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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Control Data Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
------------------------------------------------------------------------
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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------------------------------------------------------------------------
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(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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(CONTROL DATA LOGO)
September 3, 1997
Dear Control Data Stockholder:
I am pleased to invite you to attend the Special Meeting of Stockholders of
Control Data Systems, Inc. to be held on September 23, 1997, at 9:00 a.m., local
time, at the offices of Welsh, Carson, Anderson & Stowe located at 320 Park
Avenue, Suite 2500, New York, New York. At the meeting you will be asked to
consider and vote upon a proposal to approve the Agreement and Plan of Merger
dated as of July 8, 1997 (the "Merger Agreement"), which provides for the merger
(the "Merger") of CDSI Acquisition Corp. (the "Purchaser"), a wholly-owned
subsidiary of CDSI Holding Corporation ("Parent"), with and into Control Data.
Under the terms of the Merger Agreement, each share of Control Data Common Stock
will be converted in the Merger into the right to receive $20.25 in cash,
without interest.
The Merger is the second and final step in the acquisition by Parent of the
entire equity interest in Control Data. As a result of a tender offer that
expired on August 11, 1997, the Purchaser owns, with power to vote, shares
representing in the aggregate approximately 89.2 percent of the outstanding
shares entitled to vote at the Special Meeting. The affirmative vote of the
holders of a majority of the outstanding shares of Control Data Common Stock is
required to approve the Merger Agreement and the Merger. As more fully described
in the accompanying Proxy Statement, Parent and the Purchaser have agreed to
vote all shares of Control Data Common Stock owned by them in favor of approval
of the Merger Agreement and the Merger and, accordingly, approval of the Merger
Agreement is assured.
Please review carefully the attached Proxy Statement, which contains a
detailed description of the Merger Agreement, its terms and conditions, and the
transactions contemplated by the Merger Agreement. A copy of the Merger
Agreement is attached to the Proxy Statement as Appendix A.
The Board of Directors determined that the proposed transaction is fair and
in the best interests of Control Data and its stockholders and unanimously
recommended approval of the Merger Agreement and the Merger.
Following consummation of the Merger, each stockholder of record will be
mailed a transmittal form and instructions for surrender of stock certificates
for payment pursuant to the Merger Agreement. PLEASE DO NOT SURRENDER YOUR STOCK
CERTIFICATES UNTIL YOU HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS
THERETO.
Sincerely,
/s/ James E. Ousley
James E. Ousley
PRESIDENT AND CHIEF EXECUTIVE OFFICER
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CONTROL DATA SYSTEMS, INC.
4201 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126-6198
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 23, 1997
------------------------
TO THE STOCKHOLDERS OF CONTROL DATA SYSTEMS, INC.:
A Special Meeting of the Stockholders of Control Data Systems, Inc.
("Control Data") will be held at the offices of Welsh, Carson, Anderson & Stowe
located at 320 Park Avenue, Suite 2500, New York, New York, on September 23,
1997, at 9:00 a.m., local time, to consider and vote upon a proposal to approve
the Agreement and Plan of Merger dated as of July 8, 1997 (the "Merger
Agreement") among CDSI Holding Corporation ("Parent"), CDSI Acquisition Corp.
(the "Purchaser"), and Control Data. Pursuant to the Merger Agreement, (a) the
Purchaser will be merged (the "Merger") with and into Control Data, with Control
Data to be the surviving corporation and to become a wholly-owned subsidiary of
Parent, and (b) each outstanding share of Control Data Common Stock, par value
$.01 per share (individually, a "Share" and collectively, the "Shares"), will be
converted into the right to receive $20.25 in cash, without interest. The Merger
is more completely described in the accompanying Proxy Statement and a copy of
the Merger Agreement is included as Appendix A thereto.
Only stockholders of record as shown on the books of Control Data at the
close of business on August 22, 1997 are entitled to notice of and to vote at
the Special Meeting or any adjournments thereof. The affirmative vote of the
holders of a majority of the outstanding Shares is required to approve the
Merger Agreement and the Merger. The Purchaser owns and has the power to vote
approximately 89.2 percent of the Shares, which is sufficient to approve the
Merger Agreement and the Merger without the affirmative vote of any other
stockholder. Pursuant to the Merger Agreement, Parent and the Purchaser have
agreed to vote all Shares owned by them in favor of approval of the Merger
Agreement and the Merger and, accordingly, such approval is assured.
Control Data stockholders have the right to dissent from the proposed Merger
and to demand payment of the "fair value" of their shares in the event the
Merger is consummated. The right of stockholders to receive such payment is
contingent upon strict compliance with the requirements set forth in section 262
of the Delaware General Corporation Law (the "DGCL"), which are summarized in
the accompanying Proxy Statement. The full text of section 262 of the DGCL is
set forth as Appendix C to the accompanying Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Ruth A. Rich
Ruth A. Rich
SECRETARY
September 3, 1997
STOCKHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THE PROXY CARD
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(CONTROL DATA LOGO)
Control Data Systems, Inc.
4201 Lexington Avenue North
Arden Hills, MN 55126-6198
Telephone: (612) 415-3001
------------------------
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS OF CONTROL DATA SYSTEMS, INC.
TO BE HELD ON SEPTEMBER 23, 1997
------------------------
This Proxy Statement is being furnished to the stockholders of Control Data
Systems, Inc. ("Control Data") in connection with the special meeting of
stockholders (the "Meeting") of Control Data to be held at the offices of Welsh,
Carson, Anderson & Stowe located at 320 Park Avenue, Suite 2500, New York, New
York, on September 23, 1997, at 9:00 a.m., local time. At the Meeting, Control
Data stockholders will be asked to consider and act upon a proposal to approve
the Agreement and Plan of Merger dated as of July 8, 1997 (the "Merger
Agreement"), a copy of which is attached hereto as Appendix A, pursuant to which
(a) CDSI Acquisition Corp. ("Purchaser"), a wholly-owned subsidiary of CDSI
Holding Corporation ("Parent"), will be merged (the "Merger") with and into
Control Data, which will be the surviving corporation in the Merger and will
thereby become a wholly-owned subsidiary of Parent, and (b) each share of
Control Data Common Stock, par value $.01 per share (individually, a "Share" and
collectively, the "Shares"), that is outstanding immediately prior to the Merger
(other than Shares owned by Parent, the Purchaser or any subsidiary thereof or
held in the treasury of Control Data or any subsidiary of Control Data and other
than Shares held by stockholders who have properly exercised appraisal rights)
will be converted into the right to receive $20.25 in cash, without interest.
This Proxy Statement is first being mailed to Control Data stockholders on or
about September 3, 1997.
Pursuant to the Merger Agreement, the Purchaser commenced a tender offer
(the "Offer") for all outstanding Shares on July 15, 1997, and the Offer expired
on August 11, 1997. As a result of the Offer, the Purchaser owns of record and
has the power to vote Shares sufficient in number to approve the Merger
Agreement and the Merger without the affirmative vote of any other stockholder.
Pursuant to the Merger Agreement, Parent and the Purchaser have agreed to vote
all Shares owned by them in favor of approval of the Merger Agreement and the
Merger and, accordingly, such approval is assured.
Additional copies of this Proxy Statement and the proxy card to be returned
for the Meeting can be obtained from Control Data, 4201 Lexington Avenue North,
Arden Hills, Minnesota 55126-6198, Attention: Investor Relations, telephone
(612) 415-4469. QUESTIONS OR REQUESTS FOR ASSISTANCE IN COMPLETING AND
SUBMITTING PROXY CARDS SHOULD BE DIRECTED TO GEORGESON & COMPANY INC., WALL
STREET PLAZA, NEW YORK, NEW YORK 10005, TOLL FREE (800) 223-2064.
THE DATE OF THIS PROXY STATEMENT IS SEPTEMBER 3, 1997.
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TABLE OF CONTENTS
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SUMMARY.................................................................................................... 3
GENERAL INFORMATION........................................................................................ 7
THE MERGER................................................................................................. 9
General.................................................................................................. 9
Effective Time of the Merger............................................................................. 9
Background of the Merger................................................................................. 9
Purchaser's Director-Designees........................................................................... 11
Control Data's Reasons for the Merger; Recommendation of the Control Data Board of Directors............. 11
Opinion of Control Data's Financial Advisor.............................................................. 12
Vote Required............................................................................................ 17
The Merger Agreement..................................................................................... 17
Investor Financing....................................................................................... 21
Exchange of Shares of Control Data Common Stock.......................................................... 22
Interests of Certain Persons in the Merger............................................................... 22
Deregistration of Control Data Common Stock.............................................................. 23
Accounting Treatment of the Merger....................................................................... 23
Certain Federal Income Tax Consequences.................................................................. 23
Regulatory Requirements.................................................................................. 23
Rights of Dissenting Control Data Stockholders........................................................... 24
STOCK PRICES AND DIVIDENDS................................................................................. 26
SELECTED FINANCIAL DATA OF CONTROL DATA.................................................................... 27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CONTROL DATA............................. 28
AVAILABLE INFORMATION...................................................................................... 29
INFORMATION REGARDING CONTROL DATA......................................................................... 29
SHAREHOLDER PROPOSALS...................................................................................... 29
APPENDIX A--Agreement and Plan of Merger................................................................... A-1
APPENDIX B--Opinion of Cowen & Company..................................................................... B-1
APPENDIX C--Section 262 of Delaware General Corporation Law................................................ C-1
APPENDIX D--Control Data's Form 10-K for Year Ended 12/31/96............................................... D-1
APPENDIX E--Financial Information of Control Data for Year Ended 12/31/96.................................. E-1
APPENDIX F--Control Data's Form 10-Q for Quarter Ended 6/30/97............................................. F-1
</TABLE>
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SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS
PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT,
THE APPENDICES HERETO, AND THE DOCUMENTS INCORPORATED IN THIS PROXY STATEMENT BY
REFERENCE.
PARTIES TO THE MERGER
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CONTROL DATA...................... Control Data, a Delaware corporation, was incorporated
in 1992 and was established through the transfer by
Ceridian Corporation ("Ceridian") of its Computer
Products business to Control Data and Ceridian's
subsequent distribution, in July 1992, of Control Data's
stock as a dividend to Ceridian's stockholders. Control
Data is a global software and services company dedicated
to helping organizations develop the enterprise-wide
systems required to create, transmit, access and control
business information. Control Data's principal offices
and corporate headquarters are located at 4201 Lexington
Avenue North, Arden Hills, Minnesota 55126-6198,
telephone: (612) 415-3001.
PARENT............................ Parent, a Delaware corporation, was organized in 1997 at
the direction of Welsh, Carson, Anderson & Stowe VII,
L.P. ("WCAS VII") to effect the transactions described
herein. WCAS VII is an investment partnership affiliated
with Welsh, Carson, Anderson & Stowe ("WCAS"), a private
equity investment firm principally engaged in investing
in and acquiring companies in the health care and
information processing industries. Parent's principal
offices are located at 1013 Centre Road, Wilmington,
Delaware 19805.
THE PURCHASER..................... The Purchaser, a Delaware corporation, was recently
organized at the direction of WCAS VII for the purpose
of effecting the Merger. It has not engaged in any
activities except in connection with the Offer and the
proposed Merger. The Purchaser is a direct wholly-owned
subsidiary of Parent.
CONTROL DATA STOCKHOLDERS' MEETING
TIME, DATE, AND PLACE OF
MEETING.......................... The special meeting of stockholders will be held on
September 23, 1997, at 9:00 a.m., local time, at the
offices of WCAS located at 320 Park Avenue, Suite 2500,
New York, New York (the "Meeting").
PURPOSE OF THE MEETING............ The purpose of the Meeting is to consider and vote upon
a proposal to approve the Merger Agreement and the
Merger.
RECORD DATE....................... Only holders of record of Shares of Control Data at the
close of business on August 22, 1997, will be entitled
to notice of and to vote at the Meeting or any
adjournment or adjournments thereof.
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VOTE REQUIRED..................... The affirmative vote by the holders of a majority of the
outstanding Shares is required to approve the Merger
Agreement and the Merger. As of the record date,
12,622,359 Shares were outstanding and entitled to vote.
The Purchaser owns 11,255,203 Shares (approximately
89.2% of the outstanding Shares). Pursuant to the Merger
Agreement, the Purchaser has agreed to vote all Shares
owned by it in favor of the Merger Agreement and the
Merger. As a result, no action by any other stockholder
is required to approve the Merger Agreement and the
Merger.
ACTIONS PRIOR TO THE MERGER
THE OFFER......................... Pursuant to the Merger Agreement, on July 15, 1997, the
Purchaser commenced the Offer at a price of $20.25 per
Share, net to the seller in cash, without interest. The
Offer expired at 12:00 midnight, New York City time, on
August 11, 1997. Pursuant to the Offer, the Purchaser
accepted for payment and paid for 11,255,203 Shares.
PURCHASER'S DIRECTOR-DESIGNEES.... Pursuant to the Merger Agreement, upon the acceptance by
the Purchaser of a majority of the Shares for payment in
the Offer (and deposit by the Purchaser of funds
sufficient to pay for such Shares), four of Control
Data's then existing directors resigned from the Board
of Directors and three persons designated by the
Purchaser (Patrick J. Welsh, Thomas E. McInerney and
Rudolph E. Rupert) were elected to the Board of
Directors. Grant A. Dove and W. Douglas Hajjar continue
to serve on the Board of Directors.
DESCRIPTION OF THE MERGER
GENERAL........................... Upon consummation of the Merger, the Purchaser will be
merged into Control Data and Control Data will become a
wholly-owned subsidiary of Parent. Each Share
outstanding immediately prior to the Merger (other than
Shares owned by Parent, the Purchaser or any subsidiary
thereof or held in the treasury of Control Data or any
subsidiary of Control Data and other than Shares held by
stockholders who have properly exercised appraisal
rights) will be converted into the right to receive
$20.25 in cash, without interest.
EFFECTIVE TIME OF THE MERGER...... It is expected that the Merger will become effective as
promptly as practicable following approval of the Merger
Agreement by the requisite vote of the Control Data
stockholders and the satisfaction or waiver of the other
conditions to the Merger.
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RECOMMENDATION OF CONTROL DATA'S
BOARD............................ The Board of Directors of Control Data unanimously
approved the Merger and adopted the Merger Agreement and
recommended that the stockholders of Control Data vote
in favor of the proposal to approve the Merger Agreement
and the Merger. The Board of Directors' recommendation
was based upon a number of factors discussed in this
Proxy Statement.
CONTROL DATA'S FINANCIAL
ADVISOR.......................... On July 8, 1997, Cowen & Company ("Cowen") rendered an
opinion to the Board of Directors of Control Data to the
effect that the financial terms of the Offer and the
Merger are fair, from a financial point of view, to the
Control Data stockholders (other than Parent and its
affiliates) as of the date of such opinion. The full
text of the opinion of Cowen, which includes the
assumptions made, matters considered and the scope and
limitations on the reviews undertaken in rendering such
opinion, is attached as Appendix B to this Proxy
Statement and should be read in its entirety.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES..................... The receipt of cash for Shares pursuant to the Merger
will be a taxable transaction for federal income tax
purposes with respect to which gain or loss, if any,
will be recognized.
ACCOUNTING TREATMENT.............. As required by generally accepted accounting principles,
Parent will use the purchase method of accounting to
account for the Merger.
TREATMENT OF STOCK OPTIONS........ Pursuant to the Merger Agreement, all outstanding
options to purchase Shares will be accelerated and fully
vested as a result of the Merger, and the holders of
such options will receive from Control Data upon the
Merger, for each Share subject to an option, cash in an
amount equal to the excess of $20.25 over the exercise
price of the option. In addition, the holders of options
under Control Data's employee stock purchase plan will
be deemed to purchase upon the Merger, at the price
provided for in the plan, the number of Shares for which
payroll deductions have previously been accumulated by
those holders, and they will receive $20.25 in cash for
each such Share plus any accumulated payroll deductions
that were not sufficient to purchase a whole Share.
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INTERESTS OF CERTAIN PERSONS...... Certain members of the management and the Board of
Directors of Control Data have certain interests in the
Merger that are in addition to the interests of
stockholders of Control Data generally. These interests
include, among other things, the interests of certain
executives and directors of Control Data in stock
options and stock rights that will immediately vest as a
result of the Merger, and the obligation of Parent to
cause Control Data to maintain officers' and directors'
liability insurance coverage for two years following the
Effective Time and to indemnify directors, officers,
employees and agents of Control Data under certain
circumstances from claims, actions, suits or
proceedings. In addition, certain executives have
severance agreements that contain change of control
provisions, which were triggered upon consummation of
the Offer. As a result of the acquisition of a majority
of the Shares, representatives of the Purchaser have
been elected to fill a majority of the positions on the
Board of Directors of Control Data.
REGULATORY APPROVAL............... The only federal or state regulatory approval needed to
effect the Merger was the expiration of the waiting
period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"). The parties
received early termination of such waiting period on
July 28, 1997. The parties also obtained clearance of
the Offer and the Merger from the German Cartel Office.
APPRAISAL RIGHTS.................. Under Delaware law, holders of Control Data Common Stock
have the right to dissent from the Merger and to demand
payment of the fair value of their Shares in the event
the Merger is consummated. The right of stockholders to
receive such payment is contingent upon strict
compliance with the requirements set forth in section
262 of the DGCL. The full text of section 262 of the
DGCL is attached as Appendix C to this Proxy Statement.
</TABLE>
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GENERAL INFORMATION
This Proxy Statement is being furnished to the stockholders of Control Data
in connection with the solicitation by the Board of Directors of Control Data of
proxies to be voted at the Meeting to be held on September 23, 1997.
At the Meeting, Control Data stockholders will be asked to consider and vote
upon the approval of the Agreement and Plan of Merger dated as of July 8, 1997
(the "Merger Agreement"), among Parent, Control Data, and Purchaser, providing
for the Merger of the Purchaser, a wholly-owned subsidiary of Parent, with and
into Control Data, as a result of which Control Data will become a wholly-owned
subsidiary of Parent. A copy of the Merger Agreement is attached as Appendix A
to this Proxy Statement. Other terms and provisions related to the Merger are
set forth in the Merger Agreement, as described herein.
On July 8, 1997, the Board of Directors of Control Data unanimously approved
the Merger. The Board of Directors of Parent has also approved the Merger.
Applicable Delaware law does not require that Parent stockholders approve the
Merger, and no such approval is being sought. Parent, as the sole stockholder of
the Purchaser, has approved the Merger.
The close of business on August 22, 1997 (the "Record Date") has been fixed
as the record date for determination of the holders of Control Data Common Stock
who are entitled to notice of and to vote at the Meeting or at any adjournment
thereof. Control Data has only one class of capital stock outstanding, Common
Stock, $.01 par value per share. As of the Record Date, there were 12,622,359
shares of Control Data Common Stock outstanding held by approximately 13,500
holders of record. The holders of record on the Record Date of shares of Control
Data Common Stock are entitled to one vote per share at the Meeting. The
presence at the Meeting in person or by proxy of the holders of a majority of
the outstanding shares of Control Data Common Stock entitled to vote will
constitute a quorum for the transaction of business. The affirmative vote of the
holders of a majority of the outstanding shares of Control Data Common Stock is
required for approval of the Merger. The Purchaser owns and has the power to
vote approximately 89.2 percent of the Shares, which is sufficient to approve
the Merger Agreement and the Merger without the affirmative vote of any other
stockholder. Pursuant to the Merger Agreement, Parent and the Purchaser have
agreed to vote all Shares owned by them in favor of approval of the Merger
Agreement and the Merger and, accordingly, such approval is assured.
Representatives of KPMG Peat Marwick LLP, Control Data's independent
accountants, are not expected to be present at the Meeting.
A proxy card is enclosed for use by Control Data stockholders. Such
stockholders are solicited on behalf of the Board of Directors of Control Data
to SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is
required if mailed within the United States. QUESTIONS OR REQUESTS FOR
ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS MAY BE DIRECTED TO GEORGESON
& COMPANY INC. AT THE ADDRESS OR TELEPHONE NUMBER LISTED ON THE FIRST PAGE OF
THIS PROXY STATEMENT.
All properly executed proxies not revoked will be voted at the Meeting in
accordance with the instructions contained therein. Proxies containing no
instructions will be voted in favor of approval of the Merger Agreement. A
stockholder who has executed and returned a proxy may revoke it at any time
before it is voted, but only by executing and returning a proxy bearing a later
date, by giving written notice of revocation to an officer of Control Data, or
by attending the Meeting and voting in person. Abstentions will be treated as
shares present for purposes of determining a quorum for the Meeting but will
have the same effect as a vote against approval of the Merger Agreement. If a
broker or other record holder or nominee indicates on a proxy that it does not
have direction or authority as to certain shares to vote on the Merger
Agreement, those certain shares will be considered present at the Meeting for
purposes of determining a quorum but will not be considered present with respect
to the vote on the Merger Agreement.
7
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If any other matters are properly presented for consideration at the
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
THE BOARD OF DIRECTORS OF CONTROL DATA RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT.
STOCKHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
In addition to the solicitation of proxies by use of mail, the directors,
officers or regular employees of Control Data may, but without compensation
other than their regular compensation, solicit proxies personally or by
telephone or fax. Control Data intends to reimburse brokerage houses and other
custodians, nominees, and fiduciaries for reasonable out-of-pocket expenses
incurred in forwarding copies of solicitation material to beneficial owners of
Control Data Common Stock held of record by such persons. In addition, Georgeson
& Company Inc. has been engaged to serve as information agent in connection with
the Merger. It will receive reasonable and customary compensation for such
services and reimbursement of reasonable out-of-pocket expenses.
All information in this Proxy Statement with respect to Parent or the
Purchaser has been furnished by Parent and all information with respect to
Control Data has been furnished by Control Data.
The mailing of this Proxy Statement to stockholders of Control Data is
expected to commence on or about September 3, 1997.
8
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THE MERGER
SET FORTH BELOW IS A BRIEF DESCRIPTION OF CERTAIN TERMS OF THE MERGER
AGREEMENT AND RELATED MATTERS. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, WHICH IS
ATTACHED HERETO AS APPENDIX A AND IS INCORPORATED HEREIN BY REFERENCE.
GENERAL
Parent, the Purchaser, and Control Data have entered into the Merger
Agreement, which provides that the Purchaser will be merged with and into
Control Data, with Control Data becoming a wholly-owned subsidiary of Parent. In
the Merger, each outstanding share of Control Data Common Stock (other than
Shares held by Parent and its affiliates, certain treasury shares, and shares
held by any stockholders properly asserting appraisal rights) will be converted
at the Effective Time into the right to receive $20.25 in cash, without
interest.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after the conditions to consummation of the Merger
described below have been satisfied or waived, and unless the Merger Agreement
has been terminated as provided below, a certificate of merger will be filed
with the Secretary of State of the State of Delaware, at which time the Merger
will become effective (the "Effective Time"). It is presently contemplated that
the Effective Time will be as soon as practicable after approval of the Merger
Agreement at the Meeting.
BACKGROUND OF THE MERGER
During the last three years Control Data has, at the recommendation of the
Board of Directors, pursued strategic and financial opportunities intended to
improve the focus of Control Data and enhance the value of Control Data.
Numerous discussions and the completion of several transactions took place
during this period. Completed transactions have included the sale of the stock
or assets of eight product subsidiaries to AmeriData, Inc. in 1995 and 1996 and
the sale of Control Data's ownership interest in Metaphase Technology, Inc. and
Control Data's related product data management sales and support business to
Structural Dynamics Research Corporation ("SDRC") effective January 1, 1997.
Control Data also made several acquisitions and held numerous other discussions
during this period to explore merger, acquisition and investment opportunities.
These included discussions with computer systems companies both in the United
States and Europe, telecommunication companies, computer services companies and
investment companies. None of these discussions resulted, however, in any formal
offers to acquire Control Data or any material part of it, except with respect
to the sales to AmeriData, Inc. and SDRC referenced above. Control Data also
held discussions with various investment bankers in fall 1995 and spring 1997 to
consider strategic options for Control Data.
In November 1995, management of Control Data met with representatives of
WCAS, which directly or indirectly controls Parent and the Purchaser, as to
whether either party was interested in pursuing the sale of Control Data to one
of the WCAS managed funds. On November 1, 1995, Control Data and WCAS VII
executed a Confidentiality Agreement, and a series of presentations occurred on
November 7, 1995, in which Control Data management presented certain financial
and business information to WCAS. Subsequent to the November 7 meeting, Control
Data provided additional information to WCAS. In December 1995, Control Data
received an oral response from WCAS that it was not interested in pursuing a
transaction. Control Data held no further discussions with WCAS during the
balance of 1995 or during 1996. Control Data meanwhile continued to pursue
strategic opportunities as described above.
At the January 29, 1997, Board meeting, the Board reviewed the overall
strategic plan for 1997 and beyond and instructed management to continue to
explore strategic and financial alternatives for Control Data. Discussions were
pursued by James E. Ousley, President and Chief Executive Officer of Control
9
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Data, with additional potential strategic partners without success. Management
also pursued informal discussions with various investment bankers and strategic
partners to explore alternatives.
In March 1997, Control Data received a request from WCAS to update the
information that WCAS had reviewed in November 1995. In April 1997, Mr. Ousley
and W. Douglas Hajjar, Chairman of the Board of Control Data, met with
representatives of WCAS to discuss strategic plans and alternatives for Control
Data.
On May 21, 1997, representatives of WCAS met with Mr. Ousley and Mr. Hajjar
to discuss the possibility of WCAS making an offer to purchase Control Data.
Subsequent to that discussion, information on business and financial matters of
Control Data was provided to WCAS pursuant to its requests. On June 11-12, 1997,
WCAS reviewed marketing, technology and financial matters with Control Data, and
decided to proceed with a due diligence review of Control Data. From June 16 to
July 8, 1997, WCAS and its advisors performed legal, financial and business due
diligence with respect to Control Data.
On June 23, 1997, the Board of Directors of Control Data met by
teleconference to discuss a potential offer from WCAS to purchase Control Data.
The Board directed management to continue to proceed with its discussions with
WCAS and, at that meeting, Mr. Hajjar reviewed a meeting that Mr. Ousley and Mr.
Hajjar had with representatives of Cowen on May 22, 1997, at which time Cowen
reviewed with Mr. Ousley and Mr. Hajjar its views on the outlook for sale of
Control Data, potential buyers that had been identified, and the potential
valuation methods for Control Data as a whole and its nonstrategic business
segments. Mr. Ousley informed the Board that he had previously contacted each of
the target companies identified by Cowen that were believed to be viable
prospects for an acquisition, had held discussions with those that had indicated
interest, and that no offers had resulted from those discussions.
On June 27, 1997, the Board of Directors of Control Data met in Minneapolis.
At that meeting, representatives of Cowen outlined a preliminary valuation
approach for Control Data. The Board then unanimously directed Control Data to
pursue discussions with WCAS. Representatives of Control Data and WCAS and their
respective legal advisors also proceeded to negotiate documentation for the
contemplated transactions.
On July 8, 1997, discussions were held among representatives of WCAS and
Control Data regarding the price at which WCAS would be willing to acquire the
Shares. Subsequently, on July 8, 1997, after the close of the financial markets
in the United States, the Purchaser offered to pay $20.25 per Share, in cash,
for the Shares. Control Data management conducted further discussions with the
Purchaser and then presented the offer to the Board of Directors at a special
meeting held in the early evening of July 8, 1997. Following further discussion
of the price and terms offered by the Purchaser, Cowen delivered its opinion to
the Control Data Board that the financial terms of the Offer and the Merger are
fair, from a financial point of view, to the Control Data stockholders (other
than Parent and its affiliates) as of the date of such opinion. Late in the
evening on July 8, 1997, the Boards of Directors of Control Data and the
Purchaser each approved the transactions and the purchase price. Following such
approvals, the Merger Agreement was executed and delivered, and the transaction
was publicly announced before financial markets in the United States opened on
July 9, 1997.
On July 15, 1997, Purchaser commenced the Offer and filed with the
Securities and Exchange Commission (the "Commission") a Tender Offer Statement
on Schedule 14D-1 (the "Schedule 14D-1") in connection with the Offer, which
included as an exhibit thereto the Purchaser's Offer to Purchase dated July 15,
1997. On the same date, Control Data filed with the Commission a
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
setting forth, among other things, the recommendation of the Board of Directors
of Control Data with respect to the Offer and the Merger. See "Control Data's
Reasons for the Merger; Recommendation of the Control Data Board of Directors."
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The Offer expired at 12:00 midnight, New York City time, on August 11, 1997.
Pursuant to the Offer, the Purchaser accepted for payment and purchased
11,255,203 Shares tendered in the Offer, representing approximately 89.2 percent
of the outstanding Shares as of the Record Date.
PURCHASER'S DIRECTOR-DESIGNEES
Pursuant to the Merger Agreement, upon the acceptance by the Purchaser of a
majority of the Shares for payment in the Offer (and deposit by the Purchaser of
funds sufficient to pay for such Shares), at the request of Parent, Control Data
secured the resignations of W. Donald Bell, Marcelo A. Gumucio, Keith A. Libbey
and James E. Ousley from the Board of Directors and caused Patrick J. Welsh,
Thomas E. McInerney and Rudolph E. Rupert to be elected to the Board of
Directors of Control Data. Grant A. Dove and W. Douglas Hajjar continue to serve
as directors of Control Data. Pursuant to the Merger Agreement, Control Data has
further agreed to use its best efforts to cause individuals designated by the
Purchaser to constitute the same percentage, on each committee of the Board of
Directors and on the board of directors of each subsidiary of Control Data, that
they represent on the Board of Directors of Control Data.
Pursuant to section 14(f) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and Rule 14f-1 thereunder, Control Data was required to
file certain information with the Commission and to furnish such information to
the stockholders of Control Data prior to or upon the change in a majority of
the directors of Control Data. The information required by section 14(f) and
Rule 14f-1 was filed by Control Data with the Commission on July 15, 1997 and
was furnished to the stockholders of Control Data together with the Schedule
14D-9.
CONTROL DATA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE CONTROL DATA BOARD
OF DIRECTORS
At its meeting on July 8, 1997, the Board of Directors of Control Data
unanimously (i) approved the Merger Agreement, the Offer and the Merger, (ii)
determined that the Offer and the Merger are fair to, and in the best interests
of, the stockholders of Control Data, and (iii) resolved to recommend that
stockholders accept the Offer and tender their Shares pursuant to the Offer and
that stockholders approve the Merger.
Prior to reaching its decision to approve the transactions contemplated by
the Merger Agreement and to recommend acceptance of the Offer, the Board of
Directors received presentations from, and reviewed the proposed terms of the
Offer and the Merger Agreement with, management of Control Data as well as with
Cowen and Control Data's legal counsel. In reaching its decision, the Board
considered a number of factors, including, but not limited to, the following:
(i) the terms and conditions of the Merger Agreement, including the amount and
form of the consideration; (ii) the fact that the $20.25 per Share price
represents a premium of approximately 29% over the closing sale price of $15.69
per Share as reported on the Nasdaq National Market on July 8, 1997; (iii) the
recent historical market prices of the Shares; (iv) the Board of Directors'
knowledge of the business, operations, prospects, properties, assets and
earnings of Control Data; (v) Control Data's current financial condition and
future prospects; (vi) the effect of the proposed transaction on Control Data's
relationships with its employees and customers; (vii) the likelihood that the
Offer and the Merger would be consummated, including the experience, reputation
and financial condition of WCAS and its affiliates; (viii) a review of possible
values realizable by Control Data's stockholders through other alternatives;
(ix) the fact that, pursuant to the Merger Agreement, Control Data is not
prohibited from responding to any unsolicited alternative transaction to the
extent that the Board of Directors of Control Data determines in good faith,
after consultation with outside counsel, that it is necessary to do so in order
to comply with its fiduciary duties to Control Data's stockholders under the
DGCL; and (x) the presentation of Cowen at the meeting of the Board of Directors
on July 8, 1997, and the written opinion of Cowen dated July 8, 1997, to the
effect that, as of such date, the financial terms of the Offer and the Merger
are fair to the Control Data stockholders (other than Parent and its affiliates)
from a financial point of view.
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The full text of the opinion of Cowen, which sets forth, among other things,
the assumptions made, matters considered and limitations on the review
undertaken, is attached as Appendix B hereto and is incorporated herein by
reference. Stockholders of Control Data are urged to read such opinion in its
entirety. Cowen's opinion was presented for the information of the Board in
connection with its consideration of the Merger Agreement, and is directed only
to the fairness from a financial point of view of the consideration to be
received by holders of Control Data's Common Stock (other than Parent and its
affiliates) pursuant to the Offer and the Merger. Cowen's opinion did not
constitute a recommendation to any stockholder as to whether to sell such
stockholder's Shares in the Offer pursuant to the Merger Agreement or as to how
to vote at the Meeting.
In light of all the factors set forth above, the Board of Directors approved
the Merger Agreement, the Offer, and the Merger. In view of the variety of
factors considered in connection with its evaluation of the transaction, the
Board of Directors did not assign relative weights to the specific factors
considered in reaching its decision.
OPINION OF CONTROL DATA'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated June 20, 1997 (the "Cowen Engagement
Letter"), the Control Data Board retained Cowen to render, if requested, an
opinion to the Control Data Board as to the fairness, from a financial point of
view, of the financial terms of the Offer and the Merger to the stockholders of
Control Data (other than Parent and its affiliates). The amount of consideration
was determined through negotiations between Control Data and the Purchaser and
not pursuant to recommendations of Cowen.
On July 8, 1997, Cowen delivered certain of its written analyses and its
oral opinion to the Control Data Board, subsequently confirmed in writing as of
the same date, to the effect that, as of such date, the financial terms of the
Offer and the Merger are fair, from a financial point of view, to the Control
Data stockholders (other than Parent and its affiliates). THE FULL TEXT OF THE
WRITTEN OPINION OF COWEN, DATED JULY 8, 1997, IS ATTACHED HERETO AS APPENDIX B
AND IS INCORPORATED BY REFERENCE. STOCKHOLDERS OF CONTROL DATA ARE URGED TO READ
THE OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER
MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY COWEN. THIS SUMMARY OF THE
WRITTEN OPINION OF COWEN SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. Cowen's analyses and opinion were
prepared for and addressed to the Control Data Board and are directed only to
the fairness, from a financial point of view, of the financial terms of the
Offer and the Merger and do not constitute an opinion as to the merits of the
Offer and the Merger or a recommendation to any stockholders of Control Data as
to how to vote at the Meeting.
Cowen was selected by the Control Data Board to render an opinion to the
Control Data Board because Cowen is a nationally recognized investment banking
firm and because certain principals of Cowen have substantial experience in
transactions similar to the Offer and the Merger, and are familiar with Control
Data and its businesses. As part of its investment banking business, Cowen is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for corporate and other
purposes. In addition, in the ordinary course of its business, Cowen and its
affiliates trade the equity securities of Control Data for their own account and
for the accounts of their customers, and accordingly, may at any time hold a
long or short position in such securities.
In arriving at its opinion, Cowen (a) reviewed Control Data's financial
statements for the fiscal years ended December 31, 1995 and December 31, 1996
and for the three month periods ended March 31, 1996 and March 31, 1997 and
certain publicly available filings with the Commission and certain other
relevant financial and operating data of Control Data; (b) reviewed a draft of
the Merger Agreement; (c) held meetings and discussions with senior management
of Control Data to discuss the business, operations, competitive position,
historical financial results and future prospects of Control Data; (d) reviewed
financial projections furnished to Cowen by the management of Control Data,
including, among other
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things, the capital structure, sales, net income, cash flow, capital
requirements and other data of Control Data that Cowen deemed relevant; and (e)
reviewed Cowen research estimates and First Call EPS consensus estimates for
Control Data. In addition, Cowen (i) considered the financial terms, to the
extent publicly available, of selected recent business transactions that Cowen
deemed to be comparable in whole or in part to the Offer and the Merger; (ii)
reviewed certain financial and stock market information regarding Control Data,
in comparison with similar information regarding certain other companies that
Cowen deemed relevant; (iii) reviewed the premiums implied by the Offer and the
Merger in comparison with premiums paid in other recent acquisitions and
transactions deemed to be relevant; (iv) analyzed the projections provided by
the management of Control Data for the cash flows generated by Control Data and
its Business Units (as defined below) to determine the present value of the
discounted cash flows; (v) reviewed historical market prices, price/earnings
ratios and trading activity of Control Data Common Stock from July 31, 1992 to
July 8, 1997 and compared those trading histories with those of other companies
that Cowen deemed relevant; and (vi) conducted such other studies, analyses,
inquiries and investigations as Cowen deemed appropriate. Cowen was not
requested to, and did not, solicit third-party indications of interest in
acquiring all or substantially all of the stock or assets or the assets of
Control Data or the assets of any of its Business Units.
Cowen assumed and relied, without independent verification, upon the
accuracy and completeness of the financial and other information that was
available to it from public sources, that was provided to it by management of
Control Data, or that was otherwise reviewed by it. Cowen did not assume any
responsibility for independent verification of such information, including
financial information. In addition, with respect to the financial projections
furnished to Cowen by Control Data's management, Cowen assumed, with the consent
of the Control Data Board, the attainability of the financial results therein
and that such projections were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the future financial performance
of Control Data, and management of Control Data confirmed that such projections
provided a reasonable basis for Cowen's opinion. Because such projections are
inherently subject to uncertainty, none of Control Data, Cowen or any other
person assumes responsibility for their accuracy. Cowen did not make any
independent valuation or appraisal of the assets or liabilities of Control Data,
nor has Cowen been furnished with any such appraisals. Cowen made no independent
investigations of any legal matters affecting Control Data. Cowen's opinion was
necessarily based on economic, market, financial and other conditions as in
effect on, and the information made available to it as of, July 8, 1997. It
should be understood that, although developments subsequent to July 8, 1997 may
affect its opinion, Cowen does not have any obligation to update, revise or
reaffirm its opinion.
The following is a summary of certain financial analyses performed by Cowen
to arrive at its opinion. Cowen performed certain procedures, including each of
the financial analyses described below, and reviewed with the management of
Control Data the assumptions on which such analyses were based and other
factors, including the historical and projected financial results of Control
Data. No limitations were imposed by the Control Data Board with respect to the
investigations made or procedures followed by Cowen in rendering its opinion.
ANALYSIS OF CERTAIN TRANSACTIONS. Cowen reviewed the financial terms, to
the extent publicly available, of: (i) 13 selected transactions involving the
acquisition of companies in the systems integration industry (the "SI
Transactions") that were completed since June 30, 1995; (ii) two selected
transactions in the electronic commerce industry (the "EC Transactions") that
were completed since July 28, 1994; (iii) five selected transactions in the
computer aided design industry (the "CAD Transactions") that were completed
since September 29, 1992; and (iv) four selected transactions in the computer
value added reseller industry (the "VAR Transactions") that were completed since
August 17, 1995 (collectively, the "Selected Transactions"). Cowen reviewed the
market capitalization of common stock plus total debt less cash and equivalents
("Enterprise Value") paid in the Selected Transactions as a multiple of latest
reported 12-month ("LTM") revenues and earnings before interest expense and
income taxes ("EBIT"), and also
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examined the multiples of equity value paid in the Selected Transactions to LTM
net income (collectively, the "Transaction Multiples").
Cowen reviewed the relative contribution of each of Control Data's
electronic commerce, integration services, ICEM and technical services business
units (collectively, the "Business Units") to Control Data's total LTM revenues,
LTM EBIT and LTM net income for all Business Units. Cowen then weighted the
Transaction Multiples for each of the SI Transactions, the EC Transactions, the
CAD Transactions and the VAR Transactions, based on the relative contributions
of the corresponding Business Units to Control Data's total results. By adding
the fractional multiples for each of the separate Business Units, Cowen computed
weighted average composite multiples that could be compared against the
multiples implied by the Purchaser's offer.
Such analyses on the Selected Transactions indicated that, (i) on the basis
of the Enterprise Value paid, the weighted average composite multiples were 0.60
times to 1.28 times LTM revenues and 11.3 times to 16.4 times LTM EBIT, and (ii)
on the basis of equity value paid, the weighted average composite multiples were
27.4 times to 37.4 times LTM net income. The corresponding multiples of LTM
revenues and LTM EBIT implied by the Purchaser's offer are 0.69 times, and 52.9
times, respectively. The corresponding multiple of LTM net income implied by the
Purchaser's offer is 27.9 times.
Although the Selected Transactions were used for comparison purposes, none
of such transactions is directly comparable to the Offer and the Merger, and
none of the companies in such transactions are directly comparable to Control
Data or its Business Units. Accordingly, an analysis of the results of such a
comparison is not purely mathematical but instead involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the companies involved and other
factors that could affect the acquisition value of such companies or Control
Data.
BREAK-UP VALUATION--CERTAIN TRANSACTIONS. Cowen reviewed the historical and
projected income statements for each of the Business Units. Cowen also analyzed
the multiples implied by the SI Transactions, EC Transactions, CAD Transactions
and VAR Transactions which corresponded to the industries represented by the
Business Units. Cowen determined an Enterprise Value for each Business Unit
based on such Unit's LTM revenues, LTM EBIT and LTM net income multiplied by the
corresponding Transaction Multiples from the SI Transactions, EC Transactions,
CAD Transactions and VAR Transactions. Cowen determined the equity value of
Control Data based on the aggregate sum of the values of the Business Units,
plus cash, less long-term debt. Based on this analysis, the implied equity value
per share for Control Data ranged from $19.97 to $27.86.
