BBN CORPORATION
150 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MASSACHUSETTS 02140
May 12, 1997
Dear Stockholder:
We are pleased to report that BBN Corporation (the "Company") has entered
into a merger agreement with GTE Corporation ("GTE") and one of its
subsidiaries that provides for the acquisition of the Company by GTE at a
price of $29.00 per share in cash. Under the terms of the proposed
transaction, a GTE subsidiary is today commencing a cash tender offer for all
outstanding shares of the Company's common stock at $29.00 per share.
Following the successful completion of the GTE tender offer, the GTE
subsidiary will be merged into the Company and all shares not purchased in the
GTE tender offer will be converted into the right to receive $29.00 per share
in cash in the merger.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE GTE TENDER OFFER AND
DETERMINED THAT THE TERMS OF THE TENDER OFFER AND THE MERGER, TAKEN TOGETHER,
ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS ACCEPTANCE OF THE
GTE TENDER OFFER AND APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER BY THE SHAREHOLDERS OF THE COMPANY.
In arriving at its recommendations, the Board of Directors gave careful
consideration to a number of factors. These factors included the opinion dated
May 6, 1997 of Alex. Brown & Sons Incorporated ("Alex. Brown"), financial
advisor to the Company, to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the cash consideration of
$29.00 per share to be received by Company shareholders (other than GTE and
its affiliates) in the offer and the merger was fair from a financial point of
view to such shareholders.
Accompanying this letter is a copy of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9. Also enclosed is
GTE's Offer to Purchase and related materials, including a Letter of
Transmittal for use in tendering shares. We urge you to read the enclosed
materials, including Alex. Brown's opinion which is attached to the Schedule
14D-9, carefully.
The management and directors of BBN Corporation thank you for the support
you have given the Company.
Sincerely,
/s/ George H. Conrades
George H. Conrades
Chairman of the Board, President
and Chief Executive Officer
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14D-9
Solicitation/Recommendation Statement Pursuant to
Section 14(d)(4) of the Securities Exchange Act of 1934
BBN CORPORATION
(Name of Subject Company)
----------------
BBN CORPORATION
(Name of Person Filing Statement)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(INCLUDING THE ASSOCIATED RIGHTS)
(Title of Classes of Securities)
055283105
(CUSIP Number of Class of Securities)
----------------
JOHN MONTJOY
SENIOR VICE PRESIDENT
BBN CORPORATION
150 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MASSACHUSETTS 02140
(617) 873-2000
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of
the Person Filing Statement)
----------------
WITH A COPY TO
ROBERT F. HAYES, ESQ.
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110
(617) 951-7000
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is BBN Corporation, a Massachusetts
corporation (the "Company"). The address of the principal executive offices of
the Company is 150 CambridgePark Drive, Cambridge, Massachusetts 02140. The
title of the class of equity securities to which this Statement relates is the
shares of common stock, par value $1.00 per share, of the Company (the "Common
Stock"), together with the associated rights (the "Rights," and together with
the Common Stock, the "Shares") to purchase shares of Common Stock issued
pursuant to the Common Stock Rights Agreement dated as of June 23, 1988, as
amended (the "Rights Agreement"), between the Company and The First National
Bank of Boston (the "Rights Agent").
ITEM 2. TENDER OFFER OF THE BIDDER
This Statement relates to a tender offer by GTE Massachusetts Incorporated,
a Massachusetts corporation ("Purchaser") and a wholly owned subsidiary of GTE
Corporation, a New York corporation ("Parent"), disclosed in a Tender Offer
Statement on Schedule 14D-1 (the "Schedule 14D-1") dated May 12, 1997 offering
to purchase all of the outstanding Shares at a price of $29.00 per Share, net
to the seller in cash, without interest thereon upon the terms and subject to
the conditions set forth in the Offer to Purchase dated May 12, 1997 (the
"Offer to Purchase") and the related Letter of Transmittal (which together
constitute the "Offer").
The Offer is being made pursuant to an Agreement and Plan of Merger dated as
of May 5, 1997 (the "Merger Agreement") among Parent, Purchaser, and the
Company. The Merger Agreement provides that, among other things, as soon as
practicable after the consummation of the Offer and satisfaction or, if
permissible, waiver of the conditions to the Merger (as defined below)
Purchaser shall be merged with and into the Company (the "Merger"), the
separate corporate existence of Purchaser shall cease, and the Company shall
continue as the surviving corporation (the "Surviving Corporation"). A copy of
the Merger Agreement is filed as Exhibit 1 to this Statement and is
incorporated herein by reference.
According to the Offer to Purchase, the principal executive offices of
Parent and Purchaser are located at One Stamford Forum, Stamford, Connecticut
06904.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
Statement, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements or understandings between
the Company and its executive officers, directors and affiliates are described
under the captions "1. Election of Directors", "Principal Holders of Company
Common Stock", "Compensation and Certain Other Transactions Involving
Executive Officers" and "Report of Compensation and Stock Option Committee on
Annual Executive Compensation" on pages 4-8 and 18-31 of the Company's Proxy
Statement dated October 2, 1996 for its 1996 Annual Meeting of Shareholders
(the "1996 Proxy Statement"). A copy of such portion of the 1996 Proxy
Statement is filed as Exhibit 4 to this Statement and is incorporated herein
by reference.
INDEMNIFICATION UNDER MASSACHUSETTS LAW, THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND BY-LAWS AND THE MERGER AGREEMENT
The Company is organized under the laws of Massachusetts. The Massachusetts
Business Corporation Law (the "MBCL") provides that indemnification of
directors, officers, employees, and other agents of a Massachusetts
corporation, and persons who serve at its request
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as directors, officers, employees, or other agents of another organization, or
who serve at its request in any capacity with respect to any employee benefit
plan, may be provided by the corporation to whatever extent is specified in
the charter document or votes adopted by its shareholders, except that no
indemnification may be provided for any person with respect to any matter as
to which the person shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his/her action was in the
best interests of the corporation, or to the extent that such matter relates
to services with respect to an employee benefit plan, in the best interests of
the participants or beneficiaries of such employee benefit plan. Under
Massachusetts law, a corporation can purchase and maintain insurance on behalf
of any person against any liability incurred as a director, officer, employee,
agent, or person serving at the request of the corporation as a director,
officer, employee, or other agent of another organization or with respect to
any employee benefit plan, in his/her capacity as such, whether or not the
corporation would have the power to itself indemnify him/her against such
liability.
The Company's Restated Articles of Organization provide that a director of
the Company shall not be liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that such exculpation from liability is not permitted by the MBCL as
the same exists now or may hereafter be amended. Such Restated Articles of
Organization provide further that no amendment to or repeal of the foregoing
provision shall apply to or have any effect on the liability or alleged
liability of any director for or with respect to any act or omission of such
director occurring prior to such amendment or repeal.
