussions or negotiations; and
(ii) to the extent applicable, complying with Rule 14e-2 or 14d-9 promulgated
under the 1934 Act with regard to a proposed Alternative Transaction.
Nothing in this Section shall (x) permit the Company to terminate this Agreement
(except as specifically provided in Article 7 hereof), or (y) permit the Company
to enter into any agreement providing for an Alternative Transaction (other than
as specifically provided in Article 7 hereof, or the confidentiality agreement
as provided, and in the circumstances and under the conditions set forth, above)
for as long as this Agreement remains in effect.
For purposes of this Agreement, a "Superior Proposal" shall mean a proposal for
an Alternative Transaction that the Board of Directors of the Company has
reasonably and in good faith determined (with the advice of its financial
advisors and taking into account all legal, financial and regulatory aspects of
the likelihood of the consummation of such Alternative Transaction, including,
but not limited to, the conditions to consummation and the consequences under
such Alternative Transaction proposal of any material adverse effects or changes
in the Company) to be more favorable to the Company's stockholders than the
transactions contemplated by this Agreement.
5.4 ACCESS AND INFORMATION.
(a) The Company and Parent shall afford each other, and to their
respective accountants, officers, directors, employees, counsel, and other
representatives, reasonable access during normal business hours upon
reasonable prior notice, from the date hereof through the Effective Time, to
all of its properties, books, contracts, commitments, and records, and,
during such period, the Company and Parent shall furnish promptly to each
other all information concerning its and its Subsidiaries' businesses,
prospects, properties, liabilities, results of operations, financial
condition,
A-28
<PAGE>
research and development, intellectual property, officers, employees,
consultants, advisers, distributors, customers, suppliers, and others having
material dealings with it or any Subsidiary as the other may reasonably
request, and reasonable opportunity to contact and obtain information from
such officers, employees, consultants, advisers, distributors, customers,
suppliers, and others having dealings with it or any Subsidiary as the other
may reasonably request provided that each party may require the other to
enter into a supplemental confidentiality agreement with regard to certain
technical proprietary or competitively sensitive information prior to
providing such information to the other party. During the period from the
date hereof to the Effective Time, the parties shall in good faith meet and
correspond on a regular basis for mutual consultation concerning the conduct
of their respective businesses and, in connection therewith, Parent and the
Company shall be entitled, during normal business hours upon reasonable
prior notice and in a manner that does not unreasonably interfere with the
other party's business, to have employees or other representatives present
at the offices of the other party to observe, and be kept informed
concerning, the other party's operations and business planning.
(b) Parent and the Company shall hold in confidence all such nonpublic
information as required by and in accordance with the confidentiality
agreement dated February 3, 1999, between Parent and the Company and any
supplemental confidentiality agreements entered into between the parties
prior to the Effective Time (collectively, the "Confidentiality Agreement").
5.5 APPROVAL OF STOCKHOLDERS; PROXY STATEMENT; REGISTRATION STATEMENT.
(a) The Company shall use commercially reasonable efforts to promptly,
subject to applicable law or SEC or Nasdaq regulations, take all action
necessary in accordance with the DGCL and the Company's Certificate of
Incorporation and Bylaws to cause a special meeting of the Company's
stockholders (the "Company Stockholders Meeting") to be duly called and held
as soon as reasonably practicable following the date upon which the
Registration Statement (as defined below) becomes effective for the purpose
of voting upon the Merger and the adoption and approval of this Agreement
and at such Meeting to submit this Agreement and the Merger to a vote of the
stockholders. The stockholder vote or consent required for adoption and
approval of this Agreement and the approval of the Merger shall be no
greater than that set forth in the DGCL and the Company's Certificate of
Incorporation as previously provided to Parent. Accordingly, the Company
represents and warrants that the affirmative vote of the holders of record
of a majority of the shares of Company Common Stock outstanding on the
record date for the Company Stockholders Meeting is all that is necessary to
obtain stockholder adoption and approval of this Agreement and approval of
the Merger. The Company shall use commercially reasonable efforts to obtain
the adoption and approval by the Company's stockholders of this Agreement
and the approval by the Company's stockholders of the Merger, unless such
action is inconsistent with the fiduciary duties of the Board of Directors
to its stockholders imposed by applicable law. In accordance therewith, the
Company shall, with the cooperation of Parent, prepare and file, as soon as
reasonably practicable, a proxy statement/ prospectus to be included as part
of the Registration Statement (such proxy statement/prospectus, together
with notice of meeting, form of proxy, and any letter or other materials to
the Company's stockholders included therein are referred to in this
Agreement as the "Proxy Statement/Prospectus"). Parent shall furnish to the
Company all information concerning Parent and its subsidiaries, officers,
directors and shareholders, and shall take such other action and otherwise
cooperate, as the Company may reasonably request in connection with any such
action. The Company shall use commercially reasonable efforts to cause the
definitive Proxy Statement/Prospectus to be mailed to the stockholders of
the Company as soon as reasonably practicable after the Registration
Statement shall have become effective, with the date of mailing as mutually
determined by the Company and Parent. The Proxy Statement/Prospectus shall
include the recommendation of the Company's Board of Directors in favor of
the Merger, unless such action is inconsistent with the fiduciary
A-29
<PAGE>
duties of the Board of Directors to its stockholders imposed by applicable
law. Unless and until this Agreement is validly terminated pursuant to
Article 7, nothing herein shall limit or eliminate in any way the Company's
obligation to call, give notice of, convene and hold the Company
Stockholders Meeting and at such meeting submit this Agreement and the
Merger to a vote of the Company's stockholders (and not postpone or adjourn
such meeting or the vote by the Company's stockholders upon this Agreement
and the Merger to another date without Parent's approval, not to be
unreasonably withheld if and only to the extent such postponement or
adjournment is required by law or by SEC or Nasdaq regulation).
(b) Parent shall, with the cooperation of the Company, prepare and file,
as soon as reasonably practicable following completion of the SEC's review
and comment on the Proxy Statement/Prospectus, a registration statement
under the 1933 Act registering the shares of Parent Common Stock to be
issued in the Merger (the "Registration Statement"), which Registration
Statement shall include the Proxy Statement/Prospectus. Parent will use
commercially reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly thereafter as practicable. Parent shall
also take any action required to be taken under state blue sky or securities
laws in connection with the issuance of Parent Common Stock pursuant to the
Merger. The Company shall furnish to Parent all information concerning the
Company and its Subsidiaries and the holders of its capital stock, and shall
take such other action and otherwise cooperate, as Parent may reasonably
request in connection with any such action.
(c) Parent shall notify the Company promptly (i) of the receipt of the
comments of the SEC, (ii) of any request by the SEC for amendments or
supplements to the Registration Statement, (iii) of the time when the
Registration Statement has become effective or any supplement or amendment
has been filed, or the issuance of any stop order and (iv) of the suspension
of the qualification of the Parent Common Stock issuable in connection with
the Merger for offering or sale in any jurisdiction and shall supply the
Company with copies of all correspondence with the SEC with respect to the
Registration Statement.
(d) If at any time prior to the Effective Time, any event or
circumstance relating to the Company, any Subsidiary, or the Company's
officers or directors should occur and be discovered by the Company that is
required to be described in an amendment or supplement to the definitive
Proxy Statement/Prospectus or the Registration Statement, the Company shall
promptly inform Parent. If at any time prior to the Effective Time, any
event or circumstance relating to Parent or any of its subsidiaries or their
respective officers or directors should occur and be discovered by Parent
that is required to be described in an amendment or supplement to the
definitive Proxy Statement/Prospectus or the Registration Statement, Parent
shall promptly inform the Company. Whenever any event occurs that should be
described in an amendment of, or supplement to, the definitive Proxy
Statement/Prospectus or the Registration Statement, the Company or Parent,
as the case may be, shall, upon learning of such event, promptly notify the
other and consult and cooperate with the other in connection with the
preparation of a mutually acceptable amendment or supplement. The parties
shall promptly file such amendment or supplement with the SEC and mail such
amendment or supplement as soon as practicable after it is cleared by the
SEC. No amendment or supplement to the Proxy Statement/Prospectus or the
Registration Statement will be made by Parent or the Company without the
approval of the other party (such approval not to be unreasonably withheld
or delayed).