PREMIUMS-PAID ANALYSIS. Cowen also separately reviewed the financial terms,
to the extent publicly available, of 16 selected transactions involving the
acquisition of public companies in the information services, design software and
technical services industries (the "Selected Public Transactions"). Cowen
reviewed the premium of the offer price over the trading prices one trading day
and four weeks prior to the announcement date of the Selected Public
Transactions. Cowen also reviewed the premium of the offer price less the cash
on the acquired company's balance sheet on a per share basis ("Per Share Cash")
over the trading prices less Per Share Cash one trading day and four weeks prior
to the announcement date of the Selected Public Transactions.
The median premiums by which offer prices exceeded the closing stock prices
one trading day and four weeks prior to the announcement date of the Selected
Transactions were 24.1% and 47.7%, respectively. The Purchaser's offer
represented premiums of 29.1% and 36.1%, respectively, over the Control Data
Common Stock closing stock price one trading day and four weeks prior to July 8,
1997, the date of Cowen's written opinion and the date immediately preceding the
announcement of the Offer. The median premiums by which offer prices (less Per
Share Cash) exceeded the closing stock prices (less Per Share Cash) one trading
day and four weeks prior to the announcement date of the Selected Transactions
were 27.2% and 50.8%, respectively. The Purchaser's offer (less Per Share Cash)
represented premiums of
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53.9% and 70.3%, respectively, over the Control Data Common Stock closing price
(less Per Share Cash) one trading day and four weeks prior to July 8, 1997.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES. To provide contextual data
and comparative market information, Cowen compared selected historical operating
and financial ratios for Control Data to the corresponding data and ratios of
certain other companies (the "Selected Companies") whose securities are publicly
traded and which Cowen deemed comparable to Control Data and its Business Units
in certain respects. These Selected Companies were divided into four groups: (i)
nine systems integration companies (the "SI Companies"); (ii) six electronic
commerce companies (the "EC Companies"); (iii) nine computer aided design
companies (the "CAD Companies"); and (iv) four computer value added reseller
companies (the "VAR Companies"). The SI Companies included: BDM International,
Inc., Cambridge Technology Partners, Carnegie Group Inc., CIBER, Inc., Claremont
Technology Group, Inc., Computer Sciences Corp., Electronic Data Systems Corp.,
Renaissance Solutions, Inc., and Sapient Corp. The EC Companies included:
Worldtalk Corp., Premenos Technology Corp., Retix, Sterling Commerce, Inc.,
Harbinger Corp., and ISOCOR. The CAD Companies included: Autodesk, Inc., ANSYS,
Inc., Computervision Corporation, Dassault Systemes S.A., Intergraph Corp.,
MacNeal-Schwendler Corp., Parametric Technology Corp., Structural Dynamics
Research Corp. and Tecnomatix Technologies, Ltd. The VAR Companies included:
DecisionOne Holdings Corp., Vanstar Corp., MicroAge, Inc., and CompuCom Systems,
Inc.
Such data and ratios include the Enterprise Value of such Selected Companies
as multiples of LTM revenues and LTM EBIT, and the ratios of the current prices
of the Selected Companies to the LTM earnings per share ("EPS"), estimated 1997
calendar year EPS as estimated by First Call and the 1998 calendar year EPS as
estimated by First Call for such Selected Companies (collectively, the "Public
Trading Multiples").
Cowen reviewed the relative contribution of the Business Units to Control
Data's total LTM revenues, LTM EBIT, 1997 EPS and 1998 EPS for all Business
Units. Cowen then weighted the Public Trading Multiples for each of the SI
Companies, the EC Companies, the CAD Companies and the VAR Companies, based on
the relative contributions of the corresponding Business Units to Control Data's
total results. By adding the fractional multiples for each of the separate
Business Units, Cowen computed weighted average composite multiples that could
be compared against the multiples implied by the Purchaser's offer.
Such analysis indicated that for the Selected Companies, (i) on the basis of
Enterprise Value the weighted average composite multiples were 0.69 times to
1.41 times LTM revenues and 8.5 times to 11.7 times LTM EBIT, and (ii) on the
basis of current prices the weighted average composite multiples of LTM EPS were
10.7 times to 14.9 times for the 1997 calendar year and 9.5 times to 13.1 times
for the 1998 calendar year, respectively. The corresponding multiples of LTM
revenues and EBIT for Control Data implied by the Purchaser's offer are 0.69
times and 27.9 times, respectively. The corresponding multiples of the estimated
EPS for the 1997 and 1998 calendar years for Control Data implied by the
Purchaser's offer are 22.0 times and 13.1 times, respectively.
Although the Selected Companies were used for comparison purposes, none of
such companies is directly comparable to Control Data or its Business Units.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the Selected Companies and other factors that could affect
the public trading value of the Selected Companies or Control Data.
BREAK-UP VALUATION--CERTAIN PUBLICLY TRADED COMPANIES. Cowen reviewed the
historical and projected income statements for each of the Business Units. Cowen
also analyzed the market trading multiples of the SI Companies, EC Companies,
CAD Companies and VAR Companies which corresponded to the industries represented
by the Business Units. Cowen determined an Enterprise Value for each Business
Unit based on such Unit's LTM revenues, LTM EBIT, LTM net income, 1997 net
income and 1998 net
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income multiplied by the corresponding Public Trading Multiples of the SI
Companies, EC Companies, CAD Companies and VAR Companies. Cowen determined the
equity value of Control Data based on the aggregate sum of the Enterprise Values
of the Business Units and adjusting for cash and long-term debt. Based on this
analysis, Control Data's equity value per share ranged from $17.07 to $22.33.
DISCOUNTED FUTURE NET INCOME ANALYSIS. Cowen estimated a range of values
for Control Data based upon the discounted present value of the projected
calendar 1998 EPS net income of Control Data. This analysis was based upon the
median EPS estimates for Control Data provided by First Call. In performing this
analysis, Cowen utilized discount rates of 15.0% to 20.0%, which were selected
based on the estimated industry weighted average cost of capital and Control
Data's estimated average cost of capital, and a price to LTM earnings ("Trailing
P/E") multiple range of 19.0 times to 23.0 times, which was based on Control
Data's historical Trailing P/E. Utilizing this methodology, the equity value of
Control Data ranged from $18.79 to $24.25.
DISCOUNTED CASH FLOW ANALYSIS. Cowen estimated a range of values for
Control Data Common Stock based upon the discounted present value of the
projected after-tax free cash flows of the Business Units for the years ended
December 31, 1997 through December 31, 1999, and of the terminal value of the
Business Units at December 31, 1999, based upon multiples of earnings before
interest expense, income, taxes, depreciation, and amortization for the calendar
year 1999. However, because of the limited number of years for which projected
financial information for Control Data was provided by Control Data, and because
the discounted terminal value accounted for such a high percentage of the
discounted present value of Control Data, Cowen did not ascribe significance to
this analysis in reaching its opinion.
STOCK TRADING HISTORY. Cowen reviewed the historical market prices and
trading volumes of Control Data Common Stock from July 31, 1992 to July 8, 1997
(the last trading day prior to announcement of the Offer). Cowen also compared
Control Data's historical market prices from July 8, 1996 to July 8, 1997 with
indices for the SI Companies, EC Companies, CAD Companies, and VAR Companies.
This information was presented solely to provide the Control Data Board with
background information regarding the stock prices of Control Data over the
period indicated. Cowen noted that over the period from July 31, 1992 to July 8,
1997 the high and low prices for shares of Control Data Common Stock were $27.50
and $5.50, respectively, and that the average daily trading volume of Control
Data Common Stock traded was approximately 147,080 during the period indicated.
Cowen also reviewed the ratios of current price over one year forward
earnings ("Forward P/E"), based on EPS estimates provided by First Call, at
which Control Data Common Stock traded between July 8, 1996 and July 8, 1997,
and noted that Control Data's Forward P/E multiple ranged from a high of 24.4
times to a low of 17.0 times, and the multiple implied by the Purchaser's offer
was 22.0 times.
The summary set forth above does not purport to be a complete description of
the analyses performed by Cowen. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Cowen did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, notwithstanding the separate factors summarized above, Cowen
believes, and has advised the Control Data Board, that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the process underlying its opinion. In performing
its analyses, Cowen made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond the control of Control Data. These analyses performed by Cowen are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to the value of businesses do not purport to be
appraisals or to reflect the prices at which businesses or securities may
actually be sold. Accordingly,
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such analyses and estimates are inherently subject to substantial uncertainty
and none of Control Data, Cowen or any other person assumes responsibility for
their accuracy. As described above, the analyses supplied by Cowen and its
opinion were among several factors taken into consideration by the Control Data
Board in making its determination to approve the Offer and the Merger and to
recommend acceptance of the Offer and approval of the Merger. The analyses of
Cowen and its opinion should not be considered as determinative of the decision
of the Control Data Board to approve the Offer and the Merger and to recommend
acceptance of the Offer and approval of the Merger.
Pursuant to the Cowen Engagement Letter, Control Data has agreed to pay
Cowen a fee of $500,000 in consideration for Cowen delivering its fairness
opinion. Additionally, Control Data has agreed to reimburse Cowen for its
out-of-pocket expenses (including the reasonable fees and expenses of its
counsel) incurred or accrued during the period of, and in connection with
Cowen's engagement. Control Data has also agreed to indemnify Cowen against
certain liabilities, including liabilities under the federal securities laws,
relating to or arising out of services performed by Cowen in rendering its
fairness opinion to the Control Data Board in connection with the Offer and the
Merger, unless it is finally judicially determined that such liabilities arose
out of Cowen's gross negligence or willful misconduct. The terms of the fee
arrangement with Cowen, which are customary in transactions of this nature, were
negotiated at arm's length between Control Data and Cowen, and the Control Data
Board was aware of such arrangement.
VOTE REQUIRED
Approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Control Data Common Stock. Each holder of
Control Data Common Stock outstanding as of the Record Date is entitled to one
vote for each share held. On the Record Date, there were 12,622,359 Shares
outstanding. Of such Shares, 11,255,203 Shares (approximately 89.2% of the
outstanding shares of Control Data Common Stock) are owned by the Purchaser. As
a result, the Purchaser can approve the Merger Agreement and the Merger without
the affirmative vote of any other stockholder. Pursuant to the Merger Agreement,
Parent and the Purchaser agreed to vote all Shares owned by them in favor of
approval of the Merger Agreement and the Merger and, accordingly, such approval
is assured.
Parent, as the sole stockholder of the Purchaser, has approved the Merger
Agreement. Approval of the Merger Agreement by Parent's stockholders is not
required under Delaware law and is not being sought.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement.
Such summary is qualified in its entirety by reference to the Merger Agreement
attached hereto as Appendix A.
THE MERGER. The Merger Agreement provides that as soon as practicable after
the satisfaction or waiver (if permissible) of the conditions to the Merger and
in accordance with the relevant provisions of the DGCL, the Purchaser will be
merged with and into Control Data. As a result of the Merger, the separate
corporate existence of the Purchaser will cease and Control Data will continue
as the Surviving Corporation and will become a wholly-owned subsidiary of
Parent.
CONVERSION OF SECURITIES. At the Effective Time, each Share issued and
outstanding immediately prior to the Effective Time (other than Shares owned by
Parent, the Purchaser or any subsidiary thereof or held in the treasury of
Control Data or any subsidiary of Control Data and other than Shares held by
stockholders who have properly demanded and perfected appraisal rights under
section 262 of the DGCL) will be canceled and converted at the Effective Time
into the right to receive an amount in cash, without interest, equal to $20.25
(the "Merger Consideration").
The Purchaser or the designated paying agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to the Merger
Agreement to any holder of Shares such amounts that the Purchaser or the paying
agent is required to deduct and withhold with respect to the making of such
payment under the Internal Revenue Code of 1986, as amended (the "Code"), the
rules and regulations promulgated thereunder or any other applicable law.
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Pursuant to the Merger Agreement, each share of common stock, par value $.01
per share, of the Purchaser issued and outstanding immediately prior to the
Effective Time shall be automatically converted into and become at the Effective
Time one share of common stock of the Surviving Corporation.
OPTIONS. The Merger Agreement provides for the acceleration of the vesting
of all unvested stock options outstanding under Control Data's 1992 Equity
Incentive Plan (the "Stock Option Plan") so that each holder of an option
thereunder will be entitled to receive from Control Data, as of the Effective
Time, for each Share subject to such option, an amount in cash in cancellation
of such option equal to the excess, if any, of the Merger Consideration over the
per Share exercise price of such option, subject to applicable withholding, if
any.
Pursuant to the Merger Agreement, immediately prior to the Effective Time,
all options outstanding under Control Data's 1993 Employee Stock Purchase Plan
(the "Stock Purchase Plan") shall become exercisable to the extent of payroll
deductions accumulated by participants as of such date, and each participant
shall be deemed to have purchased the number of whole Shares subject to the
options held by such participant at a per Share price determined pursuant to the
provisions of the Stock Purchase Plan, and each participant shall receive a cash
payment equal to the balance, if any, of such accumulated payroll deductions
remaining after the deemed purchase of such Shares. As of the Effective Time,
each participant shall receive, for each Share such participant is deemed to
have purchased thereunder, the Merger Consideration.
The Stock Option Plan and the Stock Purchase Plan and all options issued and
outstanding thereunder will terminate effective as of the Effective Time.
DIRECTORS AND OFFICERS; CERTIFICATE OF INCORPORATION AND BYLAWS. The Merger
Agreement provides that the directors of the Purchaser immediately prior to the
Effective Time will be the initial directors of the Surviving Corporation and
that the officers of Control Data immediately prior to the Effective Time will
be the initial officers of the Surviving Corporation, until their respective
successors are duly elected and qualified. The Merger Agreement provides that,
at the Effective Time, the Certificate of Incorporation and Bylaws of the
Purchaser will become the Certificate of Incorporation and Bylaws of the
Surviving Corporation.
APPROVALS REQUIRED UNDER THE DGCL AND CONTROL DATA'S RESTATED CERTIFICATE OF
INCORPORATION. Pursuant to the DGCL and Control Data's Restated Certificate of
Incorporation, the affirmative vote of a majority of the outstanding Shares
entitled to vote thereon is required to approve the Merger Agreement and the
Merger.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various
customary representations and warranties of the parties thereto including, among
others, representations by Control Data, Parent and the Purchaser as to
corporate status and the enforceability of the Merger Agreement against each
such party and by Control Data as to its capitalization, compliance with law,
the accuracy of financial statements and filings with the Commission and the
absence of certain material adverse changes or events concerning Control Data's
business since December 31, 1996.
STOCKHOLDERS' MEETING. Parent and the Purchaser have agreed to vote at the
Meeting all Shares owned or acquired pursuant to the Offer or otherwise by them
or any of their affiliates in favor of the Merger.
CONDUCT OF CONTROL DATA'S BUSINESS. In the Merger Agreement, Control Data
has agreed to conduct the business of Control Data and its subsidiaries prior to
the Effective Time only in the ordinary course of business and consistent with
past practice. In particular, Control Data has agreed, among other things, not
to do any of the following prior to the Effective Time: (i) sell, pledge,
dispose of or encumber (or permit any subsidiary of Control Data to sell,
pledge, dispose of or encumber) any assets of Control Data or any subsidiary of
Control Data, except inventory and immaterial assets in the ordinary course of
business; (ii) amend or propose to amend its Certificate of Incorporation or
Bylaws; (iii) split, combine or reclassify
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any outstanding shares of its capital stock, or declare, set aside or pay any
dividend payable in cash, stock, property or otherwise with respect to such
shares (except for any dividends paid in the ordinary course to Control Data or
to any wholly-owned subsidiary of Control Data); (iv) redeem, purchase, acquire
or offer to acquire (or permit any subsidiary of Control Data to redeem,
purchase, acquire or offer to acquire) any shares of its capital stock; (v)
enter into any contract, agreement, commitment or arrangement with respect to
any of the foregoing matters; (vi) issue, sell, pledge or dispose of, or agree
to issue, sell, pledge or dispose of, any additional shares of, or securities
convertible or exchangeable for, or any options, warrants or rights of any kind
to acquire any shares of, its capital stock of any class or other property or
assets whether pursuant to the Stock Option Plan or the Stock Purchase Plan
(except in respect of outstanding options under such Plans), or otherwise; (vii)
acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof
(except an existing wholly-owned subsidiary of Control Data); (viii) incur any
indebtedness for borrowed money or issue any debt securities in an amount
exceeding $3,000,000 in the aggregate; (ix) enter into or modify any material
contract, lease, agreement or commitment, except in the ordinary course of
business and consistent with past practice; (x) terminate, modify, assign,
waive, release or relinquish any material contract rights or amend any material
rights or claims not in the ordinary course of business; (xi) settle or
compromise any material claim, action, suit or proceeding pending or threatened
against Control Data, or, if Control Data may be liable or obligated to provide
indemnification, against Control Data's directors or officers, before any court,
governmental agency or arbitrator; (xii) grant any increase in the salary or
other compensation of its employees except (A) pursuant to the terms of
employment agreements in effect on the date of the Merger Agreement and
previously disclosed to Parent and (B) in the case of employees who are not
executive officers of Control Data, in the ordinary course of business and
consistent with past practice; (xiii) grant any bonus to any employee or enter
into any employment agreement or make any loan to or enter into any material
transaction of any other nature with any employee of Control Data or any
subsidiary of Control Data; or (xiv) with certain exceptions, adopt or amend any
welfare or benefit agreement, plan or arrangement for directors, officers or
employees.
NOTICES. Control Data and Parent are each obligated under the Merger
Agreement to give the other prompt notice of (i) the occurrence, or failure to
occur, of any event that such party believes would be likely to cause any of its
representations or warranties contained in the Merger Agreement to be untrue or
inaccurate in any material respect at any time from July 8, 1997 to the
Effective Time and (ii) any material failure of Control Data, Parent or the
Purchaser, as the case may be, or any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
INDEMNIFICATION AND INSURANCE. The Merger Agreement provides for the
survival beyond the Merger, for a period of not less than six years from the
Effective Time, of all rights to indemnification and exculpation from liability
set forth in Control Data's Restated Certificate of Incorporation and Bylaws as
in effect on the date of the Merger Agreement. During such period, such
provisions may not be amended, repealed or otherwise modified in any manner that
would adversely affect the rights thereunder of individuals who, on or prior to
the Effective Time, were directors, officers, employees or agents of Control
Data ("Indemnified Parties") unless such modification is required by law. Parent
has agreed to guarantee the performance of Control Data's obligations under the
existing indemnification agreements with Control Data's directors and officers.
In addition, pursuant to the Merger Agreement, Parent has agreed to cause
Control Data to maintain, for a period of two years after the expiration date of
Control Data's current policy, officers' and directors' liability insurance
covering those Indemnified Parties who are currently covered by Control Data's
directors' and officers' liability insurance policy, on terms that are no less
favorable to such Indemnified Parties than the terms of such current coverage.
Control Data is not obligated to expend in any one year an amount in excess of
150% of the annual premiums currently payable by Control Data for such
insurance.
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FURTHER ASSURANCES. Pursuant to the terms of the Merger Agreement and
subject to the conditions thereof, each of the parties thereto has agreed to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by the
Merger Agreement, including, without limitation, using all reasonable efforts to
obtain all necessary waivers, consents and approvals and to effect all necessary
registrations and filings. Neither Parent nor Control Data is obligated,
however, to divest or agree to divest a significant asset in order to obtain any
waiver, consent or approval.
CONDITIONS TO THE MERGER. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the satisfaction
at or prior to the Effective Time of the following conditions: (i) the Merger
Agreement and the Merger shall have been approved and adopted by the requisite
vote of the stockholders of Control Data; (ii) any waiting period under the HSR
Act shall have expired or earlier terminated; (iii) no preliminary or permanent
injunction or other order, decree or ruling shall be in effect that would
restrain the effective operation of the business of Control Data and its
subsidiaries from and after the Effective Time, and (iv) no proceeding
challenging the Merger Agreement or the transactions contemplated thereby or
seeking to prohibit, alter, prevent or materially delay the Merger is pending.
INQUIRIES AND NEGOTIATIONS. Until termination of the Merger Agreement,
neither Control Data nor any of its subsidiaries, nor any of their respective
directors, officers, employees, representatives or other agents, may, directly
or indirectly, solicit or initiate any discussions, submissions of proposals or
offers or negotiations with, or, subject to the fiduciary duties of the Control
Data Board as advised by counsel, participate in any negotiations or discussions
with, or provide any information or data of any nature whatsoever to, or
otherwise cooperate in any other way with, or assist or participate in,
facilitate or encourage any effort or attempt by, any person, corporation,
entity or "group" (as defined in section 13(d) of the Exchange Act) other than
Parent and its affiliates, representatives and agents (each, a "Third Party") in
connection with any merger, consolidation, sale of any substantial subsidiary or
division that is material to the business of Control Data and its subsidiaries,
sale of shares of capital stock or other equity securities, tender or exchange
offer, recapitalization, debt restructuring or similar transaction involving
Control Data (such transactions being hereinafter referred to as "Alternative
Transactions"). Control Data has agreed to notify Parent immediately if any
proposal, offer, inquiry or other contact is received by or continued with
Control Data in respect of any such transaction, and, in any such notice, to
indicate the identity of the Third Party and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
must keep Parent informed, on a current basis, of the status and terms of any
such proposals or offers and the status of any such discussions or negotiations.
Control Data is required to give Parent not less than two business days' notice
prior to the execution of a definitive agreement with respect to an Alternative
Transaction and not less than two days' notice (or the longest notice legally
permitted, in the reasonable opinion of Control Data's counsel, if less than two
days) of any public announcement relating thereto. Control Data may not release
any third party from, or waive any provision of, any confidentiality or
standstill agreement to which Control Data is a party.
Prior to furnishing any nonpublic information to, or entering into
negotiations or discussions with, any Third Party, Control Data is required to
obtain an executed confidentiality agreement from such Third Party on terms
substantially the same as, or no less favorable to Control Data in any material
respect than, those contained in the Confidentiality Agreement. Control Data
cannot release any Third Party from, or waive any provision of, any such
confidentiality agreement or any other confidentiality or standstill agreement
to which Control Data is a party. As of the date of the Merger Agreement,
Control Data, its subsidiaries and the officers, directors, employees,
representatives and other agents of Control Data and its subsidiaries were
required to cease all discussions, negotiations and communications with all
Third Parties and demand the immediate return of all confidential information
previously provided to Third Parties.
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TERMINATION; FEES AND EXPENSES. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time,
notwithstanding any requisite approval thereof by the stockholders of Control
Data:
(i) by mutual action of the Boards of Directors of Parent and Control
Data;
(ii) by either Parent or Control Data, if the Merger is not effected on
or before the close of business on December 31, 1997; unless such event has
been caused by the breach of the Merger Agreement by the party seeking such
termination;
(iii) by Parent if (1) the conditions to its obligations to consummate
the Merger are not complied with or performed in any material respect prior
to December 31, 1997; or (2) the Board of Directors of Control Data
withdraws, modifies or amends in a manner adverse to Parent and the
Purchaser its approval or recommendation of the Offer and the Merger or
approves, recommends or endorses any proposal for, or authorizes Control
Data to enter into, an Alternative Transaction; or
(iv) by Control Data if (1) the conditions to its obligations to
consummate the Merger are not complied with or performed in any material
respect prior to December 31, 1997.
If the Merger Agreement is terminated due to a "Payment Event" (as defined
in the Merger Agreement), Control Data will be required to pay to Parent, within
two business days following such Payment Event, (i) a fee of $8,200,000 in cash,
plus (ii) all reasonable and documented out-of-pocket costs and expenses of
Parent and the Purchaser, including without limitation fees and expenses of
counsel, accountants, investment bankers and other advisors and printing
expenses. Following the acquisition by the Purchaser of approximately 89.2% of
the Shares pursuant to the Offer, however, it is unlikely that a Payment Event
would occur. In the event that the Merger Agreement is terminated for any other
reason, and Control Data has failed to comply with or perform, or has breached
in any material respect, any of its covenants or agreements contained in the
Merger Agreement, Control Data shall pay to Parent, within two business days
following such termination, the fees and expenses referred to in clause (ii) of
the preceding sentence, except that such fees and expenses are not payable if
Parent or the Purchaser has failed to comply with or perform, or has breached in
any material respect, any of its covenants or agreements contained in the Merger
Agreement.
Except as set forth above, in the event that the transactions contemplated
by Merger Agreement are not consummated, neither Control Data, on the one hand,
nor Parent and the Purchaser, on the other hand, shall have any obligation to
pay any of the fees and expenses of the other.
In the event that the transactions contemplated by the Merger Agreement are
consummated, Parent shall pay all of the fees and expenses of Control Data,
Parent, and the Purchaser incident to the negotiation, preparation and execution
of the Merger Agreement, including the fees and expenses of counsel,
accountants, investment bankers and other advisors.
AMENDMENT. The Merger Agreement may be amended or supplemented at any time
before or after its approval and adoption by the stockholders of Control Data by
action of the respective Boards of Directors of Control Data, Parent and the
Purchaser, without action by the stockholders thereof, except that after
approval and adoption of the Merger Agreement by Control Data's stockholders, no
such amendment or supplement shall, without consent of such stockholders, reduce
the amount or alter the form of the consideration that the holders of the
capital stock of Control Data shall be entitled to receive at the Effective Time
pursuant to the Merger.
INVESTOR FINANCING
On July 8, 1997, WCAS VII and WCAS Capital Partners III, L.P. ("WCAS CP
III") delivered to Parent a letter agreement confirming their commitment to
provide or cause to be provided up an aggregate
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$300 million of financing to Parent and the Purchaser, the proceeds of which
would be used by the Purchaser to fund the purchase of the Shares pursuant to
the Offer and the Merger.
On August 11, 1997, Parent entered into a definitive Securities Purchase
Agreement with WCAS VII, certain related investors and WCAS CP III pursuant to
which (i) WCAS VII and the related investors agreed to acquire an aggregate
300,000 shares of preferred stock and 30 million shares of common stock of
Parent for aggregate consideration of $60 million; and (ii) WCAS CP III agreed
to acquire units consisting of an aggregate $60 million principal amount of
senior subordinated notes due 2004 and an aggregate of approximately 4.2 million
shares of common stock of Parent for a purchase price of $60 million. WCAS VII
also agreed, under certain circumstances, to purchase up to $69 million in
principal amount of junior subordinated notes of Parent due 2004.
On August 11, 1997, the Purchaser entered into a definitive Credit Agreement
with NationsBank of Texas, N.A., as Agent, and The Bank of Nova Scotia, as
Documentation Agent, providing a tender offer credit facility of approximately
$128 million, secured in part by the Shares purchased pursuant to the Offer, and
a bridge loan facility of up to approximately $85 million, secured in part by
the Securities Purchase Agreement referred to above.
EXCHANGE OF SHARES OF CONTROL DATA COMMON STOCK
As soon as practicable after the Effective Time, the Bank of New York, as
exchange agent for the Merger (the "Exchange Agent") will mail a letter of
transmittal to holders of a certificate or certificates that prior to the
Effective Time represented shares of Control Data Common Stock. The letter of
transmittal will include instructions regarding the surrender of certificates
representing shares of Control Data Common Stock in exchange for the cash
payable for such Shares pursuant to the Merger.
As soon as practicable after the Effective Time, the Exchange Agent will
distribute to holders of shares of Control Data Common Stock, upon surrender to
the Exchange Agent of one or more certificates for such shares of Control Data
Common Stock for cancellation, together with a duly-executed letter of
transmittal, a check in the amount of cash into which the shares represented by
the certificate(s) have been converted. Holders of Control Data Common Stock
will not be entitled to receive interest on any cash to be received in the
Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Control Data
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders of Control Data should be aware that certain members of the
management and certain members of the Board of Directors of Control Data who
voted to approve the Merger Agreement and the Merger have certain interests in
the Merger that are in addition to the interests of stockholders of Control Data
generally. These interests include, among other things, the interests of certain
executives and directors of Control Data in stock options and stock rights that
will immediately vest as a result of the Merger, and the obligation of Parent to
cause Control Data to maintain officers' and directors' liability insurance
coverage for two years following the Effective Time and to indemnify directors,
officers, employees and agents of Control Data under certain circumstances from
claims, actions, suits or proceedings. See "Security Ownership of Certain
Beneficial Owners and Management" and "The Merger Agreement."
In addition, two executive officers of Control Data, James E. Ousley and
Joseph F. Killoran, and the Chairman of the Board of Control Data, W. Douglas
Hajjar, have severance agreements with Control Data that contain change of
control provisions. Under those provisions, which were triggered upon
consummation of the Offer but are not further triggered by the Merger, the
executive will be paid three times his annual salary or fee (or, in the case of
Mr. Killoran, one and one-half times) in the event that he ceases to hold his
current position with Control Data under certain circumstances within 12 months
after the change of control.
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As a result of the Purchaser's acquisition of a majority of the Shares,
representatives of the Purchaser have been elected to fill a majority of the
positions on the Board of Directors of Control Data.
DEREGISTRATION OF CONTROL DATA COMMON STOCK
Upon the consummation of the Merger, the Control Data Common Stock will
cease to be quoted on the Nasdaq National Market and Control Data will apply to
the Commission for the deregistration of Control Data Common Stock under the
Exchange Act.
ACCOUNTING TREATMENT OF THE MERGER
As required by generally accepted accounting principles, Parent will use the
purchase method of accounting to account for the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general description of the federal income tax consequences of
the Merger does not take into account the facts and circumstances of any
particular stockholder of Control Data. EACH CONTROL DATA STOCKHOLDER SHOULD
CONSULT HIS OR HER ADVISOR ABOUT THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE PROPOSED TRANSACTIONS, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS, CHANGES IN SUCH TAX LAWS, AND TAX RETURN REPORTING
REQUIREMENTS. Special tax consequences not described herein may be applicable to
a particular class of taxpayers, such as financial institutions, broker-dealers,
persons who are not citizens or residents of the United States and stockholders
who acquired their Shares through the exercise of an employee stock option or
otherwise as compensation.
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes under the Code and may also be a
taxable transaction under applicable state, local, foreign, and other tax laws.
Generally, for federal income tax purposes, a stockholder will recognize gain or
loss in an amount equal to the difference between the cash received by the
stockholder pursuant to the Merger and the stockholder's adjusted tax basis in
the Shares surrendered pursuant to the Merger. For federal income tax purposes,
such gain or loss will be capital gain or loss and will be long-term capital
gain or loss if the beneficial owner held the Shares for more than one year as
of the Effective Time of the Merger. Under recently enacted legislation,
long-term capital gain of individuals will be taxed at a maximum rate of 20
percent, in the case of Shares held more than 18 months, and 28 percent, in the
case of Shares held more than one year.
A stockholder (other than certain exempt stockholders including, among
others, all corporations and certain foreign individuals and entities) may be
subject to 31 percent backup withholding unless the stockholder provides its
taxpayer identification number or social security number (a "TIN") and certifies
that such number is correct or properly certifies that it is awaiting a TIN, or
unless an exemption applies. A stockholder who does not furnish its TIN may be
subject to a penalty imposed by the Internal Revenue Service (the "IRS").
If backup withholding applies to a stockholder, the Exchange Agent is
required to withhold 31 percent from payments to such stockholder. Backup
withholding is not an additional tax. Rather, the amount of the backup
withholding can be credited against the federal income tax liability of the
person subject to the backup withholding, provided that the required information
is given to the IRS. If backup withholding results in an overpayment of tax, a
refund can be obtained by the stockholder upon filing an appropriate income tax
return.
REGULATORY REQUIREMENTS
Under the HSR Act, certain acquisition transactions, including the Merger,
cannot be consummated unless certain information has been furnished to the
Federal Trade Commission and the Antitrust Division
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of the United States Department of Justice and certain waiting period
requirements have been satisfied. Parent and Control Data each furnished such
information, and they received early termination of the requisite waiting period
on July 28, 1997. The parties also obtained clearance of the Offer and the
Merger from the German Cartel office.
RIGHTS OF DISSENTING CONTROL DATA STOCKHOLDERS
Control Data stockholders have certain rights under the DGCL to dissent from
the Merger and to demand appraisal of, and to receive payment in cash of the
fair value of, their Shares. The following is a brief summary of the statutory
procedures to be followed by a holder of Shares at the Effective Time who does
not wish to accept the per Share cash consideration pursuant to the Merger (a
"Remaining Stockholder") in order to dissent from the Merger and perfect
appraisal rights under Delaware law. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE DGCL, THE
TEXT OF WHICH IS SET FORTH IN APPENDIX C. ANY REMAINING STOCKHOLDER CONSIDERING
DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL. APPRAISAL RIGHTS WILL
NOT BE AVAILABLE UNLESS AND UNTIL THE MERGER IS CONSUMMATED.
Remaining Stockholders of record who desire to exercise their appraisal
rights must fully satisfy all of the following conditions. A written demand for
appraisal of Shares must be delivered to the Secretary of Control Data before
the taking of the vote on the approval and adoption of the Merger Agreement.
This written demand for appraisal of Shares must be in addition to and separate
from any proxy or vote abstaining from or against the approval and adoption of
the Merger Agreement, and neither voting against, nor abstaining from voting,
nor failing to vote on the Merger Agreement will constitute a demand for
appraisal within the meaning of section 262 of the DGCL. Any stockholder seeking
appraisal rights must hold the Shares for which appraisal is sought on the date
of the making of the demand, continuously hold such Shares through the Effective
Time, and otherwise comply with the provisions of section 262 of the DGCL.
A demand for appraisal must be executed by or for the stockholder of record,
fully and correctly, as such stockholder's name appears on the stock
certificates. If Shares are owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, such demand must be executed by the fiduciary.
If Shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, such demand must be executed by all joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in exercising
the demand, he or she is acting as agent for the record owner.
A record owner, such as a broker, who holds Shares as a nominee for others,
may exercise appraisal rights with respect to the Shares held for all or less
than all beneficial owners of Shares as to which the holder is the record owner.
In such case the written demand must set forth the number of Shares covered by
such demand. Where the number of Shares is not expressly stated, the demand will
be presumed to cover all Shares outstanding in the name of such record owner.
Beneficial owners who are not record owners and who intend to exercise appraisal
rights should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights before the date of
the Meeting.
Remaining Stockholders who elect to exercise appraisal rights must mail or
deliver their written demands to: Secretary, Control Data Systems, Inc., 4201
Lexington Avenue North, Arden Hills, Minnesota 55126. The written demand for
appraisal should specify the stockholder's name and mailing address, the number
of Shares covered by the demand and that the stockholder is demanding appraisal
of such Shares. Control Data must, within 10 days after the Effective Time,
provide notice of the Effective Time to all stockholders who have complied with
section 262 of the DGCL and have not voted for approval and adoption of the
Merger Agreement.
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Remaining Stockholders electing to exercise their appraisal rights under
section 262 must not vote for the approval and adoption of the Merger Agreement
or consent thereto in writing. Voting in favor of the approval and adoption of
the Merger Agreement, or delivering a proxy in connection with the Meeting
(unless the proxy votes against, or expressly abstains from the vote on, the
approval and adoption of the Merger Agreement), will constitute a waiver of the
stockholder's right of appraisal and will nullify any written demand for
appraisal submitted by the stockholder.
Within 120 days after the Effective Time, either Control Data or any
stockholder who has complied with the required conditions of section 262 and who
is otherwise entitled to appraisal rights may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the Shares of
the dissenting stockholders. If a petition for an appraisal is timely filed,
after a hearing on such petition, the Delaware Court of Chancery will determine
which stockholders are entitled to appraisal rights and thereafter will appraise
the Shares owned by such stockholders, determining the fair value of such
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid, if
any, upon the amount determined to be the fair value.
The cost of the appraisal proceeding may be determined by the Delaware Court
of Chancery and taxed upon the parties as the Delaware Court of Chancery deems
equitable in the circumstances. Upon application of a dissenting stockholder,
the Delaware Court of Chancery may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all
Shares entitled to appraisal. In the absence of such determination or
assessment, each party bears its own expenses.
Any Remaining Stockholder who has duly demanded appraisal in compliance with
section 262 of the DGCL will not, after the Effective Time, be entitled to vote
for any purpose the Shares subject to such demand or to receive payment of
dividends or other distributions on such Shares, except for dividends or other
distributions payable to stockholders of record at a date prior to the Effective
Time.
At any time within 60 days after the Effective Time, any former holder of
Shares shall have the right to withdraw his or her demand for appraisal and to
accept the per Share cash consideration pursuant to the Merger, without interest
thereon. After this period, such holder may withdraw his or her demand for
appraisal only with the consent of Control Data as the surviving corporation in
the Merger. If no petition for appraisal is filed with the Delaware Court of
Chancery within 120 days after the Effective Time, stockholders' rights to
appraisal shall cease and all stockholders shall be entitled to receive the per
Share cash consideration pursuant to the Merger, without interest thereon.
Failure to take any required step in connection with the exercise of
appraisal rights may result in the termination or waiver of such rights.
Stockholders should be aware that the "fair value" of the Shares may be
determined to be greater than, equal to, or less than the amount paid pursuant
to the Merger, and Parent intends to cause Control Data, as the surviving
corporation in the Merger, to argue in any appraisal proceeding that, for
purposes of such proceeding, the fair value of each Share is less than the
$20.25 per Share being paid pursuant to the Merger.
25
<PAGE>
STOCK PRICES AND DIVIDENDS
Control Data Common Stock is listed and traded principally on the Nasdaq
National Market under the symbol CDAT. The following table sets forth, for the
quarters indicated, the high and low sales prices per share of Control Data
Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
CONTROL DATA
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
CALENDAR 1995
First Quarter.............................................................. $ 7.25 $ 5.88
Second Quarter............................................................. $ 10.75 $ 6.63
Third Quarter.............................................................. $ 12.13 $ 8.63
Fourth Quarter............................................................. $ 21.38 $ 10.13
CALENDAR 1996
First Quarter.............................................................. $ 26.13 $ 14.25
Second Quarter............................................................. $ 27.50 $ 18.00
Third Quarter.............................................................. $ 24.00 $ 12.75
Fourth Quarter............................................................. $ 28.63 $ 19.13
CALENDAR 1997
First Quarter.............................................................. $ 24.38 $ 13.50
Second Quarter............................................................. $ 15.88 $ 12.75
Third Quarter (through August 27, 1997).................................... $ 21.19 $ 14.63
</TABLE>
On July 8, 1997, the last trading day prior to public announcement of the
Merger Agreement, the reported closing sale price of the Shares on the Nasdaq
National Market was $15.69 per Share. On August 27, 1997, the most recent
practicable trading day prior to the mailing of this Proxy Statement, the
reported closing sale price of the Shares on the Nasdaq National Market was
$20.00 per Share. Control Data has never paid cash dividends on its Common
Stock.
26
<PAGE>
SELECTED FINANCIAL DATA OF CONTROL DATA
The selected consolidated financial data of Control Data for the five fiscal
years ended December 31, 1996 have been taken or derived from the audited
consolidated financial statements of Control Data and its subsidiaries that are
contained in or incorporated by reference into Control Data's Annual Reports on
Form 10-K for the fiscal years then ended, as filed with the Commission. The
selected consolidated financial data of Control Data for the six months ended
June 30, 1997 and 1996 have been taken or derived from the unaudited
consolidated financial statements of Control Data and its subsidiaries that are
contained in Control Data's Quarterly Reports on Form 10-Q for such fiscal
periods, as filed with the Commission. Such data should be read in conjunction
with the consolidated financial statements of Control Data and related Notes
thereto included elsewhere in this Proxy Statement.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED
-------------------- --------------------------------------------------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, JANUARY 1, JANUARY 2,
1997 1996 1996 1995 1994 1994 1993
--------- --------- ------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
REVENUES................................ $ 121,231 $ 153,785 $ 305,696 $ 454,815 $ 524,227 $ 451,835 $ 516,979
COST OF REVENUES........................ 78,598 101,756 201,369 330,380 382,528 285,448 320,728*
--------- --------- ------------- ------------- ------------ ----------- -----------
Gross profit.......................... 42,633 52,029 104,327 124,435 141,699 166,387 196,251
--------- --------- ------------- ------------- ------------ ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative... 34,315 43,084 86,860 113,047 129,491 139,467 164,312
Technical............................. 6,543 6,434 12,483 9,673 14,241 23,782 39,953*
Restructuring......................... -- -- -- -- 70,100 -- 114,900
Goodwill write-off.................... -- -- -- -- 24,900 -- --
Change in the valuation of spare parts
inventory............................ -- -- -- -- -- -- 14,900
--------- --------- ------------- ------------- ------------ ----------- -----------
Total operating expenses............ 40,858 49,518 99,343 122,720 238,732 163,249 334,065
--------- --------- ------------- ------------- ------------ ----------- -----------
Earnings (loss) from operations..... 1,775 2,511 4,984 1,715 (97,033) 3,138 (137,814)
NONOPERATING INCOME, NET................ 20,069 4,821 12,094 8,353 3,630 7,832 5,338
--------- --------- ------------- ------------- ------------ ----------- -----------
Earnings (loss) before income taxes... 21,844 7,332 17,078 10,068 (93,403) 10,970 (132,476)
PROVISION FOR INCOME TAXES.............. 2,550 800 1,100 1,200 1,000 1,850 1,558
--------- --------- ------------- ------------- ------------ ----------- -----------
Net earnings (loss)................... $ 19,294 $ 6,532 $ 15,978 $ 8,868 $ (94,403) $ 9,120 $(134,034)
--------- --------- ------------- ------------- ------------ ----------- -----------
--------- --------- ------------- ------------- ------------ ----------- -----------
Primary earnings (loss) per common
share and common share equivalents... $ 1.42 $ 0.45 $ 1.09 $ 0.67 $ (6.87) $ 0.66 $ (12.03)
--------- --------- ------------- ------------- ------------ ----------- -----------
--------- --------- ------------- ------------- ------------ ----------- -----------
Fully diluted earnings (loss) per
common share and common share
equivalents.......................... $ 1.42 $ 0.45 $ 1.09 $ 0.62 $ (6.87) $ 0.66 $ (12.03)
--------- --------- ------------- ------------- ------------ ----------- -----------
--------- --------- ------------- ------------- ------------ ----------- -----------
Weighted average common shares
outstanding (in thousands):
Primary............................... 13,546 14,438 14,623 13,294 13,740 13,764 11,138
Fully diluted......................... 13,546 14,452 14,623 14,298 13,740 13,764 11,138
--------- --------- ------------- ------------- ------------ ----------- -----------
--------- --------- ------------- ------------- ------------ ----------- -----------
BALANCE SHEET DATA
Cash and short-term investments....... $ 101,134 $ 89,488 $ 84,610 $ 84,034 $ 85,415 $ 81,635 $ 134,423
Total assets.......................... 208,802 222,457 220,297 227,485 300,568 352,923 373,522
Working capital....................... 112,172 108,785 110,791 98,715 93,341 133,868 160,816
Debt obligations...................... 3,832 2,295 289 686 2,933 1,891 9,768
Stockholders' equity.................. 109,922 96,817 109,020 83,498 82,306 175,176 159,207
</TABLE>
- ------------------------------
*Technical expenses of $10.5 million were reclassified to cost of revenues in
1992.