The Company's By-laws provide that the Company shall, to the extent legally
permissible, indemnify each of its directors and officers (including persons
who serve at its request as directors, officers, or trustees of another
organization in which it has any interest, as a shareholder, creditor or
otherwise) against all liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees, reasonably incurred by him/her in connection with the defense or
disposition of any action, suit, or other proceeding, whether civil or
criminal, in which he/she may be involved or with which he/she may be
threatened, while in office or thereafter, by reason of his/her being or
having been such a director or officer, except with respect to any matter as
to which he/she shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his/her action was in the
best interests of the Company; provided, however, that as to any matter
disposed of by a compromise payment by such director or officer, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless such compromise shall be approved
as in the best interests of the Company, after notice that it involves such
indemnification, (a) by a disinterested majority of the directors then in
office; or (b) by a majority of the disinterested directors then in office,
provided that there has been obtained an opinion in writing of independent
legal counsel to the effect that such director or officer appears to have
acted in good faith in the reasonable belief that his/her action was in the
best interests of the Company; or (c) by the holders of a majority of the
outstanding stock at the time entitled to vote for directors, voting as a
single class, exclusive of any stock owned by any interested director or
officer. The By-laws further provide that the right of indemnification
provided therein shall not be exclusive of or affect any other rights to which
any director or officer may be entitled.
The Company maintains a Directors and Officers Liability and Corporate
Reimbursement Insurance Policy and a Fiduciary Responsibility Insurance Policy
covering its directors and officers.
The Merger Agreement provides that, from and after the consummation of the
Offer, Parent shall cause the Company and, after the Effective Time, the
Surviving Corporation to indemnify, defend, and hold harmless the present and
former directors and officers of the Company and its subsidiaries (each an
"Indemnified Party") against all losses, claims, damages, or liabilities
arising out of actions or omissions in their capacity as a director or officer
of the Company or a subsidiary occurring on or prior
2
to the consummation of the Offer to the maximum extent permitted or required
under the MBCL and the Company's By-laws in effect on the date of the Merger
Agreement, including provisions with respect to advances of expenses incurred
in the defense of any action or suit, provided that any determination required
to be made with respect to whether an Indemnified Party's conduct complies
with the standards set forth under the MBCL and the Company's By-laws shall be
made by independent legal counsel selected in good faith by the Surviving
Corporation. From and after the consummation of the Offer, Parent shall cause
the Company and, after the Effective Time, the Surviving Corporation, to pay
from time to time in advance of the disposition of any such action, suit, or
other proceeding expenses, including counsel fees, reasonably incurred by the
Indemnified Party in connection with any such action, suit, or other
proceeding; provided that such Indemnified Party shall undertake to repay the
amounts so paid if it is ultimately determined that indemnification for such
expenses is not authorized under the Merger Agreement or otherwise.
Pursuant to the Merger Agreement, from and after the consummation of the
Offer, Parent shall cause the Company and, after the Effective Time, the
Surviving Corporation to maintain the Company's existing officers' and
directors' liability insurance ("D&O Insurance") in full force and effect
without reduction of coverage for a period of three years after the Effective
Time; provided that the Surviving Corporation will not be required to pay an
annual premium therefor in excess of 200% of the last annual premium paid
prior to the date of the Merger Agreement (the "Current Premium"); and,
provided, further, that if the existing D&O Insurance expires, is terminated,
or canceled during the 3-year period, the Surviving Corporation will use
reasonable efforts to obtain as much D&O Insurance as can be obtained for the
remainder of such period for a premium on an annualized basis not in excess of
200% of the Current Premium.
The Merger Agreement provides that the Company will maintain, through the
Effective Time, the Company's existing D&O Insurance in full force and effect
without reduction of coverage.
Pursuant to the Merger Agreement, if the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger and the continuing or surviving entity does not assume
the obligations of the Surviving Corporation relating to indemnification of
officers and directors of the Company set forth in Section 6.9 of the Merger
Agreement, or (ii) transfers all or substantially all of its properties and
assets to any person, then, and in each such case, proper provision shall be
made so that the successors and assigns of the Surviving Corporation assume
the obligations set forth in Section 6.9 of the Merger Agreement.
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, a copy of which is filed herewith as Exhibit 1 and is incorporated
herein by reference. Capitalized terms not otherwise defined in the following
summary of certain provisions of the Merger Agreement have the respective
meanings ascribed to them in the Merger Agreement.
THE OFFER. The Merger Agreement provides for the making of the Offer by
Purchaser. Subject to the Merger Agreement not having been terminated in
accordance with its terms and to the Conditions (as defined below) to the
Offer, Purchaser has agreed to accept for payment and pay $29.00 per share
(the "Offer Price") for all the Shares validly tendered pursuant to the Offer
and not withdrawn prior to the expiration date of the Offer, as promptly as
practicable following the expiration date. Pursuant to the Merger Agreement
and subject to the Conditions, if all of the Conditions are not satisfied on
the initial expiration date of the Offer and the Agreement has not been
terminated in accordance with its terms, Purchaser shall extend (and re-
extend) the Offer through the Final Termination Date to provide time to
satisfy such Conditions. The Final Termination Date shall initially be August
15, 1997; provided, however, if the Purchaser shall extend the Offer pursuant
to the provisions of the last sentence of this paragraph beyond August 15,
1997, the Final Termination Date shall be November 15, 1997. In addition,
whether or not the Conditions have been satisfied, Purchaser may, in its
judgment, extend
3
and reextend the Offer, from time to time, but in no event beyond November 15,
1997, if it believes such extension is advisable in order to facilitate the
orderly transition of the business of the Company and to preserve and maintain
the Company's business relationships.
The obligation of Purchaser to accept for payment and pay for Shares tendered
pursuant to the Offer is subject to (i) the tender and non-withdrawal of Shares
which, when added to the Shares then beneficially owned by Parent, constitutes
two-thirds of the outstanding Shares and (ii) the satisfaction of certain other
Conditions described below. Subject to the terms of the Merger Agreement,
Purchaser reserves the right to amend the terms and conditions of the Offer
provided that, without the written consent of the Company, no amendment to the
Offer may be made which (i) decreases the price per Share or changes the form
of consideration to be paid in the Offer, (ii) decreases the number of Shares
sought in the Offer, or (iii) imposes additional conditions to the Offer other
than those described below or amends any other term of the Offer in any manner
adverse to holders of Shares.