5.6 CONSENTS. The Company will, at its cost and expense, use commercially
reasonable efforts to obtain all material approvals and consents of all third
parties necessary on the part of the Company or its Subsidiaries to consummate
the transactions contemplated hereby. Parent agrees to cooperate with the
Company in connection with obtaining such approvals and consents. Parent will,
at its cost and expense, use commercially reasonable efforts to obtain all
material approvals and consents of all third parties necessary on the part of
Parent to consummate the transactions contemplated hereby. The
A-30
<PAGE>
Company and Parent agree to cooperate with each other in connection with
obtaining such approvals and consents.
5.7 AFFILIATES' LETTERS.
(a) As soon as practicable after the date of this Agreement, the Company
shall deliver to Parent a list of names and addresses of those persons, in
the Company's reasonable judgment after consultation with outside legal
counsel, who, as of the date hereof, are affiliates within the meaning of
Rule 145 of the rules and regulations promulgated under the 1933 Act or
otherwise applicable SEC accounting releases with respect to
pooling-of-interests accounting treatment (each such person, an "Affiliate")
of the Company. The Company shall provide Parent such information and
documents as Parent shall reasonably request for purposes of reviewing such
list and shall promptly update such list to reflect any changes thereto. As
soon as practicable after the date of this Agreement, the Company will
deliver to Parent an affiliate's letter in the form attached hereto as
EXHIBIT B, executed by each of the Affiliates of the Company identified in
the foregoing list, and shall use best efforts to deliver or cause to be
delivered to Parent as soon as practicable after the date hereof such an
affiliate's letter executed by any persons who, to the knowledge of the
Company, become Affiliates after the date hereof. Parent shall be entitled
to place legends as specified in such affiliates' letters on the
certificates evidencing any of the Parent Common Stock received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Parent Common
Stock, consistent with the terms of such letters.
(b) For so long as resales of shares of Parent Common Stock issued
pursuant to the Merger are subject to the resale restrictions set forth in
Rule 145 under the 1933 Act, Parent will use commercially reasonable efforts
to comply with Rule 144(c)(1) under the 1933 Act.
5.8 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the transactions
contemplated hereby, the Proxy Statement/Prospectus, and the Registration
Statement will be paid by the party incurring such costs and expenses, except
that the Company and Parent will share equally the cost of printing and filing
with the SEC the Proxy Statement/Prospectus and the Registration Statement and
the filing fees required under the HSR Act or any Foreign Merger Laws.
5.9 FURTHER ACTIONS. Subject to the terms and conditions herein provided
and without being required to waive any conditions herein (whether absolute,
discretionary, or otherwise), each of the parties hereto agrees to use
commercially reasonable efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper, or advisable to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
5.10 REGULATORY APPROVALS.
(a) The Company and Parent each shall use commercially reasonable
efforts to take, or cause to be taken, all appropriate action, and do, or
cause to be done, all things as may be necessary under federal or state
securities laws or the HSR Act or Foreign Merger Laws (including without
limitation, furnishing all information required under the HSR Act or Foreign
Merger Laws and in connection with approvals of or filings with any other
Governmental Entity) applicable to or necessary for, and will file as soon
as reasonably practicable and, if appropriate, use commercially reasonable
efforts to have declared effective or approved all documents and
notifications with the SEC and other governmental or regulatory bodies
(including, without limitation, foreign regulatory bodies that administer
Foreign Merger Laws, and any foreign labor councils or bodies as may be
required) that they deem necessary or appropriate for the consummation of
the Merger or any of
A-31
<PAGE>
the other transactions contemplated hereby, and each party shall give the
other information reasonably requested by such other party pertaining to it
and its subsidiaries and affiliates to enable such other party to take such
actions.
(b) Although the parties do not anticipate any legislative,
administrative or judicial objection to the consummation of the Merger or
any of the transactions contemplated by this Agreement, each of the Company,
Parent and Merger Subsidiary shall use commercially reasonable efforts
vigorously to contest and resist any action, including legislative,
administrative or judicial action, and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order (whether
temporary, preliminary or permanent) (an "Order") that is in effect and that
restricts, prevents or prohibits the consummation of the Merger or any of
the other transactions contemplated by this Agreement, including, without
limitation, by vigorously pursuing available avenues of administrative and
judicial appeal. Each of the Company, Parent and Merger Subsidiary shall
also use commercially reasonable efforts to take any and all actions
necessary to avoid or eliminate each and every impediment under any
antitrust law that may be asserted by any governmental antitrust authority
or any other party so as to enable the parties to close by the date
specified in Section 7.1(b) the transactions contemplated hereby, including
without limitation, committing to and/or effecting, by consent decree,
separate orders, or otherwise, the sale or disposition of such assets or
businesses as are required to be divested in order to avoid the entry of, or
to effect the dissolution of, any injunction, temporary restraining order or
other order in any suit or proceeding, which would otherwise have the effect
of preventing the consummation by the date specified in Section 7.1(b) of
all or any material part of the transactions contemplated hereby. The
Company and Parent shall respond as promptly as practicable to (i) any
inquiries or requests received from the Federal Trade Commission or the
Department of Justice or any foreign regulatory bodies that administer
Foreign Merger Laws for additional information or documentation and (ii) any
inquiries or requests received from any state attorney general or other
governmental entity in connection with antitrust or related matters. Each of
the Company and Parent shall (1) give the other party prompt notice of the
commencement of any Legal Proceeding by or before any Governmental Entity
with respect to the Merger or any of the other transactions contemplated by
this Agreement, (2) keep the other party informed as to the status of any
such Legal Proceeding, and (3) promptly inform the other party of any
communication to or from such Government Entity regarding the Merger. The
Company and Parent will consult with and cooperate with one another and will
consider in good faith the views of one another, in connection with any
analysis, appearance, presentation, memorandum, brief, argument, opinion or
proposal made or submitted in connection with any Legal Proceeding under or
related to the HSR Act or the Foreign Merger Laws or any other federal or
state antitrust or fair trade law. In addition, except as may be prohibited
by any Governmental Entity, in connection with any Legal Proceeding under or
related to the HSR Act or the Foreign Merger Laws or any other federal or
state antitrust or fair trade law, or any other similar Legal Proceeding,
each of the Company and Parent shall permit authorized representatives of
the other party to be present at each meeting or conference relating to such
Legal Proceeding.
Notwithstanding the foregoing or anything herein to the contrary, in no
event shall any party hereto be required under this Section 5.10 to make
arrangements for or to effect the sale, cessation, or other disposition of
product lines or businesses or take any action materially adverse to such party.
5.11 CERTAIN NOTIFICATIONS. The Company shall promptly notify Parent in
writing of the occurrence of any event that will or could reasonably be expected
to result in the failure by the Company or its affiliates to satisfy any of the
conditions specified in Section 6.1 or 6.2. Parent shall promptly notify the
Company in writing of the occurrence of any event that will or could reasonably
be expected to result in the failure by Parent or its affiliates to satisfy any
of the conditions specified in Section 6.1, 6.2(e) or 6.3.
A-32
<PAGE>
5.12 [INTENTIONALLY OMITTED.]
5.13 NASDAQ LISTING APPLICATION. Parent shall promptly prepare and submit
to the Nasdaq National Market a listing application for the Parent Common Stock
to be issued in the Merger pursuant to Article 1 of this Agreement, and shall
use commercially reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such Parent Common Stock, subject to official notice
to the Nasdaq National Market of issuance. The Company shall cooperate with
Parent in such listing application.
5.14 LETTERS OF THE COMPANY'S AND PARENT'S ACCOUNTANTS.
(a) The Company shall cooperate with Parent and use reasonable best
efforts to cause to be delivered to Parent and the Company, letters from
Grant Thornton LLP addressed to the Company, as of the Closing Date, stating
that based upon discussions with officials of the Company responsible for
financial and accounting matters, and information furnished to Grant
Thornton LLP to the date of its letter, Grant Thornton LLP is not aware of
any fact concerning the Company or any of the stockholders or affiliates of
the Company that could preclude the Company from being a "poolable entity"
in accordance with generally accepted accounting principles, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC.