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS. The following table shows information concerning
each person who to the best of Control Data's knowledge, was the beneficial
owner of more than 5% of Control Data Common Stock as of August 22, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- -------------------------------------------------- ------------------- -----------
<S> <C> <C>
CDSI Acquisition Corp. ........................... 11,255,203(1) 89.2%
1013 Centre Road
Wilmington, DE 19805
CDSI Holding Corporation ......................... 11,255,203(2) 89.2%
1013 Centre Road
Wilmington, DE 19805
Welsh, Carson, Anderson & Stowe VII, L.P. ........ 11,255,203(2) 89.2%
320 Park Avenue
New York, New York 10022
WCAS Capital Partners III, L.P. .................. 11,255,203(2) 89.2%
320 Park Avenue
New York, New York 10022
</TABLE>
- ------------------------
(1) Represents sole power to vote and dispose of such Shares. Such Shares are
pledged as security for a $128 million loan in connection with the Offer.
See "Investor Financing."
(2) Each of the listed entities may be deemed, for certain purposes, to
beneficially own the Shares held by CDSI Acquisition Corp.
MANAGEMENT STOCKHOLDINGS. The following table shows the Control Data Common
Stock beneficially owned by each Control Data director, each executive officer
named in the Summary Compensation Table and by all directors and executive
officers (including the named individuals as a group) as of August 22, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) CLASS
- -------------------------------------------------- ------------------------ ---------------
<S> <C> <C>
Grant A. Dove..................................... 34,999 0.3%
W. Douglas Hajjar................................. 34,999 0.3%
Patrick J. Welsh.................................. 11,255,203(2) 89.2%
Thomas E. McInerney............................... 11,255,203(2) 89.2%
James E. Ousley................................... 351,906 2.7%
Joseph F. Killoran................................ 107,620 0.8%
Dieter Porzel..................................... 50,001 0.4%
Ruth A. Rich...................................... 103,230 0.8%
Arnold Rutgers.................................... 41,849 0.3%
All directors and executive officers as a group
(12 persons)..................................... 12,057,480 89.8%
</TABLE>
- ------------------------
(1) Except as otherwise noted, each person or group named in the table has sole
power to vote and dispose of all shares listed for such person or group.
Shares not currently outstanding but deemed beneficially owned by virtue of
the right of the person to acquire them as of August 22, 1997, or within 60
days of such date (on or before October 21, 1997), are treated as also
outstanding only when determining the amount and percent owned by such
person or by the group. Shares covered by unexercisable portions of options
are not considered outstanding but are subject to the receipt of cash
28
<PAGE>
therefor in connection with the Merger. Such additional shares so considered
outstanding are as follows: Mr. Dove, 34,999 shares; Mr. Hajjar, 34,999
shares, Mr. Ousley, 351,677 shares; Mr. Killoran, 107,400 shares; Mr.
Porzel, 50,001 shares; Ms. Rich, 103,230 shares; Mr. Rutgers, 41,849 shares;
all directors and executive officers as a group, 801,828 shares.
(2) Messrs. Welsh and McInerney are general partners of the sole general partner
of WCAS VII and managing members of the sole general partner of WCAS CP III
and may be deemed, for certain purposes, to beneficially own the shares
beneficially owned by such entities
AVAILABLE INFORMATION
Control Data is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements, and other
information with the Commission. The reports, proxy and information statements,
and other information filed by Control Data pursuant to the Exchange Act can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661, and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such documents can
also be obtained upon payment of the Commission's customary charges by writing
to the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains an Internet
site on the World Wide Web at -arrow-http://www.sec.gov-arrow- that contains
reports, proxy and information statements, and other information.
INFORMATION REGARDING CONTROL DATA
Information concerning Control Data, its business, properties, financial
information, and related matters is set forth in (i) Control Data's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, included in
Appendix D attached hereto, (ii) Control Data's financial statements for the
fiscal year ended December 31, 1996, and the management's discussion and
analysis related thereto, included in Appendix E attached hereto, and (iii)
Control Data's Quarterly Report on Form 10-Q for the period ended June 30, 1997,
included in Appendix F attached hereto.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, any stockholder who wishes to present a
proposal for inclusion in the Proxy Statement for action at future Annual
Meetings of Stockholders must comply with the rules and regulations of the
Commission then in effect. The date by which such proposals must be received by
Control Data for inclusion in its Proxy Statement for the 1998 Annual Meeting
has not yet been determined. If the Merger is not consummated, Control Data will
inform holders of Shares of the date by which such proposals must be received by
Control Data for inclusion in Control Data's Proxy Statement for the 1998 Annual
Meeting of Stockholders.
By Order of the Board of Directors
By /s/ James E. Ousley
James E. Ousley,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
29
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
CDSI HOLDING CORPORATION,
CDSI ACQUISITION CORP.
AND
CONTROL DATA SYSTEMS, INC.
DATED AS OF JULY 8, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I
THE OFFER
SECTION 1.01 The Offer............................................................................. A-1
SECTION 1.02 Company Action........................................................................ A-2
SECTION 1.03 Directors............................................................................. A-2
ARTICLE II
THE MERGER
SECTION 2.01 The Merger............................................................................ A-3
SECTION 2.02 Effect of the Merger.................................................................. A-3
SECTION 2.03 Consummation of the Merger............................................................ A-3
SECTION 2.04 Certificate of Incorporation; By-Laws; Directors and Officers......................... A-3
SECTION 2.05 Conversion of Securities.............................................................. A-3
SECTION 2.06 Stock Options......................................................................... A-4
SECTION 2.07 Payment for Shares.................................................................... A-4
SECTION 2.08 Dissenting Shares..................................................................... A-5
SECTION 2.09 Dissenting Shares After Payment of Fair Value......................................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01 Organization and Qualification........................................................ A-6
SECTION 3.02 Subsidiaries.......................................................................... A-6
SECTION 3.03 Authority Relative to Agreement....................................................... A-6
SECTION 3.04 Non-Contravention..................................................................... A-6
SECTION 3.05 Capitalization........................................................................ A-7
SECTION 3.06 SEC Filings........................................................................... A-7
SECTION 3.07 Financial Statements.................................................................. A-7
SECTION 3.08 Absence of Certain Changes or Events.................................................. A-8
SECTION 3.09 Governmental Approvals................................................................ A-8
SECTION 3.10 Compliance with Laws.................................................................. A-8
SECTION 3.11 Disclosure Documents.................................................................. A-9
SECTION 3.12 Litigation............................................................................ A-9
SECTION 3.13 Software.............................................................................. A-9
SECTION 3.14 Trade Secrets......................................................................... A-10
SECTION 3.15 Severance Arrangements................................................................ A-10
SECTION 3.16 Taxes................................................................................. A-10
SECTION 3.17 Employee Benefit Plans................................................................ A-11
SECTION 3.18 Environmental Matters................................................................. A-11
SECTION 3.19 Customer Relationships................................................................ A-12
SECTION 3.20 Certain Transactions.................................................................. A-12
SECTION 3.21 State Takeover Statute Inapplicable................................................... A-12
SECTION 3.22 Brokers............................................................................... A-12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
SECTION 4.01 Organization and Qualification........................................................ A-12
SECTION 4.02 Authority Relative to Agreement....................................................... A-12
</TABLE>
a-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
SECTION 4.03 Non-Contravention..................................................................... A-13
<S> <C> <C>
SECTION 4.04 Governmental Approvals................................................................ A-13
SECTION 4.05 Disclosure Documents.................................................................. A-13
SECTION 4.06 Brokers............................................................................... A-13
SECTION 4.07 Financing............................................................................. A-13
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUISITION
SECTION 5.01 Organization and Qualification........................................................ A-14
SECTION 5.02 Authority Relative to Agreement....................................................... A-14
SECTION 5.03 Non-Contravention..................................................................... A-14
SECTION 5.04 Governmental Approvals................................................................ A-14
ARTICLE VI
CERTAIN AGREEMENTS
SECTION 6.01 Conduct of the Company's Business..................................................... A-14
SECTION 6.02 Stockholder Approval.................................................................. A-16
SECTION 6.03 Access to Information................................................................. A-16
SECTION 6.04 Further Assurances.................................................................... A-17
SECTION 6.05 Inquiries and Negotiations; Certain Payments.......................................... A-17
SECTION 6.06 Notification of Certain Matters....................................................... A-18
SECTION 6.07 Indemnification....................................................................... A-18
SECTION 6.08 Voting of Shares...................................................................... A-19
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01 Conditions to the Merger Relating to Parent and Acquisition........................... A-19
SECTION 7.02 Conditions to the Merger Relating to the Company...................................... A-19
ARTICLE VIII
TERMINATION AND ABANDONMENT
SECTION 8.01 Termination and Abandonment........................................................... A-20
SECTION 8.02 Effect of Termination................................................................. A-20
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 Nonsurvival of Representations and Warranties......................................... A-20
SECTION 9.02 Expenses, Etc......................................................................... A-21
SECTION 9.03 Publicity............................................................................. A-21
SECTION 9.04 Execution in Counterparts............................................................. A-21
SECTION 9.05 Notices............................................................................... A-21
SECTION 9.06 Waivers............................................................................... A-22
SECTION 9.07 Entire Agreement...................................................................... A-22
SECTION 9.08 Applicable Law........................................................................ A-22
SECTION 9.09 Binding Effect, Benefits.............................................................. A-22
SECTION 9.10 Assignability......................................................................... A-22
SECTION 9.11 Amendments............................................................................ A-23
</TABLE>
a-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of July 8, 1997, among CDSI HOLDING
CORPORATION, a Delaware corporation ("Parent"), CDSI ACQUISITION CORP., a
Delaware corporation and a wholly-owned subsidiary of Parent ("Acquisition"),
and CONTROL DATA SYSTEMS, INC., a Delaware corporation (the "Company"). The
Company and Acquisition are hereinafter sometimes referred to as the
"Constituent Corporations" and the Company as the "Surviving Corporation."
WHEREAS the respective Boards of Directors of Parent, Acquisition and the
Company have each approved, upon the terms and subject to the conditions
hereinafter provided, the acquisition of the Company by Acquisition pursuant to
a tender offer by Acquisition for all the outstanding shares of Common Stock,
$.01 par value ("Company Common Stock"), of the Company, followed by a merger of
Acquisition with and into the Company;
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger and the mode of carrying the same into
effect, the parties hereto hereby agree as follows:
ARTICLE I
THE OFFER
SECTION 1.01 THE OFFER. (a) Provided that nothing shall have occurred
that, had the Offer referred to below been commenced, would give rise to a right
to terminate the Offer under any of the conditions set forth in Annex I hereto,
Acquisition shall, as promptly as practicable after the date hereof, but in no
event later than five business days following the public announcement of the
terms of this Agreement, commence an offer (the "Offer") to purchase all of the
outstanding shares (the "Shares" of Company Common Stock at a price of $20.25
per Share, net to the seller in cash (or at such higher price as Acquisition, in
its sole discretion, elects to offer), but subject to any withholding required
by law. The Offer shall be subject to the condition that there shall be validly
tendered prior to the expiration date of the Offer and not withdrawn a number of
Shares representing at least 51% of the Shares outstanding on a fully diluted
basis (the "Minimum Condition") and to the other conditions set forth in Annex I
hereto. For purposes of determining the Minimum Condition, (i) Shares tendered
subject to guaranteed delivery shall not be considered validly tendered unless
and until delivery shall have been completed and (ii) Shares outstanding on a
fully-diluted basis shall mean all Shares actually outstanding plus all Shares
issuable upon exercise, conversion or exchange of then-outstanding options,
warrants and other rights to purchase, or other securities convertible into or
exchangeable for, Company Common Stock, including any Shares issuable pursuant
to the Company Stock Purchase Plan or the Company Stock Option Plan (each as
defined in Section 3.05). Acquisition expressly reserves the right to waive the
Minimum Condition or any of the other conditions to the Offer and to make any
change in the terms or conditions of the Offer; PROVIDED that no change may be
made that changes the form of consideration to be paid or decreases the price
per Share or the number of Shares sought in the Offer or which imposes
conditions to the Offer in addition to those set forth in Annex I.
(b) As soon as practicable on the date of commencement of the Offer,
Acquisition shall file with the Securities and Exchange Commission ("SEC") a
Tender Offer Statement on Schedule 14D-1 with respect to the Offer which will
contain the offer to purchase and form of the related letter of transmittal
(together with any supplements or amendments thereto, collectively the "Offer
Documents"). Acquisition and the Company each agrees promptly to correct any
information provided by it for use in the Offer Documents if and to the extent
that it shall have become false or misleading in any material respect.
Acquisition agrees to take all steps necessary to cause the Offer Documents as
so corrected to be filed with the SEC and to be disseminated to holders of
Shares, in each case as and to the extent required by applicable federal
securities laws. The Company and its counsel shall be given a reasonable
opportunity to review and comment on the Offer Documents prior to their being
filed with the SEC.
A-1
<PAGE>
SECTION 1.02 COMPANY ACTION. (a) The Company hereby consents to the Offer
and represents that its Board of Directors, at a meeting duly called and held,
has (i) unanimously determined that this Agreement and the transactions
contemplated hereby, including the Offer and the Merger (as defined in Section
2.01), are fair to and in the best interest of the Company's stockholders, (ii)
unanimously approved this Agreement and the transactions contemplated hereby,
including the Offer and the Merger, which approval constituted approval of the
Offer, the Merger and this Agreement for purposes of Sections 203 and 251 of the
General Corporation Law of the State of Delaware (the "Delaware GCL"), and (iii)
unanimously resolved to recommend acceptance of the Offer and approval and
adoption of this Agreement and the Merger by its stockholders. The Company
further represents that Cowen & Company has delivered to the Company's Board of
Directors its written opinion that, as of the date of such opinion, the
consideration to be paid in the Offer and the Merger is fair to the holders of
Shares (other than Parent and its affiliates) from a financial point of view.
The Company has been advised that all of its directors and executive officers
intend either to tender their Shares pursuant to the Offer or to vote in favor
of the Merger. The Company will promptly furnish Acquisition with a list of its
stockholders, mailing labels and any available listing or computer file
containing the names and addresses of all record holders of Shares and lists of
securities positions of Shares held in stock depositories, in each case true and
correct as of the most recent practicable date, and will provide to Acquisition
such additional information (including, without limitation, updated lists of
stockholders, mailing labels and lists of securities positions) and such other
assistance as Acquisition may reasonably request in connection with the Offer.
(b) As soon as practicable on the day that the Offer is commenced, the
Company will file with the SEC a Solicitation/ Recommendation Statement on
Schedule 14D-9 (the "Schedule 14D-9"), which shall reflect the recommendations
of the Company's Board of Directors referred to above. The Company and
Acquisition each agree promptly to correct any information provided by it for
use in the Schedule 14D-9 if and to the extent that it shall have become false
or misleading in any material respect. The Company agrees to take all steps
necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC
and to be disseminated to holders of Shares, in each case as and to the extent
required by applicable federal securities laws. Parent, Acquisition and their
counsel shall be given an opportunity to review and comment on the Schedule
14D-9 prior to its being filed with the SEC.
SECTION 1.03 DIRECTORS. (a) Effective upon the acceptance for payment by
Acquisition of, and deposit by Acquisition with the depositary for the Offer of
funds sufficient to make payment for, a majority of the outstanding Shares
pursuant to the Offer, Acquisition shall be entitled to designate the number of
directors, rounded up to the next whole number, on the Company's Board of
Directors that equals the product of (i) the total number of directors on the
Company's Board of Directors (giving effect to the election of any additional
directors pursuant to this Section) and (ii) the percentage that the number of
Shares owned by Acquisition (including Shares accepted for payment and for which
deposit has been made as aforesaid) bears to the total number of Shares
outstanding, and the Company shall take all action necessary to cause
Acquisition's designees to be elected or appointed to the Company's Board of
Directors, including, without limitation, increasing the number of directors and
seeking and accepting resignations of incumbent directors. At such times, the
Company will use its best efforts to cause individuals designated by Acquisition
to constitute the same percentage as such individuals represent on the Company's
Board of Directors of (A) each committee of the Board (other than any committee
of the Board established to take action under this Agreement), (B) each board of
directors of each Subsidiary (as defined in Section 3.02) and (C) each committee
of each such board. Notwithstanding the foregoing, at all times prior to the
Effective Time the Board shall include at least two directors in office as of
the date hereof who are not employees of the Company or any of its subsidiaries
or affiliates of Parent or Acquisition (any such director remaining in office
being a "Continuing Director").
(b) The Company's obligations to appoint designees to the Board of Directors
shall be subject to Section 14(f) of the Exchange Act (as defined in Section
3.06) and Rule 14f-1 promulgated thereunder. The Company shall promptly take all
actions required pursuant to Section 14(f) and Rule 14f-1 in order to
A-2
<PAGE>
fulfill its obligations under this Section and shall include in the Schedule
14D-9 such information with respect to the Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill its
obligations under this Section 1.03. Acquisition will supply to the Company in
writing and be solely responsible for any information with respect to itself and
its nominees, officers, directors and affiliates required by Section 14(f) and
Rule 14f-1.
ARTICLE II
THE MERGER
SECTION 2.01 THE MERGER. As promptly as reasonably practicable after
consummation of the Offer, subject to the terms and conditions of this
Agreement, at the Effective Time (as hereinafter defined), in accordance with
this Agreement and the Delaware GCL, Acquisition shall be merged with and into
the Company (the "Merger"), the separate existence of Acquisition (except as it
may be continued by operation of law) shall cease, and the Company shall
continue as the surviving corporation.
SECTION 2.02 EFFECT OF THE MERGER. Upon the effectiveness of the Merger,
the Surviving Corporation shall succeed to and assume all the rights and
obligations of the Company and Acquisition in accordance with the Delaware GCL
and the Merger shall otherwise have the effects set forth in Section 259 of the
Delaware GCL.
SECTION 2.03 CONSUMMATION OF THE MERGER. As soon as practicable after the
satisfaction or waiver of the conditions to the obligations of the parties to
effect the Merger set forth herein, provided that this Agreement has not been
terminated previously, the parties hereto will cause the Merger to be
consummated by filing with the Secretary of State of the State of Delaware a
properly executed certificate of merger in accordance with the Delaware GCL,
which shall be effective upon filing or on such later date as may be specified
therein (the time of such effectiveness being the "Effective Time").
SECTION 2.04 CERTIFICATE OF INCORPORATION; BY-LAWS; DIRECTORS AND
OFFICERS. The Certificate of Incorporation of Acquisition in effect at the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation, until thereafter amended in accordance with the provisions thereof
and as provided by the Delaware GCL. The By-Laws of Acquisition in effect at the
Effective Time shall be the By-Laws of the Surviving Corporation, until
thereafter amended in accordance with the provisions thereof and the Certificate
of Incorporation of the Surviving Corporation and as provided by the Delaware
GCL. From and after the Effective Time and until their respective successors are
duly elected or appointed and qualified, (a) the directors of Acquisition at the
Effective Time shall be the directors of the Surviving Corporation and (b) the
officers of the Company at the Effective Time shall be the officers of the
Surviving Corporation.
SECTION 2.05 CONVERSION OF SECURITIES. By virtue of the Merger and without
any action on the part of either Constituent Corporation or any holder of the
capital stock thereof, at the Effective Time:
(a) Each share of Common Stock, $.01 par value, of Acquisition issued
and outstanding immediately prior to the Effective Time shall be converted
into and become one validly issued, fully paid and nonassessable share of
Common Stock of the Surviving Corporation;
(b) Each share of Company Common Stock that is held in the treasury of
the Company or of any Subsidiary, or by Parent, Acquisition or any of their
subsidiaries, shall be canceled and retired and no consideration shall be
paid or delivered in exchange therefor; and
(c) Each remaining share of Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares, as
defined in Section 2.08) shall be converted into the right to receive an
amount in cash, without interest, equal to the $20.25 or any higher price
paid for each Share in the Offer (the "Merger Consideration").
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SECTION 2.06 STOCK OPTIONS. (a) All stock options outstanding at the
Effective Time under the Company Stock Option Plan (as defined in Section 3.05)
shall, whether or not exercisable or vested, become fully exercisable and
vested, and each holder of an option thereunder shall be entitled to receive
from the Company, as of the Effective Time, for each share of Company Common
Stock subject to an option an amount in cash in cancellation of such option
equal to the excess, if any, of the Merger Consideration over the per share
exercise price of such option, subject to applicable withholding, if any. The
Company Stock Option Plan and all options issued and outstanding thereunder
shall terminate effective as of the Effective Time.
(b) Immediately prior to the Effective Time, all options outstanding under
the Company Stock Purchase Plan (as defined in Section 3.05) shall become
exercisable to the extent of payroll deductions accumulated by participants as
of such date, and each participant shall be deemed to have purchased the number
of whole Shares subject to the options held by such participant at a per Share
price determined pursuant to the provisions of the Company Stock Purchase Plan,
and each participant shall receive a cash payment equal to the balance, if any,
of such accumulated payroll deductions remaining after the deemed purchase of
such Shares. As of the Effective Time, each participant shall receive, for each
Share such participant is deemed to have purchased, the Merger Consideration.
The Company Stock Purchase Plan and all options issued and outstanding
thereunder shall terminate effective as of the Effective Time.
SECTION 2.07 PAYMENT FOR SHARES. (a) Prior to the Effective Time, Parent
shall designate a bank or trust company to act as exchange agent (the "Exchange
Agent") for the purpose of exchanging certificates representing Shares for the
Merger Consideration. At the Effective Time, Parent and Acquisition shall cause
such funds as are required for the conversion of the Shares pursuant to Section
2.05(c) hereof (the "Exchange Fund") to be deposited with the Exchange Agent.
(b) Promptly after the Effective Time, the Surviving Corporation shall
instruct the Exchange Agent to mail to each holder of record of one or more
shares of Company Common Stock, (i) a letter of transmittal, which shall specify
that delivery shall be effected, and risk of loss and title to the certificates
that immediately prior to the Effective Time represented outstanding Shares
(each, a "Certificate") shall pass, only upon proper delivery of the Certificate
to the Exchange Agent and have such other provisions as Parent shall specify,
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for Merger Consideration. Until surrendered as contemplated by this
Section 2.07, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive the Merger Consideration. No
interest will be paid or accrued on the Merger Consideration.
(c) Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed and completed in
accordance with the instructions thereto, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor the Merger Consideration
payable in respect of the Shares previously represented by such Certificate,
after giving effect to any applicable withholding tax, and the Certificate so
surrendered shall forthwith be canceled.
(d) If Merger Consideration is to be paid to any person other than the
person in whose name the Certificates for Shares surrendered for conversion are
registered, it shall be a condition of the payment that such Certificates be
properly endorsed and the signatures thereon properly guaranteed and otherwise
in proper form for transfer and that the person requesting such payment shall
pay to the Exchange Agent any transfer or other taxes required by reason of the
delivery of Merger Consideration to a person other than the registered holder of
such Certificate, or shall establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not applicable.
(e) Any portion of the Exchange Fund held by the Exchange Agent for delivery
pursuant to this Section 2.07 and unclaimed at the end of six months after the
Effective Time shall be repaid or redelivered to Parent, upon demand, and any
holders of Certificates who have not theretofore complied with this Section 2.07
shall, subject to applicable law, thereafter look only to the Surviving
Corporation for payment
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of the Merger Consideration in respect of such holders' Shares. Notwithstanding
the foregoing, none of Parent, the Surviving Corporation or the Exchange Agent
shall be liable to any holder of Shares of Company Stock for any amount paid to
a public official pursuant to any applicable abandoned property, escheat or
similar law. Any amounts unclaimed by holders of Shares two years after the
Effective Time (or such earlier date immediately prior to such time as such
amounts would otherwise escheat to or become the property of any governmental
entity) shall, to the extent permitted by applicable law, become the property of
the Surviving Corporation free and clear of any claims or interest of any person
previously entitled thereto.
(f) The Exchange Agent shall invest any cash in the Exchange Fund, as
directed by Parent, in (i) direct obligations of the United States of America,
(ii) obligations for which the full faith and credit of the United States of
America is pledged to provide for the payment of principal and interest or (iii)
commercial paper rated, at the time of purchase, in either of the two highest
quality categories by both Moody's Investors Services Inc. and Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc., and any net earnings with
respect thereto shall be paid to Parent as and when requested by Parent. In the
event the Exchange Fund shall realize a loss on any such investment, Parent
shall promptly thereafter deposit in the Exchange Fund cash in an amount
sufficient to enable the Exchange Fund to satisfy all remaining obligations
originally contemplated to be paid out of the Exchange Fund.
(g) At and after the Effective Time, the stock transfer books of the Company
shall be closed, and there shall be no further registrations of transfers of
shares of Company Common Stock thereafter on the records of the Company. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, Parent or the Exchange Agent for any reason, they shall be canceled
and exchanged for Merger Consideration as provided in this Section 2.07.
SECTION 2.08 DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, Shares that are outstanding immediately prior to the Effective
Time and that are held by stockholders who have not voted such Shares in favor
of the approval and adoption of this Agreement and who shall have delivered a
written demand for appraisal of such shares in the manner provided in Section
262 of the Delaware GCL ("Dissenting Shares") shall not be converted into the
right to receive the Merger Consideration, but the holders of such Shares shall
be entitled to payment of the appraised value of such Shares in accordance with
the provisions of Section 262 of the Delaware GCL; PROVIDED, HOWEVER, that (i)
if any holder of Dissenting Shares shall subsequently deliver a written
withdrawal of such holder's demand for appraisal of such shares (with the
written approval of the Surviving Corporation, if such withdrawal is not
tendered within 60 days after the Effective Time), or (ii) if any holder fails
to perfect or loses such holder's appraisal rights as provided in Section 262 of
the Delaware GCL, or (iii) if any holder of Dissenting Shares fails to demand
payment within the time period provided in Section 262 of the Delaware GCL, such
holder shall forfeit the right to appraisal of such shares and such shares shall
thereupon be deemed to have been converted into, as of the Effective Time, the
right to receive the Merger Consideration, without any interest thereon. The
Company shall give Acquisition prompt notice of any demands received by the
Company for appraisal of Shares, and the Company shall not, except with the
written consent of Acquisition, make any payment with respect to, or settle or
offer to settle, any such demands.
SECTION 2.09 DISSENTING SHARES AFTER PAYMENT OF FAIR VALUE. Dissenting
Shares, if any, shall be canceled after payments of fair value in respect
thereto have been made to dissenting stockholders of the Company pursuant to the
Delaware GCL.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Acquisition as follows:
SECTION 3.01 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own or
lease and operate its properties and assets and to carry on its business as it
is now being conducted. The Company is duly qualified as a foreign corporation
to do business, and is in good standing, in each jurisdiction in which the
character of its properties owned or leased or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
would not reasonably be expected to have a Material Adverse Effect (as
hereinafter defined) on the Company. As used herein, "Material Adverse Effect"
shall mean, with respect to any party, a material adverse effect on the
business, assets, condition (financial or other) or operating results of such
party and its subsidiaries, taken as a whole.
SECTION 3.02 SUBSIDIARIES. (a) Except for shares of the Subsidiaries (as
hereinafter defined), and except as set forth in Section 3.02 of the Disclosure
Schedule delivered by the Company to Parent and Acquisition on the date hereof
(the "Disclosure Schedule"), the Company does not own of record or beneficially,
directly or indirectly, (i) any shares of outstanding capital stock or
securities convertible into capital stock of any other corporation or (ii) any
participating interest in any partnership, joint venture or other non-corporate
business enterprise. Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite corporate power and authority to own or
lease and operate its properties and to carry on its business as it is now being
conducted. Each Subsidiary is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
reasonably be expected to have a Material Adverse Effect on the Company. Each
Subsidiary and its jurisdiction of formation is identified in Section 3.02 of
the Disclosure Schedule.
(b) Except as set forth in Section 3.02 of the Disclosure Schedule, all the
outstanding shares of capital stock of each Subsidiary are validly issued, fully
paid and nonassessable and are owned by the Company or by a wholly-owned
Subsidiary of the Company, free and clear of any liens, claims, charges,
encumbrances or adverse claims, and there are no proxies outstanding or
restrictions on voting with respect to any such shares.
(c) For purposes of this Agreement, the term "Subsidiary" shall mean any
corporation or other business entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time owned by
the Company and/or one or more other Subsidiaries.
SECTION 3.03 AUTHORITY RELATIVE TO AGREEMENT. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution, delivery and
performance of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by the Company's
Board of Directors, and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement and the transactions
contemplated hereby, other than the approval and adoption of this Agreement by a
majority of the stockholders of the Company. This Agreement has been duly
executed and delivered by the Company and, subject to such stockholder approval,
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms.
SECTION 3.04 NON-CONTRAVENTION. Except as set forth in Section 3.04 of the
Disclosure Schedule, the execution and delivery of this Agreement by the Company
do not and the consummation by the Company of the transactions contemplated
hereby will not (i) conflict with any provision of the Amended
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and Restated Certificate of Incorporation or By-Laws of the Company; (ii) result
(with the giving of notice or the lapse of time or both) in any violation of or
default or loss of a benefit under, or permit the acceleration of any obligation
under, any mortgage, indenture, lease, agreement or other instrument, permit,
concession, grant, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any Subsidiary or
their respective properties; or (iii) result in the creation or imposition of
any lien, charge or encumbrance of any nature whatsoever upon any asset of the
Company or any Subsidiary; other than (in the cases of clauses (ii) and (iii)
above) such as would not reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect on the Company.
SECTION 3.05 CAPITALIZATION. The authorized capital stock of the Company
consists of (i) 50,000,000 shares of Company Common Stock, and (ii) 5,000,000
shares of preferred stock, $.01 par value ("Preferred Stock"). As of July 7,
1997, 12,622,359 shares of Company Common Stock are issued and outstanding, all
of which were duly and validly issued, fully paid and nonassessable, and no
shares of Preferred Stock are outstanding or have ever been issued. Except for
options to purchase an aggregate 1,688,490 shares of Company Common Stock
granted pursuant to the Company's 1992 Equity Incentive Plan (the "Company Stock
Option Plan"), and options to purchase, depending on the extent of payroll
deductions, up to an aggregate 65,000 shares of Company Common Stock granted
pursuant to the Company's 1993 Employee Stock Purchase Plan (the "Company Stock
Purchase Plan"), no subscription, warrant, option, convertible security, stock
appreciation or other right (contingent or other) to purchase or acquire, or any
securities convertible into or exchangeable for, any shares of any class of
capital stock of the Company or any Subsidiary is authorized or outstanding and
there is not any commitment of the Company or any Subsidiary to issue any
shares, warrants, options or other such rights or to distribute to holders of
any class of its capital stock any evidences of indebtedness or assets. Neither
the Company nor any Subsidiary has any obligation (contingent or other) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof.
SECTION 3.06 SEC FILINGS. The Company has provided to Parent and
Acquisition true and complete copies of (i) the Annual Reports of the Company on
Form 10-K for the years ended December 31, 1994, 1995 and 1996, (ii) the
Quarterly Report of the Company on Form 10-Q for the three months ended March
31, 1997, (iii) its proxy or information statements relating to meetings of, or
actions taken without a meeting by, the stockholders of the Company since
January 1, 1994, and (iv) all other reports, statements and registration
statements filed by the Company with the SEC since January 1, 1994
(collectively, the "Company SEC Filings"). The Company SEC Filings (including,
without limitation, any financial statements or schedules included therein) (i)
were prepared in compliance with the requirements of the Securities Act of 1933,
as amended (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, in all material respects and
(ii) did not at the time of filing (or if amended, supplemented or superseded by
a filing prior to the date hereof, on the date of that filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
the Subsidiaries is required to file any forms, reports or other documents with
the SEC.
SECTION 3.07 FINANCIAL STATEMENTS. The consolidated financial statements
of the Company included in the Company SEC Filings have been prepared in
accordance with generally accepted accounting principles consistently applied
and consistent with prior periods, subject, in the case of unaudited interim
consolidated financial statements, to year-end adjustments (which consist of
normal recurring accruals) and the absence of certain footnote disclosures. The
consolidated balance sheets of the Company included in the Company SEC Filings
fairly present in all material respects the financial position of the Company
and the Subsidiaries as of their respective dates, and the related consolidated
statements of operations, stockholders' equity and cash flows included in the
Company SEC Filings fairly present in all
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material respects the results of operations of the Company and the Subsidiaries
for the respective periods then ended, subject, in the case of unaudited interim
financial statements, to year-end adjustments (which consist of normal recurring
accruals) and the absence of certain footnote disclosures.
SECTION 3.08 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 3.08 of the Disclosure Schedule, since December 31, 1996, neither the
Company nor any Subsidiary has (i) issued any stock, bonds or other corporate
securities, (ii) borrowed any material amount or incurred any material
liabilities (absolute or contingent), except in the ordinary course of business,
(iii) discharged or satisfied any material lien or incurred or paid any material
obligation or liability (absolute or contingent) other than current liabilities
shown on the consolidated balance sheet of the Company and the Subsidiaries as
of December 31, 1996 and current liabilities incurred since the date of such
balance sheet in the ordinary course of business, (iv) declared or made any
payment or distribution to stockholders or purchased or redeemed any shares of
its capital stock or other securities, (v) mortgaged, pledged or subjected to
lien any of its material assets, tangible or intangible, other than liens for
current real property taxes not yet due and payable (and liens that,
individually and in the aggregate, could not materially impair the use or value
of the assets subject thereto), (vi) sold, assigned or transferred any of its
tangible assets, or canceled any debts or claims, except in the ordinary course
of business, in immaterial amounts or as otherwise contemplated hereby, (vii)
sold, assigned or transferred any patents, trademarks, trade names, copyrights,
trade secrets or other intangible assets, (viii) made any changes in officer or
executive compensation, (ix) agreed, in writing or otherwise, to take any of the
actions listed in clauses (i) through (viii) above, (x) suffered any Material
Adverse Effect or waived any rights of substantial value, whether or not in the
ordinary course of business, or (xi) entered into any transaction, except in the
ordinary course of business or as otherwise contemplated hereby; which, with
respect to any of the above, was or would reasonably be expected to be material
to any of the three business segments described in the Company's annual report
to stockholders for the year ended December 31, 1996 (each, a "Business
Segment").
SECTION 3.09 GOVERNMENTAL APPROVALS. No consent, approval, order or
authorization of, or registration, declaration or filing with, any federal,
state, local or foreign governmental or regulatory authority is required to be
made or obtained by the Company in connection with the execution and delivery of
this Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except for (i) compliance by the Company with
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii)
filings pursuant to the Exchange Act and the rules and regulations promulgated
by the SEC thereunder, as contemplated by Sections 1.02 and 6.02 hereof, (iii)
the filing of a certificate of merger with the Secretary of State of the State
of Delaware in accordance with the Delaware GCL, (iv) such as are listed in
Section 3.09 of the Disclosure Schedule and (v) such consents, approvals, orders
or authorizations which if not obtained, or registrations, declarations or
filings which if not made, would not materially adversely affect the ability of
the Company to consummate the transactions contemplated hereby or the ability of
the Surviving Corporation or any Business Segment to conduct its business after
the Effective Time substantially as currently conducted by the Company or such
Business Segment.
SECTION 3.10 COMPLIANCE WITH LAWS. Except as set forth in Section 3.10 of
the Disclosure Schedule, neither the Company nor any Subsidiary is in default
under or in violation of any order of any court, governmental authority or
arbitration board or tribunal to which the Company or such Subsidiary is or was
subject or in violation of any laws, ordinances, governmental rules or
regulations (including, but not limited to, those relating to export controls,
labor and employment matters and foreign corrupt practices) to which the Company
or any Subsidiary is or was subject, except for such defaults or violations
that, in the aggregate, would not reasonably be expected to have a Material
Adverse Effect. Except as set forth in said Section 3.10, neither the Company
nor any Subsidiary has failed to obtain any licenses, permits, franchises or
other governmental authorizations necessary to the ownership of its properties
or to the conduct of its business, which failure would reasonably be expected to
have a Material Adverse Effect, and, after giving
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effect to the transactions contemplated hereby, all such licenses, permits,
franchises and other governmental authorizations will continue to be valid and
in full force and effect, except where the failure to have such licenses,
permits, franchises and other governmental authorizations would not reasonably
be expected to have a Material Adverse Effect on the Company.
SECTION 3.11 DISCLOSURE DOCUMENTS. (a) Each document required to be filed
by the Company with the SEC in connection with the transactions contemplated
hereby (collectively, the "Company Disclosure Documents"), including, without
limitation, the Schedule 14D-9, the Proxy Statement (as defined in Section 6.03
hereof), if any, and any amendments or supplements thereto will, when filed,
comply as to form in all material respects with the requirements of the Exchange
Act.
(b) The Proxy Statement (as defined in Section 6.02 hereof) will not (i) at
the time it or any amendment or supplement is first mailed to stockholders of
the Company, at the time such stockholders vote on adoption of this Agreement
and at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or (ii) at
the time of such stockholder vote or at the Effective Time, omit any information
necessary to correct any statement that has become materially false or
misleading in any earlier communication with respect to the solicitation of any
proxy for such meeting. At the time of the filing of any Company Disclosure
Document other than the Proxy Statement and at the time of distribution thereof,
such Company Disclosure Document will not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Notwithstanding the foregoing, no representation is made by the
Company with respect to information supplied by Parent or Acquisition
specifically for inclusion in the Proxy Statement or any other Company
Disclosure Document that relates to Parent or any affiliate or associate of
Parent.
(c) The information with respect to the Company or any Subsidiary that the
Company furnishes to Parent in writing specifically for use in the Offer
Documents, or that is incorporated therein by reference to any of the Company
SEC Filings, will not, at the time of the filing of the Offer Documents, at the
time of any distribution thereof and at the time of the consummation of the
Offer, contain any untrue statement of a material fact or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 3.12 LITIGATION. Except as set forth in Section 3.12 of the
Disclosure Schedule, there is no action, suit, investigation, proceeding or
claim pending or, to the knowledge of the Company, threatened against or
affecting the Company or any Subsidiary, or their respective properties or
rights, before any governmental body or arbitration board or tribunal, either
alone or together with other similar actions, the outcome of which would
reasonably be expected to have a Material Adverse Effect on the Company.
SECTION 3.13 SOFTWARE. (a) Except as set forth in Section 3.13(a) of the
Disclosure Schedule, the Company and each of the Subsidiaries has valid licenses
to all copies of all software that is not owned by it and is used by it in
connection with the conduct of its business ("Third Party Software"), and the
use by the Company or such Subsidiary of such Third Party Software, including
without limitation all modifications and enhancements thereto (whether or not
created by the Company), complies with such license (except for such
noncompliance as could not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on the Company). Except as set forth
in Section 3.13(a) of the Disclosure Schedule, the Company owns all right, title
and interest in and to all software marketed or licensed by the Company and the
Subsidiaries to customers or held for use or in development for marketing and
licensing to customers (collectively, the "Proprietary Software").
(b) Except as set forth in Section 3.13(b) of the Disclosure Schedule, to
the Company's knowledge, none of the Third Party Software or Proprietary
Software, no use thereof by the Company or any Subsidiary, and no permitted use
thereof by any licensee infringes upon or violates any patent, copyright,
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trade secret or other intellectual property right of any person or entity. No
claim or demand with respect to any such infringement or violation has been made
or, to the knowledge of the Company, threatened.
(c) To the knowledge of the Company, there are no viruses in the Proprietary
Software and there are no defects in the Proprietary Software that would prevent
such software from performing in all material respects the tasks and functions
that it was intended to perform except those that can be cured without a
Material Adverse Effect on the Company.
SECTION 3.14 TRADE SECRETS. No third party has claimed or notified the
Company or any Subsidiary that any person employed by or otherwise affiliated
with the Company or any Subsidiary has, in respect of his or her activities to
date, violated any of the terms or conditions of his or her employment contract
with any third party, or disclosed or utilized any trade secrets or proprietary
information or documentation of any third party, or interfered in the employment
relationship between any third party and any of its employees, and to the
knowledge of the Company, no person employed by or otherwise affiliated with the
Company or any Subsidiary has employed any trade secrets or any information or
documentation proprietary to any former employer, or violated any confidential
relationship which such person may have had with any third party, in connection
with the development or sale of any products of the Company or any Subsidiary.