CONDITIONS TO THE OFFER. Notwithstanding any other provision of the Offer,
Purchaser shall not be required to accept for payment or, subject to any
applicable rules and regulations of the SEC, including without limitation, Rule
14e-1(c) under the Securities Exchange Act of 1934 (the "Exchange Act")
(relating to Purchaser's obligation to pay for or return Shares promptly after
termination or withdrawal of the Offer), pay for, or may delay the acceptance
for payment of or payment for, any tendered shares, or may, in its sole
discretion, terminate or amend the Offer as to any Shares not then paid for, if
(i) any applicable waiting period under the HSR Act shall not have expired or
been terminated, (ii) the number of Shares validly tendered and not withdrawn
when added to the Shares then beneficially owned by Parent does not constitute
two-thirds of the Shares then outstanding; or (iii) on or after the date of the
Merger Agreement and at or before the time of payment for the Shares, any of
the following events shall occur and be continuing:
(a) there shall have occurred and be continuing (1) any general
suspension of trading in, or limitation on prices for, securities on the
NYSE, (2) the declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States (whether or not
mandatory), (3) the commencement of a war, armed hostilities or other
international or national calamity directly or indirectly involving the
United States and having had or being reasonably likely to have a Material
Adverse Effect (as defined hereinafter) or would restrain, prohibit or
delay beyond the Final Termination Date the consummation of the Offer, (4)
any limitation or proposed limitation (whether or not mandatory) by any
Governmental Entity, or any other event, that materially adversely affects
generally the extension of credit by banks or other financial institutions,
(5) from the date of the Merger Agreement through the date of termination
or expiration of the Offer, a decline of at least 25% in the Standard &
Poor's 500 Index or (6) in the case of any of the situations described in
clauses (1) through (5) inclusive, existing at the date of the Merger
Agreement, a material acceleration, escalation or worsening thereof;
(b) (i) the representations and warranties of the Company set forth in
the Merger Agreement shall not have been true and correct in any material
respect on the date of the Merger Agreement or (ii) the representations and
warranties of the Company set forth in the Merger Agreement shall not be
true and correct in any respect as of the scheduled expiration date (as
such date may be extended) of the Offer as though made on or as of such
date or the Company shall have breached or failed in any respect to perform
or comply with any obligation, agreement or covenant required by the Merger
Agreement to be performed or complied with by it except, in each case with
respect to clause (ii), (x) for changes specifically permitted by the
Merger Agreement and (y) (A) for those representations and warranties that
address matters only as of a particular date which are true and correct as
of such date or (B) where the failure of representations and warranties
(without giving effect to any limitation based on "materiality," "Material
Adverse Effect" or words of similar effect set forth therein) to be true
and correct, or the performance or compliance with such obligations,
agreements or covenants, would not in the aggregate reasonably be expected
to have a Material Adverse Effect;
4
(c) there shall be any action or proceeding commenced by or before, or
threatened in writing by, any Governmental Entity, which has a reasonable
likelihood of success and which, if decided adversely to the Company, would
have a Material Adverse Effect or would restrain, prohibit or delay beyond
the Final Termination Date the consummation of the Offer and if decided
adversely to Parent, would have the effect of (i) making the purchase of,
or payment for, some or all of the Shares pursuant to the Offer or the
Merger or otherwise illegal, or resulting in a material delay in the
ability of Parent or Purchaser to accept for payment or pay for some or all
of the Shares, (ii) compelling Parent or Purchaser to dispose of or hold
separately all or any material portion of the Company's or Parent's
business or assets, (iii) making illegal, or otherwise directly or
indirectly restraining or prohibiting or imposing material financial
burdens, penalties or fines or requiring the payment of material damages in
connection with the making of, the Offer, the acceptance for payment of,
payment for, or ownership, directly or indirectly, of some of or all the
Shares by Parent or Purchaser, the consummation of the Offer or the Merger,
(iv) otherwise preventing consummation of the Offer or the Merger, or (v)
imposing limitations on the ability of Parent or Purchaser effectively (A)
to acquire, hold or operate the business of the Company and its
subsidiaries taken as a whole or (B) to exercise full rights of ownership
of the Shares acquired by it, including, but not limited to, the right to
vote the Shares purchased by it on all matters properly presented to the
stockholders of the Company, which, in either case, would effect a material
diminution in the value of the Company or the Shares;
(d) there shall been any law, rule or regulation enacted, promulgated,
entered or deemed applicable to the Offer or the Merger Agreement or any
other action shall have been taken or threatened in writing, by any
Governmental Entity on or after the date of the Offer that would reasonably
be expected to, directly or indirectly, result in any of the consequences
referred to in clauses (i) through (v) of paragraph (c) above;
(e) the Board of Directors of the Company shall have publicly (including
by amendment of its Schedule 14D-9) withdrawn or adversely modified its
recommendation of acceptance of the Offer;
(f) since the date of the Merger Agreement, there shall have occurred any
event or events that, singly or in the aggregate, have had or would
reasonably be expected to have a Material Adverse Effect; or
(g) the Merger Agreement shall have been terminated in accordance with
its terms, or Parent or Purchaser shall have reached an agreement or
understanding in writing with the Company providing for termination or
amendment of the Offer;
which, in any such case, and regardless of the circumstances (including any
action or inaction by Parent or Purchaser) giving rise to any such conditions,
makes it in the sole discretion of Parent inadvisable to proceed with the
Offer and/or with such acceptance for payment of or payment for the Shares.
The foregoing conditions (the "Conditions") are for the sole benefit of
Parent and Purchaser and may be asserted by Parent or Purchaser regardless of
the circumstances giving rise to any such Condition and may be waived by
Parent or Purchaser, in whole or in part, at any time and from time to time,
in the sole discretion of Parent or Purchaser. The failure by Parent or
Purchaser at any time to exercise any of the foregoing rights will not be
deemed a waiver of any right and each right will be deemed an ongoing right
which may be asserted at any time and from time to time.
RECOMMENDATION. In the Merger Agreement, the Company states that the Board
has unanimously (i) determined that the Offer and the Merger are fair to and
in the best interests of the stockholders of the Company and (ii) resolved to
recommend acceptance of the Offer and approval and adoption of the Merger
Agreement and the Merger by the stockholders of the Company.
THE MERGER. The Merger Agreement provides that, as soon as practicable
following the purchase of Shares pursuant to the Offer, and the satisfaction
or waiver of the other conditions to the
5
Merger, or on such other date as the parties thereto may agree (such agreement
to require the approval of the majority of the Continuing Directors, if at
that time there shall be any Continuing Directors), Purchaser will be merged
with and into the Company. The Merger shall become effective by filing with
the Secretary of State of Massachusetts articles of merger (the "Articles of
Merger") in accordance with the relevant provisions of the MBCL at such time
(the time the Merger becomes effective being the "Effective Time").
At the Effective Time, (i) each Share issued and outstanding immediately
prior to the Effective Time (other than Shares described in clause (ii) below)
will be converted into the right to receive $29.00 in cash, or any higher
price paid per Share in the Offer, without interest thereon (the "Merger
Price"); (ii) (a) each Share held in the treasury of the Company or held by
any wholly owned subsidiary of the Company and each Share held by Parent or
any wholly owned subsidiary of Parent immediately prior to the Effective Time
will be cancelled and retired and cease to exist; (b) each Share held by any
holder who has perfected any dissenters' rights under the MBCL, as applicable
(the "Dissenting Shares"), will not be converted into or be exchangeable for
the right to receive the Merger Price, and (iii) each share of common stock of
Purchaser issued and outstanding immediately prior to the Effective Time will
be converted into and exchangeable for one share of common stock of the
Surviving Corporation.
The Merger Agreement provides that the Articles of Organization and By-laws
of the Company as in effect at the Effective Time (including such amendments
to the Articles of Organization as are effected by the Articles of Merger)
will be the Articles of Organization and By-laws of the Surviving Corporation
until amended in accordance with applicable law. The Merger Agreement also
provides that (i) the directors of Purchaser at the Effective Time will be the
initial directors of the Surviving Corporation, (ii) the officers of the
Company at the Effective Time will be the initial officers of the Surviving
Corporation, and (iii) the initial officers and directors of the Surviving
Corporation will hold office from the Effective Time until their respective
successors are duly elected or appointed and qualify in the manner provided in
the Articles of Organization and By-laws of the Surviving Corporation, or as
otherwise provided by applicable law.