(b) The Company shall cooperate with Parent and Parent shall use
reasonable best efforts to cause to be delivered to the Company and Parent,
letters from Arthur Andersen LLP addressed to Parent, dated as of the
Closing Date, to the effect that Arthur Andersen LLP concurs with
management's conclusion that the Merger may be accounted for as a pooling of
interests transaction in accordance with generally accepted accounting
principles, Accounting Principles Board Opinion No. 16 and all published
rules, regulations and policies of the SEC.
5.15 SUBSIDIARY SHARES. At or prior to the Closing, the Company shall use
commercially reasonable efforts to cause all issued and outstanding Subsidiary
shares (other than any interests in joint ventures or similar arrangements)
owned by any person other than the Company or any of its Subsidiaries to be
transferred for no or nominal consideration to such qualified person or persons
designated by Parent.
5.16 BENEFIT PLANS AND EMPLOYEE MATTERS.
(a) From and after the Effective Time, Parent shall, to the extent
practicable and commercially reasonable, cause the Surviving Corporation to
provide employee benefits and programs to the Company's and its
Subsidiaries' employees that, in the aggregate, are substantially comparable
to or more favorable than those in existence as of the date hereof and
disclosed in writing to Parent prior to the date hereof; provided that
stock-based compensation shall be comparable, in the aggregate, to that
offered by Parent and its subsidiaries generally. To the extent Parent
satisfies its obligations under this Section by maintaining Company benefit
plans, Parent shall not be required to include employees of the Company in
Parent's benefit plans. From and after the Effective Time, Parent shall
honor, in accordance with their terms, all employment, change of control,
consulting and severance agreements and all severance, incentive and bonus
plans as in effect immediately prior to the Closing Date that are applicable
to any current or former employees or directors of the Company or any of its
Subsidiaries and that are disclosed in the Company Disclosure Schedule,
except to the extent that the coverage of any such agreement or plan is
terminated by mutual agreement between the Company and any covered or
applicable current or former employee or director.
(b) To the extent that service is relevant for purposes of eligibility,
level of participation or vesting under any employee benefit plan, program
or arrangement established or maintained by Parent, the Company or any of
their respective subsidiaries, employees of the Company and its
A-33
<PAGE>
Subsidiaries shall be credited for service accrued or deemed accrued prior
to the Effective Time with the Company or such Subsidiary, as the case may
be. Under no circumstances shall employees receive credit for service
accrued or deemed accrued prior to the Effective Time with the Company or
such Subsidiary, as the case may be, for benefit accruals under any defined
benefit plan (as defined by Section 3(23) of ERISA) or any retiree health
plan established or maintained by Parent.
(c) Parent will use commercially reasonable efforts to, or will cause
the Surviving Corporation or any of their respective Subsidiaries to: (i)
waive all limitations as to pre-existing conditions, exclusions and waiting
periods with respect to participation and coverage requirements applicable
to employees who remain employees of the Surviving Corporation or its
Subsidiaries, following the Effective Time ("Continuing Employees") under
any welfare benefit plans that such Continuing Employees may be eligible to
participate in after the Effective Time, other than limitations or waiting
periods that are already in effect with respect to such Continuing Employees
and that have not been satisfied as of the Effective Time, and (ii) provide
each Continuing Employee with credit for the remaining short plan year for
any co-payments and deductibles paid under each comparable welfare plan
maintained by the Company or its Subsidiaries prior to the Effective Time in
satisfying any applicable deductible or co-payment requirements under any
welfare plans that such Continuing Employees are eligible to participate in
after the Effective Time.
5.17 OBLIGATIONS OF MERGER SUBSIDIARY. Parent shall take all action
necessary to cause Merger Subsidiary to perform its obligations under this
Agreement and to consummate the Merger on the terms and subject to the
conditions set forth in this Agreement.
5.18 PLAN OF REORGANIZATION. This Agreement is intended to constitute a
"plan of reorganization" within the meaning of Section 1.368-2(g) of the income
tax regulations promulgated under the Code. From and after the date of this
Agreement and after the Effective Time, each party hereto shall use commercially
reasonable efforts to cause the Merger to qualify, and shall not, without the
prior written consent of the other parties hereto, knowingly take any actions or
cause any actions to be taken which could prevent the Merger from qualifying as
a reorganization under the provisions of Section 368(a) of the Code.
5.19 POOLING. From and after the date of this Agreement and until the
Effective Time, neither Parent nor the Company, nor any of their respective
subsidiaries or other affiliates, shall knowingly take any action, or knowingly
fail to take any action, that is reasonably likely to jeopardize the treatment
of the Merger as a "pooling of interests" transaction under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations. Between
the date of this Agreement and the Effective Time, Parent and the Company each
shall use reasonable best efforts to cause the characterization of the Merger as
a pooling of interests for accounting purposes if such a characterization were
jeopardized by action taken by Parent or the Company, respectively, prior to the
date of this Agreement. Following the Effective Time, Parent shall not knowingly
take any action, or fail to take any action, that would jeopardize the
characterization of the Merger as a "pooling of interests" transaction for
accounting purposes.
5.20 TAX MATTERS. At or prior to the filing of the Registration Statement
and at or prior to the Closing, the Company and Parent shall execute and deliver
to Lindquist & Vennum P.L.L.P. and to Gray Cary Ware & Freidenrich LLP tax
representation letters reasonably satisfactory to such counsel setting forth
customary representations which may be relied upon by such counsel in rendering
any opinions contemplated by this Agreement. Parent shall use commercially
reasonable efforts to cause Lindquist & Vennum P.L.L.P. to deliver to Parent a
legal opinion, satisfying the requirements of Item 601 of Regulation S-K
promulgated under the 1933 Act and dated as of a date that is no more than two
business days prior to the date of filing of the Registration Statement and as
of the Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of
A-34
<PAGE>
the Code, based in part on the tax representation letters described in this
Section 5.20. The Company shall use commercially reasonable efforts to cause
Gray Cary Ware & Freidenrich LLP to deliver to the Company a legal opinion,
satisfying the requirements of Item 601 of Regulation S-K promulgated under the
1933 Act and dated as of a date that is no more than two business days prior to
the date of filing of the Registration Statement and as of the Closing Date, to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, based in part on the tax representation letters
described in this Section 5.20.
5.21 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) All rights to indemnification existing in favor of any person who is
now, or has been prior to the date of this Agreement or who becomes prior to
the Effective Time, an officer or director of the Company (the "Indemnified
Persons") for acts and omissions occurring prior to the Effective Time, as
provided in the Company's Certificate of Incorporation or Bylaws or the
Company's predecessor's Articles of Incorporation or Bylaws, or in
indemnification agreements between the Company or its predecessor and any
such Indemnified Persons shall survive the Merger and shall be fulfilled and
honored in all respects by the Parent and the Surviving Corporation.
(b) Parent shall maintain or shall cause the Surviving Corporation to
maintain in effect a policy or policies of directors and officers liability
insurance with coverage substantially comparable to policies in force as of
the date of this Agreement covering the Indemnified Parties for a period of
not less than six years following the Effective Time.
(c) If the Surviving Corporation lacks sufficient capital to comply with
its obligations under this Section 5.21, Parent shall provide Surviving
Corporation with such capital.
(d) The provisions of this Section 5.21 are intended for the benefit of
and shall be enforceable by each Indemnified Party, his or her heirs or
representatives and may not be amended, altered or repealed without the
written consent of the affected Indemnified Parties.
ARTICLE 6 CLOSING CONDITIONS
6.1 CONDITIONS TO OBLIGATIONS OF PARENT, MERGER SUBSIDIARY AND THE
COMPANY. The respective obligations of each party to consummate the Merger
shall be subject to the fulfillment at or prior to the Closing of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(a) NO INJUNCTION. None of Parent, Merger Subsidiary or the Company
shall be subject to any final order, decree, or injunction of a court of
competent jurisdiction within the United States that is then in effect that
(i) has the effect of making the Merger illegal or otherwise prohibiting the
consummation of the Merger, or (ii) would impose any material limitation on
the ability of Parent to effectively exercise full rights of ownership of
the stock of the Surviving Corporation or of the Surviving Corporation to
own and operate the assets and business of the Company.
(b) STOCKHOLDER APPROVAL. The Required Company Stockholder Vote shall
have been obtained, in accordance with the DGCL and the Company's
Certificate of Incorporation and Bylaws.