SECTION 3.15 SEVERANCE ARRANGEMENTS. Except as set forth in Section 3.15
of the Disclosure Schedule, neither the Company nor any Subsidiary is party to
any agreement with any employee (i) the benefits of which (including, without
limitation, severance benefits) are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving the Company
or any Subsidiary of the nature of any of the transactions contemplated by this
Agreement or (ii) providing severance benefits in excess of those generally
available under the Company's severance policies as in effect on the date hereof
(which are described in Section 3.15 of the Disclosure Schedule), or which are
conditioned upon a change of control, after the termination of employment of
such employees regardless of the reason for such termination of employment.
Except as set forth in Section 3.15 of the Disclosure Schedule, neither the
Company nor any Subsidiary is a party to any employment agreement or
compensation guarantee extending for a period longer than one year from the date
hereof.
SECTION 3.16 TAXES. (a) Except as set forth in Section 3.16 of the
Disclosure Schedule, each of the Company, the Subsidiaries and any affiliated,
combined or unitary group of which any such corporation is or was a member has
(i) timely filed all Federal, state, local and foreign returns, declarations,
reports, estimates, information returns and statements ("Returns") required to
be filed by it in respect of any Taxes (as hereinafter defined), which Returns
correctly reflect the facts regarding the income, business, assets, operations,
activities and status of the Company and the Subsidiaries, (ii) timely paid or
withheld all Taxes that are due and payable with respect to the Returns referred
to in clause (i) (other than Taxes that are being contested in good faith by
appropriate proceedings and are adequately reserved for in the Company's most
recent consolidated financial statements described in Section 3.07 hereof),
(iii) established reserves that are adequate for the payment of all Taxes not
yet due and payable with respect to the results of operations of the Company and
the Subsidiaries through the date hereof, and (iv) to the knowledge of the
Company, complied in all material respects with all applicable laws, rules and
regulations relating to the payment and withholding of Taxes and has timely
withheld from employee wages and paid over to the proper governmental
authorities all amounts required to be so withheld and paid over.
(b) Except as set forth in Section 3.16 of the Disclosure Schedule, (i)
there is no deficiency, claim, audit, action, suit, proceeding, or investigation
now pending or, to the knowledge of the Company, threatened against or with
respect to the Company or any Subsidiary in respect of any Taxes; and (ii) there
are no requests for rulings or determinations in respect of any Taxes pending
between the Company or any Subsidiary and any taxing authority.
(c) Except as set forth in Section 3.16 of the Disclosure Schedule, neither
the Company nor any Subsidiary has executed or entered into (or prior to the
Effective Time will execute or enter into) with the
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Internal Revenue Service or any taxing authority (i) any agreement or other
document extending or having the effect of extending the period for assessments
or collection of any Taxes for which the Company or any Subsidiary would be
liable or (ii) a closing agreement pursuant to Section 7121 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any predecessor provision
thereof or any similar provision of foreign, state or local Tax law that relates
to the assets or operations of the Company or any Subsidiary.
(d) For purposes of this Agreement, "Tax" (and with correlative meaning,
"Taxes") shall mean all federal, state, local, foreign or other taxing authority
net income, franchise, sales, use, ad valorem, property, payroll, withholding,
excise, severance, transfer, employment, alternative or add-on minimum, stamp,
occupation, premium, environmental or windfall profits taxes, and other taxes,
charges, fees, levies, imposts, customs, duties, licenses or other assessments,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any taxing authority.
SECTION 3.17 EMPLOYEE BENEFIT PLANS. (a) Except as set forth in Section
3.17(a) of the Disclosure Schedule, each of the Company and the Subsidiaries has
complied and currently is in compliance in all material respects, both as to
form and operation, with the applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Code, with respect to
each "employee benefit plan" as defined under Section 3(3) of ERISA ("Plan")
which the Company or any Subsidiary (i) has ever adopted, maintained,
established or to which any of the same has been required to contribute to or
has ever contributed or (ii) currently maintains or to which any of the same
currently contributes or is required to contribute or (iii) currently
participates in or is required to participate in.
(b) Except as set forth in Section 3.17(b) of the Disclosure Schedule,
neither the Company nor any Subsidiary has ever maintained, adopted or
established, contributed or been required to contribute to, or otherwise
participated in or been required to participate in, a "multiemployer plan" (as
defined in Section 3(37) of ERISA). No amount is due or owing from the Company
or any of its subsidiaries on account of a multiemployer plan or on account of
any withdrawal therefrom.
(c) Notwithstanding anything else set forth herein, other than routine
claims for benefits and liability for premiums due to the Pension Benefit
Guaranty Corporation and underfunded pension liabilities previously disclosed to
Parent, neither the Company nor any Subsidiary has incurred any material
liability with respect to a Plan that is currently due and owing and has not yet
been satisfied, including without limitation under ERISA (including without
limitation Title I or Title IV thereof), the Code or other applicable law, and,
to the knowledge of the Company, no event has occurred and no condition or set
of circumstances currently exists (other than the accrual of benefits under the
normal terms of the Plans), that would reasonably be expected to result in the
imposition of any material liability on the Company or any Subsidiary with
respect to a Plan, including without limitation under ERISA (including without
limitation Title I or Title IV of ERISA), the Code or other applicable law with
respect to a Plan.
(d) Except as required by applicable law or as set forth in Section 3.17(d)
of the Disclosure Schedule, neither the Company nor any Subsidiary has committed
itself, orally or in writing, (x) to provide or cause to be provided to any
person any payments or provision of any "welfare" or "pension" benefits (as
defined in Sections 3(1) and 3(2) of ERISA) in addition to, or in lieu of, those
payments or benefits set forth under any Plan, (y) to continue the payment of,
or accelerate the payment of, benefits under any Plan, except as expressly set
forth thereunder or (z) to provide or cause to be provided any severance or
other post-employment benefit, salary continuation, termination, disability,
death, retirement, health or medical benefit to any person (including without
limitation any former or current employee) except as set forth under any Plan.
SECTION 3.18 ENVIRONMENTAL MATTERS. The Company and each Subsidiary
conducts its business and operations in compliance with all applicable
environmental laws, ordinances and regulations, and neither the Company nor any
Subsidiary has received notice of any claim, action, suit, proceeding, hearing
or investigation, based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
emission, discharge, release or threatened release into the
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environment, of any pollutant, contaminant, or hazardous or toxic material or
waste (collectively, an "Environmental Event") by the Company or any Subsidiary,
except for such as, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect on the Company. To the knowledge of
the Company, no notice of any Environmental Event was given to any person or
entity that occupied any of the premises occupied by or used by the Company or
any Subsidiary prior to the date such premises were so occupied. Without
limiting the generality of the foregoing, to the knowledge of the Company,
neither the Company nor any Subsidiary has disposed of or placed on or in any
property or facility used in its business any waste materials, hazardous
materials or hazardous substances in violation of law.
SECTION 3.19 CUSTOMER RELATIONSHIPS. Neither the Company nor any
Subsidiary has, since December 31, 1996, lost, or been notified that it will
lose or suffer material diminution in, and to the knowledge of the Company no
representative of any customer has notified the Company or any Subsidiary that
in the event of a change of ownership of the Company such as contemplated by
this Agreement the Company or any Subsidiary would, lose or suffer material
diminution in, its relationship with any customer or customers that are,
individually or in the aggregate, material to the Company or any Business
Segment.
SECTION 3.20 CERTAIN TRANSACTIONS. Except as disclosed in the Company SEC
Filings or as set forth in Section 3.20 of the Disclosure Schedule, there are no
existing or proposed material transactions or arrangements between the Company
or any Subsidiary and (i) any person or entity controlling or under common
control with the Company or (ii) Ceridian Corporation or any of its subsidiaries
or affiliates.
SECTION 3.21 STATE TAKEOVER STATUTE INAPPLICABLE. The Board of Directors
of the Company has approved the Offer, the Merger Agreement and the Merger in
accordance with paragraph (a)(1) of Section 203 of the Delaware GCL.
SECTION 3.22 BROKERS. No person is entitled to any brokerage or finder's
fee or commission in connection with the transactions contemplated by this
Agreement as a result of any action taken by or on behalf of the Company. Cowen
& Company, pursuant to an engagement letter dated June 20, 1997, a copy of which
has been furnished to Parent, has performed services to the Company and is
entitled to compensation from the Company in connection with the transactions
contemplated hereby, including its fairness opinion with respect thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 4.01 ORGANIZATION AND QUALIFICATION. (a) Parent is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own or
lease and operate its properties and assets and to carry on its business as it
is now being conducted. Parent is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction in which the character
of its properties owned or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect on Parent.
(b) Since the date of its incorporation, Parent has not engaged in any
activity other than in connection with or as contemplated by this Agreement, the
Offer and the Merger or in connection with arranging financing required to
consummate the transactions contemplated hereby.
SECTION 4.02 AUTHORITY RELATIVE TO AGREEMENT. Parent has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this Agreement
by Parent and the consummation by Parent of the transactions contemplated hereby
have been duly authorized by the Board of Directors of Parent, and no other
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corporate proceedings on the part of Parent (including, without limitation, any
action by its stockholders) are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Parent and constitutes the legal, valid and binding obligation of
Parent, enforceable against Parent in accordance with its terms.
SECTION 4.03 NON-CONTRAVENTION. The execution and delivery of this
Agreement by Parent and the consummation by Parent of the transactions
contemplated hereby will not (i) conflict with any provision of the Certificate
of Incorporation or By-Laws of Parent or (ii) result (with the giving of notice
or the lapse of time or both) in any violation of or default or loss of a
benefit under, or permit the acceleration of any obligation under, any mortgage,
indenture, lease, agreement or other instrument, permit, concession, grant,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent or any of its properties, other than any such
violation, default, loss or acceleration that would not materially adversely
affect the ability of Parent to consummate the transactions contemplated hereby.
SECTION 4.04 GOVERNMENTAL APPROVALS. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
state, local or foreign governmental or regulatory authority is required to be
made or obtained by Parent in connection with the execution and delivery of this
Agreement by Parent or the consummation by Parent of the transactions
contemplated hereby, except for (i) compliance by Parent with the HSR Act, (ii)
filings pursuant to the Exchange Act and the rules and regulations promulgated
by the SEC thereunder, as contemplated by Sections 1.01 and 6.02 hereof, (iii)
the filing of a certificate of merger with the Secretary of State of the State
of Delaware in accordance with the Delaware GCL, and (iv) such consents,
approvals, orders or authorizations which if not obtained, or registrations,
declarations or filings which if not made, would not materially adversely affect
the ability of Parent to consummate the transactions contemplated hereby.
SECTION 4.05 DISCLOSURE DOCUMENTS. (a) Each of the Offer Documents, when
filed with the SEC in connection with the transactions contemplated hereby, will
comply as to form in all material respects with the requirements of the Exchange
Act.
(b) At the time of filing with the SEC, none of the Offer Documents will
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the foregoing, no
representation is made by Parent or Acquisition with respect to information
supplied by the Company specifically for inclusion in any Offer Document that
relates to the Company or any Subsidiary, affiliate or associate of the Company.
None of the information relating to Parent or Acquisition included in the Proxy
Statement will, at the time the Proxy Statement is distributed to the Company's
stockholders, at the time of the meeting of stockholders to which the Proxy
Statement relates or at the Effective Time, as then amended or supplemented, be
false or misleading with respect to any material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading.
SECTION 4.06 BROKERS. No person is entitled to any brokerage or finder's
fee or commission in connection with the transactions contemplated by this
Agreement as a result of any action taken by or on behalf of Parent or
Acquisition, other than J.P. Morgan Securities Inc.
SECTION 4.07 FINANCING. The Company has received a copy of the commitment
letter dated July 8, 1997, from Welsh, Carson, Anderson & Stowe VII, L.P., WCAS
Capital Partners III, L.P. and certain affiliates (collectively, the "Financing
Entities"), pursuant to which the Financing Entities have committed, subject to
the terms and conditions set forth therein, to provide Parent with up to an
aggregate $300 million of financing (the "Financing") and, subject to the terms
and conditions of this Agreement, to ensure Parent's performance of its
obligations hereunder. Parent believes that the aggregate proceeds of the
Financing will be sufficient to pay all amounts to be paid pursuant to the
Offer, the Merger Consideration, to pay related fees and expenses and to provide
a reasonable amount of working capital for
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the Surviving Corporation (collectively, the "Required Amounts"). Such
commitment letter has not been withdrawn as of the date hereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUISITION
Acquisition represents and warrants to the Company as follows:
SECTION 5.01 ORGANIZATION AND QUALIFICATION. (a) Acquisition is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own or lease and operate its properties and assets and to carry on its business
as it is now being conducted.
(b) Since the date of its incorporation, Acquisition has not engaged in any
activity other than in connection with or as contemplated by this Agreement, the
Offer and the Merger or in connection with arranging financing required to
consummate the transactions contemplated hereby.
SECTION 5.02 AUTHORITY RELATIVE TO AGREEMENT. Acquisition has all
requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution, delivery and performance of
this Agreement by Acquisition and the consummation by Acquisition of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Acquisition and by Parent as its sole stockholder, and no other
corporate proceedings on the part of Acquisition are necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Acquisition and constitutes the legal, valid and
binding obligation of Acquisition, enforceable against Acquisition in accordance
with its terms.
SECTION 5.03 NON-CONTRAVENTION. The execution and delivery of this
Agreement by Acquisition and the consummation by Acquisition of the transactions
contemplated hereby will not (i) conflict with any provision of the Certificate
of Incorporation or By-Laws of Acquisition or (ii) result (with the giving of
notice or the lapse of time or both) in any violation of or default or loss of a
benefit under, or permit the acceleration of any obligation under, any mortgage,
indenture, lease, agreement, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Acquisition or its properties, other
than any such violation, default, loss or acceleration that would not materially
adversely affect the ability of Acquisition to consummate the transactions
contemplated hereby.
SECTION 5.04 GOVERNMENTAL APPROVALS. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
state, local or foreign governmental or regulatory authority is required to be
made or obtained by Acquisition in connection with the execution and delivery of
this Agreement by Acquisition or the consummation by Acquisition of the
transactions contemplated hereby, except for (i) compliance by Acquisition with
the HSR Act, (ii) filings pursuant to Securities Act
and the Exchange Act and the rules and regulations promulgated by the SEC
thereunder, as contemplated by Sections 1.01 and 6.02 hereof, (iii) the filing
of a certificate of merger with the Secretary of State of the State of Delaware
in accordance with the Delaware GCL, and (iv) such consents, approvals, orders
or authorizations which if not obtained, or registrations, declarations or
filings which if not made, would not materially adversely affect the ability of
Acquisition to consummate the transactions contemplated hereby.
ARTICLE VI
CERTAIN AGREEMENTS
SECTION 6.01 CONDUCT OF THE COMPANY'S BUSINESS. The Company covenants and
agrees that, prior to the Effective Time, unless Parent shall otherwise consent
in writing or as otherwise expressly contemplated by this Agreement:
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(a) the business of the Company and the Subsidiaries shall be conducted
only in, and the Company and the Subsidiaries shall not take any action
except in, the ordinary course of business and consistent with past
practice; and
(b) neither the Company nor any Subsidiary shall, directly or
indirectly, do any of the following: (i) sell, pledge, dispose of or
encumber (or permit any Subsidiary to sell, pledge, dispose of or encumber)
any assets of the Company or any Subsidiary, except inventory and immaterial
assets in the ordinary course of business; (ii) amend or propose to amend
its Certificate of Incorporation or By-Laws; (iii) split, combine or
reclassify any outstanding shares of its capital stock, or declare, set
aside or pay any dividend payable in cash, stock, property or otherwise with
respect to such shares (except for any dividends paid in the ordinary course
to the Company or to any wholly-owned Subsidiary); (iv) redeem, purchase,
acquire or offer to acquire (or permit any Subsidiary to redeem, purchase,
acquire or offer to acquire) any shares of its capital stock; or (v) enter
into any contract, agreement, commitment or arrangement with respect to any
of the matters set forth in this paragraph (b);
(c) neither the Company nor any Subsidiary shall (i) issue, sell, pledge
or dispose of, or agree to issue, sell, pledge or dispose of, any additional
shares of, or securities convertible or exchangeable for, or any options,
warrants or rights of any kind to acquire any shares of, its capital stock
of any class or other property or assets whether pursuant to the Company
Stock Option Plan, the Company Stock Purchase Plan, or otherwise, PROVIDED
that the Company may issue shares of Company Common Stock upon the exercise
of currently outstanding options referred to in Section 3.05 hereof; (ii)
acquire (by merger, consolidation or acquisition of stock or assets) any
corporation, partnership or other business organization or division thereof
(except an existing wholly-owned Subsidiary); (iii) incur any indebtedness
for borrowed money or issue any debt securities in an amount exceeding
$3,000,000 in the aggregate; (iv) enter into or modify any material
contract, lease, agreement or commitment, except in the ordinary course of
business and consistent with past practice; (v) terminate, modify, assign,
waive, release or relinquish any material contract rights or amend any
material rights or claims not in the ordinary course of business or (vi)
settle or compromise any material claim, action, suit or proceeding pending
or threatened against the Company, or, if the Company may be liable or
obligated to provide indemnification, against the Company's directors or
officers, before any court, governmental agency or arbitrator; PROVIDED that
nothing herein shall require any action that might impair or otherwise
affect the obligation of any insurance carrier under any insurance policy
maintained by the Company;
(d) neither the Company nor any Subsidiary shall grant any increase in
the salary or other compensation of its employees except (i) pursuant to the
terms of employment agreements in effect on the date hereof and previously
disclosed to Parent and (ii) in the case of employees who are not executive
officers of the Company, in the ordinary course of business and consistent
with past practice, or grant any bonus to any employee or enter into any
employment agreement or make any loan to or enter into any material
transaction of any other nature with any employee of the Company or any
Subsidiary;
(e) neither the Company nor any Subsidiary shall (except in the case of
employees who are not executive officers of the Company, for salary
increases in the ordinary course of business and consistent with past
practice) adopt or amend, in any respect, except as contemplated hereby or
as may be required by applicable law or regulation, any collective
bargaining, bonus, profit sharing, compensation, stock option, restricted
stock, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund, plan or arrangement for the
benefit or welfare of any directors, officers or employees (including,
without limitation, any such plan or arrangement relating to severance or
termination pay);
(f) neither the Company nor any Subsidiary shall take any action that
would make any representation or warranty of the Company hereunder
inaccurate in any material respect at, or as of any time prior to, the
Effective Time, or omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any material respect at
any such time; and
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(g) each of the Company and the Subsidiaries shall use its best efforts,
to the extent not prohibited by the foregoing provisions of this Section
6.01, to maintain its relationships with its suppliers and customers, and if
and as requested by Parent or Acquisition, (i) the Company shall use its
best efforts to make reasonable arrangements for representatives of Parent
or Acquisition to meet with customers and suppliers of the Company or any
Subsidiary and (ii) the Company shall schedule, and the management of the
Company shall participate in, meetings of representatives of Parent or
Acquisition with employees of the Company or any Subsidiary.
SECTION 6.02 STOCKHOLDER APPROVAL. (a) As soon as reasonably practicable
following the acquisition by Acquisition of a majority of the outstanding Shares
(on a fully diluted basis), the Company shall take all action necessary in
accordance with the Delaware GCL and its Certificate of Incorporation and
By-Laws to call, give notice of and convene a meeting (a "Meeting") of its
stockholders to consider and vote upon the approval and adoption of this
Agreement and the Merger and for such other purposes as may be necessary or
desirable. The Board of Directors of the Company has determined that the Merger
is advisable and in the best interests of the stockholders of the Company and
shall, subject to fiduciary duties as advised by counsel, recommend that the
stockholders of the Company vote to approve and adopt this Agreement and the
Merger and any other matters to be submitted to stockholders in connection
therewith.
(b) As promptly as reasonably practicable following the acquisition by
Acquisition of a majority of the outstanding Shares (on a fully diluted basis),
the Company shall file a proxy or information statement pertaining to the Merger
(the "Proxy Statement"). Parent and Acquisition shall cooperate fully with the
Company in the preparation of the Proxy Statement and any amendments and
supplements thereto. The Proxy Statement shall not be distributed, and no
amendment or supplement thereto shall be made by the Company, without the prior
consent of Parent and its counsel. The Company shall use its best efforts to
have the Proxy Statement cleared by the SEC and shall cause a definitive Proxy
Statement to be distributed to its stockholders entitled to vote upon the Merger
as promptly as practicable thereafter.
(c) The Company shall notify Parent of the receipt of the comments of the
SEC and of any requests by the SEC for amendments or supplements to the Proxy
Statement or for additional information, and shall promptly supply Parent with
copies of all correspondence between the Company (or its representatives) and
the SEC (or its staff) with respect thereto. If, at any time prior to the
Meeting, any event should occur relating to or affecting the Company, Parent or
Acquisition, or to their respective officers or directors, which event should be
described in an amendment or supplement to the Proxy Statement, the parties
shall promptly inform one another and shall cooperate in promptly preparing,
filing and clearing with the SEC and, if required by applicable securities laws,
distributing to the Company's stockholders such amendment or supplement.
SECTION 6.03 ACCESS TO INFORMATION. (a) The Company shall, and shall cause
the Subsidiaries and its and their respective officers, directors, employees,
representatives and agents to, afford, from the date hereof to the Effective
Time, the officers, employees, representatives and agents of Parent reasonable
access during regular business hours to its officers, employees, agents,
properties, books, records and workpapers, and shall promptly furnish Parent all
financial, operating and other information and data as Parent, through its
officers, employees or agents, may reasonably request.
(b) Except as required by law, Parent shall hold, and will cause its
respective officers, employees, representatives and agents to hold, any
confidential information in accordance with the Confidentiality Agreement dated
November 1, 1995 between the Company and Welsh, Carson, Anderson & Stowe VII,
L.P. (the "Confidentiality Agreement").
(c) No investigation pursuant to this Section 6.03 shall affect, add to or
subtract from any representations or warranties of the parties hereto or the
conditions to the obligations of the parties hereto to consummate the Offer or
effect the Merger.
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SECTION 6.04 FURTHER ASSURANCES. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to use all reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement,
including, without limitation, using all reasonable efforts to obtain all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings (including without limitation any necessary filings
under the HSR Act); provided that the foregoing shall not require Parent or the
Company to make, or agree to make, or require Parent to permit the Company or
any the Subsidiaries to make, any divestiture of a significant asset in order to
obtain any waiver, consent or approval.
SECTION 6.05 INQUIRIES AND NEGOTIATIONS; CERTAIN PAYMENTS. (a) From the
date hereof until the termination hereof, the Company, the Subsidiaries and
their respective officers, directors, employees, representatives and other
agents will not, directly or indirectly, solicit or initiate any discussions,
submissions of proposals or offers or negotiations with or, subject to the
fiduciary duties of the Company's Board of Directors as advised by counsel,
participate in any negotiations or discussions with, or provide any information
or data of any nature whatsoever to, or otherwise cooperate in any other way
with, or assist or participate in, facilitate or encourage any effort or attempt
by, any person, corporation, entity or "group" (as defined in Section 13(d) of
the Exchange Act) other than Parent and its affiliates, representatives and
agents (each, a "Third Party") in connection with any merger, consolidation,
sale of any Subsidiary or division that is material to the business of the
Company and the Subsidiaries, sale of shares of capital stock or other equity
securities, tender or exchange offer, recapitalization, debt restructuring or
similar transaction involving the Company (such transactions being hereinafter
referred to as "Alternative Transactions"), provided, however, that nothing
contained in this Agreement shall prohibit the Company Board from taking and
disclosing a position required by Rule 14e-2 under the Exchange Act. The Company
shall immediately notify Parent if any proposal, offer, inquiry or other contact
is received by, any information is requested from, or any discussions or
negotiations are sought to be initiated or continued with, the Company in
respect of an Alternative Transaction, and shall, in any such notice to Parent,
indicate the identity of the Third Party and the terms and conditions of any
proposals or offers or the nature of any inquiries or contacts, and thereafter
shall keep Parent informed, on a current basis, of the status and terms of any
such proposals or offers and the status of any such discussions or negotiations.
Without limiting the generality of the foregoing, the Company shall provide
Parent with not less then (i) two business days' notice prior to the execution
by the Company of any definitive agreement with respect to any Alternative
Transaction and (ii) two days' notice (or the longest notice legally permissible
in the reasonable determination of counsel for the Company, if less than two
days) of any public announcement relating to any Alternative Transaction. Prior
to furnishing any non-public information to, or entering into negotiations or
discussions with, any Third Party, the Company will obtain an executed
confidentiality agreement from such Third Party on terms substantially the same
as, or no less favorable to the Company in any material respect than, those
contained in the Confidentiality Agreement. The Company shall not release any
Third Party from, or waive any provision of, any such confidentiality agreement
or any other confidentiality or standstill agreement to which the Company is a
party. As of the date hereof, the Company shall cease, and shall cause its
subsidiaries and the officers, directors, employees, representatives and other
agents of the Company and its subsidiaries to cease all discussions,
negotiations and communications with all Third Parties and demand the immediate
return of all confidential information previously provided to Third Parties.
(b) If a Payment Event (as hereinafter defined) occurs, the Company shall
pay to Parent, within two business days following such Payment Event, (i) a fee
of $8,200,000 in cash, plus (ii) all reasonable and documented out-of-pocket
costs and expenses of Parent and Acquisition, including without limitation fees
and expenses of counsel, accountants, investment bankers and other advisors and
printing expenses. In the event that this Agreement shall be terminated for any
other reason and the Company shall have failed to comply with or perform, or
shall have breached, in any material respect, any of its covenants or agreements
contained herein, the Company shall pay to Parent, within two business days
following such termination,
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the fees and expenses referred to in clause (ii) of the preceding sentence;
PROVIDED that such fees and expenses shall not be so payable if Parent or
Acquisition shall have failed to comply with or perform, or shall have breached,
in any material respect, any of its covenants or agreements contained herein.
(c) "Payment Event" means (i) the termination of this Agreement by Parent
pursuant to Section 8.01(e); (ii) the termination of this Agreement by the
Company pursuant to Section 8.01(d) or (iii) the occurrence of any of the
following events within 6 months after the date of termination of this Agreement
(other than by reason of Parent's or Acquisition's failure to comply with or
perform, or breach, in any material respect, of any of its covenants or
agreements contained herein) whereby stockholders of the Company receive,
pursuant to such event, cash, securities or other consideration having an
aggregate value, when taken together with the value of any securities of the
Company or its subsidiaries otherwise held by the stockholders of the Company
after such event, in excess of $20.90 per Share: (w) the Company is acquired by
merger or otherwise by a Third Party; (x) a Third Party acquires more than 50%
of the total assets of the Company and the Subsidiaries, taken as a whole; (y) a
Third Party acquires more than 50% of the outstanding Shares or (z) the Company
adopts and implements a plan of liquidation or share repurchase relating to more
than 50% of the outstanding Shares or an extraordinary dividend relating to more
than 50% of the assets of the Company and the Subsidiaries, taken as a whole.
(d) The Company acknowledges that the agreements contained in this Section
6.05 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent and Acquisition would not enter into
this Agreement; accordingly, if the Company fails to promptly pay any amount due
pursuant to this Section 6.05, and, in order to obtain such payment, Parent
and/or Acquisition commences a suit which results in a judgment against the
Company for the fee and expenses set forth in this Section 6.05, the Company
shall also pay to Parent and Acquisition their costs and expenses incurred in
connection with such litigation. Notwithstanding the foregoing, each party shall
bear its own costs and expenses incurred in connection with any litigation over
the reasonableness and/or documentation of any expenses submitted for
reimbursement hereunder.
(e) This Section 6.05 shall survive any termination of this Agreement,
however caused.
SECTION 6.06 NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Parent and Acquisition, and Parent and Acquisition shall give
prompt notice to the Company, of (i) the occurrence, or failure to occur, of any
event that such party believes would be likely to cause any of its
representations or warranties contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time and (ii) any material failure of the Company, Parent or
Acquisition, as the case may be, or any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; PROVIDED, HOWEVER, that failure to
give such notice shall not constitute a waiver of any defense that may be
validly asserted.
SECTION 6.07 INDEMNIFICATION. (a) The Certificate of Incorporation and
By-Laws of the Surviving Corporation shall contain the provisions with respect
to indemnification and exculpation from liability set forth in the Company's
Certificate of Incorporation and By-Laws as in effect on the date hereof, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who, on or prior to the Effective Time, were
directors, officers, employees or agents of the Company (collectively, the
"Indemnified Parties"), unless such modification is required by law. Parent
shall guarantee the obligations of the Surviving Corporation with respect to
indemnification of the Indemnified Parties under such provisions and under the
Company's indemnification agreements with its directors and officers.
(b) For a period of two years after the expiration date of the Company's
current policy, the Surviving Corporation shall maintain officers' and
directors' liability insurance covering those Indemnified Parties who are
currently covered by the Company's directors' and officers' liability insurance
policy, a copy of which has heretofore been delivered to Parent, on terms no
less favorable than the terms of such current
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insurance coverage, PROVIDED, HOWEVER, that in no event shall the Surviving
Corporation be required to expend in any one year an amount in excess of 150% of
the annual premiums currently payable by the Company for such insurance,
PROVIDED, FURTHER, HOWEVER,that if the annual premiums of such insurance
coverage exceed such amount, the Surviving Corporation shall obtain a policy
with the greatest coverage available for a cost not exceeding such amount.
(c) This Section 6.07 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit the Company, Parent, the Surviving
Corporation and the Indemnified Parties, and shall be binding on the successors
and assigns of the Surviving Corporation.
SECTION 6.08 VOTING OF SHARES. Each of Parent and Acquisition agrees to
vote all Shares beneficially owned by it in favor of adoption of this Agreement
and approval of the Merger.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01 CONDITIONS TO THE MERGER RELATING TO PARENT AND
ACQUISITION. The obligation of Parent and Acquisition to effect the Merger
shall be subject, at their option, to the fulfillment at or prior to the
Effective Time of the following conditions:
(a) this Agreement and the Merger shall have been approved and adopted
by the requisite vote of the stockholders of the Company;
(b) the expiration or earlier termination of any waiting period under
the HSR Act shall have occurred;
(c) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would restrain the effective operation of the business of the Company and
the Subsidiaries from and after the Effective Time, and no proceeding
challenging this Agreement or the transactions contemplated hereby or
seeking to prohibit, alter, prevent or materially delay the Merger shall be
pending before any court, arbitrator or governmental agency, body or
official; and
(d) Acquisition shall have purchased Shares pursuant to the Offer
(provided that this condition shall be deemed fulfilled if Acquisition shall
have failed to purchase Shares in violation of the Offer).
SECTION 7.02 CONDITIONS TO THE MERGER RELATING TO THE COMPANY. The
obligation of the Company to effect the Merger shall be subject, at its option,
to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) this Agreement and the Merger shall have been approved and adopted
by the requisite vote of the stockholders of the Company;
(b) the expiration or earlier termination of any waiting period under
the HSR Act shall have occurred; and
(c) no preliminary or permanent injunction or other order, decree or
ruling issued by any court of competent jurisdiction nor any statute, rule,
regulation or order entered, promulgated or enacted by any governmental,
regulatory or administrative agency or authority shall be in effect that
would prevent the consummation of the Merger as contemplated hereby.
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<PAGE>
ARTICLE VIII
TERMINATION AND ABANDONMENT
SECTION 8.01 TERMINATION AND ABANDONMENT. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after approval by the stockholders of the Company:
(a) by mutual action of the Boards of Directors of Parent and the
Company;
(b) by either Parent or the Company, if (i) the Offer shall not have
been consummated on or prior to the close of business on October 31, 1997;
(ii) the conditions to its obligations under Section 7.01 or Section 7.02,
as the case may be, shall not have been complied with or performed in any
material respect and such noncompliance or nonperformance shall not have
been cured or eliminated (or by its nature cannot be cured or eliminated) by
the other party on or before December 31, 1997; or (iii) the Merger shall
not have been effected on or prior to the close of business on December 31,
1997; unless, in any case, such event has been caused by the breach of this
Agreement by the party seeking such termination;
(c) by Parent, if the Offer is terminated or expires without the
purchase of any Shares thereunder, unless such termination or expiration has
been caused by the failure of Parent or Acquisition to perform in any
material respect its obligations under this Agreement and the Offer;
(d) by the Company if, prior to the earlier of (i) the acceptance for
payment of Shares by Acquisition under the Offer and (ii) stockholder
approval of this Agreement and the Merger, the Company shall enter into a
definitive written agreement with respect to an Alternative Transaction with
a Third Party, or a Third Party has commenced a tender offer which, in
either case, the Board of Directors of the Company believes in good faith is
more favorable to the Company's stockholders than the transactions
contemplated by this Agreement; PROVIDED, that all amounts payable under
Section 6.05 hereof shall have been paid prior to such termination (except
for any amounts due in respect of expenses for which documentation shall not
have been provided prior to such termination, which amounts shall be paid as
promptly as practicable after delivery to the Company of required
documentation thereof); or
(e) by Parent, if (i) the Board of Directors of the Company shall have
withdrawn, modified or amended in a manner adverse to Parent and Acquisition
its approval or recommendation of the Offer and the Merger or approved,
recommended or endorsed any proposal for, or authorized the Company to enter
into, an Alternative Transaction, or (ii) Cowen & Company shall have
withdrawn its opinion at any time prior to the earlier of (A) acceptance for
payment of Shares by Acquisition under the Offer and (B) the Effective Time.
Any party desiring to terminate this Agreement pursuant to this Section 8.01
shall give notice to the other party in accordance with Section 9.05.
SECTION 8.02 EFFECT OF TERMINATION. Except as provided in Sections 6.05
and 9.02 hereof, in the event of the termination of this Agreement and the
abandonment of the Merger pursuant to Section 8.01, this Agreement shall
thereafter become void and have no effect, and no party hereto shall have any
liability to any other party hereto or its stockholders or directors or officers
in respect thereof, except that nothing herein shall relieve any party from
liability for any willful breach hereof.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant hereto shall survive the Effective
A-20
<PAGE>
Time, PROVIDED that this Section 9.01 shall not limit any covenant or agreement
of the parties that by its terms contemplates performance after the Effective
Time.
SECTION 9.02 EXPENSES, ETC. (a) In the event that the transactions
contemplated by this Agreement are not consummated, then, except as set forth in
Section 6.05(b), neither the Company, on the one hand, nor Parent and
Acquisition, on the other hand, shall have any obligation to pay any of the fees
and expenses of the other incident to the negotiation, preparation and execution
of this Agreement, including the fees and expenses of counsel, accountants,
investment bankers and other experts.
(b) In the event that the transactions contemplated by this Agreement are
consummated, Parent shall pay all of the fees and expenses of the Company
incident to the negotiation, preparation and execution of this Agreement,
including the fees and expenses of counsel, accountants, investment bankers and
other advisors, and Parent shall pay all such fees and expenses incurred by
Acquisition and Parent.
SECTION 9.03 PUBLICITY. The Company and Parent agree that they will not
issue any press release or make any other public announcement concerning this
Agreement or the transactions contemplated hereby without the prior consent of
the other party, except that the Company or Parent may make such public
disclosure that it believes in good faith to be required by law (in which event
such party shall consult with the other prior to making such disclosure).
SECTION 9.04 EXECUTION IN COUNTERPARTS. For the convenience of the
parties, this Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument, and may be delivered in person or by facsimile
transmission.
SECTION 9.05 NOTICES. All notices that are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given in writing and delivered by hand or national
overnight courier service, transmitted by telecopy or mailed by registered or
certified mail, postage prepaid, as follows:
If to Parent to it:
In care of Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, N.Y. 10022
Attention: Patrick J. Welsh
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, N.Y. 10111
Attention: William J. Hewitt
If to the Company, to:
Control Data Systems, Inc.
4201 Lexington Avenue North
Arden Hills, MN 55126-6198
Attention: Chief Executive Officer
A-21
<PAGE>
with a copy to:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Keith A. Libbey
or such other address or addresses as any party hereto shall have designated by
notice in writing to the other parties hereto.
SECTION 9.06 WAIVERS. The Company, on the one hand, and Parent and
Acquisition, on the other hand, may, by written notice to the other, (i) extend
the time for the performance of any of the obligations or other actions of the
other under this Agreement; (ii) waive any inaccuracies in the representations
or warranties of the other contained in this Agreement or in any document
delivered pursuant to this Agreement; (iii) waive compliance with any of the
conditions of the other contained in this Agreement; or (iv) waive performance
of any of the obligations of the other under this Agreement. Except as provided
in the preceding sentence, no action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
SECTION 9.07 ENTIRE AGREEMENT. This Agreement, the Disclosure Schedule,
the documents executed at the Effective Time in connection herewith and the
Confidentiality Agreement constitute the entire agreement among the parties
hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof. The Company may, in its discretion and for
its convenience, include in the Disclosure Schedule items that are not material,
and such inclusions shall not be deemed to be an agreement or admission by the
Company that such items are material or otherwise be used to interpret the
meaning of such term for purposes of this Agreement or otherwise. The parties
agree that no representation, warranty, promise, inducement or statement of
intention made by any party that is not embodied in this Agreement or such other
documents may be relied upon for any purpose by any party, and none of the
parties shall be bound by, or be liable for, any alleged representation,
warranty, promise, inducement or statement of intention not embodied herein or
therein. The projections and budgets furnished by the Company to Parent are
arithmetically accurate, based on the assumptions set forth therein; it being
understood that, while facts and circumstances resulting in a Material Adverse
Effect on the Company may also result or be reflected in the Company's failure
to achieve such projected or budgeted results, such failure shall not, in and of
itself, be deemed to be a Material Adverse Effect on the Company.
SECTION 9.08 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to principles of conflict of laws.
SECTION 9.09 BINDING EFFECT, BENEFITS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective permitted
successors and assigns. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their respective permitted
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement; PROVIDED, HOWEVER, that the provisions of
Section 6.07 hereof shall accrue to the benefit of, and shall be enforceable by,
each of the current and former directors and officers of the Company.
SECTION 9.10 ASSIGNABILITY. Neither this Agreement nor any of the parties'
rights hereunder shall be assignable by any party hereto without the prior
written consent of the other parties hereto.
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<PAGE>
SECTION 9.11 AMENDMENTS. This Agreement may be varied, amended or
supplemented at any time before or after the approval and adoption of this
Agreement by the stockholders of the Company by action of the respective Boards
of Directors of the Company, Parent and Acquisition, without action by the
stockholders thereof; PROVIDED that, after approval and adoption of this
Agreement by the Company's stockholders, no such variance, amendment or
supplement shall, without consent of such stockholders, reduce the amount or
alter the form of the consideration that the holders of the capital stock of the
Company shall be entitled to receive upon the Effective Time pursuant to Section
2.05 hereof. Without limiting the generality of the foregoing, this Agreement
may only be amended, varied or supplemented by an instrument in writing, signed
by the parties hereto.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
and Plan of Merger as of the day and year first above written.
<TABLE>
<S> <C> <C>
CDSI HOLDING CORPORATION
By /s/ THOMAS E. MCINERNEY
-----------------------------------------
Name: Thomas E. McInerney
Title: PRESIDENT
CDSI ACQUISITION CORP.
BY /S/ THOMAS E. MCINERNEY
-----------------------------------------
Name: Thomas E. McInerney
Title: PRESIDENT
CONTROL DATA SYSTEMS, INC.
By /s/ JAMES E. OUSLEY
-----------------------------------------
Name: James E. Ousley
Title: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
</TABLE>
A-23
<PAGE>
INDEX TO DEFINED TERMS
THIS INDEX IS INCLUDED FOR CONVENIENCE ONLY AND
DOES NOT CONSTITUTE A PART OF THE AGREEMENT
<TABLE>
<CAPTION>
TERM REFERENCE
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
"Acquisition"....................................................................................... Recitals
"Alternative Transactions".......................................................................... 6.05(a)
"Business Segment".................................................................................. 3.08
"Certificate"....................................................................................... 2.07(b)
"Code".............................................................................................. 3.17(a)
"Company"........................................................................................... Recitals
"Company Common Stock".............................................................................. Recitals
"Company Disclosure Documents"...................................................................... 3.11(a)
"Company SEC Filings"............................................................................... 3.06
"Company Stock Option Plan"......................................................................... 3.05
"Company Stock Purchase Plan"....................................................................... 3.05
"Confidentiality Agreement"......................................................................... 6.03(c)
"Constituent Corporations".......................................................................... Recitals
"Continuing Director"............................................................................... 1.03(a)
"Delaware GCL"...................................................................................... 1.02(a)
"Disclosure Schedule"............................................................................... 3.02
"Dissenting Shares"................................................................................. 2.08
"Effective Time".................................................................................... 2.01
"Environmental Event"............................................................................... 3.18
"ERISA"............................................................................................. 3.17(a)
"Exchange Act"...................................................................................... 3.06
"Exchange Agent".................................................................................... 2.07(a)
"Exchange Fund"..................................................................................... 2.07(a)
"Financing"......................................................................................... 4.07
"Financing Entities"................................................................................ 4.07
"HSR Act"........................................................................................... 3.09
"Indemnified Parties"............................................................................... 6.07(a)
"Material Adverse Effect"........................................................................... 3.01
"Meeting"........................................................................................... 6.02(a)
"Merger"............................................................................................ 2.01
"Merger Consideration".............................................................................. 2.05(c)
"Minimum Condition"................................................................................. 1.01
"Offer"............................................................................................. 1.01
"Parent"............................................................................................ Recitals
</TABLE>
A-24
<PAGE>
INDEX TO DEFINED TERMS
THIS INDEX IS INCLUDED FOR CONVENIENCE ONLY AND
DOES NOT CONSTITUTE A PART OF THE AGREEMENT
<TABLE>
<CAPTION>
TERM REFERENCE
- ---------------------------------------------------------------------------------------------------- ------------
"Payment Event"..................................................................................... 6.05(c)
<S> <C>
"Plans"............................................................................................. 3.17(a)
"Preferred Stock"................................................................................... 3.05
"Proprietary Software".............................................................................. 3.13(a)
"Proxy Statement"................................................................................... 6.02(b)
"Returns"........................................................................................... 3.16(a)
"Required Amounts".................................................................................. 4.07
"SEC"............................................................................................... 1.01
"Securities Act".................................................................................... 3.06
"Schedule 14D-9".................................................................................... 1.02(b)
"Shares"............................................................................................ 1.01
"Subsidiary"........................................................................................ 3.02(c)
"Surviving Corporation"............................................................................. Recitals
"Third Party"....................................................................................... 6.05(a)
"Third Party Software".............................................................................. 3.13(a)
"Tax"............................................................................................... 3.16(d)
</TABLE>
A-25
<PAGE>
ANNEX I
CONDITIONS TO THE OFFER
Capitalized terms used in this Annex I shall have the meanings assigned to
them in the Agreement to which it is attached (the "Merger Agreement").