TREATMENT OF OPTIONS AND CERTAIN OTHER STOCK PURCHASE RIGHTS. In the Merger
Agreement, the Company has agreed, with certain exceptions, that it will not
grant to any non-employees, including non-employee members of the Board of
Directors ("Directors"), and former employees (collectively "Non-Employees"),
or to any current employees any options to purchase Shares, stock appreciation
rights, restricted stock, restricted stock units or any other real or phantom
stock or stock equivalents on or after the date of this Agreement. Options to
acquire Shares which were outstanding as of the date of the Merger Agreement
and which were granted to employees or Non-Employees under any stock option
plan, program or similar arrangement of the Company or any of its subsidiaries
("Options"), other than Options which constitute Restricted Stock (as defined
below) and Options under the ESPP (as defined below) are treated in the Merger
Agreement as follows:
(i) Each current employee as of the date of the Merger Agreement whose
annual base salary is $80,000 or more ("Key Employee") and who is holding
Options which have an exercise price ("Exercise Price") less than the Offer
Price ("In the Money Options") and which are vested as of the date on which
the consummation of the Offer occurs (the "Closing Date") may make an
irrevocable election on a grant by grant basis to be effective immediately
following the Closing Date to receive in exchange for cancellation of each
such vested In the Money Option either (A) a credit to an individual
deferred compensation book account equal to the excess of the Offer Price
over the Exercise Price of such In the Money Option times the number of
Shares subject to such In the Money Option, such deferred compensation book
account to have the terms described below, or (B) an option to purchase a
number of shares of Parent common stock (a "Parent Option") equal to 150%
of the number of Shares subject to the Key Employee's In the Money Option;
provided that (x) the Parent Option received in the exchange will be fully
vested and have
6
the same expiration date as the vested In the Money Option exchanged
therefor, (y) the Exercise Price of the Parent Option is equal to the Fair
Market Value (as defined below), and (z) the Parent Option is governed by
the provisions of the GTE Corporation 1997 Long-Term Incentive Plan
("LTIP") and by applicable LTIP award agreements. For purposes of the
relevant portions of the Merger Agreement, the deferred compensation book
account is denominated in Parent phantom stock units, and dividend
equivalent payments will be credited to such deferred compensation book
account at such time and in such manner as dividends are paid on Parent
common stock. Before the third anniversary of the Closing Date, no
distribution may be made in respect of the deferred compensation book
account to a Key Employee who is employed by Parent or an affiliate of
Parent. The dividend equivalent payments on the deferred compensation book
account are subject to forfeiture in the event the Key Employee is not
employed by Parent or an affiliate of Parent on any date that precedes the
third anniversary of the Closing Date. Parent will determine administrative
procedures and provisions with regard to the deferred compensation book
account. In the event a Key Employee does not make such an irrevocable
election before the Closing Date, the Key Employee will be deemed to have
irrevocably elected the deferred compensation book account credit as
described in clause (A) of the first sentence of this paragraph (i), and
all In the Money Options will be canceled. "Fair Market Value" means the
average of the high and low sales price of the Parent common stock on the
composite tape of the New York Stock Exchange issues as of the Closing
Date, or, in the event that no trading occurs on such day, then the
applicable value will be determined on the last preceding day on which
trading took place.
(ii) Each current employee whose annual base salary as of the date of the
Merger Agreement is less than $80,000 ("Employee") who is holding In the
Money Options which are vested as of the Closing Date may make an
irrevocable election on a grant by grant basis to be effective immediately
following the Closing Date to receive in exchange for cancellation of each
such vested In the Money Option either (A) a cash payment equal, for each
such In the Money Option, to the excess of the Offer Price of a Share over
the Exercise Price of such In the Money Option times the number of Shares
subject to such In the Money Option, or (B) a Parent Option to purchase a
number of shares of Parent common stock equal to 150% of the number of
Shares subject to the Employee's In the Money Option; provided that (x) the
Parent Option received in the exchange will be fully vested and have the
same expiration date as the vested In the Money Option exchanged therefor,
(y) the Exercise Price of the Parent Option will equal the Fair Market
Value, and (z) the Parent Option will be governed by the provisions of the
LTIP and by applicable LTIP award agreements. In the event an Employee does
not make such election before the Closing Date, the Employee will be deemed
to have irrevocably elected the cash payment described in clause (A) of the
preceding sentence, and all In the Money Options will be canceled.
(iii) Options of Key Employees or Employees which have an Exercise Price
equal to or in excess of the Offer Price ("Under-Water Options"),
regardless of whether such Under-Water Options are vested as of the Closing
Date, will immediately following the Closing Date be canceled and exchanged
for Parent Options to purchase a number of shares of Parent common stock
equal to 100% of the number of Shares subject to the Key Employee's or
Employee's Under-Water Options, provided that (x) the Parent Options
received in the exchange will have the same vesting schedule and expiration
date as the Under-Water Options exchanged therefor, (y) the Exercise Price
of the Parent Options will equal the Fair Market Value, and (z) the Parent
Options will be governed by the provisions of the LTIP and by applicable
LTIP award agreements. Notwithstanding the foregoing, if, on or after the
date of the Merger Agreement, a Key Employee exercises vested In the Money
Options that, on the date of the Merger Agreement, represent 50% or more of
the dollar value of the Key Employee's vested In the Money Options, all of
such Key Employee's Under-Water Options will be canceled immediately, the
exchange provisions of this paragraph (iii) will not apply to such Key
Employee, and such Key Employee will receive the sum of one dollar ($1.00)
as good and valuable consideration for all of such Key Employee's Under-
Water Options. For purposes of the immediately preceding sentence, the
dollar value of a vested
7
In the Money Option will be equal to the excess of the Offer Price over the
Exercise Price of such In the Money Option times the number of Shares
subject to the vested In the Money Option.
(iv) In the Money Options of individuals who are Non-Employees as of the
date of the Merger Agreement, including Directors, which are vested as of
the Closing Date will, immediately following the Closing Date, be canceled
and exchanged for a cash payment equal, for each vested In the Money
Option, to the excess of the Offer Price of a Share over the Exercise Price
of such In the Money Option times the number of Shares subject to such In
the Money Option. All other Options of Non-Employees, including Directors,
will be canceled immediately as of the Closing Date and each such Non-
Employee will receive the sum of one dollar ($1.00) as good and valuable
consideration for all such Options.
(v) With respect to In the Money Options of Key Employees, Employees and
Non-Employees, including Directors, the Board of Directors or an
appropriate committee thereof, will provide for the full and immediate
vesting of such In the Money Options as of the Closing Date. Except as
provided in the immediately preceding sentence on or after the date of the
Merger Agreement, the Board of Directors will not make any other changes to
the terms and conditions of any outstanding Options, stock appreciation
rights, restricted stock, restricted stock units or any other real or
phantom stock or stock equivalents.