(c) REGISTRATION STATEMENT. The Registration Statement (as amended or
supplemented) shall have become effective under the 1933 Act and shall not
be subject to any "stop order," and no action, suit, proceeding, or
investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing.
A-35
<PAGE>
(d) NASDAQ LISTING. The shares of Parent Common Stock to be delivered
pursuant to the Merger shall have been duly authorized for quotation on the
Nasdaq National Market, subject to official notice of issuance.
(e) WAITING PERIODS. The waiting periods (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act and any
Foreign Merger Laws shall have expired or been terminated.
(f) BLUE SKY LAWS. Parent shall have received all permits or other
authorizations required under applicable state blue sky laws for the
issuance of shares of Parent Common Stock pursuant to the Merger.
(g) THIRD PARTY CONSENTS. All approvals and consents of third parties
referred to in Section 5.6 shall have been obtained.
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUBSIDIARY. The
respective obligations of Parent and Merger Subsidiary to consummate the Merger
shall be subject to the fulfillment at or prior to the Closing of the following
additional conditions, any or all of which may be waived by Parent, in whole or
in part, to the extent permitted by applicable law:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of the Company contained in this Agreement shall be true and
correct on the Closing Date as though such representations and warranties
were made on such date, except that those representations and warranties
that address matters only as of the date hereof or another particular date
shall remain true and correct as of such date, and except in any case for
any inaccuracies that have not had a Company Material Adverse Effect. Parent
shall have received a certificate to the foregoing effect signed by the
Chief Executive Officer of the Company or other authorized officer of the
Company reasonably satisfactory to Parent.
(b) PERFORMANCE. The Company shall have performed and complied in all
material respects with all covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing, and Parent
shall have received a certificate to such effect signed by the Chief
Executive Officer of the Company or other authorized officer of the Company
reasonably satisfactory to Parent.
(c) TAX OPINION. Parent shall have received the opinions of Lindquist
& Vennum P.L.L.P. described in Section 5.20.
(d) POOLING OPINION. Parent shall have received each of the letters
described in Section 5.14.
(e) EMPLOYMENT OF KEY EXECUTIVES. Those executive officers of the
Company identified on EXHIBIT C hereto shall have executed and delivered
employment agreements with the Company in the forms set forth as EXHIBIT D.
(f) LEGAL OPINION. Parent shall have received an opinion of Gray Cary
Ware & Freidenrich LLP as to the matters set forth on EXHIBIT E.
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the Merger shall be subject to the fulfillment at or prior
to the Closing of the following additional conditions, any or all of which may
be waived by the Company, in whole or in part, to the extent permitted by
applicable law:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of Parent contained in this Agreement shall be true and correct on
the Closing Date as though such representations and warranties were made on
such date, except that those representations and warranties that address
matters only as of the date hereof or another particular date shall remain
A-36
<PAGE>
true and correct as of such date, and except in any case for any
inaccuracies that have not had, or would not reasonably be expected to have
a Parent Material Adverse Effect. The Company shall have received a
certificate to the foregoing effect signed by the Chief Executive Officer or
other authorized officer of Parent reasonably satisfactory to the Company.
(b) PERFORMANCE. Parent and Merger Subsidiary shall have performed and
complied in all material respects with all material covenants required by
this Agreement to be performed or complied with by them at or prior to the
Closing, and the Company shall have received a certificate to such effect
signed by the Chief Executive Officer or other authorized officer of Parent
reasonably satisfactory to the Company.
(c) TAX OPINION. The Company shall have received the opinions of Gray
Cary Ware & Freidenrich LLP described in Section 5.20.
(d) POOLING OPINION. The Company shall have received each of the
letters described in Section 5.14.
(e) LEGAL OPINION. The Company shall have received an opinion of
Lindquist & Vennum P.L.L.P. as to the matters set forth on EXHIBIT F.
ARTICLE 7 TERMINATION AND ABANDONMENT
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of the
Company, only:
(a) by mutual written consent duly authorized by the Board of Directors
of Parent and the Board of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before July 31, 1999; provided, however, that the
terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have been the
proximate cause of, or resulted in, the failure to consummate the Merger by
such date and provided further, however, that, if a request for additional
information is received from the U.S. Federal Trade Commission ("FTC") or
Department of Justice ("DOJ") pursuant to the HSR Act, or additional
information is requested by a governmental authority (a "Foreign Authority")
pursuant to Foreign Merger Laws, such date shall be extended to the 90th day
following acknowledgment by the FTC, DOJ, or Foreign Authority, as
applicable, that Parent and the Company have complied with such request, but
in any event not later than October 31, 1999;
(c) by either Parent or the Company if a court of competent jurisdiction
or an administrative, governmental, or regulatory authority has issued a
final nonappealable order, decree, or ruling, or taken any other action,
having the effect of permanently restraining, enjoining, or otherwise
prohibiting the Merger;
(d) by either Parent or the Company if, at the Company Stockholder's
Meeting, the requisite vote of the stockholders of the Company for approval
and adoption of this Agreement and the Merger is not obtained, except that
the right to terminate this Agreement under this Section 7.1(d) will not be
available to any party whose failure to perform any material obligation
under this Agreement has been the proximate cause of, or resulted in, the
failure to obtain the requisite vote of the stockholders of the Company;
(e) by Parent if either (i) the Company has breached its obligations
under Section 5.3 in any material respect, (ii) the Board of Directors of
the Company has recommended, approved, or authorized the Company's
acceptance or execution of a letter of intent or definitive agreement
providing for an Alternative Transaction, as defined in Section 5.3, (iii)
the Board of Directors of
A-37
<PAGE>
the Company has modified in a manner materially adverse to Parent, or
withdrawn, its recommendation of this Agreement or (iv) a tender offer or
exchange offer for any outstanding shares of Company Common Stock is
commenced, and the Board of Directors of the Company, within 10 business
days after such tender offer or exchange offer is so commenced, either fails
to recommend against acceptance of such tender offer or exchange offer by
its stockholders or takes no position with respect to the acceptance of such
tender offer or exchange offer by its stockholders;
(f) by the Company or Parent prior to the Required Company Stockholder
Vote if (i) the Board of Directors of the Company has complied with, and
continues to comply with, all requirements and procedures of Section 5.3 in
all material respects and has authorized, subject to complying with the
terms of this Agreement, the Company to enter into a letter of intent or
binding written agreement concerning a transaction that constitutes a
Superior Proposal and the Company notifies Parent in writing that it intends
to enter into such agreement, attaching the most current version of such
agreement to such notice, (ii) Parent does not make, within ten business
days after receipt of the Company's written notice of its intention to enter
into a letter of intent or binding agreement for a Superior Proposal, any
offer that the Board of Directors of the Company reasonably and in good
faith determines, after consultation with its financial and legal advisors,
is at least as favorable to the stockholders of the Company as the Superior
Proposal and during such ten business-day period the Company reasonably
considers and discusses in good faith all proposals submitted by Parent and,
without limiting the foregoing, meets with, and causes its financial
advisors and legal advisors to meet with, Parent and its advisors from time
to time as requested by Parent to reasonably consider and discuss in good
faith Parent's proposals, and (iii) upon termination pursuant to this
Section 7.1(f), the Company pays to Parent the fee required by Section 7.2
to be paid to Parent in the manner therein provided. The Company agrees (x)
that it will not enter into a letter of intent or binding agreement referred
to in clause (i) above until at least the 11th business day after Parent has
received the notice to Parent required by clause (i) above, and (y) to
notify Parent promptly if its intention to enter into a letter of intent or
binding agreement referred to in its notice to Parent shall change at any
time after giving such notice;
(g) by Parent if (i) Parent is not in material breach of its obligations
under this Agreement and (ii) there has been a material breach by the
Company of any of its representations, warranties, or obligations under this
Agreement such that the conditions in Section 6.2 will not be satisfied
("Terminating Company Breach"); provided, however, that, if such Terminating
Company Breach is curable by the Company through the exercise of reasonable
efforts and such cure is reasonably likely to be completed prior to the
applicable date specified in Section 7.1(b), then for so long as the Company
continues to exercise reasonable efforts, Parent may not terminate this
Agreement under this Section 7.1(g); or
(h) by the Company if (i) the Company is not in material breach of its
obligations under this Agreement and (ii) there has been a material breach
by Parent of any of its representations, warranties, or obligations under
this Agreement such that the conditions in Section 6.3 will not be satisfied
("Terminating Parent Breach"); provided, however, that, if such Terminating
Parent Breach is curable by Parent through the exercise of commercially
reasonable efforts and such cure is reasonably likely to be completed prior
to the applicable date specified in Section 7.1(b), then for so long as
Parent continues to exercise commercially reasonable efforts, the Company
may not terminate this Agreement under this Section 7.1(h).