Notwithstanding any other provision of the Offer, Acquisition shall not be
required to accept for payment or pay for any Shares, and may terminate the
Offer, if (1) prior to the expiration date of the Offer (A) the number of Shares
validly tendered and not withdrawn, together with any Shares then owned by
Acquisition, shall not satisfy the Minimum Condition, or (B) the applicable
waiting period under the HSR Act shall not have expired or been terminated; or
(2) at any time on or after July 8, 1997, and prior to acceptance for payment of
or payment for Shares, any of the following conditions exist:
(a) there shall be instituted or pending any action or proceeding by any
government or governmental authority or agency, before any court or
governmental authority or agency, (i) challenging or seeking to make
illegal, to delay or otherwise directly or indirectly to restrain or
prohibit the making of the Offer, the acceptance for payment of or payment
for some of or all the Shares by Acquisition or the consummation by
Acquisition or Parent of the Merger, or seeking to obtain material damages
relating to the transactions contemplated by the Offer or the Merger, (ii)
seeking to restrain or prohibit Parent's or Acquisition's full rights of
ownership or operation (or that of Parent's subsidiaries or affiliates) of a
material portion of the business or assets of the Company and its
subsidiaries, taken as a whole, or of Parent and its subsidiaries, taken as
a whole, or any of their respective affiliates or to compel Parent or any of
its subsidiaries or affiliates to dispose of or hold separate a material
portion of the business or assets of the Company and its subsidiaries, taken
as a whole, or of Parent and its subsidiaries, taken as a whole, or any of
their respective affiliates, (iii) seeking to impose material limitations on
the ability of Parent or any of its subsidiaries or affiliates effectively
to exercise full rights of ownership of the Shares, including, without
limitation, the right to vote any Shares acquired or owned by Parent or any
of its subsidiaries or affiliates on all matters properly presented to the
Company's stockholders, (iv) seeking to require divestiture by Parent or any
of its subsidiaries or affiliates of any Shares, (v) prohibiting the
financing of the Offer, or (vi) that otherwise would reasonably expected to
have a Material Adverse Effect on the Company; or
(b) there shall have been any action taken or any statute, rule,
regulation, judgment, administrative interpretation, injunction, order or
decree proposed, enacted, enforced, promulgated, issued or deemed applicable
to the Offer, the acceptance for payment of or payment for any Shares or the
Merger, by any court, government or governmental authority or agency (other
than the application of the waiting period provisions of the HSR Act to the
Offer, the acceptance for payment of or payment for any Shares or the
Merger), that has, directly or indirectly, resulted, or is reasonably likely
to, directly or indirectly, result in any of the consequences referred to in
clauses (i) through (vi) of paragraph (a) above; or
(c) any change shall have occurred or been threatened (or any
development shall have occurred or been threatened involving a prospective
change) in the business, assets, liabilities, financial condition,
capitalization, operations or results of operations of the Company or any of
its subsidiaries or affiliates that has had or would reasonably be expected
to have a Material Adverse Effect, or Parent and Acquisition shall have
become aware of any facts that have had or are reasonably likely to have a
Material Adverse Effect; or
(d) there shall have occurred (i) any general suspension of trading in,
or limitation on prices for securities on any national securities exchange
or in the over-the-counter market, (ii) any decline in either the Dow Jones
Industrial Average or the Standard and Poor's Index of 500 Industrial
Companies by an amount in excess of 15%, measured from July 8, 1997, (iii)
the declaration of any
AI-1
<PAGE>
banking moratorium or any suspension of payments in respect of banks or any
material limitation (whether or not mandatory) on the extension of credit by
lending institutions in the United States, (iv) the commencement of a war,
material armed hostilities or other material international or national
calamity directly or indirectly involving the United States or having a
significant adverse effect on the functioning of the financial markets in
the United States, or (v) in the case of any of the foregoing existing at
the time of execution of the Merger Agreement, a material acceleration or
worsening thereof; or
(e) it shall have been publicly disclosed or Parent or Acquisition shall
have otherwise learned that (i) any Third Party shall have acquired
beneficial ownership of more than 10% of any class or series of capital
stock of the Company (including the Shares), through the acquisition of
stock, the formation of a group or otherwise, or shall have been granted any
option, right or warrant, conditional or otherwise, to acquire beneficial
ownership of more than 10% of any class or series of capital stock of the
Company (including the Shares) other than acquisitions for bona fide
arbitrage purposes only and other than as disclosed in a Schedule 13D or 13G
on file with the Commission prior to the date of the Merger Agreement, (ii)
any Third Party that, prior to the date of the Merger Agreement, had filed
such a Schedule with the Commission shall have acquired beneficial ownership
of additional shares of any class or series of capital stock of the Company
(including the Shares), through the acquisition of stock, the formation of a
group or otherwise, constituting an additional 5% or more of any such class
or series, or shall have been granted any option, right or warrant,
conditional or otherwise, to acquire beneficial ownership of additional
shares of any class or series of capital stock of the Company (including the
Shares) constituting and additional 5% or more of any such class or series,
or (iii) any Third Party shall have entered into a definitive agreement or
an agreement in principle with respect to a merger, consolidation or other
business combination with the Company; or
(f) the Company shall have breached or failed to perform any of its
covenants or agreements under the Merger Agreement, or any of the
representations and warranties of the Company set forth in the Merger
Agreement shall not have been true when made, or at any time prior to
consummation of the Offer, as if made at and as of such time, provided that
representations and warranties made as of a particular date need be true
only as of such date (for the purpose of this paragraph (f), representations
and warranties of the Company that are expressly qualified by a materiality
qualification shall be true and correct subject to such materiality
qualification, and all other representations and warranties shall be true
and correct in all material respects); and in any such case, such breach,
failure or untruth would reasonably be expected to materially influence the
investment decision of a reasonable purchaser of all or a substantial
portion of the Company's outstanding securities; or
(g) all consents, approvals, licenses, certificates, accreditations,
authorizations or orders of any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of the Merger Agreement and for the Surviving Corporation and
the Subsidiaries to conduct business in substantially the manner conducted
by the Company and the Subsidiaries as of the date of the Merger Agreement,
shall not have been obtained, except for any of the same, the failure to
obtain which would not reasonably be expected to have a Material Adverse
Effect on the Company after giving effect to the transactions contemplated
by the Merger Agreement; or
(h) the Merger Agreement shall have been terminated in accordance with
its terms or amended in accordance with its terms to provide for such
termination or amendment of the Offer; or
(i) all members of the Board of Directors of the Company, other than two
Continuing Directors, shall not have resigned, effective upon and subject
only to the acceptance for payment by Acquisition of, and deposit by
Acquisition with the depositary for the Offer of funds sufficient to make
payment for, a majority of the outstanding Shares pursuant to the Offer, or
the Board of Directors of the Company shall not have elected, effective upon
and subject only to such acceptance and deposit,
AI-2
<PAGE>
at least three individuals designated by Parent as directors of the Company,
effective upon such consummation,
which, in the sole judgment of Acquisition in any such case, and regardless of
the circumstances giving rise to any such condition, makes it inadvisable to
proceed with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of Acquisition and may be
asserted or waived by Acquisition in whole or in part at any time and from time
to time in its sole discretion. The failure by Acquisition at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right and may be asserted
at any time and from time to time.
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<PAGE>
APPENDIX B
[LOGO]
July 8, 1997
Board of Directors
Control Data Systems, Inc.
4201 Lexington Avenue North
Arden Hills, MN 55126
Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of the outstanding shares of
Common Stock, par value $0.01 per share ("Common Stock") of Control Data
Systems, Inc. (the "Company"), of the terms of the Transaction (as hereinafter
defined). For the purposes of this opinion, the "Transaction" means collectively
the transactions described below pursuant to that certain Agreement and Plan of
Merger among the Company, CDSI Holding Corporation ("Parent"), a Delaware
corporation, and CDSI Acquisition Corp. ("Acquisition"), a wholly owned
subsidiary of Parent to be dated July 8, 1997 (the "Agreement").
As more specifically set forth in the Agreement, and subject to certain
terms and conditions thereof, Acquisition has agreed to purchase all of the
outstanding shares of Common Stock at a price of $20.25 per share. Following the
closing of the Tender Offer, Acquisition will be merged with and into the
Company (the "merger"), and each outstanding share of Common Stock not acquired
by Acquisition pursuant to the Tender Offer portion of the Transaction will be
converted into the right to receive $20.25 in cash (other than shares of Common
Stock held in the treasury of the Company or any subsidiary thereof).
In the ordinary course of its services, Cowen & Company ("Cowen") is
regularly engaged in the valuation and pricing of businesses and their
securities and in advising corporate securities issuers on related matters. In
arriving at our opinion, Cowen has, among other things:
(1) reviewed Control Data's financial statements for the fiscal years ended
December 31, 1995 and December 31, 1996 and for the three month periods
ended March 31, 1996 and March 31, 1997 and certain publicly available
filings with the Securities and Exchange Commission and certain other
relevant financial and operating data of the Company;
(2) reviewed a draft of the Agreement;
(3) held meetings and discussions with senior management of the Company to
discuss the business, operations, competitive position, historical
financial results and future prospects of the Company;
(4) reviewed financial projections furnished to us by the management of the
Company, including, among other things, the capital structure, sales,
net income, cash flow, capital requirements and other data of the
Company we deemed relevant;
(5) reviewed Cowen research estimates and First Call EPS consensus estimates
for the Company (collectively, the "Estimates");
B-1
<PAGE>
Board of Directors
Control Data Systems, Inc.
July 8, 1997
Page 2
(6) reviewed certain financial and stock market information regarding the
Company, in comparison with similar information regarding certain other
publicly traded companies which we deemed relevant;
(7) considered the financial terms, to the extent publicly available, of
selected recent business transactions which we deemed to be comparable
in whole or in part to the Transaction;
(8) analyzed the projections provided by the management of the Company for
the cash flows generated by the Company and its business units to
determine the present value of the discounted cash flows;
(9) reviewed the historical prices, price/earnings ratios and trading
activity of the Company Common Stock from July 31, 1992 to July 8, 1997
and compared those trading histories with those of other companies which
we deemed relevant;
(10) reviewed the premiums implied by the Agreement in comparison with
premiums paid in other recent acquisitions and transactions deemed to be
relevant;
(11) conducted such other studies, analysis, inquiries and investigations as
we deemed appropriate.
Cowen was not requested to, and did not, solicit third party indications of
interest in acquiring all or substantially all of the stock or assets of the
Company or the assets of any of its business units.
On July 8, 1997, the closing price of the Common Stock of the Company in the
last transaction reported by NASDAQ was $15.6875 per share.
In rendering our opinion, we relied upon the Company's management with
respect to the accuracy and completeness of the financial and other information
furnished to us as described above. With respect to the financial projections
furnished to us by management of the Company, we have also assumed, with your
consent, that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgements of the Company' management. In
addition, with respect to the Estimates, the management of the Company confirmed
that such Estimates provide a reasonable basis for our opinion. With your
consent, we have relied upon such projections and the Estimates in preparing our
opinion.
We have not assumed any responsibility for independent verification of such
information, including financial information, nor have we made an independent
evaluation or appraisal of any of the properties or assets of the Company.
With respect to all legal matters relating to the Company and Transaction,
we have relied on the advice of legal counsel to the Company. We have also
assumed that the Transaction will be consummated in a manner that complies in
all respects with the applicable provisions of the Securities Exchange Act of
1934, as amended, and all other applicable federal and state statutes, rules and
regulations. Our opinion is based on economic, monetary, market and other
conditions existing on the date hereof.
B-2
<PAGE>
Board of Directors
Control Data Systems, Inc.
July 8, 1997
Page 3
Cowen will receive a fee for rendering this opinion. In addition, in the
ordinary course of its business, Cowen trades the debt and equity securities of
the Company for its own account and for the accounts of its customers, and,
accordingly, it may at any time hold a long or short position in such
securities.
On the basis of our review and analysis, as described above, it is our
opinion as investment bankers that, as of the date hereof, the financial terms
of the Transaction are fair, from a financial point of view, to the stockholders
of the Company (other than Parent and its affiliates).
This letter does not constitute a recommendation to any holders of common
stock to tender or not to tender their shares in the Transaction or how to vote
in any shareholder vote with respect to the Transaction.
Very truly yours,
/s/ Cowen & Company
--------------------------------------
Cowen & Company
B-3
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APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) 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. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either 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. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section228
or Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within twenty days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holders'
shares in accordance with this subsection. An affidavit of the
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secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given; provided that, if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the
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final determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX D
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-20252
------------------------
CONTROL DATA SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 41-1718075
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
4201 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126-6198
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 415-3001
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the closing sale price of the
Common Stock on March 17, 1997 on the Nasdaq National Market as reported in The
Wall Street Journal, was approximately $160,000,000. Shares of voting stock held
by each executive officer and director and by each person who owns more than 5%
of any class of the registrant's voting stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
AS OF MARCH 17, 1997, THE REGISTRANT HAD OUTSTANDING 12,919,468 SHARES OF COMMON
STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the registrant's
1997 Annual Meeting of Stockholders are incorporated by reference into Part III,
and portions of the registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated by reference into Parts II and IV.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND. Control Data Systems, Inc. (Control Data or the Company) is a
global software and services company dedicated to helping organizations develop
the enterprise-wide systems required to create, transmit, access and control
business information. With its Rialto brand of directory-enabled software tools
and services, the Company is focused on the architecture, implementation and
lifetime support of digital commerce and enterprise-wide client-server solutions
for business and government.
The Company provides Enterprise Integration software and service solutions
that include network design, installation and maintenance; application
re-hosting to client-server architectures; the integration of disparate
electronic messaging systems; and corporate directory design and implementation.
Its Technical Services offerings include hardware and software maintenance
services; rapid technology deployment in distributed environments; and customer
service hotline support. The Company's Product Design software provides
computer-aided design (CAD) software and services, primarily to the discrete
manufacturing industry.
The Company also has a number of suppliers and partners providing a range of
hardware and software platforms, complementary products and services, and sales
and marketing activities.
The Company invests in four major areas:
- Development of software products and tools associated with digital
commerce and CAD.
- Training and development of its technical workforce.
- Marketing and sales of its products and services.
- Marketing and sales support for its service provider partners.
The Company was established through Ceridian Corporation's (Ceridian)
transfer of its Computer Products business to the Company and Ceridian's
subsequent distribution, in July of 1992, of the Company's stock as a dividend
to Ceridian's stockholders.
The Company's principal offices are located at 4201 Lexington Avenue North,
Arden Hills, Minnesota 55126-6198.
INDUSTRY BACKGROUND AND BUSINESS TRANSITION
The excitement over the information superhighway and other manifestations of
Internet activity obscure the more significant forces at work below the surface
of the emerging electronic marketplace. The introduction of inexpensive,
easy-to-use browser technology is helping to popularize the medium, but this
technology alone is not driving this trend. Global competitive forces, combined
with continued technology breakthroughs in hardware, software, and
telecommunications, are stimulating entrepreneurial interest in conducting
business electronically--across both private and public networks--without the
traditional limitations of time and space. While the individual technologies are
important, equally crucial are the skills to align processes and practices
through enterprise networking and applications integration.
Electronic messaging has become the basic transport mechanism for today's
leading business and government institutions. Although there are already more
than 100 million e-mail users worldwide, this electronic messaging transport
mechanism means much more than just e-mail. Organizations are quickly leveraging
this transport infrastructure to convert traditional paper processes to digital
ones or do away with some processes altogether.
This is the beginning of a new digital commerce era characterized by the
integration of Internet technologies with existing back office applications.
Critical to this integration, both inside a company (intranet) and outside
(Internet), are two areas in which Control Data excels: messaging and directory
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services. Messaging expertise is important because many of the workflow and
collaboration applications used by this new Internet technology are based on
messaging protocols. Directories are important because Internet technologies
don't offer the security and control that used to exist in mainframe
environments. Directories bring about this security and control, while
maintaining the advantages of distributed computing. By focusing on the needs of
Global 1000 organizations, Control Data is extending its leadership in messaging
and directory services to this emerging market.
From its history in the pioneering computer environments of the 1950's, the
Company has applied its network integration skills across heterogeneous
computing environments. In the early 1990's, the Company completed its
transition away from the manufacture of proprietary mainframe computers to that
of an open systems integration company. In 1994, the Company recorded a
restructuring charge and goodwill write-off of $95.0 million. The restructuring
charge and goodwill write-off included expenses for reducing the worldwide
employee population, consolidating operations in selected locations, and
revaluing certain intangible assets associated with prior acquisitions. In 1995
and early 1996, Control Data took further steps to focus its business for growth
in the markets for our enterprise network integration software and services with
the sale of certain of its international product fulfillment operations to
AmeriData Technologies, Inc. (AmeriData). In late 1996, the Company signed a
definitive agreement to sell its 50-percent interest in Metaphase Technology,
Inc. to its partner in the joint venture, Structural Dynamics Research
Corporation. The sale was completed in January 1997, thus ending Control Data's
participation in the product data management integration market and providing
greater focus on the digital commerce integration business.
For additional information regarding the divestiture to AmeriData and the
restructuring charges, see notes 3 and 18 of the Notes to Consolidated Financial
Statements incorporated herein by reference to the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
PRODUCTS AND SERVICES
The following table sets forth revenues for the Company's major product and
service offerings for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
DECEMBER DECEMBER DECEMBER
31, 1996 31, 1995 31, 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Software and services................... $ 170,332 $ 174,080 $ 154,275
Maintenance and support................. 56,046 75,452 92,785
Hardware products....................... 79,318 205,283 277,167
----------- ----------- -----------
Total revenues........................ $ 305,696 $ 454,815 $ 524,227
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Excluding the international operations sold to AmeriData, pro forma total
revenues were $313,964 and $336,402 for 1995 and 1994, respectively.
SOFTWARE AND SERVICES
In 1996, the Company took an aggressive step to meet the growing demand for
digital commerce technologies with the launch of the Rialto suite of products.
Rialto brings together four of the most fundamental building blocks of a digital
commerce infrastructure: messaging, security, information access, and
directories.
Rialto includes a series of solutions designed to help large organizations
build and manage enterprise-wide communications networks, or intranets. The
objective is to provide three key benefits:
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- Enable desktop users to more easily locate information within their
enterprise, including the ad hoc materials now being proliferated by
intranet and messaging technology, as well as highly structured data that
currently resides in legacy information systems.
- Enable institutions to secure their communications infrastructures and
protect their resources so they can pursue new business objectives and
initiate new processes outside their organizational borders.
- Enable institutions to cost effectively manage their infrastructure so
that economies of scale can be leveraged across an entire enterprise.
SOFTWARE
RIALTO DIRECTORIES. This solution set includes a more powerful version of
Control Data's Global Directory Server, one of the industry's leading
implementations of the international X.500 standard for directory services, and
a new Global Naming Administration offering. This offering enables organizations
with distributed and disparate Information Technology (IT) infrastructures to
have one management environment for user attributes. The major benefit is the
scalability and dramatically reduced cost of administering multiple networks
from a central point, as well as more timely updates of changes to user
attributes.
RIALTO SECURITY. This solution set includes a set of services and products
that links security enforcement policies and technologies into an integrated
program driven from an enterprise directory. Security policies are entered as
rules into the directory. Designated enforcement technologies use the directory
information to enforce the security policy. The primary benefit is the universal
deployment, monitoring, and enforcement of an organizational security policy
from a central point, which improves security effectiveness and reduces security
costs.
RIALTO INFORMATION ACCESS. This solution set includes new solutions that
dramatically improve access, communication, and control of information across
enterprise intranets. Any user, with appropriate access privileges obtained
through the enterprise directory, can access information using an easy-to-use
web browser regardless of system type or location. One solution, called I*Hub,
creates an enterprise-level digital library for transitory data such as
electronic mail messages and their attachments.
RIALTO MESSAGING. This solution set includes a new client-server messaging
solution, IntraStore Server, designed to support corporate intranets and the
Internet. IntraStore Server allows individual users to integrate Internet
messaging clients while preserving centralized administration and management.
Rialto Messaging also includes Mail*Hub, Control Data's existing message
integration solution for connecting complex heterogeneous messaging
environments.
As a state of the art implementation of X.500 directory technology, Mail*Hub
is the Company's leading network integration software product. It is packaged
with services that include network analysis, configuration, installation,
training, network monitoring, maintenance, and hotline support.
CAD/CAM/CAE APPLICATION SOFTWARE PRODUCTS. The Company offers
computer-aided design, manufacturing and engineering (CAD/CAM/CAE) software
applications packages that provide simultaneous engineering, or automated
merging of engineering analysis, design, drafting, and manufacturing functions.
This eliminates separate data entry operations, reducing the chance of errors
and shortening the time to produce a product.
The Company's most important CAD/CAM/CAE offering is its Integrated
Computer-aided Engineering and Manufacturing (ICEM) series of CAD/CAM/CAE
software modules for the manufacturing industry, specifically for automotive
companies and their suppliers, airplane and aerospace companies and their
suppliers, and machinery companies. ICEM software packages include surface
modeling, computational fluid dynamics, surface milling, and solid modeling
packages.
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Additionally, the Company resells software products from a wide range of
third party standards-based suppliers, including Oracle, Informix, Sybase,
OpenVision, 3Com, Wellfleet, Banyan, Novell, and Wingra.
SERVICES
The Company has a heritage of managing large programs requiring complex
systems integration. Previously such projects centered on use of the Company's
proprietary products. In the networked systems environment, the Company is
increasingly involved in digital commerce integration activities that require a
diverse set of products and services selected from the Rialto suite of solutions
as well as other sources. Integral to this business are the many professional
services analysts whose knowledge and skills are required to assist in systems
design and implementation.
The Company's digital commerce integration services are designed to assist
customers in the selection and creation of computer systems tailored to solve
business-specific information management and networking problems or to automate
system activities. In creating these customized systems, the Company
incorporates selected hardware and software products it has developed or
obtained from its suppliers.
CLIENT/SERVER SERVICES. For customers that are downsizing or reengineering
their computing systems through the application of client-server technology, the
Company offers the following specialized services:
- Program management, design/development of user interfaces, database
design, solution connectivity, system administration, and the
implementation of application functionality.
- Evaluation and implementation of operating environments required by the
customer's application software. The Company offers experience in both
enhanced and conventional versions of UNIX, desktop systems (MS-DOS,
Microsoft Windows, and Windows NT), and high performance I/O extensions.
- Evaluation and implementation of the most appropriate, cost effective
computer hardware and software for a customer's client/server environment.
The Company offers a range of open systems platforms based on its
marketing relationships with leading industry platform and peripheral
suppliers, including Sun Microsystems, Inc. (Sun), Hewlett-Packard Company
(Hewlett-Packard), and Silicon Graphics, Inc. (SGI).
NETWORKING SOLUTIONS. As computer users take advantage of downsized
computer platforms, decentralized organizational processes, and open systems
technology, their computing environment's basic networking structure must also
be evaluated in terms of its capabilities, performance, and cost. When these
changes take place, users often need to find new solutions for interconnecting
dissimilar computer systems, finding cost-effective ways to manage complex
networks on a daily basis, and improving the productivity of their business
processes. The Company's networking experts provide solutions in the following
areas:
- E-Mail Integration. The Company's Mail*Hub product allows disparate E-Mail
systems from mainframes, PC's and workstation/servers to communicate in a
transparent manner.
- Directory Synchronization. The Company's X.500 technology enables the
consolidation of e-mail directories and other basic organizational
information in a central, updatable corporate repository.
- Security Services. The Company provides network analysis, penetration
testing, security system design, and implementation.
- EDI Solutions. Standards-based electronic data interchange (EDI)
capabilities, enabling organizations to expedite their daily business
processes.
- Network Integration Services. Requirements analysis, configuration design,
installation, performance assessment, and ongoing maintenance.
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- Enterprise Management Center. Remote management, monitoring, and
troubleshooting support for computer networks and systems, worldwide, 24
hours a day, 7 days a week.
- Help Desk Hotline. Provides answers to questions on operating systems,
networks, applications, and general computing problems. Engineers are
trained to solve problems by phone or via dispatched on-site support.
MANAGED SERVICES. In 1995, the Company introduced a full range of services
designed for customers who want to outsource the management and control of their
messaging and directory network operations.
- Enterprise Networking. Remote monitoring and management of wide-area
network hardware and software solutions that integrate local-area
resources into enterprise networks.
- Intercompany Messaging. Commercial service that offers business-ready
features to clients that require enterprise and intercompany messaging,
global directory services, and electronic commerce capabilities. Working
with a variety of regional telecommunications providers around the world,
who market the service and provide the network connections required by
clients, the Company provides the message and directory integration
technology, integration expertise, and operations support.
- Enterprise Information Management. Administration, daily operation,
maintenance, and support of client/server solutions required to integrate
locally managed data bases and other information resources into enterprise
solutions.
The Company's integration services are carried out primarily by its
professional services staff, which includes approximately 750 systems analysts
serving customers worldwide from regional centers in the United States, Europe,
and Asia. To meet the unique needs or preferences of customers in specific
geographic markets, the Company selects the most suitable and cost effective
hardware platforms currently available from marketing partners and third-party
networking products, industry standard applications, and other local products
such as microcomputers and terminals.
Revenues from software and services were $170.3 million in 1996, $174.1
million in 1995, and $154.3 million in 1994, representing 55.7%, 38.3%, and
29.4%, respectively, of the Company's total revenues. Excluding the
international operations sold to AmeriData, total pro forma revenues from
software and services were $148.0 million in 1995 and $125.4 million in 1994,
representing 47.1% and 37.3%, respectively, of the Company's total pro forma
revenues.
MAINTENANCE AND SUPPORT
The Company provides hardware and software maintenance services for both its
Cyber and open systems products through engineers located throughout the United
States and in many foreign countries. A central support organization provides
technical planning and support, including a worldwide logistics operation for
spare parts, a 24-hour hotline and an on-line diagnostic system accessible
through Cyber mainframes.
Maintenance and support revenues were $56.1 million in 1996, $75.4 million
in 1995, and $92.8 million in 1994, representing 18.3%, 16.6%, and 17.7%,
respectively, of the Company's total revenues. Excluding the international
operations sold to AmeriData, total pro forma revenues from maintenance and
support were $62.5 million in 1995 and $72.7 million in 1994, representing 19.9%
and 21.6%, respectively, of the Company's total pro forma revenues.
HARDWARE PRODUCTS
The Company is differentiated from many other integrators because it is not
captive to a particular product set or technology. This independence allows it
to work in a multivendor environment without bias. Beginning in 1989 with its
relationship with SGI, the Company began integrating UNIX-based open system
D-6
<PAGE>
products into its customer solutions. Systems based on UNIX and Intel/Microsoft
technologies can support the industry's migration from centralized computing,
which was dependent on mainframes, to a networked and distributed client-server
environment, in which application processing and data are spread across many
networked computing resources.
To expand the range of platform options available to its customers, the
Company signed remarketing agreements with Sun and Hewlett-Packard in 1993. As a
Sun integrator, the Company remarkets Sun's complete line of workstations,
servers, and software worldwide as a part of the Company's systems integration
solutions for the commercial marketplace, particularly in the financial
services, healthcare, telecommunications, and manufacturing markets. As a
Hewlett-Packard integrator, the Company remarkets HP Apollo 9000 Series 700
workstations and HP 9000 Series 800 business server hardware and software,
integrating the equipment and applications into solutions for customers in the
aerospace, automotive, manufacturing, government, and commercial markets.
Revenues from the sale and lease of hardware products were $79.3 million in
1996, $205.3 million in 1995, and $277.1 million in 1994, representing 26.0%,
45.1%, and 52.9%, respectively, of the Company's total revenues. Excluding the
international operations sold to AmeriData, total pro forma revenues from
hardware products were $103.5 million in 1995 and $138.3 million in 1994,
representing 33.0% and 41.1%, respectively, of the Company's total pro forma
revenues.
SALES
WORLDWIDE BUSINESS
The Company markets its products and services principally through its direct
sales force located in the United States and 12 other countries. The Company's
major international operations are in France, Germany, Korea, China, Taiwan, and
the United Kingdom. In 1995, the Company sold seven of its international product
distribution operations in Austria, Canada, Greece, Mexico, Norway, Portugal,
and the United Kingdom to AmeriData. In 1996, the Company sold its product
distribution operations in Denmark to AmeriData.
The Company also markets its products and services through subsidiaries and
distributors located in countries representing smaller markets. The Company
believes that one of its strengths is its long-standing presence and name
recognition in various foreign countries.
Revenues from the Company's non-U.S. operations were approximately 52.3%,
69.2%, and 71.5%, of the Company's total revenues in 1996, 1995, and 1994,
respectively. For further information regarding the Company's U.S. and
international operations, see note 17 of the Notes to Consolidated Financial
Statements incorporated herein by reference to the Company's Annual Report to
Stockholders for the fiscal year ended December 31, 1996.
The Company's sales and support operations are organized into three regions
(Americas, Europe, and Asia), each with its own marketing, sales and sales
support professionals providing consulting and engineering services. Centralized
technology support services are provided to the sales regions from the Company's
headquarters in Arden Hills, Minnesota. These resources are available to assist
field organizations in understanding technology trends, formulate technology
strategies, and provide pre-sales consulting and post-sales implementation
expertise. The Company also provides essential system integration services
including customer hot-line support, program/project management, customized
training systems, engineering analysis, and custom software development.
CUSTOMERS
The Company's products and services are used in a wide variety of
applications for customers in government, financial services,
telecommunications, and manufacturing. The Company believes that its
D-7
<PAGE>
worldwide sales and support organization enables it to better understand the
markets in which it competes, to focus its sales efforts effectively, and to
develop long-term relationships with its customers.
The U.S. Government was the only customer of the Company accounting for more
than 10% of total revenues in fiscal years 1996, 1995, or 1994. Contracts with
the U.S. government represented approximately 19.5%, 13.6%, and 12.0% of the
Company's total revenue in fiscal years 1996, 1995, and 1994, respectively.
Generally, the Company's contracts with the U.S. Government contain provisions
to the effect that they may be terminated at the convenience of the customer,
and that in the event of such termination, the Company would be entitled to
receive payment based on the cost incurred and the anticipated profit on the
work completed prior to termination.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily oriented toward
digital commerce, CAD/CAM/CAE products, and client/server solutions. In 1994,
the Company formed a new business unit dedicated to the development of products
and services related to messaging and information infrastructures. Research and
development efforts directed toward enhancing the Company's ICEM application
software product line occur through the Company's ICEM Technologies division.
Company-sponsored research and development expenses related to new products
or services and the improvement of existing products totaled $12.5 million, $9.7
million, and $10.1 million, for 1996, 1995, and 1994, respectively. The increase
in research and development expenses primarily relates to the Company's
continuing investment in digital commerce products and services.
COMPETITION
The market for the Company's products and services is highly competitive and
is characterized by rapid technological advances in both hardware and software
development. These advances result in shorter product life cycles and enhanced
product capabilities, typically at significantly better price and performance
levels. At the same time, these advances have also created increased demand for
the skills of knowledgeable systems integrators who can help customers make the
best use of the available technology.
Competition in the digital commerce integration market is intense and is
based on a variety of factors including customer satisfaction, reputation,
price, performance, product quality, software availability, connectivity,
networking, compatibility with industry standards, marketing and distribution
capability, customer support, name recognition, and financial strength. The
Company competes throughout the world with numerous local, regional, national,
and international systems integrators. Several of the Company's competitors have
significantly greater financial and operational resources than the Company.
BACKLOG
The backlog of the Company's orders believed to be firm is estimated to have
been approximately $19 million as of December 31, 1996, most of which is
expected to be reflected in revenues during 1997. At December 31, 1995, the
backlog was approximately $23 million. The decrease in the 1996 backlog from
1995 is primarily due to the operations sold to AmeriData.
No backlog amount is determinable for a large portion of the Company's
revenues. In addition, customers may elect to accelerate or delay the delivery
of products, and delivery of large orders may be spread over a period of time
and may be subject to modification from time to time. Consequently, the Company
believes that backlog information does not necessarily provide a meaningful
indication of its future business volume.
D-8
<PAGE>
ENVIRONMENTAL MATTERS
In connection with the Company's spin-off from Ceridian, Ceridian agreed to
retain responsibility for and indemnify the Company against environmental
liabilities relating to: 1) facilities formerly operated by the Computer
Products business, 2) third-party disposal or treatment sites as to which
Ceridian has been or is in the future identified as a potentially responsible
party because of past operations of the Computer Products business at its former
facilities, and 3) certain other known environmental matters related to past
operations of the Computer Products business. These facilities and sites
constitute all matters which, at the present time, are known to present
potential environmental liabilities related to the operation of the Computer
Products business. The Company has generally agreed to indemnify Ceridian
against future environmental claims that relate to current and future facilities
and operations of the Company.
Compliance by the Company with federal, state, and local environmental
protection laws during 1996 had no material effect upon capital expenditures,
earnings or competitive position, and is expected to have none in the
foreseeable future.
PATENTS
The Company owns or is licensed under a number of patents which relate to
some of its products. The Company believes that its business as a whole is not
materially dependent upon any particular patent or license, or any particular
group of patents or licenses. Instead, the Company believes that its success and
growth are more dependent, among other things, on the quality of its services
and products and its reputation with its customers.
EMPLOYEES
As of December 31, 1996, the Company had approximately 1,750 full-time
employees.
ITEM 2. PROPERTIES
The Company's corporate headquarters and U.S. field operations headquarters
are located in Arden Hills, Minnesota. Facilities located elsewhere are
primarily sales and service locations, and include significant office facilities
in Atlanta, Georgia; Sunnyvale and Anaheim, California; Rockville, Maryland;
Frankfurt, Germany; Paris, France; Delft, Netherlands; and Taipei, Taiwan. The
Company owns a significant office facility in Mexico, which is leased to
AmeriData.
The following table summarizes the usage and location of the Company's
facilities as of January 1, 1997.
FACILITIES
<TABLE>
<CAPTION>
TYPE OF PROPERTY INTEREST U.S. NON-U.S. WORLDWIDE
- ------------------------------------------------------------------ --------- ----------- -----------
(IN THOUSANDS OF SQUARE FEET)
<S> <C> <C> <C>
Owned............................................................. 325.5 179.2 504.7
Leased............................................................ 588.6 231.9 820.5
--------- ----- -----------
Total square feet............................................... 914.1 411.1 1,325.2
--------- ----- -----------
--------- ----- -----------
UTILIZATION
- -------------------------------------------------------------------------------------------------------
Warehousing....................................................... 74.7 35.6 110.3
Office, computer center and other................................. 551.9 196.5 748.4
Vacant............................................................ 21.1 69.5 90.6
Leased or subleased to others..................................... 266.4 109.5 375.9
--------- ----- -----------
Total square feet............................................... 914.1 411.1 1,325.2
--------- ----- -----------
--------- ----- -----------
</TABLE>
D-9
<PAGE>
No facilities owned by the Company are subject to any major encumbrances.
The Company believes that all of the facilities currently utilized in its
ongoing business operations meet their intended purposes and are adequately
maintained. As a result of the Company's continuing business transition, leased
property decreased during fiscal 1996 by approximately 200,000 square feet, a
reduction of 19.8%. The number of facilities also decreased from 90 at the end
of 1995 to 78 at year end 1996, a net decrease of 12 locations. This substantial
reduction was primarily attributable to the consolidation of locations in the
U.S. field operations and the sale of certain international operations to
AmeriData. Restructuring charges recorded in fiscal year ended December 31,
1994, included provisions of approximately $9.7 million for lease and other
obligations related to excess facilities.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against or involving the Company
which, in the opinion of management, will have a material adverse effect upon
its consolidated financial position or results of operations.
In connection with the Company's spin-off from Ceridian, the Company has
agreed to assume responsibility for, and indemnify Ceridian Corporation against,
liability in connection with judicial and administrative claims and proceedings
relating to the Computer Products business prior to August 1, 1992. Pending age
discrimination actions against Ceridian and the Company were settled in March
1997. The Company's aggregate liability for such actions was approximately $4.5
million. The Company has adequate reserves to cover this amount. Although
occasional adverse decisions (or settlements) may occur, management believes
that the final disposition of such matters will not have a material adverse
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
James E. Ousley........................ 51 President and Chief Executive Officer
Joseph F. Killoran..................... 56 Vice President and Chief Financial Officer
Ruth A. Rich........................... 53 Vice President, Human Resources/Administration and Secretary
Dieter Porzel.......................... 60 Vice President, Europe/Middle East/Africa Region
Michael G. Eleftheriou................. 51 Vice President, Technical Services
David B. Folsom........................ 49 Vice President, Electronic Commerce Solutions and Chief Technology
Officer
Arnold (Nol) Rutgers................... 55 Vice President, Sales and Operations, U.S. and Asia
</TABLE>
Executive officers of the Company are elected by the Board of Directors and
serve at the Board's discretion. There are no family relationships among any
directors or executive officers of the Company.
James E. Ousley has been President and Chief Executive Officer of Control
Data since August 1992. Mr. Ousley was President of Ceridian's Computer Products
business from April 1989 to July 1992; and Executive Vice President of Ceridian
from February 1990 to July 1992.
Joseph F. Killoran has been Vice President and Chief Financial Officer of
Control Data since February 1994. Mr. Killoran was Vice President and Controller
of Control Data from August 1992 to
D-10
<PAGE>
January 1994; and Vice President and Controller for Ceridian's Computer Products
business from 1989 to July 1992.
Ruth A. Rich has been Vice President, Human Resources/Administration of
Control Data since August 1992 and Secretary since March 1997. Ms. Rich was Vice
President, Human Resources/Administration for Ceridian's Computer Products
business from November 1990 to July 1992; and Vice President, Human
Resources/Administration for Ceridian's Information Services Group from May 1986
to November 1990.
Dieter Porzel has been Vice President, Europe/Middle East/Africa Region of
Control Data since February 1993. Mr. Porzel was Vice President, Central Europe
Region for Control Data from August 1992 to January 1993; and Vice President,
Central Europe Region of Ceridian's Computer Products business from 1987 to
1992.
Michael G. Eleftheriou has been Vice President, Technical Services of
Control Data since January 1996. Mr. Eleftheriou was Vice President of
Assessment and Planning for Control Data from October 1994 to December 1995;
General Manager of United States Systems Integration Operations from May 1994 to
September 1994; General Manager of Control Data Mexico from October 1992 to
April 1994; General Manager of Worldwide Sales and Services from August 1992 to
September 1992; General Manager, Worldwide Sales and Services of Ceridian's
Computer Products business from December 1991 to July 1992; and General Manager
of Ceridian's Cyber Marketing business from April 1990 to November 1991.
David B. Folsom has been Vice President, Electronic Commerce Solutions of
Control Data since October 1994. In addition, in March 1997, Mr. Folsom assumed
the role of Chief Technology Officer. Mr. Folsom was General Manager of
Networking Competency Centers of Control Data from August 1992 to September
1994; and Director of Software Development for Ceridian's Computer Products
business from 1990 to July 1992.
Arnold (Nol) Rutgers has been Vice President, Sales and Operations, U.S. and
Asia of Control Data since October 1996. Mr. Rutgers was Vice President,
Asia/Pacific Region from June 1995 to September 1996; Vice President, Marketing
from October 1994 to May 1995; General Manager of Strategic Planning for Control
Data from August 1992 to September 1994; and General Manager of Strategic
Planning for Ceridian's Computer Products business from September 1989 to July
1992.
D-11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
"Price Range of Common Stock," appearing on page 31 of the Company's 1996
Annual Report to Stockholders, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Consolidated Financial Data," appearing on inside cover page of
the Company's 1996 Annual Report to Stockholders, is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing on pages 8 through 12 of the Company's 1996 Annual Report
to Stockholders, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company and its subsidiaries as of
December 31, 1996 and 1995, the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, and the notes to consolidated financial
statements, together with report therein of KPMG Peat Marwick LLP dated January
22, 1997, appearing on pages 13 through 30 of the Company's 1996 Annual Report
to Stockholders, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
"Election of Directors" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held on May 14, 1997 (hereinafter the "Proxy
Statement") is incorporated herein by reference.
IDENTIFICATION OF EXECUTIVE OFFICERS
Information regarding executive officers of the Company is contained in Part
I of this Report on page 12 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
D-12
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Stockholdings of Certain Owners and Management" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Election of Directors--Certain Business Relationships" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Incorporated by reference into Part II, Item 8 of this report.