Pursuant to the Merger Agreement, on the Closing Date, employees of the
Company who hold Shares subject to a risk of forfeiture within the meaning of
Section 83(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
or Options with an exercise price of zero dollars ($0.00) ("Restricted Stock")
will receive in exchange for such Restricted Stock a right to receive a number
of Parent phantom stock units pursuant to a phantom stock plan ("Phantom Stock
Units") determined by dividing (A) the product of (i) the number of shares of
Restricted Stock held by such employee on the Closing Date, and (ii) the Offer
Price, by (B) the Fair Market Value. Such Phantom Stock Units will be credited
with dividend equivalent units at such time and in such manner as dividends
are normally paid on Parent common stock, and the Phantom Stock Units and
dividend equivalent units will be subject to the same vesting schedule as the
Restricted Stock which was exchanged for the Phantom Stock Units. Upon the
Phantom Stock Units vesting, the employee will receive payment of the vested
amounts in cash (less applicable withholding taxes). Parent will determine
administrative procedures and provisions with regard to Phantom Stock Units.
The Merger Agreement also provides that immediately following the Closing
Date, Restricted Stock purchased by certain Key Employees and Directors
pursuant to the Company's 1996 Restricted Stock Plan will no longer be subject
to a risk of forfeiture within the meaning of Section 83(a) of the Code and
will be tendered to Purchaser in exchange for cash equal to the Offer Price
times the number of Shares so tendered. At the Closing Date, Company stock
units in the deferred compensation account of each Director who participates
in the Company's Deferred Compensation Plan for Directors (the "DCP") will be
converted into a number of Phantom Stock Units determined by dividing (A) the
product of (i) the number of Company stock units credited to the Director's
deferred compensation account under the DCP as of the Closing Date, and (ii)
the Offer Price, by (B) the Fair Market Value. Such Phantom Stock Units will
be credited with dividend equivalent units at such time and in such manner as
dividends are paid on Parent common stock. A cash payment equal to the Phantom
Stock Units will be made to the Directors as soon as practicable after January
1, 1998. Parent will determine administrative procedures and provisions with
regard to the Phantom Stock Units.
The Merger Agreement also provides that, prior to the Closing Date, the
Board of Directors, or an appropriate committee thereof, will cause written
notice of the Merger Agreement to be given to persons holding "options" (as
defined in the Company's Employee Stock Purchase Plan (the "ESPP")) to
purchase Shares ("Purchase Rights") under the ESPP. The Merger Agreement
provides that immediately following the Closing Date, all Purchase Rights will
be accelerated as if the Closing Date was the last day of the "option period"
(as defined in the ESPP), such Purchase Rights will be
8
automatically canceled and terminated on such day and the contributions to the
ESPP during such option period will be refunded to the holder of the Purchase
Right (the "Refund Amount"), and each holder of a Purchase Right will be
entitled to receive as soon as practicable thereafter from the Company in
consideration for such cancellation an amount in cash (less applicable
withholding taxes, but without interest) equal to (a) the product of (i) the
number of Shares (and fractions thereof) subject to such Purchase Right of
such holder as of the Closing Date, multiplied by (ii) the Offer Price, less
(b) the Refund Amount of such holder. The foregoing is subject to the right of
an ESPP participant to terminate the participant's payroll deduction
authorization under the ESPP and to cancel the participant's option and
withdraw from the ESPP at any time prior to the Closing Date.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains certain
representations and warranties of the parties including representations by the
Company as to organization, capitalization, authority relative to the Merger
Agreement, no defaults, consents and approvals, financial statements and SEC
reports, absence of certain changes concerning the Company's business,
litigation and compliance with law, environmental matters, governmental
authorizations, offer documents, brokers, employee agreements and benefits,
receipt of a fairness opinion, material agreements, title to properties and
encumbrances thereon, intellectual property, tax matters, interested party
transactions, governmental contracts and takeover statutes.
CERTAIN AGREEMENTS REGARDING THE BOARD. The Merger Agreement provides that
in the event that Purchaser acquires at least a majority of the Shares
outstanding pursuant to the Offer, Parent shall be entitled to designate for
appointment or election to the Board, upon written notice to the Company, such
number of persons so that the designees of Parent constitute the same
percentage (but in no event less than a majority) of the Board (rounded up to
the next whole number) as the percentage of Shares acquired pursuant to the
Offer. Prior to the consummation of the Offer, the Company will increase the
size of the Board or obtain the resignation of such number of directors as is
necessary to enable such number of Parent designees to be so elected. In the
Merger Agreement, the Company, Parent and Purchaser have agreed to use their
respective reasonable best efforts to ensure that at least two of the members
of the Board shall, at all times prior to the Effective Time be, Continuing
Directors.
Following the election or appointment of Purchaser's designees as set forth
above and prior to the Effective Time, any amendment of the Merger Agreement
or any amendment to the Articles of Organization or By-Laws of the Company
inconsistent with the Merger Agreement, any termination of the Merger
Agreement by the Company, any extension by the Company of the time for the
performance of any of the obligations or other acts of Parent or Purchaser or
any waiver of any of the Company's rights under the Merger Agreement will
require the concurrence of a majority of the Continuing Directors.
INTERIM OPERATIONS OF THE COMPANY. Except as contemplated by the Merger
Agreement, the Company has covenanted and agreed that, during the period from
the date of the Merger Agreement to the Effective Time, the Company and its
subsidiaries will each conduct its operations according to its ordinary course
of business, consistent with past practice, and will use its reasonable best
efforts to preserve intact its business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with all persons and entities with which the Company has
significant business relations. Without limiting the generality of the
foregoing, the Company has agreed that, except as otherwise provided in the
Merger Agreement, prior to the Effective Date, neither Company nor any of its
subsidiaries will, without the prior consent of Purchaser:
(i) amend or propose to amend its Articles of Organization or By-laws (or
comparable governing instruments); (ii) authorize for issuance, issue,
grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or
dispose of any shares of, or any options, warrants, commitments,
subscriptions or rights of any kind to acquire or sell any shares of, the
capital stock or other
9
securities of the Company or any of its subsidiaries including any
securities convertible into or exchangeable for shares of stock of any
class of the Company or any of its subsidiaries, or enter into any
agreement, understanding or arrangement with respect to the purchase or
voting of shares of its capital stock, except for the issuance of Shares
pursuant to the exercise of Options or the conversion of the Subordinated
Notes outstanding on the date of the Merger Agreement, in accordance with
their present terms, and issuances of up to 120,000 Shares and options
under the ESPP to employees in the ordinary course of business; (iii)
split, combine or reclassify any shares of its capital stock, make any
other changes in its capital structure, or declare, pay or set aside any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, other than dividends
or distributions to the Company or a subsidiary wholly owned by the
Company, or redeem, purchase or otherwise acquire or offer to acquire any
shares of its capital stock or other securities, except for the repurchase
of shares of common stock from employees, consultants or directors of the
Company upon termination of their relationship with the Company in
accordance with existing contractual rights or obligations of repurchase;
(iv) (A) except for debt (including, but not limited to, obligations in
respect of capital leases) not in excess of $7,000,000 per month or
$30,000,000 in the aggregate for all entities combined, create, incur or
assume any short-term debt, long-term debt or obligations in respect of
capital leases, (B) assume, guarantee, endorse or otherwise become liable
or responsible (whether directly, indirectly, contingently or otherwise)
for the obligations of any person or entity, except for obligations of the
Company or any wholly owned subsidiary of the Company in the ordinary
course of business consistent with past practice, (C) make any capital
expenditures other than in the ordinary course in amounts not to exceed
$7,000,000 per month or $30,000,000 in the aggregate, (D) or make any
loans, advances or capital contributions to, or investments in, any other