7.2 EFFECT OF TERMINATION.
(a) In recognition of the time, efforts, and expenses expended and
incurred by Parent with respect to the Company and the opportunity that the
acquisition of the Company presents to
A-38
<PAGE>
Parent, if this Agreement is validly terminated: (i) by Parent pursuant to
Section 7.1(e)(i), (ii) by Parent pursuant to any provision of Section
7.1(e) other than 7.1(e)(i) and within 12 months after the date of such
termination, the Company shall have entered into a letter of intent or a
definitive agreement with a Third Party providing for an Alternative
Transaction or (iii) by Parent or the Company pursuant to Section 7.1(f);
then in any such event (but subject to Section 7.2(c)), the Company will pay
to Parent, within five business days after demand by Parent in the case of
termination pursuant to Section 7.1(e)(i), within five business days after
the Company entering into a letter of intent or a definitive agreement
covered by clause (ii) above, or upon the termination date in the event of
termination pursuant to Section 7.1(f) (by wire transfer of immediately
available funds to an account designated by Parent for such purpose), a fee
equal to $400,000.
(b) The Company acknowledges that the agreements contained in this
Section 7.2 are an integral part of the transactions contemplated by this
Agreement and are not a penalty, and that, without these agreements, Parent
would not enter into this Agreement. If the Company fails to pay promptly
the fee due pursuant to Section 7.2(a), the Company shall also pay to
Parent's costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other
legal action, taken to collect payment, together with interest on the amount
of the unpaid fee under this section, accruing from its due date, at an
interest rate per annum equal to two percentage points in excess of the
prime commercial lending or reference rate quoted by U.S. Bank National
Association. Any change in the interest rate hereunder resulting from a
change in such prime or reference rate shall be effective at the beginning
of the day of such change in such rate.
(c) Parent agrees that the payment provided for in Section 7.2(a) shall
be the sole and exclusive remedy of Parent upon termination of this
Agreement pursuant to Section 7.1(e) and 7.1(f), as the case may be, and
such remedy shall be limited to the sum stipulated in such Section 7.2(a),
regardless of the circumstances giving rise to such termination; provided,
however, that nothing herein shall relieve any party from liability for the
willful breach of any of its representations, warranties, covenants or
agreements set forth in this Agreement. In no event shall the Company be
required to pay to Parent more than one fee pursuant to Section 7.2(a).
Except as otherwise provided in this paragraph, in the event of the
termination of this Agreement pursuant to any paragraph of Section 7.1, the
obligations of the parties to consummate the Merger will expire, and none of
the parties will have any further obligations under this Agreement except
pursuant to Sections 5.4(b), 5.8, 7.2(a), 7.2(b) and 7.2(c) and Article 8.
ARTICLE 8 MISCELLANEOUS
8.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement
may be amended, modified, or supplemented only by written agreement of Parent,
Merger Subsidiary, and the Company at any time prior to the Effective Time with
respect to any of the terms contained herein; provided, however, that, after the
approval of this Agreement by the stockholders of the Company, no amendment may
be made which would reduce the amount or change the type of consideration into
which each share of Company Common Stock shall be converted upon consummation of
the Merger or which would otherwise require stockholder approval under
applicable law unless such stockholder approval shall have been obtained. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
8.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Parent or Merger
Subsidiary on the one hand, or the Company on the other hand, to comply with any
obligation, covenant, agreement, or condition herein may be waived by the
Company or Parent, respectively, only by a written instrument signed by an
officer of the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement, or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement
A-39
<PAGE>
requires or permits consent by or on behalf of any party hereto, such consent
shall be given in writing. Merger Subsidiary agrees that any consent or waiver
of compliance given by Parent hereunder shall be conclusively binding upon
Merger Subsidiary, whether or not given expressly on its behalf.
8.3 INVESTIGATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
respective representations and warranties of Parent and the Company contained
herein or in any certificates or other documents delivered prior to or at the
Closing shall not be deemed waived or otherwise affected by any investigation
made by any party hereto. The representations, warranties and agreements in this
Agreement and in any certificate delivered pursuant hereto shall terminate at
the Effective Time, except that the agreements set forth in Article I and
Sections 5.7(b), 5.8, 5.9, 5.16, 5.17, 5.18, 5.19, 5.21 and this Article VIII
shall survive the Effective Time.
8.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally by commercial
courier service or otherwise, or by facsimile, or three days after such notice
is mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Parent or Merger Subsidiary, to it at:
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, MN 55344-2290
Attention: Dr. Sidney W. Emery, Jr.
FAX: (612) 937-4101
with a copy to:
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
FAX: (612) 371-3207
Attention: Jeffrey N. Saunders, Esq. and John R. Houston, Esq.
(b) If to the Company, to it at:
DSP Technology Inc.
795 Highland Drive
Ann Arbor, MI 48108
Attention: F. Gil Troutman
FAX: (734) 975-1674
with a copy to:
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301-1925
FAX: (650) 327-3699
Attention: Diane Holt Frankle, Esq. and Dianne Salesin, Esq.
A-40
<PAGE>
8.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests, or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties. Except
for the provisions of Article I and Section 5.21 (the "Third Party Provisions"),
this Agreement is not intended to confer upon any other person, except the
parties hereto, any rights or remedies hereunder, and no third person shall be a
third party beneficiary of this Agreement. The Third Party Provisions may be
enforced by the beneficiaries thereof.
8.6 GOVERNING LAW. Except to the extent that Delaware law is applicable to
the duties of the Company's Board of Directors, this Agreement shall be governed
by the substantive laws of the State of Minnesota (regardless of the laws that
might otherwise govern under applicable Minnesota principles of conflicts of
law). The parties hereby (i) agree and consent to be subject to the jurisdiction
of any state or federal court in the state of Delaware or in Minneapolis or St.
Paul, Minnesota or Ann Arbor, Michigan, with respect to all actions and
proceedings arising out of or relating to this Agreement; (ii) agree that all
claims with respect to any such action or proceeding may be heard and determined
in such court; (iii) irrevocably waive any defense of an inconvenient forum to
the maintenance of any action or proceeding in such court; (iv) consent to
service of process by mailing or delivering such service to the party at its
respective principal business address; and (v) agree that a final judgment in
any such action or proceeding from which there is no further appeal shall be
conclusive and may be enforced in any other jurisdiction by suit on the judgment
or in any manner provided by law.
8.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
8.8 KNOWLEDGE. As used in this Agreement or the instruments, certificates
or other documents required hereunder, the term "knowledge" of a party hereto
shall mean actual knowledge of the directors or executive officers of such
party.
8.9 INTERPRETATION. The Table of Contents, article and Section headings
contained in this Agreement are inserted for reference purposes only and shall
not affect the meaning or interpretation of this Agreement. This Agreement shall
be construed without regard to any presumption or other rule requiring the
resolution of any ambiguity regarding the interpretation or construction hereof
against the party causing this Agreement to be drafted.
8.10 PUBLICITY. Upon execution of this Agreement by Parent, Merger
Subsidiary, and the Company, the parties shall jointly issue a press release, as
agreed upon by them. The parties intend that all future statements or
communications to the public or press regarding this Agreement or the Merger
will be mutually agreed upon by them. Neither party shall, without such mutual
agreement or the prior consent of the other, issue any statement or
communication to the public or to the press regarding this Agreement, or any of
the terms, conditions, or other matters with respect to this Agreement, except
as required by law or the rules of the SEC, NASD or Nasdaq and then only (a)
upon the advice of such party's legal counsel; (b) to the extent required by law
or the rules of the SEC, NASD or Nasdaq; and (c) following prior notice to, and
consultation with, the other party (which notice shall include a copy of the
proposed statement or communication to be issued to the press or public). The
foregoing shall not restrict Parent's or the Company's communications with their
employees or customers in the ordinary course of business. Each party shall
exercise in good faith all reasonable efforts to agree with the other party
regarding the nature, form and extent of such disclosure.