<TABLE>
<CAPTION>
PAGE IN
1996 ANNUAL
REPORT TO
STOCKHOLDERS
------------
<S> <C>
Independent Auditors' Report........................................................................ 13
Consolidated Statements of Operations--Years Ended December 31, 1996, December 31, 1995, and
December 31, 1994.................................................................................. 14
Consolidated Balance Sheets--December 31, 1996 and December 31, 1995................................ 15
Consolidated Statements of Stockholders' Equity--Years Ended December 31, 1996, December 31, 1995,
and and December 31, 1994.......................................................................... 16
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, December 31, 1995, and
December 31, 1994.................................................................................. 17
Notes to Consolidated Financial Statements.......................................................... 18
</TABLE>
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE IN THIS
FORM 10-K
---------------
<S> <C>
Independent Auditors' Report on Financial Statement Schedule......................................... 18
Schedule II--Valuation and Qualifying Accounts....................................................... 19
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
REPORTS ON FORM 8-K
None
D-13
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
2.1* Amended and Restated Purchase Agreement, dated August 31, 1995, between
the Registrant and AmeriData Technologies, Inc.--incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
dated September 13, 1995.
3.1* Restated Certificate of Incorporation of the Registrant--incorporated by
reference to Exhibit 3.1, filed under cover of Form SE dated July 9,
1992, to the Form 8. (1)
3.2* Restated Bylaws of the Registrant, as amended--incorporated by reference
to Exhibit 99 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 3, 1993.
10.1* Transfer Agreement between Ceridian and the Registrant--incorporated by
reference to Exhibit 10.1, filed under cover of Form SE dated July 9,
1992, to the Form 8.
10.2* Intercompany Services Agreement between Ceridian and the
Registrant--incorporated by reference to Exhibit 10.3, filed under cover
of Form SE dated July 9, 1992, to the Form 8.
10.3* Environmental Matters Agreement between Ceridian and the Registrant--
incorporated by reference to Exhibit 10.5, filed under cover of Form SE
dated July 9, 1992, to the Form 8.
10.4* Intellectual Property Agreement between Ceridian and the
Registrant--incorporated by reference to Exhibit 10.6, filed under cover
of Form SE dated July 9, 1992, to the Form 8.
10.5* Tax Matters Agreement between Ceridian and the Registrant--incorporated by
reference to Exhibit 10.7, filed under cover of Form SE dated July 9,
1992, to the Form 8.
10.6* Value-Added Remarketing Agreement between Ceridian and the Registrant
regarding Ceridian's Government Systems division--incorporated by
reference to Exhibit 10.9, filed under cover of Form SE dated July 9,
1992, to the Form 8.
10.7* Master Purchase Option Agreement between Ceridian and the Registrant--
incorporated by reference to Exhibit 10.12, filed under cover of Form SE
dated July 9, 1992, to the Form 8.
10.8*(2) Form of Indemnification Agreement between the Registrant and its directors
and executive officers--incorporated by reference to Exhibit 10.14, filed
under cover of Form SE dated July 9, 1992, to the Form 8.
10.9*(2) The Registrant's 1992 Equity Incentive Plan--incorporated by reference to
Exhibit 10.15, filed under cover of Form SE dated July 9, 1992, to the
Form 8.
10.10*(2) February 1994 Amendments to 1992 Equity Incentive Plan--incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 1, 1994.
10.11*(2) February 1995 Amendments to 1992 Equity Incentive Plan--incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
10.12*(2) May 1996 Amendments to 1992 Equity Incentive Plan--incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
10.13*(2) The Registrant's Executive Incentive Plan--incorporated by reference to
the description of such plan under "Executive Compensation" in the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders.
</TABLE>
D-14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.14*(2) The Registrant's 1993 Employee Stock Purchase Plan--incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 2, 1993.
10.15* Software Distribution License Agreement between Intergraph and the
Registrant-- incorporated by reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended January
2, 1993.
10.16*(2) Contract for the "Vorsitzender der Geschaeftsfuehrung" of Control Data
GmbH-- incorporated by reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended January 1, 1994.
10.17*(2) Severance Agreement, dated January 4, 1995, between the Registrant and
James E. Ousley--incorporated by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.18*(2) Severance Agreement, dated January 4, 1995, between the Registrant and
Joseph F. Killoran--incorporated by reference to Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.19*(2) Compensation arrangement between the Registrant and its
Chairman--incorporated by reference to the description of such
arrangement under "Director Compensation" in the Registrant's definitive
Proxy Statement for its 1997 Annual Meeting of Stockholders.
11.0 Computation of Earnings (Loss) per Common Share.
13.0 The portions of the Registrant's 1996 Annual Report to Stockholders that
are incorporated in this Form 10-K by reference.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Auditors.
24.0 Power of Attorney--included on Signatures page hereto.
27.0 Financial Data Schedule.
</TABLE>
- ------------------------
(Schedules to the foregoing exhibits have not been included but will be
submitted supplementary to the Commission upon request)
* -- Incorporated by reference to other filing.
(1)-- Form 8 and Form 10 refer, respectively, to the Registrant's Form 8
Amendment No. 1 dated July 10, 1992 (the "Form 8") to its Registration
Statement on Form 10 dated May 27, 1992 and declared effective July 16,
1992 (the "Form 10").
(2)-- Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to Form 10-K.
D-15
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
of Control Data Systems, Inc.:
Under date of January 22, 1997, we reported on the consolidated balance
sheets of Control Data Systems, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, as contained in the 1996 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 22, 1997
D-16
<PAGE>
SCHEDULE II
CONTROL DATA SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Allowance for Doubtful Accounts Receivable:
Balance at beginning of year.......................................... $ 4,794 $ 6,844 $ 10,063
Additions charged to costs and expenses............................. 1,127 1,384 1,906
Write-offs and other adjustments.................................... (2,182) (3,434) (5,125)
------------ ------------ ------------
Balance at end of year................................................ $ 3,739 $ 4,794 $ 6,844
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
D-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
CONTROL DATA SYSTEMS, INC.
By: /s/ JAMES E. OUSLEY
-----------------------------------------
James E. Ousley
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: March 24, 1997
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above or below constitutes and appoints James E. Ousley and Joseph F. Killoran,
or either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President and Chief
/s/ JAMES E. OUSLEY Executive Officer
- ------------------------------ (principal executive March 24, 1997
James E. Ousley officer)
Vice President and Chief
/s/ JOSEPH F. KILLORAN Financial Officer
- ------------------------------ (principal financial and March 24, 1997
Joseph F. Killoran accounting officer)
/s/ W. DONALD BELL
- ------------------------------ Director March 24, 1997
W. Donald Bell
/s/ GRANT A. DOVE
- ------------------------------ Director March 24, 1997
Grant A. Dove
</TABLE>
D-18
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MARCELO A. GUMUCIO
- ------------------------------ Director March 24, 1997
Marcelo A. Gumucio
/s/ W. DOUGLAS HAJJAR
- ------------------------------ Director March 24, 1997
W. Douglas Hajjar
/s/ KEITH A. LIBBEY
- ------------------------------ Director March 24, 1997
Keith A. Libbey
</TABLE>
D-19
<PAGE>
APPENDIX E
FINANCIAL INFORMATION OF
CONTROL DATA FOR YEAR ENDED 12/31/96
CONTROL DATA SYSTEMS, INC.
E-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OVERVIEW
Control Data Systems, Inc. (Control Data or the Company) is a global
software and services company dedicated to helping organizations develop the
enterprise-wide systems required to create, transmit, access and control
business information. With its Rialto brand of directory-enabled software tools
and services, the Company is focused on the architecture, implementation and
lifetime support of digital commerce and enterprise-wide client-server solutions
for business and government.
The Company provides Enterprise Integration software and service solutions
that include network design, installation and maintenance; application
re-hosting to client-server architectures; the integration of disparate
electronic messaging systems; and corporate directory design and implementation.
Its Technical Services offerings include hardware and software maintenance
services; rapid technology deployment in distributed environments; and customer
service hotline support. The Company's Product Design software provides
computer-aided design (CAD) software and services, primarily to the discrete
manufacturing industry.
The Company also has a number of suppliers and partners providing a range of
hardware and software platforms, complementary products and services, and sales
and marketing activities.
The Company invests in four major areas:
- Development of software products and tools associated with digital
commerce and CAD.
- Training and development of its technical workforce.
- Marketing and sales of its products and services.
- Marketing and sales support for its service provider partners.
The Company was established through Ceridian Corporation's (Ceridian)
transfer of its Computer Products business to the Company and Ceridian's
subsequent distribution, in July 1992, of the Company's stock as a dividend to
Ceridian's stockholders.
REVENUES
REVENUES BY CATEGORY
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Software and services........................................... $ 170.3 (2.2%) $ 174.1 12.8% $ 154.3
Maintenance and support......................................... 56.1 (25.6%) 75.4 (18.8%) 92.8
Hardware products............................................... 79.3 (61.4%) 205.3 (25.9%) 277.1
--------- --------- --------- --------- ---------
Total revenues.............................................. $ 305.7 (32.8%) $ 454.8 (13.2%) $ 524.2
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
E-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
REVENUES BY GEOGRAPHY
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Americas........................................................ $ 146.3 (15.6%) $ 173.4 (26.2%) $ 235.1
Europe.......................................................... 113.1 (50.3%) 227.5 (1.1%) 230.1
Asia............................................................ 46.3 (14.1%) 53.9 (8.6%) 59.0
--------- --------- --------- --------- ---------
Total revenues.............................................. $ 305.7 (32.8%) $ 454.8 (13.2%) $ 524.2
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The Company entered into a transaction with AmeriData Technologies, Inc.
(AmeriData) during 1995 to divest seven of its international subsidiary
operations. The effect of this transaction on the Company's reported results of
operations is reflected in the exclusion of the last four months of results for
the five international operations sold to AmeriData on August 31, 1995 and the
exclusion of the last two months of results for the two international operations
sold on October 31, 1995. In addition, on March 25, 1996, the Company completed
the sale to AmeriData of the Control Data operations in Denmark. See note 3 of
the Notes to Consolidated Financial Statements for additional information
regarding the AmeriData divestitures. The pro forma results discussed below
reflect the exclusion of the operating results of the divested operations for
fiscal years 1995 and 1994.
Revenues for 1996 of $305.7 million decreased 32.8% from 1995 revenues of
$454.8 million. The revenue decline was due to a 61.4% decrease in hardware
products sales and a 25.6% decrease in maintenance and support. The majority of
the decrease in hardware products sales and maintenance and support was
attributable to the AmeriData divestitures. The maintenance and support revenues
decline was also due to the decrease in the number of proprietary systems under
maintenance contracts.
Revenues for 1995 of $454.8 million decreased 13.2% from 1994 revenues of
$524.2 million. The revenue decline was due to a 25.9% decrease in hardware
products sales and an 18.8% decrease in maintenance and support, offset by a
12.8% increase in software and services revenues. The majority of the decrease
in hardware products sales and hardware maintenance and support was attributable
to lower revenues in the Americas and Asia. In addition, a portion of the
revenue decline for 1995 can be attributed to the AmeriData divestitures. The
maintenance and support revenues decline was also due to the decrease in the
number of proprietary systems under maintenance contracts. The growth in
software and services sales was primarily associated with the Company's digital
commerce and product data management/computer-aided design (PDM/CAD) projects.
On a pro forma basis, excluding the results of operations of the AmeriData
divestitures for the years 1995 and 1994, 1996 revenues of $305.7 million
decreased 2.6% from 1995 revenues of $314.0 million. The revenue decline was due
to a decrease in hardware products sales of 23.4% and a 10.2% decline in
maintenance and support, offset by a 15.1% increase in software and services
revenues. 1995 revenues of $314.0 million decreased 6.7% from 1994 revenues of
$336.4 million. The revenue decline was due to a decrease in hardware products
sales of 25.2% and a 14.2% decline in maintenance and support, offset by an
18.0% increase in software and services revenues. The increase in software and
services and the decrease in hardware products sales reflects the Company's
continuing emphasis on the digital commerce market.
Revenues from the Americas operations represented 48% of the Company's total
revenues in 1996; European operations represented 37%, and Asia operations
represented 15%. A slight increase in software and services revenue in the
Americas of 4.6% was offset by a decrease in software and services revenues in
Europe and Asia of 10.1% and 1.4%, respectively. Maintenance and support
revenues
E-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
decreased in the Americas, Europe, and Asia by 17.8%, 40.8%, and 2.7%,
respectively. Similarly, hardware products sales decreased in the Americas,
Europe, and Asia by 44.6%, 75.6%, and 27.7%, respectively. The majority of the
decrease in revenues, in the Americas and Europe, was attributable to the
AmeriData divestitures.
Revenues from European operations represented 50% of the Company's total
revenues in 1995; the Americas operations represented 38%, and Asia operations
represented 12%. The increase in software and services revenues in Asia, the
Americas, and Europe of 37.5%, 11.3%, and 8.8%, respectively, was offset in part
by a decrease in hardware products sales of 28.9%, 51.5%, and 2.7%,
respectively. The decrease in hardware products sales in the Americas was due
primarily to lower sales in Canada and Mexico in addition to the AmeriData
divestitures. On a pro forma basis, European operations represented 38% of the
Company's total revenues in 1995; the Americas operations represented 45%, and
Asia operations represented 17%.
Certain revenues have been reclassified in selected categories to conform
with the Company's standard presentation.
COST OF REVENUES AND GROSS PROFIT
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cost of revenues................................................ $ 201.4 (39.0%) $ 330.4 (13.6%) $ 382.5
Percentage of revenues.......................................... 65.9% 72.6% 73.0%
Gross profit.................................................... $ 104.3 (16.2%) $ 124.4 (12.2%) $ 141.7
Percentage of revenues.......................................... 34.1% 27.4% 27.0%
</TABLE>
Cost of revenues decreased by 39.0% and gross profit decreased by 16.2% in
1996. The primary factor contributing to the cost of revenues and gross profit
decreases was the decline in total revenues, primarily in hardware products
sales. Gross profit margins increased to 34.1% in 1996 from 27.4% in 1995, as
the result of increased margins on software and services sales and the exclusion
of lower profit margin hardware product sales associated with the AmeriData
divestitures. On a pro forma basis, gross profit margins increased to 34.1% in
1996 from 32.5% in 1995 as the result of increased margins on software and
services sales.
Cost of revenues decreased by 13.6% and gross profit decreased by 12.2% in
1995. The primary factor contributing to the cost of revenues and gross profit
decreases was the decline in total revenues, primarily in hardware products
sales, offset in part by an increase in software and services sales. Gross
profit margins increased slightly to 27.4% in 1995 from 27.0% in 1994, primarily
reflecting the exclusion of lower profit margin hardware products sales
associated with the AmeriData divestitures. On a pro forma basis, gross margins
increased to 32.5% in 1995 from 30.9% in 1994, primarily as the result of
increased margins on maintenance and support sales.
E-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
OPERATING EXPENSES
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative............................. $ 86.9 (23.1%) $ 113.0 (12.7%) $ 129.5
Percentage of revenues.......................................... 28.4% 24.8% 24.7%
Technical....................................................... $ 12.5 28.9% $ 9.7 (31.7%) $ 14.2
Percentage of revenues.......................................... 4.1% 2.1% 2.7%
Restructuring................................................... -- -- -- (100.0%) $ 70.1
Percentage of revenues.......................................... -- -- 13.4%
Goodwill write-off.............................................. -- -- -- (100.0%) $ 24.9
Percentage of revenues.......................................... -- -- 4.8%
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). The decrease in SG&A expense
was a result of downsizing actions taken by the Company over the past several
years and the exclusion of operating expenses associated with the operations
sold in the AmeriData divestitures. As a percentage of revenue, SG&A expenses
increased in 1996 as a result of investments made in support of service provider
partners. On a pro forma basis, the divested operations had lower SG&A expense
to revenue levels and the exclusion of these operations would raise the
Company's SG&A expense to revenue percentage.
TECHNICAL. The increase in technical expense was the result of higher
spending on digital commerce products and services. The AmeriData divestitures
had no effect on technical expenses.
RESTRUCTURING CHARGES. During the fourth quarter of 1994, the Company
completed a thorough review of its worldwide business operations and market
opportunities. The results of this review indicated that certain actions were
needed to further reduce the geographic scope of operations, downsize employment
levels worldwide, and revalue selected assets in order to remain competitive in
the future. Based on this review, the Company adopted a formal restructuring
plan resulting in a pre-tax restructuring charge of $70.1 million.
Under the 1994 restructuring plan, the Company planned to reduce its
pre-restructure workforce by approximately 600 individuals, thereby reducing
annualized payroll, labor, and benefit costs by approximately $38 million per
year and reduce annual rent expense by approximately $3 million, offset in part
by workforce additions and other expenditures associated with expansion of its
core business.
In 1995, the Company entered into an agreement with AmeriData to sell
certain of its international operations to AmeriData. The restructuring effect
of the AmeriData divestitures has been to replace certain employee severance and
lease related cash charges with noncash asset revaluations and write-downs. As a
result of this transaction, the reduction in workforce related to the Company's
restructuring charge will total approximately 475 individuals versus the
original estimate of 600 individuals.
See note 18 of the Notes to Consolidated Financial Statements which sets
forth the Company's restructuring activities and the reserve balances as of
December 31, 1996, December 31, 1995, and December 31, 1994.
Future cash outlays under the restructuring plan are anticipated to be $8.9
million and $3.3 million in 1997 and 1998, respectively.
GOODWILL WRITE-OFF. During the fourth quarter of 1994, the Company
concluded that the carrying values of the Evernet Systems, Inc. and
Dataselskapet A/S goodwill balances were fully impaired and the remaining
unamortized balances of $24.9 million were charged to earnings. The primary
reasons for these
E-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
write-offs included significant reductions in the employee and customer bases
and a refocusing of the Company's overall systems integration strategy. For
additional information regarding this charge, see note 19 of Notes to
Consolidated Financial Statements.
NONOPERATING INCOME (EXPENSES)
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest expense................................................... $ (0.2) $ (1.0) $ (1.3)
Interest income.................................................... 5.1 5.7 4.8
Other income....................................................... 7.2 3.7 0.1
Nonoperating income, net........................................... $ 12.1 44.0% $ 8.4 133.3% $ 3.6
Percentage of revenues............................................. 4.0% 1.8% 0.7%
</TABLE>
INTEREST EXPENSE. Interest expense decreased in 1996 primarily due to lower
average daily short-term borrowings.
INTEREST INCOME. Interest income decreased in 1996 due to lower average
interest rate yields.
OTHER INCOME. Other income increased in 1996 primarily due to a gain of
$2.0 million versus a gain of $0.4 million in 1995 from the sale of land, an
exchange gain of $2.6 million in 1996 versus a gain of $0.2 million in 1995,
rental income of $0.7 million in 1996 versus $0.2 million in 1995, offset in
part by a loss in affiliates, primarily related to the Company's 50% interest in
Metaphase Technology, Inc. of $0.3 million in 1996 versus a gain of $0.9 million
in 1995.
The increase in nonoperating income, net, in 1995 was primarily due to a
gain of $0.8 million for the increase in market value of certain short-term
marketable securities versus a $1.2 million loss in 1994, a gain in affiliates
of $0.9 million primarily related to the Company's 50% interest in Metaphase
Technology, Inc. versus a $0.4 million loss in 1994, and a gain of $0.4 million
from the sale of land.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Provision for income taxes............................................... $ 1.1 (8.3%) $ 1.2 20.0% $ 1.0
Percentage of revenues................................................... 0.4% 0.3% 0.2%
</TABLE>
The provisions for income taxes in 1996, 1995, and 1994 relate primarily to
foreign income taxes on the earnings of the Company's foreign subsidiaries and
foreign withholding taxes on certain United States income. See note 9 of Notes
to Consolidated Financial Statements which describes the differences between the
U.S. statutory and effective income tax rates.
NET EARNINGS (LOSS) AND EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net earnings (loss).............................................. $ 16.0 79.8% $ 8.9 109.4% $ (94.4)
Percentage of revenues........................................... 5.2% 2.0% (18.0)%
Earnings (loss) per share
Primary........................................................ $ 1.09 $ 0.67 $ (6.87)
Fully diluted.................................................. $ 1.09 $ 0.62 $ (6.87)
</TABLE>
E-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
NET EARNINGS (LOSS). The net earnings for 1996 were $16.0 million compared
to net earnings for 1995 of $8.9 million and net loss for 1994 of $94.4 million.
The 1996 net earnings were primarily attributable to lower operating
expenses and higher nonoperating income. The 1995 net earnings were similarly
attributable to lower operating expenses and higher nonoperating income. Also
contributing to higher earnings in 1995 was the exclusion of operating expenses
and interest expense associated with the operations sold in the AmeriData
divestitures. The 1994 net loss was primarily attributable to the $70.1 million
restructuring charge and $24.9 million goodwill write-off recorded in the fourth
quarter of 1994 and lower gross profit margins on hardware products sales.
OUTLOOK
The following factors, among others, should be considered in evaluating the
Company's outlook.
GENERAL. The Company participates in the global market for enterprise
network communications and has begun to focus its expertise in messaging and
directory services on the emerging market for digital commerce. Specialized
software vendors, large consulting firms, and systems integrators also compete
in these market segments. There are many smaller firms also active in these
market segments with no one firm having a dominant position.
Certain of the firms in these markets offer outsourcing and other types of
long-term agreements with their customer base. The result of these activities is
to develop a backlog of business that provides a more predictable future revenue
base. Because the majority of the Company's core business activities will
continue to be project-based, revenue predictability is difficult and quarterly
volatility of earnings can be expected.
The Company entered into a transaction with Structural Dynamics Research
Corporation (SDRC) in December 1996 to sell its 50-percent interest in Metaphase
Technology, Inc. and certain assets of the Company's product data management
(PDM) business. The transaction, valued at $31 million, consists of cash and a
warrant to purchase SDRC stock. The sale will produce a gain, in the first
quarter of 1997, for the Company of approximately $1.00 per share. The Company
has used a portion of the cash received from the sale to repurchase 766,833
shares of common stock in 1997.
REVENUES. The Company expects total revenues to decline from 1996 to 1997
due to the sale of the PDM business, the continuing erosion of the Company's
installed base of proprietary hardware and software maintenance revenues, and
continuing de-emphasis on hardware reselling. Software and services growth in
Enterprise Integration Services is expected to nearly offset these decreases.
COST OF REVENUES. The Company's cost of revenues as a percentage of
revenues is expected to decrease and gross margins as a percentage of revenues
are expected to increase in 1997. Primary factors contributing to these changes
include the de-emphasis of low margin hardware sales and expected cost
improvements associated with software and services revenue. Due to varying gross
profit margins of different types of product sales and varying gross profit
margins of specific large projects quarter to quarter, total gross profit
margins in 1997 could be volatile.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses are expected to
decrease in 1997 from 1996, primarily due to the divestiture of the PDM
business. This decrease will be somewhat offset by increases in SG&A expenses
associated with planned marketing activities and the support of service provider
partners in the digital commerce market.
E-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
TECHNICAL EXPENSES. Technical spending is expected to increase slightly in
1997, as the Company continues its investment in digital commerce products.
INCOME TAX RATE. In total, the Company has $100.5 million of gross deferred
tax assets at December 31, 1996, which can be used to offset taxes on future
earnings. While the Company maintains significant operations outside the United
States, a number of these operations also have deferred tax assets as of
December 31, 1996 resulting from lower than expected 1994 earnings, caused in
part by the worldwide restructuring activity. In the long term this will
significantly reduce the Company's tax expense. However, given the wide
geographical dispersion of the Company's operations, the overall effective tax
rate will be volatile. The AmeriData divestitures did not have a material impact
on deferred tax assets.
FOREIGN EXCHANGE. A large percentage of the Company's business is
transacted in currencies other than the U.S. dollar. As a result, the Company's
financial results are subject to foreign exchange rate fluctuations.
OTHER. See Notes to Consolidated Financial Statements regarding other
factors concerning the Company.
FINANCIAL CONDITION
The Company's cash and short-term investments totaled $84.6 million at
December 31, 1996 representing 38.4% of total assets. The Company has no
long-term debt. Total cash and short-term investment balances increased by $0.6
million in 1996. The primary factors in the increase were net earnings of $16.0
million which includes depreciation and amortization of $7.9 million, foreign
currency transaction gain of $2.6 million, proceeds from the sale of land of
$2.3 million, and the issuance of Common Stock of $6.7 million. Partially
offsetting the increase was $3.1 million from working capital items, the
purchase of treasury stock of $1.8 million, restructuring payments of $11.0
million, capital expenditures of $9.1 million, and net pension activity of $3.1
million. The AmeriData divestitures, through the elimination of certain hardware
distribution activities, significantly reduced the Company's investment in
inventory and the associated risk of obsolescence associated with that
inventory.
Stockholders' equity increased by $25.5 million in 1996. The increase was
primarily due to net earnings of $16.0 million, the issuance of Common Stock of
$6.7 million, the issuance of treasury stock of $1.4 million, and a minimum
pension liability adjustment of $5.2 million, offset in part by the purchase of
treasury stock of $1.8 million and a foreign currency translation adjustment of
$2.1 million.
As of December 31, 1996, the Company had available up to $15.5 million in
credit facilities, primarily short-term notes and overdraft facilities under
bank lines of credit in certain international subsidiaries, as well as a
domestic credit arrangement which provides up to $10.0 million in unsecured
short-term credit.
The Company had $12.2 million of restructure obligations as of December 31,
1996, $8.9 million of which are expected to be cash outlays in 1997, primarily
for severance costs, lease and other obligations related to excess facilities,
and litigation costs. Restructuring payments will extend into 1998 to satisfy
various long-term real estate obligations and severance issues. The Company
believes that it can finance this cash requirement through a combination of
existing cash reserves, cash flow from operations, and its borrowing capacity.
Except for the historical information contained within the Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
accompanying consolidated financial statements, and the Notes to Consolidated
Financial Statements, the matters discussed within this annual report are
E-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
forward looking statements that involve risks and uncertainties including:
business conditions and growth in the general economy and electronic messaging;
volatility in gross margins as the Company's revenues and product mix change;
additional restructuring actions or charges as the Company continues to evolve
in its rapidly changing industry; competitive factors, such as alternative
messaging and directory solutions, products and price pressures; availability of
skilled personnel in various geographic areas; acceptance of the outsourcing of
corporate messaging infrastructures; the success of the Company's business
partners in sales and marketing activities; and other factors discussed herein.
E-9
<PAGE>
MANAGEMENT'S REPORT
The accompanying consolidated financial statements, including the notes
thereto, and other financial information presented in this report were prepared
by management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon our best estimates
and judgments.
Control Data Systems, Inc. maintains an effective system of internal
accounting control. We believe this system provides reasonable assurance that
transactions are executed in accordance with management authorization and are
appropriately recorded in order to permit preparation of financial statements in
conformity with generally accepted accounting principles and to adequately
safeguard, verify, and maintain accountability of assets. The concept of
reasonable assurance is based on the recognition that the cost of a system of
internal control should not exceed the benefits derived.
KPMG Peat Marwick LLP, independent certified public accountants, are
retained to audit the Company's financial statements. Their accompanying report
is based on an audit conducted in accordance with generally accepted auditing
standards. The audit includes a review of the internal accounting control
structure to gain a basic understanding of the accounting system in order to
design an effective and efficient audit approach and not for the purpose of
providing assurance on the system of internal control.
The Audit Committee of the Board of Directors is composed of two outside
directors and is responsible for recommending the independent accounting firm to
be retained for the coming year, subject to stockholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.
E-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Control Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Control Data
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Control Data
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 22, 1997
E-11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net sales and rentals............................................... $ 130,585 $ 253,921 $ 319,302
Services............................................................ 175,111 200,894 204,925
Total revenues.................................................... 305,696 454,815 524,227
COST OF REVENUES:
Net sales and rentals............................................... 70,619 175,471 232,650
Services............................................................ 130,750 154,909 149,878
Total cost of revenues............................................ 201,369 330,380 382,528
Gross profit...................................................... 104,327 124,435 141,699
OPERATING EXPENSES:
Selling, general and administrative................................. 86,860 113,047 129,491
Technical........................................................... 12,483 9,673 14,241
Restructuring....................................................... -- -- 70,100
Goodwill write-off.................................................. -- -- 24,900
Total operating expenses.......................................... 99,343 122,720 238,732
Earnings (loss) from operations................................... 4,984 1,715 (97,033)
NONOPERATING INCOME (EXPENSES):
Interest expense.................................................... (205) (1,033) (1,282)
Interest income..................................................... 5,112 5,719 4,786
Other income, net................................................... 7,187 3,667 126
Total nonoperating income, net.................................... 12,094 8,353 3,630
Earnings (loss) before income taxes............................... 17,078 10,068 (93,403)
PROVISION FOR INCOME TAXES............................................ 1,100 1,200 1,000
Net earnings (loss)................................................. $ 15,978 $ 8,868 $ (94,403)
Primary earnings (loss) per common share and common share equivalents $ 1.09 $ 0.67 $ (6.87)
Fully diluted earnings (loss) per common share and common share
equivalents $ 1.09 $ 0.62 $ (6.87)
Weighted average common shares outstanding (in thousands):
Primary............................................................. 14,623 13,294 13,740
Fully diluted....................................................... 14,623 14,298 13,740
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
E-12
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1996 1995
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Current assets:
Cash and short-term investments.................................................... $ 84,610 $ 84,034
Trade and other receivables........................................................ 84,198 85,235
Inventories........................................................................ 14,511 19,381
Prepaid expenses and other current assets.......................................... 3,809 5,893
Total current assets............................................................. 187,128 194,543
Investments and advances........................................................... 601 138
Property and equipment, net........................................................ 17,107 16,788
Leased and data center equipment, net.............................................. 390 693
Noncurrent trade receivables....................................................... 4,820 5,187
Other noncurrent assets............................................................ 10,251 10,136
Total assets..................................................................... $ 220,297 $ 227,485
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
E-13
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Current liabilities:
Notes payable...................................................................... $ 289 $ 686
Accounts payable................................................................... 15,773 19,934
Customer advances and deferred income.............................................. 6,649 7,707
Accrued taxes...................................................................... 6,610 5,883
Accrued salaries and wages......................................................... 11,579 12,700
Restructure reserves, current portion.............................................. 8,932 16,704
Other accrued expenses............................................................. 26,505 32,214
Total current liabilities........................................................ 76,337 95,828
Deferred income taxes.............................................................. 469 452
Restructure reserves, less current portion......................................... 3,290 6,412
Pension liabilities................................................................ 28,582 38,944
Other noncurrent liabilities....................................................... 2,599 2,351
Total liabilities................................................................ 111,277 143,987
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized 5,000,000 shares; none issued
and outstanding.................................................................. -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares; issued
14,883,500 and 14,249,986 shares as of December 31, 1996 and December 31, 1995,
respectively..................................................................... 149 143
Additional paid-in capital......................................................... 171,845 164,247
Accumulated deficit................................................................ (46,395) (62,373)
Minimum pension liability adjustment............................................... (6,631) (11,854)
Foreign currency translation adjustment............................................ (1,438) 659
Unearned compensation-restricted stock............................................. (106) (213)
Unrealized gains on investments.................................................... 36 --
Treasury stock, at cost (1,203,390 and 1,185,224 shares as of December 31, 1996 and
December 31, 1995, respectively)................................................. (8,440) (7,111)
Total stockholders' equity....................................................... 109,020 83,498
Total liabilities and stockholders' equity....................................... $ 220,297 $ 227,485
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
E-14
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
SHARES ADDITIONAL EARNINGS
TREASURY COMMON PAID-IN (ACCUMULATED
OUTSTANDING STOCK ISSUED STOCK CAPITAL DEFICIT) OTHER*
------------- ----------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 13,599 -- 13,599 $ 136 $ 159,683 $ 23,162 $ (7,805)
Issuance of common stock
under the Employee Stock
Purchase Plan 84 -- 84 -- 595 -- --
Exercises of stock options 120 -- 120 2 827 -- --
Minimum pension liability
adjustment -- -- -- -- -- -- (2,235)
Foreign currency
translation adjustment -- -- -- -- -- -- 2,344
Net loss -- -- -- -- -- (94,403) --
Balance at December 31, 1994 13,803 -- 13,803 138 161,105 (71,241) (7,696)
Issuance of common stock
under the Employee Stock
Purchase Plan 57 -- 57 -- 344 -- --
Exercises of stock options 340 -- 340 4 2,480 -- --
Minimum pension liability
adjustment -- -- -- -- -- -- (4,897)
Foreign currency
translation adjustment -- -- -- -- -- -- 1,398
Restricted stock award 50 -- 50 1 318 -- (213)
Purchase of treasury stock,
at cost (1,185) 1,185 -- -- -- -- (7,111)
Net earnings -- -- -- -- -- 8,868 --
Balance at December 31, 1995 13,065 1,185 14,250 143 164,247 (62,373) (18,519)
Issuance of common stock
under the Employee Stock
Purchase Plan 28 -- 28 -- 442 -- --
Exercises of stock options 305 -- 305 3 2,411 -- --
Exercises of stock warrants 300 -- 300 3 3,856 -- --
Minimum pension liability
adjustment -- -- -- -- -- -- 5,223
Foreign currency
translation adjustment -- -- -- -- -- -- (2,097)
Restricted stock award -- -- -- -- -- -- 107
Change in unrealized gains
on investments -- -- -- -- -- -- 36
Issuance of treasury stock
for Personal Investment
Plan 77 (77) -- -- 889 -- 461
Purchase of treasury stock,
at cost (95) 95 -- -- -- -- (1,790)
Net earnings -- -- -- -- -- 15,978 --
Balance at December 31, 1996 13,680 1,203 14,883 $ 149 $ 171,845 $ (46,395) $ (16,579)
<CAPTION>
TOTAL
---------
<S> <C>
Balance at January 1, 1994 $ 175,176
Issuance of common stock
under the Employee Stock
Purchase Plan 595
Exercises of stock options 829
Minimum pension liability
adjustment (2,235)
Foreign currency
translation adjustment 2,344
Net loss (94,403)
Balance at December 31, 1994 82,306
Issuance of common stock
under the Employee Stock
Purchase Plan 344
Exercises of stock options 2,484
Minimum pension liability
adjustment (4,897)
Foreign currency
translation adjustment 1,398
Restricted stock award 106
Purchase of treasury stock,
at cost (7,111)
Net earnings 8,868
Balance at December 31, 1995 83,498
Issuance of common stock
under the Employee Stock
Purchase Plan 442
Exercises of stock options 2,414
Exercises of stock warrants 3,859
Minimum pension liability
adjustment 5,223
Foreign currency
translation adjustment (2,097)
Restricted stock award 107
Change in unrealized gains
on investments 36
Issuance of treasury stock
for Personal Investment
Plan 1,350
Purchase of treasury stock,
at cost (1,790)
Net earnings 15,978
Balance at December 31, 1996 $ 109,020
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM FOREIGN UNEARNED
PENSION CURRENCY COMPENSATION UNREALIZED
LIABILITY TRANSLATION RESTRICTED GAINS ON TREASURY
*OTHER STOCKHOLDERS' EQUITY ITEMS ADJUSTMENT ADJUSTMENT STOCK INVESTMENTS STOCK TOTAL
- --------------------------------------------- ----------- ----------- --------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ (4,722) $ (3,083) $ -- $ -- $ -- $ (7,805)
Minimum pension liability adjustment (2,235) -- -- -- -- (2,235)
Foreign currency translation adjustment -- 2,344 -- -- -- 2,344
Balance at December 31, 1994 (6,957) (739) -- -- -- (7,696)
Minimum pension liability adjustment (4,897) -- -- -- -- (4,897)
Foreign currency translation adjustment -- 1,398 -- -- -- 1,398
Restricted stock award -- -- (213) -- -- (213)
Purchase of treasury stock, at cost -- -- -- -- (7,111) (7,111)
Balance at December 31, 1995 (11,854) 659 (213) -- (7,111) (18,519)
Minimum pension liability adjustment 5,223 -- -- -- -- 5,223
Foreign currency translation adjustment -- (2,097) -- -- -- (2,097)
Restricted stock award -- -- 107 -- -- 107
Change in unrealized gains on investments -- -- -- 36 -- 36
Issuance of treasury stock for Personal
Investment Plan -- -- -- -- 461 461
Purchase of treasury stock, at cost -- -- -- -- (1,790) (1,790)
Balance at December 31, 1996 $ (6,631) $ (1,438) $ (106) $ 36 $ (8,440) $ (16,579)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
E-15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss)................................................. $ 15,978 $ 8,868 $ (94,403)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation.................................................... 7,605 10,955 14,349
Amortization.................................................... 308 1,090 3,624
Foreign currency transaction gain............................... (2,571) (190) (563)
Equity in losses (gains) of affiliates.......................... 299 (922) 429
Restructuring................................................... -- -- 70,100
Goodwill write-off.............................................. -- -- 24,900
Restructure reserves utilized................................... (10,968) (22,833) (22,854)
(Gain) loss on sale of marketable securities and
other assets.................................................. (1,706) 431 (1,140)
Net change in working capital items............................... (3,064) 9,191 21,983
Net change in noncurrent trade receivables...................... 161 2,297 3,787
Net change in other noncurrent assets........................... (611) (2,681) (2,343)
Other........................................................... (1,705) (4,379) (2,419)
Net cash provided by operating activities....................... 3,726 1,827 15,450
Cash Flows from Investing Activities:
Expended for property and equipment................................. (8,600) (10,353) (7,679)
Expended for leased and data center equipment....................... (516) (1,618) (1,368)
Investment in affiliates............................................ (469) -- (8)
Proceeds from sale of property and equipment........................ 2,306 706 1,919
Acquisitions of businesses, net of cash provided.................... -- (546) (3,844)
Dispositions of businesses, net of cash given....................... 9 9,036 --
Change in short-term investments.................................... (8,115) (708) (5,667)
Net cash used in investing activities............................. (15,385) (3,483) (16,647)
Cash Flows from Financing Activities:
(Repayments) borrowings under short-term financing arrangements,
net............................................................... (362) 3,221 (1,604)
Proceeds from issuance of common stock, net of issuance costs....... 6,715 2,828 1,424
Purchase of treasury stock.......................................... (1,790) (7,111) --
Net cash provided by (used in) financing activities............... 4,563 (1,062) (180)
Effect of Exchange Rate Changes on Cash............................... (443) 629 (510)
Net change in cash and equivalents.................................. (7,539) (2,089) (1,887)
Cash and cash equivalents, beginning of year........................ 15,188 17,277 19,164
Cash and cash equivalents, end of year.............................. 7,649 15,188 17,277
Short-term investments.............................................. 76,961 68,846 68,138
Cash and short-term investments, end of year.......................... $ 84,610 $ 84,034 $ 85,415
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
E-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
majority-owned subsidiaries of the Company. All significant intercompany
investments, accounts, and transactions have been eliminated.
The investments in and the operating results of companies in which the
Company has an ownership of 50% or less are included in the financial statements
on the basis of the equity method of accounting.
On August 31, 1995, the Company completed the sale of five international
product distribution operations to AmeriData. The Company sold to AmeriData all
of the issued and outstanding capital stock of Control Data operations in
Austria, Norway, and United Kingdom (Plc). Additionally, the Company sold to
AmeriData certain assets and AmeriData assumed certain liabilities of Control
Data operations in Canada, Mexico, and United Kingdom (Ltd). Effective October
31, 1995, the Company completed the sale to AmeriData of all the issued and
outstanding capital stock of the Control Data operations in Greece and Portugal.
On March 25, 1996, the Company completed the sale to AmeriData of all the issued
and outstanding capital stock of the Control Data operations in Denmark. Results
of operations, assets, and liabilities for the operations sold are included in
the Company's consolidated financial statements through the effective date of
divestitures.
(B) REVENUE RECOGNITION
Revenues from sales of hardware and software products are recognized upon
shipment, installation, or acceptance, based on the particular product and
contract terms. Revenues from rental and maintenance contracts are recognized
over the period of the agreement. Services revenues consist of consulting and
maintenance services and are recognized when the services are performed.
(C) STOCK-BASED COMPENSATION
Compensation expense for stock option grants is recognized in accordance
with Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued
to Employees." Pro forma effects on net income and earnings per share are
provided as if the fair value based method defined in Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
had been applied.
(D) CASH AND SHORT-TERM INVESTMENTS
Highly liquid investments with a maturity of three months or less when
purchased are classified in the balance sheet as cash equivalents. Marketable
equity and debt securities are classified in the balance sheet as short-term
investments. In accordance with the provisions of SFAS No. 115, "Accounting for
Certain Instruments in Debt and Equity Securities," marketable equity and debt
securities have been categorized as available-for-sale and are stated at fair
value. Prior to December 1995, marketable equity and debt securities were
classified as trading securities. The aggregate fair value of the Company's
marketable equity and debt securities at December 31, 1996 and 1995 totaled
$37.5 million and $41.6 million, respectively.
(E) INVENTORIES
Inventories are stated at cost not in excess of realizable values. Costs are
based on actual or average methods. Inventories include maintenance service
parts, purchased hardware and software products, and costs incurred for projects
in process.
E-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using straight-line and accelerated methods at rates
based on the estimated lives of the assets, which are generally as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements..................................................... 10-40 years
Machinery and equipment........................................................ 3-8 years
Leased and data center equipment............................................... 3-6 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset. Repairs and
maintenance are expensed as incurred. Gains or losses on dispositions are
included in results of operations.
(G) OTHER NONCURRENT ASSETS
Other noncurrent assets consist principally of prepaid pension costs.
(H) FOREIGN CURRENCY TRANSLATION
The assets and liabilities for the Company's international subsidiaries are
translated into U.S. dollars using current exchange rates. The resulting
translation adjustments are recorded in the foreign currency translation
adjustment account in equity. Statement of operations items are translated at
average exchange rates prevailing during the period. Foreign currency
transaction gains or losses are included in net earnings (loss).