person or entity (other than customary relocation loans to employees made
in the ordinary course of business consistent with past practice), or (E)
acquire the stock or substantially all the assets of, or merge or
consolidate with, any other person or entity; (v) sell, transfer, mortgage,
pledge or otherwise dispose of, or encumber, or agree to sell, transfer,
mortgage, pledge or otherwise dispose of or encumber, any material assets
or properties, real, personal or mixed (except for (A) sales of assets in
the ordinary course of business and in a manner consistent with past
practice, (B) disposition of obsolete or worthless assets and (C)
encumbrances on assets to secure purchase money financings of equipment and
capital improvements); (vi) (A) increase the compensation of any of its or
their directors, officers or key employees, except pursuant to the terms of
agreements or plans currently in effect, (B) pay or agree to pay any
pension, retirement or other employee benefit provided in any existing
plan, agreement or arrangement to any director, officer or key employee
except in the ordinary course and consistent with past practice, (C)
commit, other than pursuant to any existing collective bargaining
agreement, to any additional pension, profit sharing, bonus, extra
compensation, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay,
retirement or other employee benefit plan, agreement or arrangement, or to
any employment or consulting agreement with or for the benefit of any
director, officer or key employee, whether past or present, (D) amend, in
any material respect, any such plan, agreement or arrangement, or (E) enter
into, adopt or amend any employee benefit plans or employment or severance
agreement, or (except for normal increases in the ordinary and usual course
of business for employees with annual base cash compensation of less than
$80,000) increase in any manner the compensation of any employees; (vii)
settle or compromise any claims or litigation involving payments by the
Company or any of its subsidiaries of more than $250,000 in any single
instance or related instances, or that otherwise are material; (viii) make
any tax election or permit any insurance policy naming it as a beneficiary
or a loss payable payee to be canceled or terminated, except in the
ordinary and usual course of business consistent with past practices; (ix)
enter into any license with respect to intellectual property unless such
license is non-exclusive and entered into in the ordinary course consistent
with past practice or in accordance with existing contracts or other
agreements; (x) take any action or omit to take any action, which action or
omission would result in a breach of any of
10
the covenants, representations and warranties of the Company set forth in
the Merger Agreement; (xi) enter into any lease or amend any lease of real
property other than in the ordinary course of business consistent with past
practice; (xii) change any accounting practices, other than in the ordinary
course and consistent with past practice; (xiii) fail to use reasonable
business efforts to keep in full force and effect insurance comparable in
amount and scope of coverage to insurance now carried by it; (xiv) fail to
pay all accounts payable and other obligations, when they become due and
payable, in the ordinary course of business consistent with past practice
and with the provisions of the Merger Agreement, except if the same are
contested in good faith, and, in the case of the failure to pay any
material accounts payable or other obligations which are contested in good
faith, only after consultation with Purchaser; (xv) fail to comply in all
material respects with all laws applicable to it or any of its properties,
assets or business and maintain in full force and effect all permits
necessary for, or otherwise material to, such business; or (xvi) agree,
commit or arrange to do the foregoing.
NO SOLICITATION. In the Merger Agreement, the Company agreed that the
Company and its subsidiaries will not and they will cause each of their
respective officers, directors, employees, investment bankers, attorneys and
other agents not to (i) initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any Acquisition Proposal (as
defined below), (ii) except as described below, engage in negotiations or
discussions with, or furnish any information or data to any third party
relating to an Acquisition Proposal, (iii) except as described below, enter
into any agreement with respect to any Acquisition Proposal or approve or
resolve to approve any Acquisition Proposal or (iv) except as described below,
participate in any discussions regarding, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to any Acquisition Proposal (other than the
transactions contemplated by the Merger Agreement). Notwithstanding the
foregoing, in response to any unsolicited Acquisition Proposal, the Company
may (at any time prior to the consummation of the Offer) furnish information
concerning its business, properties or assets to the person or group (a
"Potential Acquiror") that made the unsolicited Acquisition Proposal and
participate in negotiations with the Potential Acquiror if (x) the Board is
advised by one or more of its independent financial advisors that such
Potential Acquiror has the financial wherewithal to consummate without undue
delay the transaction contemplated by the Potential Acquiror's Acquisition
Proposal, (y) the Board reasonably determines, after receiving advice from the
Company's financial advisor, that such Potential Acquiror has submitted an
Acquisition Proposal that involves consideration to the Company's stockholders
that is superior to the Offer and the Merger, and (z) based upon advice of
counsel to such effect, the Board determines in good faith that it is
necessary to so furnish information and/or negotiate in order to comply with
its fiduciary duty to stockholders of the Company. In the event the Company
determines to provide any information as described above or receives any offer
of the type referred above, it has agreed in the Merger Agreement to (x)
promptly inform Parent as to the fact that such an offer has been received
and/or information is to be provided, (y) promptly provide Parent with a copy
of any written offer or other materials received by Company, its subsidiaries
or their respective representatives in connection therewith, and (z) if such
offer is not in writing, promptly furnish to Parent in writing the identity of
the recipient of such information and/or the proponent of such offer and the
terms thereof. The Company has agreed that any non-public information
furnished to a Potential Acquiror will be pursuant to a confidentiality
agreement with confidential information and no solicitation/no hire provisions
substantially similar to those set forth in the Confidentiality Agreement
dated April 26, 1997 between the Company and Parent filed herewith as Exhibit
3. The Company has agreed to keep Parent fully informed of the status and
details, including amendments or proposed amendments to any such Acquisition
Proposal.
The Board has agreed in the Merger Agreement that it will not (x) withdraw
or modify or propose to withdraw or modify, in any manner adverse to Parent,
the approval or recommendation of the Board of the Merger Agreement, the Offer
or the Merger or (y) approve or recommend, or propose to approve
11
or recommend, any Acquisition Proposal unless, in each case, in connection
with a Superior Offer (as defined below), the Board determines in good faith,
based on advice of outside legal counsel, that it is necessary to do so in
order to comply with the Board's fiduciary duties under applicable law.
For purposes of the Merger Agreement, "Acquisition Proposal" means any bona
fide proposal, whether in writing or otherwise, made by a third party to
acquire beneficial ownership (as defined under Rule 13(d) of the Exchange Act)
of all or a material portion of the assets of the Company or any of its
subsidiaries, or any material equity interest in the Company pursuant to a
merger, consolidation or other business combination, sale of shares of capital
stock, sale of assets, tender offer or exchange offer or similar transaction
involving either the Company or any of its subsidiaries, including any single
or multi-step transaction or series of related transactions which is
structured to permit such third party to acquire beneficial ownership of any
material portion of the assets of, or any material equity interest in, the
Company and its subsidiaries. For purposes of the Merger Agreement, the term
"Superior Offer" means a bona fide offer to acquire, directly or indirectly,
for consideration consisting of cash and/or securities, two-thirds or more of
the Shares then outstanding or all or substantially all the assets of the
Company, and otherwise on terms which the Board determines in its good faith
reasonable judgment to be more favorable to the Company's stockholders than
the Offer and the Merger (based on advice of the Company's independent
financial advisor that the value of the consideration provided for in such
proposal is superior to the value of the consideration provided for in the
Offer and the Merger), for which financing, to the extent required, is then
committed or which, in the good faith reasonable judgment of the Board, based
on advice from the Company's independent financial advisor, is reasonably
capable of being financed by such third party and for which the Board
determines, in its good faith reasonable judgment, that such proposed
transaction is reasonably likely to be consummated without undue delay.