8.11 ENTIRE AGREEMENT. This Agreement, including the exhibits and
schedules hereto and the Confidentiality Agreement referred to herein, embodies
the entire agreement and understanding of
A-41
<PAGE>
the parties hereto in respect of the subject matter contained herein. This
Agreement and the Confidentiality Agreement supersede all prior agreements and
the understandings between the parties with respect to such subject matter,
whether written or oral.
8.12 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated by this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated by this Agreement be
consummated as originally contemplated to the fullest extent possible.
8.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
A-42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan
of Merger as of the date first above written.
MTS SYSTEMS CORPORATION
By: /s/ DR. SIDNEY W. EMERY, JR.
------------------------------------
Dr. Sidney W. Emery, Jr., Chairman
and
Chief Executive Officer
BADGER MERGER CORP.
By: /s/ DR. SIDNEY W. EMERY, JR.
------------------------------------
Dr. Sidney W. Emery, Jr., President
DSP TECHNOLOGY INC.
By: /s/ F. GIL TROUTMAN
------------------------------------
F. Gil Troutman, President and
Chief Executive Officer
A-43
<PAGE>
APPENDIX B
[LETTERHEAD]
March 23, 1999
Confidential
The Board of Directors
DSP Technology, Inc.
795 Highland Drive
Ann Arbor, MI 48108
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of DSP Technology, Inc. ("DSP" or the "Company") of the consideration to
be received by such shareholders in connection with the proposed merger of
Badger Merger Corp. ("Merger Sub"), a wholly-owned subsidiary of MTS Systems
Corporation ("MTS"), with and into DSP (the "Proposed Transaction") pursuant to
the Agreement and Plan of Merger to be dated as of March 23, 1999, among MTS,
Merger Sub, and DSP (the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that all of the issued and outstanding shares of Common Stock and options to
purchase shares of Common Stock shall be converted into the right to receive an
aggregate of 2,077,000 shares of common stock of MTS, as more fully set forth in
the Agreement. For purposes of this opinion, we have assumed that the Proposed
Transaction will qualify as a tax-free reorganization under the United States
Internal Revenue Code for the shareholders of the Company and that the Proposed
Transaction will be accounted for as a pooling of interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of DSP in rendering our opinion as to the fairness from a financial
point of view of the consideration to be received by the Company and its
stockholders in the Proposed Transaction, and we will receive a fee for our
services.
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of MTS
for recent years and interim periods to date and certain other relevant
financial and operating data of MTS (including its capital structure)
made available to us from published sources;
(ii) discussed the business, financial condition and prospects of MTS with
certain members of senior management;
B-1
<PAGE>
(iii) reviewed the publicly available consolidated financial statements of
DSP for recent years and interim periods to date and certain other
relevant financial and operating data of DSP made available to us from
published sources and from the internal records of DSP;
(iv) reviewed certain internal financial and operating information,
including certain projections, relating to DSP prepared by the
management of DSP;
(v) discussed the business, financial condition and prospects of DSP with
certain members of senior management;
(vi) reviewed the recent reported prices and trading activity for the common
stocks of MTS and DSP and compared such information and certain
financial information for MTS and DSP with similar information for
certain other companies engaged in businesses we consider comparable;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(viii) reviewed a draft of the Agreement dated March 23, 1999; and
(ix) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning MTS or DSP considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have not
prepared any independent valuation or appraisal of any of the assets or
liabilities of MTS or DSP, nor have we conducted a physical inspection of the
properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we have
assumed that they reflect the best currently available estimates and judgments
of the expected future financial performance of MTS and DSP. For purposes of
this opinion, we have assumed that neither MTS nor DSP is a party to any pending
transactions, including external financings, recapitalizations or material
merger discussions, other than the Proposed Transaction and those activities
undertaken in the ordinary course of conducting their respective businesses. Our
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of this letter and
any change in such conditions would require a reevaluation of this opinion. We
express no opinion as to the price at which MTS common stock will trade
subsequent to the Effective Time (as defined in the Agreement). In rendering
this opinion, we have assumed that the proposed merger will be consummated
substantially on the terms discussed in the Agreement, without any waiver of any
material terms or conditions by any party thereto. We were not requested to, and
did not, solicit indications of interest from any other parties in connection
with a possible acquisition of, or business combination with, DSP.
It is understood that this letter is for the information of the Board of
Directors only and may not be used for any other purpose without our prior
written consent; provided, however, that this letter may be reproduced in full
in the Proxy Statement/Prospectus. This letter does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Common Stock in the
Proposed Transaction is fair to such holders from a financial point
B-2
<PAGE>
of view. We express no opinion, however, as to the adequacy of any consideration
received in the Proposed Transaction by MTS or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
/s/ Paul B. Cleveland
Paul B. Cleveland
Managing Director
B-3
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of Minnesota Statutes requires the Registrant to indemnify
a person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person with respect to the
Registrant, against judgments, penalties, fines, including reasonable expenses,
if such person (1) has not been indemnified by another organization or employee
benefit plan for the same judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorneys' fees
and disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (2) acted in good faith; (3) received no
improper personal benefit, and statutory procedure has been followed in the case
of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and (5)
in the case of acts or omissions occurring in the person's performance in the
official capacity of director or, for a person not a director, in the official
capacity of officer, committee member or employee, reasonably believed that the
conduct was in the best interests of the Registrant, or, in the case of
performance by a director, officer or employee of the Registrant as a director,
officer, partner, trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not opposed to the best
interests of the Registrant. In addition, Section 302A.521, subd. 3, requires
payment by the Registrant, upon written request, of reasonable expenses in
advance of final disposition in certain instances. A decision as to required
indemnification is made by a disinterested majority of the Board of Directors
present at a meeting at which a disinterested quorum is present, or by a
designated committee of the Board, by special legal counsel, by the shareholders
or by a court. The Registrant's Bylaws provide for indemnification of officers,
directors and employees to the fullest extent provided by the Minnesota Business
Corporation Act, as it may be amended from time to time.
As permitted by Section 302A.251 of the Minnesota Business Corporation Act,
the Articles of Incorporation of the Registrant eliminate the liability of the
directors of the Registrant for monetary damages arising from any breach of
fiduciary duties as a member of the Registrant's Board of Directors, except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its shareholders; (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (c) under Sections
302A.559 or 80A.23 of the Minnesota Statutes; (d) for any transaction from which
a director derived an improper personal benefit; or (e) for any act or omission
that occurred prior to the adoption of these provisions in the Registrant's
Articles of Incorporation.
The Registrant currently has in effect policies of insurance which provide
insurance protection to its directors and officers against some liabilities
which may be incurred by them on account of their services to the Registrant.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated March 23, 1999 by and among MTS Systems Corporation, Badger
Merger Corp. and DSP Technology Inc. (included as Appendix A to the Proxy Statement/Prospectus included
in this Registration Statement).
*3.1 Articles of Amendment of the Amended and Restated Articles of Incorporation of MTS Systems Corporation.
4.1 MTS Systems Corporation Amended and Restated Articles of Incorporation, adopted January 30, 1996
(incorporated by reference from Exhibit 3.a of the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996).
4.2 MTS Systems Corporation Restated Bylaws (incorporated by reference from Exhibit 3.b of the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998).
*5.1 Opinion of Lindquist & Vennum P.L.L.P. regarding legality of securities.
*8.1 Opinion of Lindquist & Vennum P.L.L.P. regarding certain tax matters.
*8.2 Opinion of Gray Cary Ware & Freidenrich, LLP regarding certain tax matters.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Grant Thornton LLP.
23.3 Consents of Lindquist & Vennum P.L.L.P. (set forth in Exhibit 5.1 and Exhibit 8.1).
23.4 Consent of Gray Cary Ware & Friedenrich, LLP (set forth in Exhibit 8.2).
*99.1 Form of Proxy for Special Meeting of Stockholders of DSP Technology Inc.
</TABLE>
- ------------------------
* Filed herewith.