(I) RESEARCH AND DEVELOPMENT
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future gross product revenues, estimated economic
life, and changes in software and hardware technology. Amounts that could have
been capitalized under this statement after consideration of the above factors
were immaterial, and therefore, no software development costs have been
capitalized by the Company to date. Research and development costs are expensed
as incurred.
(J) INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates which are expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
E-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Except for selective dividends, the Company intends to reinvest the
unremitted earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Accordingly, no provision for U.S. income taxes or foreign
withholding taxes was required on such earnings during the three years ended
December 31, 1996.
(K) NET EARNINGS (LOSS) PER SHARE
The net earnings (loss) per common share and common share equivalents is
computed by dividing net earnings (loss) by the weighted average number of
shares and dilutive common share equivalents outstanding during each period.
Common stock equivalents result from dilutive stock options and warrants
computed using the treasury stock method.
(L) PRESENTATIONS
Beginning in the first quarter of 1994, certain cash flow activities were
reclassified to conform to the current year's presentation. All financial
information has been restated to conform to this method of presentation.
(M) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
(N) FISCAL YEAR END
In 1995, the Company changed its fiscal year end to a calendar year end.
Prior to this change the Company had adopted a 52/53 week fiscal year, which
ended on the Saturday closest to December 31. Fiscal year 1994 comprised 52
weeks and ended on December 31, 1994.
(O) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in accordance with SFAS No.
107, "Disclosure About Fair Value of Financial Instruments," to estimate the
fair value of financial instruments:
CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value
because of the short maturity of those instruments.
MARKETABLE SECURITIES. The fair values of marketable securities are based
on quoted market prices.
2. ACQUISITIONS
On January 4, 1994, the Company acquired all of the outstanding capital
stock of MICHAEL Business Systems Plc which was engaged in providing
microcomputer-based products and network integration services. The acquisition
was accounted for as a purchase and the net assets and results of operations
have been included in the Company's consolidated financial statements from the
acquisition date through the date of divestiture. The total consideration paid
for this acquisition was $5.0 million in cash. Net identifiable liabilities
acquired of $4.9 million consisted of $12.3 million of assets acquired and $17.2
E-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
million of liabilities assumed. Goodwill from this acquisition of $9.9 million
was amortized on a straight-line basis over a period of ten years. In the third
quarter of 1995, this operation was sold as part of the AmeriData divestitures
(see note 3) and the unamortized goodwill balance was charged to earnings (see
note 19).
3. DIVESTITURES
On August 31, 1995, the Company completed the sale of five international
product distribution operations to AmeriData. The Company sold to AmeriData all
of the issued and outstanding capital stock of Control Data operations in
Austria, Norway, and United Kingdom (Plc). Additionally, the Company sold to
AmeriData certain assets, and AmeriData assumed certain liabilities, of Control
Data operations in Canada, Mexico, and United Kingdom (Ltd). Effective October
31, 1995, the Company completed the sale to AmeriData of all of the issued and
outstanding capital stock of the Control Data operations in Greece and Portugal.
On March 25, 1996, the Company completed the sale to AmeriData of all the issued
and outstanding capital stock of the Control Data operations in Denmark.
AmeriData assumed all assets and liabilities of the operations in Denmark as of,
and in the normal course of business since, February 29, 1996. The total
consideration received for these divestitures was $13.7 million in cash. Net
identifiable assets and liabilities transferred to AmeriData were $59.4 million
and $48.5 million, respectively. Results of operations, assets, and liabilities
for the operations sold are included in the Company's consolidated financial
statements through the effective date of the divestitures.
The following pro forma information represents the results of operations
assuming that the divestitures described above occurred as of the beginning of
the period. The pro forma financial statement is for informational purposes only
to illustrate the estimated effects of the divestitures of these eight
operations on Control Data on a stand-alone basis and may not be indicative of
the results of operations that would have occurred had these divestitures taken
place at the beginning of the period presented or of future results of
operations.
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, ------------------------------------
EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Revenues................................................ $ 454,815 $(140,851) $ 313,964
Earnings from operations................................ 1,715 1,083 2,798
Net earnings............................................ 8,868 1,535 10,403
Primary earnings per common
share and common share equivalents.................... 0.67 0.78
Fully diluted earnings per common
share and common share equivalents.................... 0.62 0.73
</TABLE>
E-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DIVESTITURES (CONTINUED)
PRO FORMA REVENUES BY CATEGORY AND GROSS PROFIT (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, ------------------------------------
EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Software and services................................... $ 174,080 $ (26,056) $ 148,024
Maintenance and support................................. 75,452 (13,019) 62,433
Hardware products....................................... 205,283 (101,776) 103,507
Total revenues........................................ $ 454,815 $(140,851) $ 313,964
Gross profit............................................ $ 124,435 $ (22,478) $ 101,957
Gross profit %.......................................... 27.4% 32.5%
</TABLE>
PRO FORMA REVENUES BY GEOGRAPHY (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, ------------------------------------
EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Americas................................................ $ 173,401 $ (33,410) $ 139,991
Europe.................................................. 227,538 (107,441) 120,097
Asia.................................................... 53,876 -- 53,876
Total revenues........................................ $ 454,815 $(140,851) $ 313,964
</TABLE>
4. TRADE AND OTHER RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Trade receivables................................................ $ 81,433 $ 80,675
Other............................................................ 6,504 9,354
Allowance for doubtful accounts.................................. (3,739) (4,794)
Total............................................................ $ 84,198 $ 85,235
</TABLE>
5. OTHER ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Accrued warranty, support
and maintenance costs.......................................... $ 10,135 $ 10,130
Bonuses and commissions.......................................... 1,927 1,866
Royalties........................................................ 961 1,051
Insurance........................................................ 1,364 1,360
Other............................................................ 12,118 17,807
Total.......................................................... $ 26,505 $ 32,214
</TABLE>
E-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
STOCK OPTIONS
Under the 1992 Equity Incentive Plan (the "Plan"), the Compensation
Committee may award stock options, restricted stock, and performance units
("Units") to those officers and employees of the Company whose performance, in
the judgment of the Compensation Committee, can have a significant effect on the
success of the Company. In addition, provisions of the Plan provide for the
award of stock options, as specified in such provisions, to the directors of the
Company who are not employees.
As of December 31, 1996, the Company has reserved 3.2 million shares of the
Company's Common Stock for issuance pursuant to awards under the Plan. This
includes shares of replacement options provided to optionees pursuant to the
provisions of the spin-off of the Company from Ceridian to replace and preserve
the value of Ceridian stock options held by such optionees at the time of the
spin-off. If an award under the Plan expires or terminates without being
exercised in full or is forfeited, the shares subject thereto are generally
available for new awards.
The exercise price for stock options granted under the Plan (other than the
replacement options) may not be less than the fair market value of a share of
the underlying Common Stock on the date the option is granted and must be paid
in cash unless the Compensation Committee permits payment in shares of the
Company's stock. An option will generally expire ten years after the date it is
granted and will ordinarily become exercisable as to one third of the shares
subject to the option on each of the three succeeding anniversaries of the
grant. The Compensation Committee may modify the exercisability of an option at
its discretion.
The Plan also provides for shares of the Company's Common Stock to be issued
to employees in the form of restricted stock grants. Plan participants are
entitled to cash dividends and to vote their respective shares from the date of
grant. The value of such stock is established by the market price on the date of
the grant. In 1995, 50,000 shares of restricted stock were issued under the
Plan. Prior to 1995 no restricted stock had been granted. Unearned compensation
is charged for the market value of the restricted shares as these shares are
issued in accordance with the Plan. The unearned compensation is amortized
ratably over the restricted period. The unamortized unearned compensation value
is shown as a reduction of stockholders' equity in the accompanying consolidated
balance sheets.
Following a "change of control termination," all options granted under the
Plan will become immediately exercisable, and all restrictions on restricted
stock awarded under the Plan will immediately lapse.
The Plan also provides recipients with the opportunity to receive cash or
stock awards if the Company's financial goals or other business objectives are
achieved over a longer-term performance period. The cost of these awards is
charged to expense. The Compensation Committee will determine the
E-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
performance goals, the performance period, the vesting of Units, and how Units
will be valued. No Units had been issued as of December 31, 1996.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK WEIGHTED AVERAGE
----------------------- OF EXERCISE PRICE
AVAILABLE OF SHARES UNDER
STOCK OPTIONS FOR GRANT UNDER PLAN PLAN
- ----------------------------------------------------------------------- ---------- ----------- -----------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994............................................. 59,443 2,063,799 $ 8.38
Authorized for issuance.............................................. 500,000 -- --
Granted.............................................................. (754,899) 754,899 $ 7.69
Exercised............................................................ -- (121,050) $ 6.84
Canceled............................................................. 506,499 (506,499) $ 9.77
BALANCE AT DECEMBER 31, 1994........................................... 311,043 2,191,149 $ 7.89
Granted.............................................................. (480,500) 480,500 $ 10.99
Exercised............................................................ -- (389,861) $ 7.30
Canceled............................................................. 326,257 (326,257) $ 8.54
BALANCE AT DECEMBER 31, 1995........................................... 156,800 1,955,531 $ 8.57
Authorized for issuance.............................................. 300,000 -- --
Granted.............................................................. (245,500) 245,500 $ 19.98
Exercised............................................................ -- (304,816) $ 7.92
Canceled............................................................. 94,003 (94,003) $ 13.20
BALANCE AT DECEMBER 31, 1996........................................... 305,303 1,802,212 $ 10.05
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------- ----------- --------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$4.73-$7.63 434,598 6.99 $ 6.61 290,408 $ 6.29
$8.25-$8.25 582,273 5.66 $ 8.25 578,939 $ 8.25
$9.00-$10.00 399,174 7.31 $ 9.72 209,150 $ 9.81
$10.25-$22.50 371,167 8.81 $ 16.62 91,318 $ 12.01
$25.69-$25.69 15,000 9.81 $ 25.69 -- --
1,802,212 1,169,815
</TABLE>
The Company applies APB No. 25, and related interpretations, which require
compensation expense for options to be recognized only if the market price of
the underlying stock exceeds the exercise price on the date of grant.
Accordingly, no compensation expense has been recognized, except for restricted
stock awards, for options granted in 1995 and 1996. The Company will continue to
apply the existing accounting rules under APB No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied.
E-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation expense for stock options granted in 1996 and 1995 been
recorded, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below. The pro forma impact on net
income and earnings per share assumes no options will be forfeited. The per-
share weighted average fair value of stock options granted in 1996 and 1995 was
$8.02 and $4.28, respectively. The fair value of the options granted is
estimated on the grant date using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0.0%, volatility of 45.0%,
risk-free interest rate of 6.5%, and expected life of 4 years.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income As reported $ 15,978 $ 8,868
Pro forma 15,110 8,584
Primary earnings per share As reported $ 1.09 $ 0.67
Pro forma 1.03 0.65
Fully diluted earnings per share As reported $ 1.09 $ 0.62
Pro forma 1.03 0.60
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented because compensation cost is reflected over the option's vesting
period and compensation cost for options granted prior to January 1, 1995 is not
considered.
STOCK WARRANTS
In connection with the acquisition of Evernet Systems, Inc., the Company
issued warrants granting the holders the right and option to purchase 300,000
shares of the Company's Common Stock at an exercise price of $12.86 per share,
which were exercised in 1996.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1993 Employee Stock Purchase Plan (the "Purchase Plan") the
Company has reserved 400,000 shares of Common Stock for issuance pursuant to the
Purchase Plan. The primary purpose of the Purchase Plan is to provide an
opportunity for eligible employees to become stockholders of the Company.
Eligible employees may contribute up to 10% of their compensation toward the
purchase of the Company's Common Stock. The Purchase Plan operates in phases of
three months each, generally beginning on January 1, April 1, July 1, and
October 1 of each year. At the end of each phase, an employee who elects to
participate in the Purchase Plan can purchase up to 500 shares of Common Stock
with his or her accumulated payroll deductions. The purchase price for those
shares of Common Stock will be either 85% of the market price at the beginning
of the phase or 85% of the market price at the end of the phase, whichever is
less. As of December 31, 1996, shares purchased under the Purchase Plan totaled
198,692.
PERSONAL INVESTMENT PLAN
The Personal Investment Plan (the "Investment Plan") is a defined
contribution plan with funding coming from participant contributions and Company
profit sharing contributions. All United States
E-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
employees with nine hundred hours or more of service are eligible to
participate. Eligible employees may elect to contribute on a pretax basis,
through payroll deductions, from one to seventeen percent of their annual
compensation. Participant contributions are fully vested. Contributions are
invested by the trustee in accordance with participant elections, in one or more
of nine investment options. Participant contributions are subject to an Internal
Revenue Service maximum annual limit. Participants may borrow up to fifty
percent of their accumulated participant contributions and while employed by the
Company and prior to age 59 1/2, withdrawals may be made only for "financial
hardships."
Company contributions to the Investment Plan amounted to $1,386,475 and
$1,349,896 in 1996 and 1995, respectively. The 1995 contribution was made
through the issuance of 76,834 shares of the Company's Treasury Stock. No
contribution was made in 1994.
7. INVESTMENT IN METAPHASE TECHNOLOGY, INC.
In 1992, the Company and Structural Dynamics Research Corporation (SDRC)
established a joint venture company, Metaphase, to develop and market PDM
software worldwide. As of December 31, 1996, the Company owned 50% of Metaphase.
During the second half of 1996, the Company was in discussions with SDRC
about the Metaphase joint venture. As a result of these discussions, the Company
did not anticipate funding Metaphase losses. Accordingly, the Company did not
accrue its share of the Metaphase losses during the second half of 1996.
On December 16, 1996, the Company signed a definitive agreement to sell its
50-percent interest in Metaphase and certain assets of the Company's PDM
business to SDRC. The transaction closed on January 22, 1997, effective as of
January 1, 1997.
8. FINANCING ARRANGEMENTS
As of December 31, 1996, the Company's international subsidiaries have
arranged with local banks up to $15.5 million for financing, primarily
short-term notes and foreign overdraft facilities. Debt outstanding under these
arrangements amounted to $0.3 million and $0.7 million at December 31, 1996 and
December 31, 1995, respectively. There were no outstanding letters of credit at
December 31, 1996. The average amount of short-term debt outstanding for 1996
was $1.0 million.
The Company has a U.S. bank line of credit which provides for borrowings of
up to $10.0 million, none of which was outstanding at December 31, 1996. The
line of credit bears interest at prime plus two percent and expires on April 12,
1997.
9. INCOME TAXES
As discussed in note 1(j), the Company adopted SFAS No. 109, as of January
3, 1993. This change in accounting for income taxes had no significant impact on
the consolidated financial statements of the Company.
E-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The components of earnings (loss) before income taxes and the provision
(benefit) for income taxes are included in the following table:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
COMPONENTS OF EARNINGS AND TAXES 1996 1995 1994
- ---------------------------------------------------------------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic............................................................ $ 13,362 $ 8,280 $ (75,093)
Foreign............................................................. 3,716 1,788 (18,310)
Total............................................................. $ 17,078 $ 10,068 $ (93,403)
Income tax provision (benefit):
Current:
Domestic.......................................................... $ 159 $ 134 $ 325
Foreign........................................................... 924 1,231 1,059
Deferred:
Domestic.......................................................... -- -- --
Foreign........................................................... 17 (165) (384)
Total........................................................... $ 1,100 $ 1,200 $ 1,000
</TABLE>
Reconciliation of estimated income taxes at United States statutory tax rate
to the income taxes provision is reported as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
EFFECTIVE RATE RECONCILIATION 1996 1995 1994
- ---------------------------------------------------------------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. federal statutory rate........................................... 35% 35% 35%
Income tax provision (benefit) at U.S. statutory rate................. $ 5,977 $ 3,524 $ (32,691)
International rate differences, credits, translation, dividends, and
other offsets........................................................ 3,776 10,840 1,650
Non-deductible goodwill............................................... -- 1,562 10,121
Change in valuation reserve........................................... (6,168) (24,821) 20,717
Valuation reserve attributable to sold subsidiaries................... (695) 5,417 --
Losses for which no tax benefit was provided.......................... -- -- 903
U.S. state income and franchise taxes................................. -- -- 300
Other................................................................. (1,790) 4,678 --
Provision for income taxes............................................ $ 1,100 $ 1,200 $ 1,000
</TABLE>
E-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets
Depreciation and amortization........................................................ $ 4,808 $ 5,878
Inventory valuation.................................................................. 11,575 16,372
Pension plans........................................................................ 374 936
Deferred revenues.................................................................... 599 1,455
Allowance for doubtful accounts...................................................... 2,946 2,898
Restructuring and other accruals..................................................... 10,998 13,688
Net operating loss carryforwards..................................................... 56,961 55,508
Tax credit carryforwards............................................................. 7,845 4,000
Other................................................................................ 4,401 5,527
Total gross deferred tax assets.................................................... 100,507 106,262
Less valuation allowance........................................................... (94,720) (100,888)
------------ ------------
Net deferred tax assets............................................................ 5,787 5,374
------------ ------------
Deferred Tax Liabilities
Depreciation and amortization........................................................ (225) (323)
Inventory valuation.................................................................. (310) (220)
Pension plans........................................................................ (5,176) (5,165)
Other................................................................................ (545) (118)
Total deferred tax liabilities..................................................... (6,256) (5,826)
------------ ------------
Net deferred income taxes........................................................ $ (469) $ (452)
------------ ------------
------------ ------------
</TABLE>
Although the Company has available gross deferred tax assets in the amount
of $100.5 million which can be used to offset taxes on future earnings, the
Company currently maintains sizable operations in several foreign countries
whose tax on future earnings cannot be offset by these deferred tax assets.
Included in the gross deferred tax assets and the valuation reserve is $6.2
million for U.S. net operating losses subject to limitation under Section 382 of
the Internal Revenue Code. Additionally, the remainder of the Company's U.S.
deferred tax assets may become subject to limitation or permanent loss if
certain changes in ownership, as defined by U.S. tax rules, occur in the future.
U.S. and Foreign Income Tax Carryforwards at December 31, 1996
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT DATES
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Federal net operating loss carryforwards:............................................ $ 77,401 2000-2010
U.S. Federal capital loss carryforward:................................................... 22,907 2001
Foreign net operating loss carryforwards:................................................. 12,436 1997-2006
41,887 None
Tax credit carryforwards of foreign operations:........................................... 1,784 2000-2006
5,922 None
</TABLE>
E-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings of foreign subsidiaries considered to be reinvested for an
indefinite period at December 31, 1996 total approximately $25.0 million. If
those earnings were remitted, estimated withholding taxes of $3.2 million would
be currently payable.
It is impracticable to compute the deferred tax asset or liability on the
Company's investments in its foreign subsidiaries.
10. COMMITMENTS AND CONTINGENCIES
Largely as a result of divestitures and other downsizing actions and the
formation of certain cooperative ventures in recent years, the Company has
agreed to incur or retain a variety of contingent liabilities. Generally, these
liabilities include requirements for performance of various obligations assumed
in some manner by the acquirer, such as customer contracts and leases of
facilities and equipment; commitments to purchase products or services;
commitments to invest or advance funds; and potential liabilities relating to
the downsizing actions, such as litigation arising from workforce reductions,
purchase price adjustments, or representation and warranty obligations.
The Company monitors such contingent liabilities and has established
reserves for those which it believes are probable of payment. Management
believes that in the aggregate the contingent liabilities will not have a
materially adverse impact on the financial position of the Company.
11. RELATED PARTY TRANSACTIONS
SILICON GRAPHICS, INC.
In August 1992, an agreement was signed between Silicon Graphics, Inc. (SGI)
and the Company to purchase 1,185,224 shares of the Company's Common Stock for
an aggregate amount of $14.4 million. On February 14, 1995, the Company
repurchased 1,185,224 shares of its Common Stock from SGI for an aggregate
purchase price of $7.1 million.
The Company purchased a total of approximately $17.7 million of SGI products
in 1996, $33.0 million in 1995, and $39.7 million in 1994.
CERIDIAN
Computing Devices International (CDI), a subsidiary of Ceridian, has been
contracted to manufacture certain proprietary products for the Company. The
Company purchased a total of approximately $3.5 million of CDI products in 1996,
$2.3 million in 1995, and $6.5 million in 1994.
12. LEASES
As Lessor: The Company leases equipment to others through operating leases
with lease terms of one to five years. The Company pays taxes, licenses, and
insurance associated with the equipment under lease. The Company's net
investment in equipment needed to support leasing operations, included in lease
and data center equipment, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Equipment........................................................ $ 18,663 $ 29,160
Less accumulated amortization.................................... 18,274 28,481
------------ ------------
Net investment............................................... $ 389 $ 679
------------ ------------
------------ ------------
</TABLE>
E-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES (CONTINUED)
The minimum future rentals on noncancelable leases with lease terms of one
to five years existing as of December 31, 1996 are $0.9 million in 1997, $0.5
million in 1998, $0.4 million in 1999, $0.3 million in 2000, and $0.2 million in
2001.
As Lessee: The Company leases certain property and equipment under operating
leases. Most of these operating leases contain renewal options and require
payments for taxes, insurance, and maintenance. Although, in most cases
management expects that leases will be renewed or replaced by other leases in
the normal course of business, downsizing activities in recent years have
diminished the need for such renewals and replacements and increased subletting
of leased facilities.
The rental payments under these leases are charged to operations as
incurred. The amounts of rental expense and sublease income for each of the
years in the three year period ended December 31, 1996 appear in the following
table.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Rental expense.................................... $ 10,901 $ 16,785 $ 23,693
Sublease rental income............................ (2,840) (3,072) (4,296)
------------ ------------ ------------
Net rental expense............................ $ 8,061 $ 13,713 $ 19,397
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Future minimum payments under noncancelable operating leases and related
sublease income, on operating leases with initial or remaining lease terms in
excess of one year as of December 31, 1996 are described in the table below.
These amounts do not include obligations which have been recorded as restructure
liabilities, or amounts relating to leasing activity of the Company-owned
headquarters facility, which have been recorded in nonoperating income.
<TABLE>
<CAPTION>
SUBLEASE
LEASE RENTAL
PAYMENTS INCOME NET
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1997........................................................... $ 7,227 $ 1,557 $ 5,670
1998........................................................... 5,878 588 5,290
1999........................................................... 3,917 403 3,514
2000........................................................... 2,931 150 2,781
2001........................................................... 2,417 79 2,338
Thereafter..................................................... 2,567 47 2,520
</TABLE>
E-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTARY DATA TO CONSOLIDATED STATEMENTS OF OPERATIONS
NONOPERATING INCOME (EXPENSE)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency transaction gain..................................... $ 2,571 $ 190 $ 351
Asset sales........................................................... 2,843 1,197 345
Equity in (losses) earnings of affiliates............................. (299) 922 (429)
Other income (expense)................................................ 2,072 1,358 (141)
------------ ------ ------------
Total............................................................. $ 7,187 $ 3,667 $ 126
------------ ------ ------------
------------ ------ ------------
Other Data
Provisions for doubtful accounts.................................... $ 1,127 $ 1,384 $ 1,906
Research and development*........................................... 12,483 9,657 10,127
Maintenance and repairs............................................. 6,703 6,473 7,245
Royalties........................................................... 2,795 5,293 2,245
Advertising......................................................... 1,817 1,937 2,656
</TABLE>
- ------------------------
* Included in technical expenses in the consolidated financial statements.
14. RETIREMENT BENEFITS AND OTHER POST RETIREMENT BENEFITS
Prior to January 1, 1992, substantially all the U.S. employees of the
Company were eligible to participate in the Retirement Plan, a defined-benefit,
salary-reduction plan available to most Ceridian and Company U.S. employees.
Effective January 1, 1992, Ceridian established a separate pension plan for
the Company's U.S. employees (the "Retirement Plan"). Effective December 20,
1992, the Company froze the benefits under the Retirement Plan, meaning such
benefits are computed only on the basis of compensation and service up to that
date.
Certain major international subsidiaries of the Company also offer defined
benefit pension plans to their employees. Benefits under these plans are
calculated on maximum or career-average earnings and years of participation in
the plans. Funding amounts are based on determinations by independent consulting
actuaries of requirements of the Employee Retirement Income Security Act of 1974
("ERISA") in the U.S. and local statutory requirements in other countries.
The net periodic pension cost (credit) and related assumptions for all
defined benefit plans appear in an accompanying table, as does a description of
the funded status of those plans.
E-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RETIREMENT BENEFITS AND OTHER POST RETIREMENT BENEFITS (CONTINUED)
NET PERIODIC PENSION COST (CREDIT)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................................... $ 725 $ 882 $ 967
Interest cost on projected benefit obligation......................... 8,177 8,942 9,079
Actual return on plan assets.......................................... (9,582) (12,841) (5,197)
Net amortization and deferral......................................... 3,108 5,270 (4,341)
------------ ------------ ------------
Total............................................................. $ 2,428 $ 2,253 $ 508
------------ ------------ ------------
------------ ------------ ------------
Rate Assumptions
Discount rate......................................................... 7.3% 7.3% 8.3%
Rate of salary progression............................................ 4.3% 4.4% 5.1%
Long-term rate of return on assets.................................... 7.8% 7.7% 8.1%
</TABLE>
1995 pension expense was reduced by a curtailment/settlement gain of $0.3
million related to a non-U.S. plan. Retirement expense for all other plans
amounted to $0.4 million in 1996, $0.3 million in 1995, and $0.5 million in
1994.
FUNDED STATUS OF DEFINED BENEFIT RETIREMENT PLANS AT MEASUREMENT DATE
PLANS IN WHICH ASSET VALUE EXCEEDS
ACCUMULATED BENEFIT OBLIGATION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of obligation:
Vested benefit obligation.......................................................... $ 22,189 $ 23,933
Accumulated benefit obligation..................................................... $ 22,729 $ 24,546
Projected benefit obligation....................................................... $ 23,685 $ 25,570
Plan assets at fair value............................................................ 49,106 46,857
Plan assets in excess of projected benefit obligation................................ 25,421 21,287
Unrecognized net gain................................................................ (6,745) (4,332)
Unrecognized net asset............................................................... (8,859) (7,804)
------------ ------------
Net pension asset recognized in the consolidated balance sheet....................... $ 9,817 $ 9,151
------------ ------------
------------ ------------
</TABLE>
E-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RETIREMENT BENEFITS AND OTHER POST RETIREMENT BENEFITS (CONTINUED)
PLANS IN WHICH ACCUMULATED BENEFIT
OBLIGATION EXCEEDS ASSET VALUE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of obligation:
Vested benefit obligation.......................................................... $ 103,116 $ 104,382
Accumulated benefit obligation..................................................... $ 103,541 $ 104,768
Projected benefit obligation....................................................... $ 104,571 $ 105,869
Plan assets at fair value............................................................ 72,634 65,522
Projected benefit obligation in excess of plan assets................................ 31,937 40,347
Unrecognized net gain................................................................ (11,215) (15,053)
Unrecognized prior service cost...................................................... (1,529) (1,498)
Unrecognized liability for defined benefit plans..................................... 282 66
Fiscal 1997 settlement reserve....................................................... 987 1,639
Adjustment to recognize minimum pension liability.................................... 6,631 11,854
Net pension liability for defined benefit plans...................................... 27,093 37,355
Other non-defined benefit plans' obligations......................................... 1,489 1,589
------------ ------------
Net pension liability recognized in the consolidated balance sheet................... $ 28,582 $ 38,944
------------ ------------
------------ ------------
</TABLE>
OTHER POST-RETIREMENT BENEFITS
Substantially all retired U.S. employees of the Company prior to July 31,
1992, participate in post-retirement health insurance benefits provided by
Ceridian. Non-U.S. plans are not significant. Ceridian assumed all future
obligations related to all of the Company's retired employees as of July 31,
1992. The Company has no post-retirement benefits committed to retirees since
July 31, 1992.
15. CAPITAL ASSETS
CAPITAL ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Property and equipment, at cost
Land............................................................................... $ 1,216 $ 1,254
Buildings and improvements......................................................... 31,914 32,996
Machinery and equipment............................................................ 47,493 52,999
------------ ------------
Total............................................................................ 80,623 87,249
------------ ------------
Accumulated depreciation............................................................. 63,516 70,461
------------ ------------
Property and equipment, net........................................................ $ 17,107 $ 16,788
------------ ------------
------------ ------------
Leased and data center equipment, at cost $ 18,918 $ 30,809
Accumulated depreciation............................................................. 18,528 30,116
------------ ------------
Leased and data center equipment, net................................................ $ 390 $ 693
------------ ------------
------------ ------------
</TABLE>
E-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. STATEMENTS OF CASH FLOW
NET CHANGE IN WORKING CAPITAL ITEMS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Trade and other receivables........................................... $ (2,921) $ 7,599 $ 13,917
Inventories........................................................... 3,905 5,323 12,721
Prepaid expenses and other current assets............................. 1,696 (28) 1,130
Accounts payable...................................................... (2,839) 6,645 (3,743)
Customer advances and deferred income................................. (515) (11,883) 3,164
Accrued taxes......................................................... 1,220 3,919 1,016
Accrued salaries and wages............................................ (179) (1,207) (2,700)
Other accrued expenses................................................ (3,431) (1,177) (3,522)
------------ ------------ ------------
Net change in working capital items............................... $ (3,064) $ 9,191 $ 21,983
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NONCASH OPERATING, INVESTING, AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Noncash utilization of restructure reserves........................... $ (1,398) $ (22,390) $ (24,584)
Goodwill write-off.................................................... -- -- (24,900)
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid (received) during year for:
Interest paid....................................................... $ 208 $ 1,038 $ 1,426
Income taxes paid................................................... 3,638 1,856 6,325
Income taxes refunded............................................... (1,590) (8,063) (6,866)
</TABLE>
17. GEOGRAPHIC SEGMENT AND MAJOR CUSTOMER DATA
Information concerning United States and International operations appears in
the accompanying Geographic Segment Data table. Information is presented on the
same basis as utilized by the Company to manage the business. Export sales and
certain income and expense items are reported in the geographic segment where
the final sale is made rather than where the transaction originates. All
inter-company profit has been eliminated. The amounts of the parent company's
equity in net assets of and advances to international subsidiaries and branches
were $383.3 million and $382.9 million at December 31, 1996 and December 31,
1995, respectively.
In 1995 and early 1996, the Company completed the sale of eight
international product distribution operations to AmeriData. Results of
operations, assets, and liabilities for the operations sold are included through
the effective date of divestitures (see note 1(a)).
E-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. GEOGRAPHIC SEGMENT AND MAJOR CUSTOMER DATA (CONTINUED)
GEOGRAPHIC SEGMENT DATA
<TABLE>
<CAPTION>
INTERNATIONAL (2)
------------------------------------------------------------------------
UNITED(1) PAN
STATES AMERICAN EUROPE ASIA TOTAL CONSOLIDATED
---------- ----------- ---------- --------- ---------- ------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996 Revenues............................ $ 145,954 $ 357 $ 113,129 $ 46,256 $ 159,742 $ 305,696
Earnings (loss) from operations.......... 2,654 (311) 843 1,798 2,330 4,984
Identifiable assets...................... 129,665 8,389 48,352 33,891 90,632 220,297
1995 Revenues............................ 139,863 33,538 227,538 53,876 314,952 454,815
Earnings (loss) from operations.......... 1,125 1,415 (925) 100 590 1,715
Identifiable assets...................... 116,615 9,165 62,686 39,019 110,870 227,485
1994 Revenues............................ 149,517 85,615 230,131 58,964 374,710 524,227
Earnings (loss) from operations.......... (78,020) 5,658 (25,081) 410 (19,013) (97,033)
Identifiable assets...................... 112,939 32,507 115,847 39,275 187,629 300,568
</TABLE>
- ------------------------
(1) United States earnings (loss) from operations include substantially all
technical expenses, marketing expenses, and other corporate support and
administrative costs.
(2) Pan American includes primarily the operations in Canada and Mexico. Europe
includes primarily the operations in Denmark, France, Germany, and United
Kingdom. Asia includes primarily the operations in Korea and Taiwan.
MAJOR CUSTOMERS
The Company's customers are located throughout the world. No single customer
accounted for more than ten percent of the Company's revenues in 1996, 1995, or
1994, except for revenue from sales to various U.S. government agencies which
amounted to approximately 19.5% in 1996, 13.6% in 1995, and 12.0% in 1994.
18. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
During the fourth quarter of 1994, the Company completed a thorough review
of its worldwide business operations and market opportunities. The Company
concluded it was necessary to further reduce the geographic scope of operations,
downsize employment levels worldwide, and revalue selected assets. As a result,
the Company adopted a formal restructuring plan resulting in a pre-tax
restructuring charge of $70.1 million.
Under the 1994 restructuring plan, the Company took a $34.0 million charge
to reduce the worldwide workforce. During 1995, severance cost activity included
cash payments of $11.5 million related to the reduction of the worldwide
workforce by approximately 230 individuals and a reclassification of $7.6
million of severance accrual which was no longer required primarily as a direct
result of the divestiture activities discussed in note 3. This accrual was
reclassified to other restructuring accruals to offset the cash and noncash
activity associated with the AmeriData divestitures. As a result of these
divestitures, the reduction in workforce related to the Company's restructuring
charge will total approximately 475 individuals versus the original estimate of
600 individuals. Cash outlays for 1995 were below Company expectations due in
part to lower than planned severance activity in its international operations
because of delays in legally required procedures for such activities. During
1996, severance cost activity included cash
E-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT (CONTINUED)
payments of $6.8 million related to the reduction of the worldwide workforce by
approximately 115 individuals.
Asset revaluations and write-offs accounted for $14.3 million of the 1994
restructuring charge. This charge reduced certain assets to their net realizable
value and was a direct result of the Company refocusing its business strategy
including discontinuance of marketing efforts related to proprietary systems.
Both 1995 and 1996 activity included the write down of assets directly related
to the AmeriData divestitures discussed in note 3.
Lease and other facility obligations accounted for $9.7 million of the 1994
restructuring charge. This charge was comprised of lease buyouts for facilities
and other commitments under leases resulting from the Company's plan to reduce
its geographic dispersion by consolidating sales and services offices into more
central operations. During 1995, lease and other facility obligations activity
included cash payments of $8.5 million related to commitments under leases
throughout the United States, Canada, and Europe and a reclassification of a
$2.5 million lease and other facility obligations accrual which was no longer
required primarily as a direct result of the divestiture activity discussed in
note 3. This accrual was classified to other restructuring accruals to offset
the cash and noncash activity associated with the AmeriData divestitures. During
1996, lease and other facility obligations activity included cash payments of
$2.5 million related to commitments under leases throughout the United States
and Europe and reclassification that increased the accrual by $1.0 million for a
change in estimate relating to facility issues in Europe. This increase was
funded in part by the cash proceeds from the favorable settlement of a
restructure-related pension asset and other miscellaneous reclassifications. The
majority of the remaining lease obligations of $1.6 million relates to lease
commitments in Europe.
Other charges accounted for $6.5 million of the 1994 restructuring charge
and consisted of $3.5 million for pension accruals resulting from lump sum
payments, $1.1 million for litigation matters, and several less significant
items. During 1995, other activity included cash payments of $2.8 million for
litigation and other less significant items and noncash activity primarily
associated with the AmeriData divestitures including the write-off of goodwill
of $9.3 million and net book value of operations sold of $10.1 million. During
1996, other activity included cash payments of $1.7 million for litigation
matters associated with Europe and the AmeriData divestitures and several less
significant items. The majority of the remaining accrual of $2.8 million relates
to litigation matters.
Future cash outlays for the remaining restructuring reserve of $12.2 million
at December 31, 1996 are anticipated to be $8.9 million and $3.3 million in 1997
and 1998, respectively.
E-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT (CONTINUED)
The following represents the Company's restructuring activities for the
periods indicated:
<TABLE>
<CAPTION>
ASSET
REVALUATIONS AND OTHER CURRENCY
SEVERANCE AND FACILITY TRANSLATION
(DOLLARS IN THOUSANDS) COSTS WRITE-OFFS OBLIGATIONS ADJUSTMENT OTHER TOTAL
- ------------------------------------- ---------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994........... $ 17,229 $ -- $ 10,880 $ -- $ 4,167 $ 32,276
Restructuring charge............... 33,963 14,330 9,686 5,630 6,491 70,100
Noncash items...................... -- (14,330) (337) (5,630) (4,287) (24,584)
Cash payments/refunds, net......... (17,863) -- (6,389) -- 1,398 (22,854)
---------- ------------- ----------- ----------- ---------- ----------
Balance at December 31, 1994......... 33,329 -- 13,840 -- 7,769 54,938
Noncash items...................... -- (836) -- (1,515) (20,039) (22,390)
Reclassifications and transfers,
net.............................. (7,619) 812 (2,534) 3,208 19,534 13,401
Translation........................ 1,186 24 340 (1,693) 143 --
Cash payments...................... (11,496) -- (8,515) -- (2,822) (22,833)
---------- ------------- ----------- ----------- ---------- ----------
Balance at December 31, 1995......... 15,400 -- 3,131 -- 4,585 23,116
Noncash items...................... -- (889) -- (480) (29) (1,398)
Reclassifications and transfers,
net.............................. (422) 869 1,024 -- 1 1,472
Translation........................ (396) 20 (71) 480 (33) --
Cash payments........................ (6,768) -- (2,511) -- (1,689) (10,968)
---------- ------------- ----------- ----------- ---------- ----------
Balance at December 31, 1996......... $ 7,814 $ -- $ 1,573 $ -- $ 2,835 $ 12,222
---------- ------------- ----------- ----------- ---------- ----------
---------- ------------- ----------- ----------- ---------- ----------
</TABLE>
19. GOODWILL
Prior to 1995, the Company acquired several companies which were engaged in
the computer systems and network integration business. The Company classified
the excess of the purchase price over the fair value of net assets acquired as
goodwill.
In the third quarter of 1995, unamortized goodwill, related to MICHAEL
Business Systems Plc and Antares Electronics, Inc., was written off as part of
the AmeriData divestitures (see note 3).
During the fourth quarter of 1994, the Company concluded that the carrying
values of the Evernet Systems, Inc. and Dataselskapet A/S goodwill balances were
fully impaired and the remaining unamortized balances of $24.9 million were
charged to earnings. The primary reasons for these write-offs included
significant reduction in the employee and customer bases and a refocusing of the
Company's overall business strategy. At the time the write-off was taken, there
were no other noncurrent assets remaining from these acquisitions.
E-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. GOODWILL (CONTINUED)
Changes in the goodwill balances are summarized as follows:
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
ACCUMULATED TRANSLATION
GROSS AMORTIZATION ADJUSTMENT NET
---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1994..................................... $ 29,589 $ (1,742) $ (5) $ 27,842
Acquisition of businesses.................................... 9,911 -- -- 9,911
Foreign currency translation adjustment...................... -- -- 511 511
Amortization of goodwill..................................... -- (3,177) -- (3,177)
Goodwill write-off........................................... (28,683) 3,783 -- (24,900)
---------- ------------ ----------- ----------
Balance at December 31, 1994................................... 10,817 (1,136) 506 10,187
Foreign currency translation adjustment...................... -- -- (129) (129)
Amortization of goodwill..................................... -- (770) -- (770)
Goodwill write-off........................................... (10,817) 1,906 (377) (9,288)
---------- ------------ ----------- ----------
Balance at December 31, 1995................................... $ -- $ -- $ -- $ --
---------- ------------ ----------- ----------
---------- ------------ ----------- ----------
</TABLE>
The Company did not make any significant business acquisitions during 1996
or 1995.
SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................... $ 79,852 $ 72,060 $ 75,531 $ 78,254 $ 90,423 $ 105,240 $ 129,088 $ 130,064
COST OF REVENUES................... 53,676 45,938 49,168 52,588 61,352 76,078 96,483 96,467
Gross profit....................... 26,176 26,122 26,363 25,666 29,071 29,162 32,605 33,597
OPERATING EXPENSES:
Selling, general and
administrative................. 21,791 21,986 21,675 21,409 24,228 28,261 30,386 30,172
Technical........................ 2,801 3,247 3,174 3,260 2,753 2,445 2,137 2,338
Total operating expenses....... 24,592 25,233 24,849 24,669 26,981 30,706 32,523 32,510
Earnings (loss) from
operations..................... 1,584 889 1,514 997 2,090 (1,544) 82 1,087
NONOPERATING INCOME (EXPENSES):
Interest expense................. (26) (26) (40) (112) (70) (236) (453) (274)
Interest income.................. 1,375 1,300 1,231 1,207 1,478 1,263 1,592 1,386
Other income, net................ 3,590 1,061 1,349 1,186 278 1,449 1,240 700
Total nonoperating income,
net.......................... 4,939 2,335 2,540 2,281 1,686 2,476 2,379 1,812
Earnings before income taxes... 6,523 3,224 4,054 3,278 3,776 932 2,461 2,899
PROVISION FOR INCOME TAXES......... -- 300 400 400 -- 300 200 700
Net earnings..................... $ 6,523 $ 2,924 $ 3,654 $ 2,878 $ 3,776 $ 632 $ 2,261 $ 2,199
</TABLE>
E-37
<PAGE>
APPENDIX F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
(Mark one)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20252
CONTROL DATA SYSTEMS, INC.
(Exact name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
DELAWARE 41-1718075
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
</TABLE>
------------------------
4201 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126-6198
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 415-3001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 12,646,521 shares of Common
Stock, $0.01 par value per share, as of July 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CONTROL DATA SYSTEMS, INC.