ACTIONS REGARDING THE RIGHTS. Prior to the execution of the Merger
Agreement, the Company, in accordance with the terms and provisions of the
Rights Agreement, amended the Rights Agreement so that the transactions
relating to and contemplated by the Merger Agreement are exempted from certain
provisions of the Rights Agreement and a "Common Stock Event" thereunder will
not occur as a result of such transactions. In the Merger Agreement the
Company has agreed that it will, with the consent of Parent, continue to take
all actions necessary to cause the transactions contemplated by the Merger
Agreement to remain exempted from such provisions of the Rights Agreement,
including, if desirable, entering into further amendments to the Rights
Agreement or causing the Rights issued under the Rights Agreement to be
extinguished, canceled or redeemed.
MISCELLANEOUS UNDERTAKINGS. Pursuant to the Merger Agreement, if required by
applicable law in order to consummate the Merger, the Company, acting through
the Board, will, in accordance with applicable law, its Articles of
Organization and its By-laws, as soon as practicable: (i) duly call, give
notice of, convene and hold a special meeting of its stockholders as soon as
practicable following the consummation of the Offer for the purpose of
considering and taking action on the Merger Agreement (the "Stockholders'
Meeting"); (ii) subject to its fiduciary duties under applicable laws as
advised as to legal matters by counsel, include in the proxy statement or
information statement prepared by the Company for distribution to stockholders
of the Company in advance of the Stockholders' Meeting in accordance with
Regulation 14A or Regulation 14C promulgated under the Exchange Act (the
"Proxy Statement") the recommendation of the Board referred to above; and
(iii) use its reasonable efforts to (A) obtain and furnish the information
required to be included by it in the Proxy Statement, and, after consultation
with Parent, respond promptly to any comments made by the SEC with respect to
the Proxy Statement and any preliminary version thereof and cause the Proxy
Statement to be mailed to its stockholders following the consummation of the
Offer and (B) obtain the necessary approvals of the Merger Agreement and the
Merger by its stockholders. Parent will provide the Company with the
information concerning Parent and Purchaser required to be included in the
Proxy Statement and will
12
vote, or cause to be voted, all Shares owned by it or its subsidiaries in
favor of approval and adoption of the Merger Agreement and the transactions
contemplated thereby.
Pursuant to the Merger Agreement, each of Parent, Purchaser and the Company
have agreed to use their reasonable best efforts to obtain any permits
necessary for the consummation of the transactions contemplated by the Merger
Agreement, provided that the Company has agreed not to, without the consent of
Parent (which consent will not be unreasonably withheld), agree to any
amendment to any material instrument or agreement to which it is a party.
Parent, Purchaser and the Company have also agreed to cooperate with one
another (i) in promptly determining whether any filings are required to be
made or permits are required to be obtained under any law or otherwise
(including from other parties to material contracts) in connection with the
consummation of the Offer and the Merger and (ii) in promptly making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such permits. Each party has further agreed to use its
reasonable best efforts promptly to take, or cause to be taken, all actions
and promptly to do, or cause to be done, all things necessary, proper or
advisable under applicable laws to consummate and make effective the
transactions contemplated by the Merger Agreement; provided that no party
shall be required to proffer such party's willingness to accept any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) providing for divestiture of its assets or businesses which amount
to 7.5% or more of the Company's assets or earning power. The Company has also
agreed to take all actions reasonably requested by Parent to ensure the
orderly transition of the business of the Company and to preserve and maintain
the Company's business relationships. The Company has further agreed that upon
request it will assist Purchaser in any challenge of the applicability to the
Offer or the Merger of any state antitakeover statute.
CONDITIONS TO MERGER. Pursuant to the Merger Agreement, the respective
obligations of each of Parent, Purchaser and the Company to consummate the
Merger are subject to the satisfaction at or prior to the Effective Time of
the following conditions: (a) the Merger Agreement shall have been adopted by
the affirmative vote of the stockholders of the Company by the requisite vote
in accordance with applicable law, if required by applicable law; and (b) the
consummation of the Merger shall not be precluded by any order, decree, ruling
or injunction of a court of competent jurisdiction and there shall not have
been any action taken or statute, rule or regulation enacted, promulgated or
deemed applicable to the Merger by any governmental entity that makes
consummation of the Merger illegal.
Unless Purchaser has accepted for payment and paid for Shares validly
tendered pursuant to the Offer, the obligations of the Company to effect the
Merger are further subject to the satisfaction at or prior to the Effective
Time of the following conditions: (a) each of Parent and Purchaser having
performed in all material respects its obligations under the Merger Agreement
required to be performed by it at or prior to the Effective Time; (b) the
representations and warranties of Parent and Purchaser contained in the Merger
Agreement being true and correct in all material respects on the date as of
which made and on the Effective Time as though made on and as of such time;
and (c) Parent and Purchaser having delivered to the Company a certificate
with respect thereto.
Unless Purchaser has accepted for payment and paid for Shares validly
tendered pursuant to the Offer, the obligations of Parent and Purchaser to
effect the Merger are further subject to the satisfaction at or prior to the
Effective Time of the following conditions: (a) the Company having performed
in all material respects each of its obligations under the Merger Agreement
required to be performed by it at or prior to the Effective Time; (b) the
representations and warranties of the Company contained in the Merger
Agreement being true and correct in all material respects on the date as of
which made and on the Effective Time as if made at and as such time; (c) there
not having occurred after the completion of the Offer any material adverse
change in the business of the Company and its subsidiaries taken as a whole,
except for such changes that are caused by the Company's compliance
13
with the terms of the Merger Agreement and the Offer or that are contemplated
by the Merger Agreement; (d) no governmental or other action or proceeding
having been commenced after completion of the Offer that (i) in the opinion of
Parent's or Purchaser's counsel is more likely than not to be successful, and
(ii) either (A) seeks an injunction, a restraining order or any other Order
seeking to prohibit, restrain, invalidate or set aside consummation of the
Merger or (B) if successful, would have a Material Adverse Effect; and (e) the
Company having delivered to Parent and Purchaser a certificate with respect
thereto.