All other exhibits have been previously filed.
(2) Financial Statement Schedules:
All financial statement schedules have been omitted because they are not
applicable or the required information is included in the financial statements
or notes thereto previously filed as part of the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1998.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (1) (i) and (1) (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by
II-2
<PAGE>
the Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request;
(6) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a) (3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Eden
Prairie and the State of Minnesota on this 28(th) day of April, 1999.
<TABLE>
<S> <C> <C>
MTS SYSTEMS CORPORATION
By: /s/ DR. SIDNEY W. EMERY, JR.
-----------------------------------------
Dr. Sidney W. Emery, Jr.
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
</TABLE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Dr. Sidney W. Emery, Jr. and Marshall L.
Carpenter, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power and substitution and resubstitution for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and to file the same, with all exhibits and schedules thereto, and
other documents or instruments in connection with this Registration Statement or
any amendment thereto, with the Securities and Exchange Commission, granting
upon said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents or either of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 28(th) day of April, 1999,
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ DR. SIDNEY W. EMERY, JR. Officer and Chairman of
- ------------------------------ the Board of Directors
Dr. Sidney W. Emery, Jr. and Director (principal
executive officer)
Vice President and Chief
/s/ MARSHALL L. CARPENTER Financial Officer
- ------------------------------ (principal financial and
Marshall L. Carpenter accounting officer)
/s/ CHARLES A. BRICKMAN
- ------------------------------ Director
Charles A. Brickman
/s/ JEAN-LOU CHAMEAU
- ------------------------------ Director
Jean-Lou Chameau
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ BOBBY I. GRIFFIN
- ------------------------------ Director
Bobby I. Griffin
/s/ RUSSELL A. GULLOTTI
- ------------------------------ Director
Russell A. Gullotti
/s/ BRENDAN C. HEGARTY
- ------------------------------ Director
Brendan C. Hegarty
/s/ THOMAS E. HOLLORAN
- ------------------------------ Director
Thomas E. Holloran
/s/ LINDA HALL WHITMAN
- ------------------------------ Director
Linda Hall Whitman
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Amendment of the Amended and Restated Articles of Incorporation of MTS Systems Corporation.
5.1 Opinion of Lindquist & Vennum P.L.L.P. regarding legality of securities.
8.1 Opinion of Lindquist & Vennum P.L.L.P. regarding certain tax matters.
8.2 Opinion of Gray Cary Ware & Freidenrich, LLP regarding certain tax matters.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Grant Thornton LLP.
99.1 Form of Proxy for Special Meeting of Stockholders of DSP Technology Inc.
</TABLE>
<PAGE>
Exhibit 3.1
ARTICLES OF AMENDMENT OF THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MTS SYSTEMS CORPORATION
The undersigned, Patrick Delaney, Secretary of MTS Systems Corporation, a
Minnesota corporation, subject to the provisions of the Minnesota Business
Corporation Act, does hereby certify that the resolution hereinafter set forth
was duly adopted by MTS Systems Corporation pursuant to Chapter 302A of the
Minnesota Business Corporation Act:
RESOLVED, that the first sentence of Article VI of the Amended and Restated
Articles of Incorporation of the Company be amended to read as follows:
ARTICLE VI
"The number of shares of the total authorized capital stock of this
corporation shall be Sixty-Four Million (64,000,000), all of which are
common shares of capital stock. Each common share of capital stock shall
have the par value of twenty-five cents ($.25). Each share shall entitle
the holder thereof to one vote for each share held by the shareholder, but
shareholders shall have no pre-emptive right to subscribe for or purchase
securities of the corporation; and all shares shall be equal in all
respects and shall confer equal rights upon the holders thereof, including
equal rights in and to dividends and distributions and upon dissolution."
IN WITNESS WHEREOF, I have hereunto set my hand this 27th day of May, 1998.
/s/ Patrick Delaney
------------------------------
Patrick Delaney, Secretary
<PAGE>
OPINION OF LINDQUIST & VENNUM P.L.L.P.
Exhibit 5.1
[LETTERHEAD]
April 28, 1999
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, Minnesota 55344-2290
Re: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-4 filed by MTS
Systems Corporation (the "Company") with the Securities and Exchange Commission
on April 28, 1999 relating to the registration of 2,077,000 shares of Common
Stock, $.25 par value (the "Shares"), to be issued by the Company in connection
with the proposed merger of a subsidiary of the Company with and into DSP
Technology Inc., a Delaware corporation, please be advised that as counsel to
the Company, upon examination of such corporate documents and records as we have
deemed necessary or advisable for the purposes of this opinion, it is our
opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of
Minnesota.
2. All necessary corporate action on the part of the Company has been
taken to authorize the issuance of the Shares to be issued in
connection with such merger and, when issued pursuant to the merger
and paid for as contemplated by the Registration Statement, the
Shares will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Proxy Statement/Prospectus comprising a part of the Registration
Statement.
Very truly yours,
/s/Lindquist & Vennum P.L.L.P.
<PAGE>
OPINION OF LINDQUIST & VENNUM P.L.L.P.
Exhibit 8.1
[LETTERHEAD]
April 28, 1999
Board of Directors of
MTS Systems Corporation
14000 Technology Drive
Eden Prairie, MN 55344-2290
RE: FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER WITH DSP TECHNOLOGY INC.
Ladies and Gentlemen:
You have requested that we render an opinion with respect to the material
United States federal income tax considerations related to the Merger whereby a
wholly-owned subsidiary ("Merger Sub") of MTS Systems Corporation ("Parent")
will merge into DSP Technology, Inc. (the "Company") (the "Merger").
We have examined the Agreement and Plan of Merger executed March 23, 1999
(the "Merger Agreement") and the Registration Statement on Form S-4
("Registration Statement") filed with the Securities and Exchange Commission on
April 28, 1999 under the Securities Act of 1933. The Registration Statement
contains a Proxy Statement and a Prospectus (collectively, the "Joint Proxy
Statement/Prospectus"). Unless otherwise defined in this letter, terms defined
in the Joint Proxy Statement/Prospectus are used herein as defined therein.
We also have examined such matters of law, including the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and finalized
Treasury regulations promulgated thereunder (the "Regulations"), and judicial
and administrative decisions, rulings and interpretations thereof currently in
effect, as we have deemed appropriate as a basis for our opinions set forth
below. All section references herein are to the Code unless stated otherwise.
In rendering this opinion, we have relied upon the current and continued
accuracy of the factual matters we have considered, including the recitals,
agreements, representations and warranties contained in or made pursuant to the
documents cited above, as well as the representations and warranties made by the
Company, Merger Sub and Parent to Lindquist & Vennum P.L.L.P. for purposes of
rendering this opinion.
Based solely on the foregoing, and subject to the qualifications set forth
herein, we are of the opinion that if the Merger is effected in accordance with
the Merger Agreement and the above facts and representations:
<PAGE>
1. For federal income tax purposes, the Merger will constitute a
reorganization within the meaning of Section 368(a).
2. Subject to the foregoing and the fact that the discussion in the
Registration Statement under the heading "Material Federal Income Tax
Consequences" (the "Tax Discussion") is a summary and does not purport to
discuss all possible United States federal income tax consequences of the Merger
and sets forth additional limitations, qualifications, assumptions and caveats,
the Tax Discussion sets forth the material United States federal income tax
consequences of the Merger to holders of the Company's Common Stock who exchange
such stock for Parent Common Stock pursuant to the Merger Agreement.
No opinion is expressed about the tax treatment of the proposed transaction
under other provisions of the Code and the Regulations or about the tax
treatment of any conditions existing at the time of, or effects resulting from,
the proposed transaction that are not specifically covered by the above
opinions. The opinion also does not address the various state, local or foreign
tax consequences that may result from the Merger or other transactions
contemplated by the Merger Agreement.
The opinions expressed herein are rendered as of the date hereof and are
based on the Code, proposed and finalized Regulations, and judicial and
administrative decisions, rulings and interpretations, all of which are subject
to change with no assurance that changes will not be made retroactively.
An opinion of legal counsel represents an expression of legal counsel's
professional judgment regarding the subject matter of the opinion and, unlike
private letter rulings issued by the Internal Revenue Service (the "Service"),
is not binding on the Service and has no official status of any kind.