FORM 10-Q
JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART I--FINANCIAL INFORMATION:
Consolidated Statements of Operations--
Three and six months ended June 30, 1997 and June 30, 1996................................................ F-2
Consolidated Balance Sheets--
June 30, 1997 and December 31, 1996....................................................................... F-3
Consolidated Statements of Cash Flows--
Six months ended June 30, 1997 and June 30, 1996.......................................................... F-4
Notes to Consolidated Financial Statements................................................................. F-5
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... F-10
PART II--OTHER INFORMATION................................................................................. F-20
SIGNATURE.................................................................................................. F-21
EXHIBIT INDEX.............................................................................................. F-22
</TABLE>
F-1
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Software and services............................................ $ 35,172 $ 42,908 $ 70,982 $ 82,771
Maintenance and repair........................................... 12,568 14,208 24,853 29,072
Hardware products................................................ 12,538 18,415 25,396 41,942
--------- --------- ---------- ----------
Total revenues................................................. 60,278 75,531 121,231 153,785
COST OF REVENUES:
Software and services............................................ 21,610 27,379 43,992 53,729
Maintenance and repair........................................... 7,457 7,955 15,424 17,150
Hardware products................................................ 9,731 13,834 19,182 30,877
--------- --------- ---------- ----------
Total cost of revenues......................................... 38,798 49,168 78,598 101,756
Gross profit................................................... 21,480 26,363 42,633 52,029
OPERATING EXPENSES:
Selling, general and administrative.............................. 16,421 21,675 34,315 43,084
Technical........................................................ 2,812 3,174 6,543 6,434
--------- --------- ---------- ----------
Total operating expenses....................................... 19,233 24,849 40,858 49,518
--------- --------- ---------- ----------
Earnings from operations....................................... 2,247 1,514 1,775 2,511
--------- --------- ---------- ----------
NONOPERATING INCOME (EXPENSES):
Interest expense................................................. (48) (40) (75) (152)
Interest income.................................................. 1,474 1,231 2,754 2,438
Gain on sale of business......................................... -- -- 15,000 --
Other income..................................................... 1,271 1,349 2,390 2,535
--------- --------- ---------- ----------
Total nonoperating income, net................................. 2,697 2,540 20,069 4,821
--------- --------- ---------- ----------
Earnings before income taxes................................... 4,944 4,054 21,844 7,332
PROVISION FOR INCOME TAXES......................................... 2,250 400 2,550 800
--------- --------- ---------- ----------
Net earnings..................................................... $ 2,694 $ 3,654 $ 19,294 $ 6,532
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Primary earnings per common share and common share equivalents..... $ 0.20 $ 0.25 $ 1.42 $ 0.45
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Fully diluted earnings per common share and common share
equivalents....................................................... $ 0.20 $ 0.25 $ 1.42 $ 0.45
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average common shares outstanding (in thousands):
Primary.......................................................... 13,162 14,644 13,546 14,438
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Fully diluted.................................................... 13,178 14,644 13,546 14,452
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
JUNE 30, ------------
1997
-----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and short-term investments..................................................... $ 101,134 $ 84,610
Trade and other receivables......................................................... 63,694 84,198
Inventories......................................................................... 13,765 14,511
Prepaid expenses and other current assets........................................... 3,363 3,809
----------- ------------
Total current assets.............................................................. 181,956 187,128
Investments and advances.............................................................. 895 601
Property, plant and equipment, net.................................................... 16,059 17,497
Noncurrent trade and other receivables................................................ 6,298 4,820
Other noncurrent assets............................................................... 3,594 10,251
----------- ------------
Total assets...................................................................... $ 208,802 $ 220,297
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable....................................................................... $ 3,832 $ 289
Accounts payable.................................................................... 11,702 15,773
Customer advances and deferred income............................................... 4,612 6,649
Accrued taxes....................................................................... 6,989 6,610
Accrued salaries and wages.......................................................... 11,190 11,579
Other accrued expenses.............................................................. 31,459 35,437
----------- ------------
Total current liabilities......................................................... 69,784 76,337
Deferred income taxes................................................................. 439 469
Restructure reserves, less current portion............................................ -- 3,290
Pension liabilities................................................................... 26,164 28,582
Other noncurrent liabilities.......................................................... 2,493 2,599
----------- ------------
Total liabilities................................................................. 98,880 111,277
----------- ------------
Stockholders' equity:
Preferred stock, par value $.01 per share, authorized 5,000,000 shares; none issued
and outstanding................................................................... -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares; issued
14,963,064 and 14,883,500 shares as of June 30, 1997 and December 31, 1996,
respectively...................................................................... 150 149
Additional paid-in capital.......................................................... 172,586 171,845
Accumulated deficit................................................................. (27,101) (46,395)
Minimum pension liability adjustment................................................ (6,631) (6,631)
Foreign currency translation adjustment............................................. (1,954) (1,438)
Unearned compensation--restricted stock............................................. (53) (106)
Unrealized gains (losses) on investments............................................ (61) 36
Treasury stock, at cost (2,348,123 and 1,203,390 shares as of June 30, 1997 and
December 31, 1996, respectively).................................................. (27,014) (8,440)
----------- ------------
Total stockholders' equity........................................................ 109,922 109,020
----------- ------------
Total liabilities and stockholders' equity........................................ $ 208,802 $ 220,297
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONTROL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings............................................................................... $ 19,294 $ 6,532
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Gain on sale of business................................................................. (15,000) --
Gain on pension settlement............................................................... (3,914) --
Depreciation............................................................................. 3,563 3,534
Amortization............................................................................. 143 184
Foreign currency transaction gain........................................................ (1,426) (1,181)
Equity in losses of affiliates........................................................... 46 251
Restructure reserves utilized............................................................ (7,890) (6,987)
Loss on sale of marketable securities and other assets................................... 32 227
Net change in working capital items...................................................... 6,099 148
Net change in noncurrent trade receivables............................................... (1,605) 299
Net change in other noncurrent assets.................................................... (1,121) (691)
Other.................................................................................... 795 329
--------- ---------
Net cash provided by (used in) operating activities.................................... (984) 2,645
--------- ---------
Cash Flows from Investing Activities:
Expended for property, plant and equipment................................................. (3,055) (4,540)
Investment in affiliates................................................................... (893) --
Proceeds from sales of property and equipment.............................................. 216 54
Proceeds from divestitures of businesses, net of cash given................................ 21,150 9
Proceeds from pension settlement........................................................... 11,074 --
Proceeds from notes receivable............................................................. 3,600 --
Change in short-term investments........................................................... (12,037) (9,806)
--------- ---------
Net cash provided by (used in) investing activities.................................... 20,055 (14,283)
--------- ---------
Cash Flows from Financing Activities:
Borrowings under short-term financing arrangements, net.................................... 3,702 1,643
Proceeds from issuance of common stock, net of issuance costs.............................. 741 5,987
Purchase of treasury stock................................................................. (18,573) --
--------- ---------
Net cash provided by (used in) financing activities.................................... (14,130) 7,630
--------- ---------
Effect of Exchange Rate Changes on Cash...................................................... (454) (344)
--------- ---------
Net change in cash and cash equivalents.................................................. 4,487 (4,352)
Cash and cash equivalents, beginning of period........................................... 7,649 15,188
--------- ---------
Cash and cash equivalents, end of period................................................. 12,136 10,836
Short-term investments................................................................... 88,998 78,652
--------- ---------
Cash and short-term investments, end of period............................................... $ 101,134 $ 89,488
--------- ---------
--------- ---------
Net Change in Working Capital Items:
Trade and other receivables................................................................ $ 14,032 $ 4,128
Inventories................................................................................ 76 17
Prepaid expenses and other current assets.................................................. (317) 1,246
Accounts payable........................................................................... (3,430) (4,622)
Customer advances and deferred income...................................................... (1,271) (684)
Accrued taxes.............................................................................. 842 (1,611)
Accrued salaries and wages................................................................. 412 (300)
Other accrued expenses..................................................................... (4,245) 1,974
--------- ---------
Net change in working capital items.................................................... $ 6,099 $ 148
--------- ---------
--------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest paid............................................................................ $ 75 $ 153
Income taxes paid........................................................................ 491 1,741
Income taxes refunded.................................................................... (288) (883)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of Control Data Systems, Inc. ("Control Data" or
the "Company") include the accounts of all majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
In the opinion of the Company, the consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments, except as set
forth in the Notes to Consolidated Financial Statements) necessary to present
fairly the financial position for the interim periods presented.
PRESENTATIONS
Certain prior period amounts have been reclassified to conform to the
current year's presentation.
NET EARNINGS PER SHARE
The net earnings per common share and common share equivalents is computed
by dividing net earnings by the weighted average number of shares and dilutive
common share equivalents outstanding during each period. Common stock
equivalents result from dilutive stock options and warrants computed using the
treasury stock method.
F-5
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
2. STOCKHOLDERS' EQUITY
Common Stock, Additional Paid-In Capital, Retained Earnings, and Other
<TABLE>
<CAPTION>
SHARES RETAINED
----------------------------------- ADDITIONAL EARNINGS
OUTSTAND- TREASURY COMMON PAID-IN (ACCUMULATED
(DOLLARS AND SHARES IN THOUSANDS) ING STOCK ISSUED STOCK CAPITAL DEFICIT) OTHER*
- ------------------------------------- ----------- ----------- --------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......... 13,680 1,203 14,883 $ 149 $ 171,845 $ (46,395) $ (16,579)
Issuance of common stock under the
Employee Stock Purchase Plan........ 7 -- 7 -- 125 -- --
Exercises of stock options........... 16 -- 16 -- 137 -- --
Foreign currency translation
adjustment.......................... -- -- -- -- -- -- (276)
Restricted stock award............... -- -- -- -- -- -- 26
Change in unrealized gains (losses)
on investments...................... -- -- -- -- -- -- (5)
Purchase of treasury stock........... (904) 904 -- -- -- -- (14,862)
Net earnings......................... -- -- -- -- -- 16,600 --
----------- ----- --------- ----- ----------- ------------ ---------
Balance at March 31, 1997............ 12,799 2,107 14,906 $ 149 $ 172,107 $ (29,795) $ (31,696)
Issuance of common stock under the
Employee Stock Purchase Plan........ 11 -- 11 -- 137 -- --
Exercises of stock options........... 46 -- 46 1 342 -- --
Foreign currency translation
adjustment.......................... -- -- -- -- -- -- (240)
Restricted stock award............... -- -- -- -- -- -- 27
Change in unrealized gains (losses)
on investments...................... -- -- -- -- -- -- (92)
Purchase of treasury stock........... (241) 241 -- -- -- -- (3,712)
Net earnings......................... -- -- -- -- -- 2,694 --
----------- ----- --------- ----- ----------- ------------ ---------
Balance at June 30, 1997............. 12,615 2,348 14,963 $ 150 $ 172,586 $ (27,101) $ (35,713)
----------- ----- --------- ----- ----------- ------------ ---------
----------- ----- --------- ----- ----------- ------------ ---------
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS) TOTAL
- ------------------------------------- ---------
<S> <C>
Balance at December 31, 1996......... $ 109,020
Issuance of common stock under the
Employee Stock Purchase Plan........ 125
Exercises of stock options........... 137
Foreign currency translation
adjustment.......................... (276)
Restricted stock award............... 26
Change in unrealized gains (losses)
on investments...................... (5)
Purchase of treasury stock........... (14,862)
Net earnings......................... 16,600
---------
Balance at March 31, 1997............ $ 110,765
Issuance of common stock under the
Employee Stock Purchase Plan........ 137
Exercises of stock options........... 343
Foreign currency translation
adjustment.......................... (240)
Restricted stock award............... 27
Change in unrealized gains (losses)
on investments...................... (92)
Purchase of treasury stock........... (3,712)
Net earnings......................... 2,694
---------
Balance at June 30, 1997............. $ 109,922
---------
---------
</TABLE>
- --------------------------
* Other Stockholders' Equity Items
F-6
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
2. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
MINIMUM FOREIGN UNREALIZED
PENSION CURRENCY UNEARNED GAINS
LIABILITY TRANSLATION COMPENSATION- (LOSSES) ON TREASURY
(DOLLARS IN THOUSANDS) ADJUSTMENT ADJUSTMENT RESTRICTED STOCK INVESTMENTS STOCK TOTAL
- ------------------------------------------ ----------- ----------- ----------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.............. $ (6,631) $ (1,438) $ (106) $ 36 $ (8,440) $ (16,579)
Foreign currency translation adjustment... -- (276) -- -- -- (276)
Restricted stock award.................... -- -- 26 -- -- 26
Change in unrealized gains (losses) on
investments.............................. -- -- -- (5) -- (5)
Purchase of treasury stock................ -- -- -- -- (14,862) (14,862)
----------- ----------- ----- --- ---------- ----------
Balance at March 31, 1997................. $ (6,631) $ (1,714) $ (80) $ 31 $ (23,302) $ (31,696)
Foreign currency translation adjustment... -- (240) -- -- -- (240)
Restricted stock award.................... -- -- 27 -- -- 27
Change in unrealized gains (losses) on
investments.............................. -- -- -- (92) -- (92)
Purchase of treasury stock................ -- -- -- -- (3,712) (3,712)
----------- ----------- ----- --- ---------- ----------
Balance at June 30, 1997.................. $ (6,631) $ (1,954) $ (53) $ (61) $ (27,014) $ (35,713)
----------- ----------- ----- --- ---------- ----------
----------- ----------- ----- --- ---------- ----------
</TABLE>
F-7
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
3. DIVESTITURES
The Company entered into a transaction with Structural Dynamics Research
Corporation ("SDRC") in December 1996 to sell its 50% interest in Metaphase
Technology, Inc. and certain assets of the Company's Product Data Management
("PDM") business. The transaction, effective January 1, 1997, produced a gain in
the first quarter of $15.0 million or $1.08 per share. The following table
represents the Company's 1996 pro forma results, excluding the divested PDM
segment:
<TABLE>
<CAPTION>
ENTERPRISE
INTEGRATION TECHNICAL PRODUCT
SERVICES SERVICES DESIGN TOTAL
----------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1st Quarter:
Software and Services................................................. $ 20,988 $ 3,885 $ 6,788 $ 31,661
Maintenance and Repair................................................ -- 14,864 -- 14,864
Hardware Products..................................................... 16,541 1,403 4,629 22,573
----------- ----------- ----------- ---------
Total Revenues...................................................... $ 37,529 $ 20,152 $ 11,417 $ 69,098
Gross Profit %........................................................ 23.6% 36.8% 53.4% 32.4%
2nd Quarter:
Software and Services................................................. $ 28,742 $ 3,705 $ 6,544 $ 38,991
Maintenance and Repair................................................ -- 14,208 -- 14,208
Hardware Products..................................................... 12,325 260 3,336 15,921
----------- ----------- ----------- ---------
Total Revenues...................................................... $ 41,067 $ 18,173 $ 9,880 $ 69,120
Gross Profit %........................................................ 29.3% 39.3% 58.3% 36.0%
3rd Quarter:
Software and Services................................................. $ 22,114 $ 5,250 $ 7,229 $ 34,593
Maintenance and Repair................................................ -- 13,615 -- 13,615
Hardware Products..................................................... 12,558 483 2,814 15,855
----------- ----------- ----------- ---------
Total Revenues...................................................... $ 34,672 $ 19,348 $ 10,043 $ 64,063
Gross Profit %........................................................ 27.0% 36.3% 56.8% 34.5%
4th Quarter:
Software and Services................................................. $ 24,944 $ 6,734 $ 9,023 $ 40,701
Maintenance and Repair................................................ -- 13,359 -- 13,359
Hardware Products..................................................... 16,144 363 3,802 20,309
----------- ----------- ----------- ---------
Total Revenues...................................................... $ 41,088 $ 20,456 $ 12,825 $ 74,369
Gross Profit %........................................................ 26.5% 30.5% 53.2% 32.6%
Total Year:
Software and Services................................................. $ 96,788 $ 19,574 $ 29,584 $ 145,946
Maintenance and Repair................................................ -- 56,046 -- 56,046
Hardware Products..................................................... 57,568 2,509 14,581 74,658
----------- ----------- ----------- ---------
Total Revenues...................................................... $ 154,356 $ 78,129 $ 44,165 $ 276,650
----------- ----------- ----------- ---------
Gross Profit %........................................................ 26.8% 35.6% 55.2% 33.8%
</TABLE>
F-8
<PAGE>
CONTROL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1997
4. RESTRUCTURING RESERVES, CURRENT AND NONCURRENT
During the fourth quarter of 1994, the Company adopted a formal
restructuring plan resulting in a pre-tax restructuring charge of $70.1 million.
At the end of fiscal year 1996, the remaining restructure reserve associated
with this plan totaled $12.2 million. During the first quarter of 1997, uses
totaling $2.4 million reduced this balance to $9.8 million. First quarter 1997
uses were mainly attributable to severance of 28 employees, in addition to
continuing lease and facility obligations. During the second quarter, uses
totaled $5.8 million and consisted of $4.5 million for the settlement of age
discrimination actions and $1.3 million related to severance of 36 employees, in
addition to continuing lease and facility obligations. The remaining reserve
balance of $4.0 million is included in other accruals at June 30, 1997 and
primarily represents severance and facility and lease obligations expected to be
satisfied within the next year.
5. REPURCHASE OF STOCK
Under a program approved by the Board of Directors and announced in July
1996, the Company repurchased 903,733 shares of common stock during the first
quarter of 1997 and 241,000 shares of common stock during the second quarter of
1997 for $14.9 million and $3.7 million, respectively. A total of 1,239,733
shares have been acquired for $20.4 million since the repurchase program was
authorized.
6. SUBSEQUENT EVENTS
In July 1997, the Company announced the signing of a merger agreement with
CDSI Holding Corporation, a company formed at the direction of Welsh, Carson,
Anderson & Stowe, for CDSI Holding Corporation to acquire all of the outstanding
common shares of the Company at a price of $20.25 per share. CDSI Holding
Corporation announced the commencement of its cash tender offer for the
outstanding shares of the Company on July 15, 1997. Approximately 89% of the
presently outstanding common stock had been tendered pursuant to the offer,
which expired on August 11, 1997.
F-9
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED)
The following discussion presents management's analysis of the results of
operations for the first three and six months of 1997 compared to the first
three and six months of 1996 and changes in financial condition from December
31, 1996 to June 30, 1997.
RESULTS OF OPERATIONS
The Company provides Enterprise Integration software and service solutions
that include network design, installation and maintenance; application
re-hosting to client-server architectures; the integration of disparate
electronic messaging systems; and corporate directory design and implementation.
Its Technical Services offerings include hardware and software maintenance
services; rapid technology deployment in distributed environments; complex
circuit board repair; and customer service hotline support. The Company's
Product Design software provides computer-aided design ("CAD") software and
services, primarily to the discrete manufacturing industry.
The Company has a number of suppliers and partners providing a range of
hardware and software platforms, complementary products and services, and sales
and marketing activities.
REVENUES BY CATEGORY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 CHANGE 1997 1996 CHANGE
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Software and services............................. $ 35.2 $ 42.9 (17.9)% $ 71.0 $ 82.8 (14.3)%
Maintenance and repair............................ 12.6 14.2 (11.3)% 24.8 29.1 (14.8)%
Hardware products................................. 12.5 18.4 (32.1)% 25.4 41.9 (39.4)%
----- ----- ----- ----------- ----------- -----
Total revenues.................................. $ 60.3 $ 75.5 (20.1)% $ 121.2 $ 153.8 (21.2)%
----- ----- ----- ----------- ----------- -----
----- ----- ----- ----------- ----------- -----
</TABLE>
REVENUES BY GEOGRAPHY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 CHANGE 1997 1996 CHANGE
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Americas.......................................... $ 30.2 $ 33.3 (9.3)% $ 60.3 $ 69.6 (13.4)%
Europe............................................ 23.9 26.3 (9.1)% 45.7 56.8 (19.5)%
Asia.............................................. 6.2 15.9 (61.0)% 15.2 27.4 (44.5)%
----- ----- ----- ----------- ----------- -----
Total revenues.................................. $ 60.3 $ 75.5 (20.1)% $ 121.2 $ 153.8 (21.2)%
----- ----- ----- ----------- ----------- -----
----- ----- ----- ----------- ----------- -----
</TABLE>
As a result of the divested PDM business (see note 3 of the Notes to
Consolidated Financial Statements), the Company expects total revenues to
decline from 1996 to 1997 on an as reported basis. Revenues decreased in the
second quarter and the first six months of 1997 from the comparable periods of
1996 in all revenue categories. The largest percentage decrease was in hardware
products revenues. This decrease reflects the continuing erosion of the
Company's installed base of proprietary hardware and the Company's continuing
de-emphasis on low-margin hardware activity.
F-10
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
Software and services revenues decreased on an as reported basis and on a
pro forma basis in the second quarter of 1997 compared to the second quarter of
1996. In the six months ended June 30, 1997, software and services revenues
decreased on an as reported basis, but increased slightly on a pro forma basis
compared to the first six months of 1996. Software and services revenues were
affected in the second quarter of 1997 by project slippage into future quarters.
Software and services revenues were 58.3% of the Company's total revenues in
the second quarter of 1997, which is an increase from the 1996 as reported and
pro forma percentages of total revenues of 56.8% and 56.4%, respectively. In
addition, software and services revenues for the first six months of 1997 were
58.6% of the Company's total revenues, an increase from the as reported and pro
forma percentages of 53.8% and 51.1%, respectively.
The Americas operations represented 50%, Europe operations represented 40%,
and Asia operations represented 10% of the Company's total second quarter 1997
revenues. Percentages by geography, as a percentage of the Company's total
revenues, for the first six months of 1997 were similar to the second quarter
results. Comparing to the same periods in 1996, the Americas share of total
Company revenues has increased, the Asia share of the total has decreased and
Europe remains fairly consistent.
COST OF REVENUES AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 CHANGE 1997 1996 CHANGE
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Software and services......................... $ 21.6 $ 27.4 (21.2)% $ 44.0 $ 53.7 (18.1)%
Maintenance and repair........................ 7.5 8.0 (6.3)% 15.4 17.2 (10.5)%
Hardware products............................. 9.7 13.8 (29.7)% 19.2 30.9 (37.9)%
----- ----- ----- ----- ----------- -----
Total cost of revenues...................... $ 38.8 $ 49.2 (21.1)% $ 78.6 $ 101.8 (22.8)%
----- ----- ----- ----- ----------- -----
----- ----- ----- ----- ----------- -----
Percentage of revenues...................... 64.4% 65.1% 64.8% 66.2%
Total gross profit.......................... $ 21.5 $ 26.3 (18.3)% $ 42.6 $ 52.0 (18.1)%
----- ----- ----- ----- ----------- -----
----- ----- ----- ----- ----------- -----
Percentage of revenues...................... 35.6% 34.9% 35.2% 33.8%
</TABLE>
The primary factor contributing to cost of revenues and gross profit
decreases in the second quarter and first six months of 1997 from 1996, was the
decline in total revenues. Gross profits decreased in all categories in the
second quarter of 1997 versus both the as reported and the pro forma gross
profits of the comparable period in 1996. While all categories decreased for the
first six months of 1997 versus the same period in 1996 on an as reported basis,
software and services gross profits increased 8% from the pro forma year-to-date
gross profits of $25.0 million.
While total gross profits decreased, total gross margin percentages
increased in the second quarter and first six months of 1997 on an as reported
basis. On a pro forma basis, total margin percentages increased for the first
six month of 1997, however, decreased slightly in the second quarter compared to
the same period in 1996. Despite the slight decrease in total gross margin
percentages in the second quarter of 1997, software and services margin did
increase in the second quarter versus both the as reported and pro forma basis.
Margins continue to decrease in maintenance and repair and hardware products. On
a year-to-date basis, the majority of the gross margin improvement is within the
Electronic Commerce business of the Company's Enterprise Integration Services
business segment and in the Product Design business segment.
F-11
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
On a geography basis, the Americas operations had gross margin percentage
improvement, while both the Europe and Asia operations had little change in the
second quarter of 1997 from the second quarter of 1996. On a year-to-date basis,
Europe has gross margin percentage improvement in 1997 versus the comparable
period in 1996, while the Americas and Asia are relatively unchanged.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 CHANGE 1997 1996 CHANGE
----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative............ $ 16.4 $ 21.7 (24.4)% $ 34.3 $ 43.1 (20.4)%
Percentage of revenues......................... 27.2% 28.7% 28.3% 28.0%
Technical...................................... $ 2.8 $ 3.1 (9.7)% $ 6.5 $ 6.4 1.6 %
Percentage of revenues......................... 4.6% 4.2% 5.4% 4.2%
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses have decreased in
the second quarter and the first six months of 1997 versus both the as reported
basis and the pro forma basis of the comparable periods in 1996 and included a
$3.9 million gain for a pension settlement, a $1.1 million charge for bad debt
associated with an Asia contract, and a $1.3 million charge for write off of a
prepaid software license. The second quarter 1996 pro forma SG&A was $18.7
million or 27.1% of revenues. The first half 1996 pro forma SG&A was $36.9
million or 26.7% of revenues. This expense decrease in 1997 is the result of
downsizing actions taken by the Company and the divestiture of the PDM business.
As a percentage of revenues, SG&A expenses increased in 1997 as a result of
investments made in support of service provider partners.
TECHNICAL. The second quarter 1997 technical expense has decreased from the
comparable period in 1996 on an as reported basis, however, is unchanged on a
pro forma basis. Technical expense for the first six months of 1997 increased
versus both the as reported and the pro forma basis of the comparable periods in
1996. As a percentage of revenues, technical expense has increased in 1997 due
to higher spending on digital commerce products and services.
NONOPERATING INCOME (EXPENSES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
------------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 CHANGE 1997 1996 CHANGE
----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest expense................................... (0.1) -- (0.1) (0.1)
Interest income.................................... 1.5 1.2 2.8 2.4
Other income....................................... 1.3 1.3 17.4 2.5
----- --- ----- -----
Nonoperating income................................ $ 2.7 $ 2.5 8.0% $ 20.1 $ 4.8 318.8%
Percentage of revenues............................. 4.5% 3.3% 16.6% 3.1%
</TABLE>
INTEREST EXPENSE. Interest expense for the second quarter and the first six
months of 1997 was comparable to the same periods in 1996.
INTEREST INCOME. Interest income increased in the second quarter and the
first six months of 1997 versus the comparable periods in 1996 due to higher
average interest rate yields.
F-12
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
OTHER INCOME. Other income, which includes such items as rental income and
exchange gain/loss, was comparable in the second quarter of 1997 to the same
period of 1996. Other income increased in the first six months of 1997 compared
to the first six months of 1996 due to the gain of $15.0 million from the sale
of Metaphase and the PDM business in the first quarter of 1997 (see note 3 of
the Notes to Consolidated Financial Statements).
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision for income taxes............................................... $ 2.3 $ 0.4 $ 2.6 $ 0.8
Percentage of revenues................................................... 3.7% 0.5% 2.1% 0.5%
</TABLE>
A tax provision of $1.5 million was recorded in the second quarter of 1997
in association with the pension gain from the termination of a non-U.S. pension
plan. The gain from the Metaphase sale, recorded in the first quarter of 1997,
is sheltered by the Company's U.S. tax loss carryforwards and, therefore, the
remainder of the provision for income taxes relates primarily to foreign income
taxes on the earnings of the Company's foreign subsidiaries and foreign
withholding taxes on certain United States income.
NET EARNINGS AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(EARNINGS PER SHARE IN DOLLARS)
<S> <C> <C> <C> <C>
Net earnings............................................... $ 2.7 $ 3.7 $ 19.3 $ 6.5
Percentage of revenues..................................... 4.5% 4.8% 15.9% 4.3%
Earnings per share
Primary.................................................. $ 0.20 $ 0.25 $ 1.42 $ 0.45
Fully diluted............................................ $ 0.20 $ 0.25 $ 1.42 $ 0.45
</TABLE>
Excluding the $15.0 million gain from the sale of Metaphase and the PDM
business in the first quarter of 1997 (see note 3 of the Notes to Consolidated
Financial Statements), net earnings have decreased in the second quarter and
first six months of 1997 versus the comparable periods of 1996. The decrease is
primarily attributable to the increase in provision for income taxes partially
offset by higher nonoperating income, specifically interest income. The
Metaphase transaction contributed $1.08 per share to the first half 1997
earnings per share of $1.42. Operating results for the six months ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
The following tables represent second quarter results for 1997 and 1996 and
pro forma results for 1996. The 1996 second quarter pro forma results are based
on the exclusion of the Product Data Management business segment (see note 3 of
the Notes to Consolidated Financial Statements).
F-13
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
1997/1996 PRO FORMA REVENUES AND GROSS PROFITS
<TABLE>
<CAPTION>
1996
1997 ------------------------
----------- PRO FORMA
2ND QUARTER PERCENTAGE 2ND QUARTER
AS REPORTED CHANGE AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services......................................... $ 35,172 (9.8%) $ 42,908 $ 38,991
Maintenance and repair........................................ 12,568 (11.5%) 14,208 14,208
Hardware products............................................. 12,538 (21.2%) 18,415 15,921
----------- ----------- -----------
Total revenues.............................................. $ 60,278 (12.8%) $ 75,531 $ 69,120
----------- ----------- -----------
----------- ----------- -----------
Gross profit.................................................. $ 21,480 (13.8%) $ 26,363 $ 24,906
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
REVENUE DISTRIBUTION
Software and services......................................... 58.3% 56.8% 56.4%
Maintenance and repair........................................ 20.9% 18.8% 20.6%
Hardware products............................................. 20.8% 24.4% 23.0%
----------- ----------- -----------
Total revenues.............................................. 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
Gross profit.................................................. 35.6% 34.9% 36.0%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
1997 2ND QUARTER REVENUES AND GROSS PROFITS BY BUSINESS TYPE
<TABLE>
<CAPTION>
ENTERPRISE
INTEGRATION PRODUCT TECHNICAL
SERVICES DESIGN SERVICES TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services............................................... $ 25,190 $ 5,887 $ 4,095 $ 35,172
Maintenance and repair.............................................. -- -- 12,568 12,568
Hardware products................................................... 9,751 2,353 434 12,538
----------- --------- ----------- ---------
Total revenues.................................................... $ 34,941 $ 8,240 $ 17,097 $ 60,278
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Gross profit........................................................ 27.8% 59.2% 40.2% 35.6%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
F-14
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
1996 2ND QUARTER PRO FORMA REVENUES AND GROSS PROFITS BY BUSINESS TYPE
<TABLE>
<CAPTION>
ENTERPRISE
INTEGRATION PRODUCT TECHNICAL
SERVICES DESIGN SERVICES TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services............................................... $ 28,742 $ 6,544 $ 3,705 $ 38,991
Maintenance and repair.............................................. -- -- 14,208 14,208
Hardware products................................................... 12,325 3,336 260 15,921
----------- --------- ----------- ---------
Total revenues.................................................... $ 41,067 $ 9,880 $ 18,173 $ 69,120
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Gross profit........................................................ 29.3% 58.3% 39.3% 36.0%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
The following tables represent year-to-date results for 1997 and 1996 and
pro forma results for 1996. The 1996 year-to-date pro forma results are based on
the exclusion of the Product Data Management business segment (see note 3 of the
Notes to Consolidated Financial Statements).
1997/1996 PRO FORMA REVENUES AND GROSS PROFITS
<TABLE>
<CAPTION>
1996
1997 ------------------------
----------- PRO FORMA
YTD PERCENTAGE YEAR-TO-DATE
AS REPORTED CHANGE AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services............................. $ 70,982 0.5% $ 82,771 $ 70,652
Maintenance and repair............................ 24,853 (14.5%) 29,072 29,072
Hardware products................................. 25,396 (34.0%) 41,942 38,494
----------- ----------- -----------
Total revenues.................................. $ 121,231 (12.3%) $ 153,785 $ 138,218
----------- ----------- -----------
----------- ----------- -----------
Gross profit...................................... $ 42,633 (9.8%) $ 52,029 $ 47,269
----------- ----------- -----------
----------- ----------- -----------
REVENUE DISTRIBUTION
Software and services............................. 58.6% 53.8% 51.1%
Maintenance and repair............................ 20.5% 18.9% 21.0%
Hardware products................................. 20.9% 27.3% 27.9%
----------- ----------- -----------
Total revenues.................................. 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
Gross profit...................................... 35.2% 33.8% 34.2%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-15
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
1997 YEAR-TO-DATE REVENUES AND GROSS PROFITS BY BUSINESS TYPE
<TABLE>
<CAPTION>
ENTERPRISE
INTEGRATION PRODUCT TECHNICAL
SERVICES DESIGN SERVICES TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services................................. $ 50,914 $ 12,520 $ 7,548 $ 70,982
Maintenance and repair................................ -- -- 24,853 24,853
Hardware products..................................... 19,190 4,690 1,516 25,396
----------- --------- ----------- ---------
Total revenues...................................... $ 70,104 $ 17,210 $ 33,917 $ 121,231
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Gross profit.......................................... 28.4% 61.0% 36.1% 35.2%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
1996 YEAR-TO-DATE PRO FORMA REVENUES AND GROSS PROFITS BY BUSINESS TYPE
<TABLE>
<CAPTION>
ENTERPRISE
INTEGRATION PRODUCT TECHNICAL
SERVICES DESIGN SERVICES TOTAL
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Software and services................................. $ 49,730 $ 13,332 $ 7,590 $ 70,652
Maintenance and repair................................ -- -- 29,072 29,072
Hardware products..................................... 28,866 7,965 1,663 38,494
----------- --------- ----------- ---------
Total revenues...................................... $ 78,596 $ 21,297 $ 38,325 $ 138,218
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Gross profit.......................................... 26.6% 55.7% 37.9% 34.2%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
FINANCIAL CONDITION
The Company's cash and short-term investments totaled $101.1 million at June
30, 1997 representing 48.4% of total assets. The Company has no long-term debt.
Total cash and short-term investment balances increased by $16.5 million from
the corresponding December 31, 1996 balances. The primary factors in the
increase were positive cash flow of $21.1 million from the Metaphase and PDM
sale and $11.1 million from the termination of a non-U.S. pension plan, $3.6
million from notes receivable from Metaphase Technology, Inc., $6.1 million from
working capital items, net earnings of $19.3 million, which includes a gain on
the sale of Metaphase and PDM for $15.0 million and a gain on the pension plan
settlement for $3.9 million, depreciation and amortization of $3.7 million and
an increase in short term borrowings of $3.7 million partially offset by the
purchase of treasury stock of $18.6 million, restructuring payments of $7.9
million, capital expenditures of $3.1 million, noncurrent assets of $2.7
million, and a foreign currency transaction gain of $1.4 million.
Stockholders' equity increased by $0.9 million in the first six months of
1997. The increase was primarily due to net earnings of $19.3 million and the
issuance of Common Stock of $0.7 million, offset in part by the purchase of
treasury stock of $18.6 million and a foreign currency translation adjustment of
$0.5 million.
F-16
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
As of June 30, 1997, the Company had available up to $13.9 million in credit
facilities, primarily short-term notes and overdraft facilities under bank lines
of credit in certain international subsidiaries, as well as a domestic credit
arrangement which provides up to $10.0 million in unsecured short-term credit.
OUTLOOK
Except for the historical information contained within the Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
accompanying consolidated financial statements, and the Notes to Consolidated
Financial Statements, the matters discussed within this quarterly report
regarding the outlook for Control Data are forward-looking statements based on
current expectations that involve risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward-looking
statements. Such risks and uncertainties include, but are not limited to:
business conditions and growth in the general economy and electronic messaging;
volatility in gross margins as the Company's revenues and product mix change;
additional restructuring actions or charges as the Company continues to evolve
in its rapidly changing industry; competitive factors, such as alternative
messaging and directory solutions, products and price pressures; availability of
skilled personnel in various geographic areas; acceptance of the outsourcing of
corporate messaging infrastructures; the success of the Company's business
partners in sales and marketing activities; and other factors discussed herein.
The following factors, among others, should be considered in evaluating the
Company's outlook.
GENERAL. The Company participates in the global market for enterprise
network communications and focuses its expertise in messaging and directory
services on the emerging market for digital commerce. Specialized software
vendors, large consulting firms, and systems integrators also compete in these
market segments. There are many smaller firms also active in these market
segments with no one firm having a dominant position.
Certain of the firms in these markets offer outsourcing and other types of
long-term agreements with their customer base. The result of these activities is
to develop a backlog of business that provides a more predictable future revenue
base. Because the majority of the Company's core business activities will
continue to be project-based, revenue predictability is difficult and quarterly
volatility of earnings can be expected.
REVENUES. The Company expects total revenues to decline in 1997 from 1996
due to the sale of the PDM business, the continuing erosion of the Company's
installed base of proprietary hardware and software maintenance revenues, and
continuing de-emphasis on hardware reselling. Software and services revenues are
expected to grow in 1997 in the Company's Enterprise Integration Services
business on a pro forma basis as compared to 1996.
COST OF REVENUES. The Company's cost of revenues as a percentage of
revenues is expected to decrease and gross margins as a percentage of revenues
are expected to increase in 1997. Primary factors contributing to these changes
include the de-emphasis of low margin hardware sales and expected cost
improvements associated with software and services revenue. Due to varying gross
profit margins of different types of product sales and varying gross profit
margins of specific large projects quarter to quarter, total gross profit
margins in 1997 could be volatile.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses are expected to
decrease in 1997 from 1996, primarily due to the divestiture of the PDM
business. This decrease will be somewhat offset by
F-17
<PAGE>
CONTROL DATA SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
increases in SG&A expenses associated with planned marketing activities and the
support of service provider partners in the digital commerce market.
TECHNICAL EXPENSES. Technical spending is expected to increase slightly in
1997, as the Company continues its investment in digital commerce products.
INCOME TAX RATE. In total, the Company had $100.5 million of gross deferred
tax assets at December 31, 1996, which can be used to offset taxes on future
earnings. The Company maintains significant operations outside the United
States. Some, but not all, of these operations have deferred tax assets as of
December 31, 1996 resulting from lower than expected 1994 earnings, caused in
part by the worldwide restructuring activity. In the long term this will
significantly reduce the Company's tax expense. However, given the wide
geographical dispersion of the Company's operations, the overall effective tax
rate will be volatile.
FOREIGN EXCHANGE. A large percentage of the Company's business is
transacted in currencies other than the U.S. dollar. As a result, the Company's
financial results are subject to foreign exchange rate fluctuations.
OTHER. See Notes to Consolidated Financial Statements regarding other
factors concerning the Company.
F-18
<PAGE>
PART II
OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Registrant's stockholders was held on May 14,
1997.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees, and the following persons were elected
directors of the Registrant to serve until the next annual meeting of
stockholders and until their successors shall have been duly elected and
qualified:
<TABLE>
<CAPTION>
NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
- ----------------------------------------------- ------------------- ------------------------
<S> <C> <C>
W. Donald Bell................................. 11,305,862 105,932
Grant A. Dove.................................. 11,303,327 108,467
Marcelo A. Gumucio............................. 11,305,939 105,855
W. Douglas Hajjar.............................. 11,307,209 104,585
Keith A. Libbey................................ 11,175,512 236,282
James E. Ousley................................ 11,302,660 109,134
</TABLE>
(c) At the Annual Meeting, the stockholders approved the appointment of KPMG
Peat Marwick LLP as the Company's independent auditors for the current
fiscal year by a vote of 11,290,874 For, 16,423 Against, 104,497 Abstentions
and no broker nonvotes.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
CONTROL DATA SYSTEMS, INC.
---------------------------------------------
Registrant
Date: August 11, 1997 /s/ J. F. KILLORAN
---------------------------------------------
J. F. Killoran
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
F-19
<PAGE>
[LOGO]
CONTROL DATA SYSTEMS, INC.
SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder hereby appoints Thomas E. McInerney and Rudolph
E. Rupert, and each of them as proxies, each with full power of substitution,
to vote as designated on the other side of this card, all shares of common
stock of Control Data Systems, Inc. held of record as of August 22, 1997,
which the undersigned would be entitled to vote if personally present at the
Special Meeting of Stockholders to be held on September 23, 1997, at 9:00
a.m., local time, at 320 Park Avenue, Suite 2500, New York, New York, and at
any adjournment or adjournments thereof, upon the proposal as specified on
reverse side of this card. This proxy will be voted as specified by the
stockholder, but if no choice is specified, this proxy will be voted FOR
approval of the Agreement and Plan of Merger.
(CONTINUED AND TO BE SIGNED AND DATED ON THE OTHER SIDE)
CONTROL DATA SYSTEMS, INC.
P.O. BOX 11055
- --------------------------------------------------- NEW YORK, N.Y. 10203-0055
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
.
Proposal to approve the Agreement and Plan of Merger providing for the merger of CDSI Acquisition Corp. with and into Control
Data Systems, Inc., with Control Data Systems, Inc. to be the surviving corporation and a wholly-owned subsidiary of CDSI Holding
Corporation, a copy of which Agreement and Plan of Merger is attached as Appendix A to the Proxy Statement for the Special
Meeting.
For /X/ Against /X/ Abstain /X/
CHANGE OF ADDRESS AND
OR COMMENTS MARK HERE /X/
IMPORTANT: Please sign exactly as name or names
appear on this Proxy. Joint owners should each
sign personally. When signing as attorney,
executor, administrator, trustee or guardian,
please give your full title as such. When
signing as a corporation or a partnership,
please sign in the name of the entity by an
authorized person.
Dated: , 1997
-----------------------------------------
-----------------------------------------------
(Please sign name exactly as it appears hereon)
-----------------------------------------------
- ---------------------------------------------------------------------------- (Signature of joint owner, if any)
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED PROXY RETURN VOTES MUST BE INDICATED /X/
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF (X) IN BLACK OR BLUE INK.
AN ENVELOPE IS NOT ENCLOSED OR HAS BEEN MISPLACED, PLEASE RETURN THIS
COMPLETED PROXY TO THE BANK OF NEW YORK, P.O. BOX 11055, NEW YORK, N.Y.
10203-0055.
</TABLE>