This opinion is for the sole use of the Board of Directors of Parent and
may not be relied upon by any other entity or individual.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Joint Proxy Statement/Prospectus.
Sincerely,
/s/ Lindquist & Vennum P.L.L.P.
<PAGE>
OPINION OF GRAY CARY WARE & FREIDENRICH, LLP
Exhibit 8.2
[LETTERHEAD]
April 28, 1999
DSP Technology Inc.
795 Highland Drive
Ann Arbor, MI 48108
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with the requirements of
Item 601(b)(8) of Regulation S-K under the Securities Act of 1933, as amended,
in connection with the filing of a registration statement on Form S-4 of a Proxy
Statement/Prospectus (the "Registration Statement") pursuant to the Agreement
and Plan of Merger dated as of March 23, 1999 (the "Reorganization Agreement")
by and among MTS Systems Corporation, a Minnesota corporation ("Parent"), Badger
Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Parent
("Merger Sub") and DSP Technology Inc., a Delaware corporation (the "Company").
Pursuant to the Reorganization Agreement, Merger Sub will merge with and into
the Company (the "Merger").
Unless otherwise defined, capitalized terms referred to herein have the meanings
set forth in the Reorganization Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to the Company in connection with the preparation
and execution of the Reorganization Agreement. As such, and for the purpose of
rendering this opinion, we have examined and are relying upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and warranties
contained in the following documents (including all schedules and exhibits
thereto): (1) the Reorganization Agreement; (2) representations and warranties
made to us by Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and (3) such other instruments and documents related to the
formation, organization and operation of Parent, Merger Sub and the Company or
to the consummation of the Merger and the transactions contemplated thereby as
we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time
<PAGE>
of the Merger) due execution and delivery of all documents where due execution
and delivery are prerequisites to effectiveness thereof;
2. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification. As to all matters in
which a person or entity making a representation referred to above has
represented that such person or entity either is not a party to, does not have,
or is not aware of, any plan or intention, understanding or agreement, there is
in fact no such plan, intention, understanding or agreement;
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us (including, but not
limited to the Tax Representation Letters) are true and correct as of the date
hereof and at the Effective Time, and no actions have been (or will be) taken
which are inconsistent with such statements, descriptions and representations;
4. The Merger will be consummated in accordance with the Reorganization
Agreement (and without any waiver, breach or amendment of any of the material
provisions thereof), will be effective under the applicable state law, and will
be reported by Parent and the Company on their respective federal income tax
returns in a manner consistent with the opinion set forth below; and
5. An opinion of Lindquist & Vennum P.L.L.P., counsel to Parent,
substantially identical in substance to this opinion, has been delivered and not
withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions, and caveats set forth herein, we are of the opinion
that:
1. For federal income tax purposes, the Merger will be constitute a
reorganization within the meaning of Section 368(a) of the Code; and
2. Subject to the foregoing and the fact that the discussion in the
Registration Statement under the heading "Material Federal Income Tax
Consequences" (the "Discussion") is a summary and does not purport to discuss
all possible United Stated federal income tax consequences of the Merger and
sets forth additional limitations, qualifications, assumptions and caveats, the
Discussion sets forth the material United States federal income tax consequences
of the Merger to holders of Company Common Stock who exchange such stock for
Parent Common Stock pursuant to the Reorganization Agreement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or other transactions contemplated
by the Reorganization Agreement. In addition, no opinion is expressed as to any
federal income tax consequences of the Merger or the other transactions
contemplated by the Reorganization Agreement except as specifically set forth
herein, and this opinion may not be relied upon except with respect to the
consequences specifically discussed herein.
No opinion is expressed as to any transaction other than the Merger as described
in the
<PAGE>
Reorganization Agreement or to any transaction whatsoever, including the Merger,
if all the transactions described in the Reorganization Agreement are not
consummated in accordance with the terms of such Reorganization Agreement and
without waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and the
Internal Revenue Service is not precluded from successfully asserting a contrary
position. Furthermore, no assurance can be given that future legislative,
judicial or administrative changes, on either a prospective or retroactive
basis, would not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
This opinion has been delivered to you only for the purposes stated. It is
intended for the benefit of the Company and the stockholders of the Company and
may not be relied upon for any other purpose or by any other person or entity,
and may not be made available to any other person or entity without our prior
written consent. We hereby consent, however, to the use of this opinion as an
exhibit to the Registration Statement and further consent to the use of our name
wherever appearing in the Registration Statement, including the Proxy
Statement/Prospectus constituting a part thereof, and any amendments thereto.
Very truly yours,
/s/ Gray Cary Ware & Freidenrich, LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated November 20, 1998
included and incorporated by reference in MTS Systems Corporation's Form 10-K
for the year ended September 30, 1998 and to all references to our Firm in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 28, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 12, 1999, except for Note N as to which
the date is March 23, 1999, accompanying the consolidated financial statements
of DSP Technology Inc. and subsidiaries contained in the Registration Statement
on Form S-4. We consent to the use of the aforementioned reports in the
Registration Statement, and to the use of our name as it appears under the
caption "Experts."
/s/ Grant Thornton LLP
San Jose, California
April 27, 1999
<PAGE>
DSP TECHNOLOGY INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints F. Gil Troutman, Jr. and Jose M. Millares,
Jr., or either, as proxy with full power of substitution to vote and act on and
consent in respect to any and all shares of the stock of DSP Technology Inc.
held or owned by or standing in the name of the undersigned on the Company's
books on April 15th, 1999 at the Special Meeting of Stockholders of the Company
to be held at the offices of DSP Technology Inc., 48500 Kato Road, Fremont,
California 94538 at 2:00 p.m. local time on May 28, 1999, and any continuation
or adjournment thereof, with all power the undersigned would possess if
personally present at the meeting.
THE UNDERSIGNED HEREBY DIRECTS AND AUTHORIZES SAID PROXIES, AND EACH OF
THEM, OR THEIR SUBSTITUTES, TO VOTE AS SPECIFIED BELOW WITH RESPECT TO THE
PROPOSAL LISTED IN THE PARAGRAPH ON THE REVERSE SIDE, OR IF NO SPECIFICATION IS
MADE, TO VOTE IN FAVOR THEREOF.
The undersigned hereby further confers upon said proxies, and each of them,
or their substitutes, discretionary authority to vote in respect to all other
matters which may properly come before the meeting or any continuation or
adjournment thereof.
The undersigned hereby acknowledges receipt of: (1) Notice of Special
Meeting of Stockholders of the Company, and (2) accompanying Proxy Statement.
CONTINUED AND TO BE SIGNED ON REVERSED SIDE
<PAGE>
/X/ PLEASE MARK
VOTE AS IN
THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED AT THE MEETING.
<TABLE>
<S> <C> <C> <C>
To adopt and approve the Agreement and Plan of Merger dated as of March 23, 1999, FOR AGAINST ABSTAIN
among MTS Systems Corporation, Badger Merger Corp. and DSP Technology Inc. and to / / / / / /
approve the merger of Badger Merger Corp. with and into DSP Technology Inc.
pursuant to which DSP Technology Inc. will become a wholly-owned subsidiary of MTS
Systems Corporation.
</TABLE>
SIGN EXACTLY AS YOUR NAME(S) APPEARS ON YOUR STOCK CERTIFICATE. IF SHARES OF
STOCK STAND OF RECORD IN THE NAMES OF TWO OR MORE PERSONS OR IN THE NAME OF
HUSBAND AND WIFE, WHETHER AS JOINT TENANTS OR OTHERWISE, BOTH OR ALL OF SUCH
PERSONS SHOULD SIGN THE ABOVE PROXY. IF SHARES OF STOCK ARE HELD OF RECORD BY A
CORPORATION, THE PROXY SHOULD BE EXECUTED BY THE PRESIDENT OR VICE PRESIDENT AND
THE SECRETARY OR ASSISTANT SECRETARY. EXECUTORS OR ADMINISTRATORS OR OTHER
FIDUCIARIES WHO EXECUTE THE ABOVE PROXY FOR A DECEASED STOCKHOLDER SHOULD GIVE
THEIR FULL TITLE. PLEASE DATE THE PROXY.
<TABLE>
<S> <C>
Signature: Date:
Signature: Date:
</TABLE>