TERMINATION. Pursuant to Section 8.1 of the Merger Agreement, the Merger
Agreement may be terminated and the Merger may be abandoned at any time
(whether before or after approval of the Merger by the stockholders of the
Company) prior to the Effective Time: (a) by mutual written consent of each of
Parent and the Company; (b) by either Parent and Purchaser or the Company, (1)
if the Shares have not been purchased pursuant to the Offer on or prior to the
Final Termination Date; provided, however, that such termination right will
not be available to any party whose failure to fulfill any obligation under
the Merger Agreement has been the cause of, or resulted in, the failure of
Purchaser to purchase the Shares pursuant to the Offer on or prior to such
date; or (2) if any governmental authority has issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other action
the parties will use their respective reasonable best efforts to lift), in
each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement or prohibiting Parent or
Purchaser from acquiring or holding or exercising rights of ownership of the
Shares except such prohibitions which would not reasonably be expected to have
a Material Adverse Effect or prevent the consummation of the Offer prior to
the Final Termination Date, and such order, decree, ruling or other action
shall have become final and non-appealable; (c) by the Company, (1) if, prior
to the purchase of Shares pursuant to the Offer the Board of Directors has
withdrawn, or modified or changed in a manner adverse to Parent or Purchaser
its approval or recommendation of the Offer, the Merger Agreement or the
Merger (or the Board of Directors resolves to do any of the foregoing) as a
result of a Superior Offer, and if concurrently with such termination the
Termination Fee (as defined hereinafter) is paid to Parent, (2) if Parent or
Purchaser has terminated the Offer, or the Offer has expired, without
Purchaser purchasing any Shares pursuant thereto; provided that the Company
will not have such right to terminate the Merger Agreement if the Company's
failure to fulfill any obligation under the Merger Agreement has been the
cause of, or resulted in, the termination of the Offer or the failure of
Purchaser to purchase any Shares pursuant to the Offer, (3) if due to an
occurrence that if occurring after the commencement of the Offer would result
in a failure to satisfy any of the conditions of the Offer, Parent, Purchaser
or any of their affiliates shall have failed to commence the Offer on or prior
to five business days following the date of the initial public announcement of
the Offer; provided that the Company will not have such right to terminate the
Merger Agreement if the Company's failure to fulfill any obligation under the
Merger Agreement has been the cause of, or resulted in, the failure of Parent,
Purchaser or any affiliate to commence the Offer, or (4) prior to the purchase
of Shares pursuant to the Offer, (A) if any representation or warranty of
Parent and Purchaser set forth in the Merger Agreement shall be untrue in any
material respect when made, or (B) upon a breach in any material respect of
any covenant or agreement on the part of Parent or Purchaser set forth in the
Merger Agreement, in each case where such misrepresentation or breach would
result in a failure to satisfy any of the Conditions of the Offer; provided
that the Company shall not have such right to terminate the Merger Agreement
if any such breach is curable by Parent or Purchaser through the exercise of
its reasonable best efforts prior to the Final Termination Date and for so
long as Parent or Purchaser continues to exercise such reasonable best
efforts; or (d) by Parent and Purchaser, (1) if, prior to the purchase of the
Shares pursuant to the Offer, the Board of Directors shall have (A) withdrawn,
modified or changed in a manner adverse to Parent or Purchaser its approval or
recommendation of the Offer, the Merger Agreement or the Merger, or (B)
recommended an Acquisition Proposal or shall have executed an agreement in
principle or definitive agreement relating to an Acquisition Proposal or
similar business combination with a person or entity other than Parent,
Purchaser or their affiliates (or the Board of Directors resolves to do any of
the foregoing); (2)
14
if, due to an occurrence that if occurring after the commencement of the Offer
would result in a failure to satisfy any of the Conditions of the Offer,
Parent, Purchaser or any of their affiliates shall have failed to commence the
Offer on or prior to five business days following the date of the initial
public announcement of the Offer; provided that neither Parent nor Purchaser
shall have such right to terminate the Merger Agreement if the failure of
Purchaser or Parent to fulfill any obligation under the Merger Agreement has
been the cause of, or resulted in, the failure of Parent, Purchaser or any
affiliate to commence the Offer; (3) prior to the purchase of Shares pursuant
to the Offer, (A) if any representation or warranty of the Company set forth
in the Merger Agreement shall be untrue in any material respect when made or
(B) upon a breach in any material respect of any covenant or agreement on the
part of the Company set forth in the Merger Agreement, in each case where such
misrepresentation or breach would cause the Conditions of the Offer not to be
met; provided that neither Parent nor Purchaser shall have such right to
terminate the Merger Agreement if any such breach is curable by the Company
through the exercise of its reasonable best efforts prior to the Final
Termination Date and for so long as the Company continues to exercise such
reasonable best efforts; (4) if any person or group shall have become the
beneficial owner of 20% or more of the outstanding Shares; or (5) if the
Company shall have failed to file this Schedule 14D-9 with the SEC within 10
business days of the commencement of the Offer. As used in the Merger
Agreement, the term "Material Adverse Effect" means any change, effect, matter
or circumstances that has or would reasonably be expected to have a material
adverse effect on the business, assets or properties (including intangible
assets or properties), liabilities, results of operations or financial
condition of the Company and its subsidiaries taken as a whole, other than any
such changes, effects or circumstances (i) specifically referred to in the
Disclosure Schedule delivered by the Company to Parent, (ii) generally
affecting the United States economy or (iii) resulting from both (x) the
proposed acquisition of Company and (y) the fact that the acquiror is Parent.
Pursuant to the Merger Agreement, in the event of the termination of the
Merger Agreement in accordance with its terms, the Merger Agreement shall
forthwith become null void and have no effect, without any liability on the
part of any party thereto or its affiliates, directors, officers or
stockholders, other than the provisions of the Merger Agreement relating to
fees and expenses (including the Termination Fee), the Termination Option (as
defined below), governing law and confidentiality of information.
Notwithstanding the foregoing, no party will be relieved from liability that
it may have for willful breach of the Merger Agreement.
TERMINATION FEE AND TERMINATION OPTION. The Company has agreed to pay to
Parent by wire transfer $13.5 million (the "Termination Fee"), upon demand, if
(i) the Company terminates the Merger Agreement pursuant to Section 8.1(c)(i)
thereof (which generally relates to a change in the Board's recommendation
adverse to Parent as a result of a Superior Offer), in which case the
Termination Fee must be paid simultaneously with such termination, (ii) Parent
or Purchaser terminates the Merger Agreement pursuant to Section 8.1(d)(i)
thereof (which generally relates to a change in the Board's recommendation
adverse to Parent or an agreement relating to an Acquisition Proposal with a
third party), or (iii) the Merger Agreement is terminated for any reason
(other than as a result of (x) the failure of Parent or Purchaser to fulfill
any material obligation under the Merger Agreement, (y) the applicable waiting
period under the HSR Act not having expired or been terminated on or prior to
the Final Termination Date or (z) the failure of certain Conditions of the
Offer to be satisfied or waived by Parent on or prior to the Final Termination
Date), at any time after an Acquisition Proposal has been made and within nine
months after such a termination, the Company completes either (x) a merger,
consolidation or other business combination between the Company or a
subsidiary of the Company and any other person or entity (other than Parent,
Purchaser or an affiliate of Parent) or (y) the sale of 30% or more (in voting
power) of the voting securities of the Company or of 30% or more (in market
value) of the assets of the Company and its subsidiaries, on a consolidated
basis.
Concurrently with the execution of the Merger Agreement the Company issued
to Parent an option to purchase 4,225,000 Shares at a price per Share equal to
$29.00 pursuant to the Stock Option
15
Agreement dated as of May 5, 1997 between the Company and Parent (the "Stock
Option Agreement"). Such option becomes exercisable by Parent when a
Termination Fee is payable to Parent. For a summary of the Stock Option
Agreement see "--Stock Option Agreement."
AMENDMENT. The Merger Agreement may be amended by action taken by the
Company, Parent and Purchaser provided that after the date of adoption of the
Merger Agreement by the stockholders of the Company (if stockholder approval
of the Merger is required by applicable law), no amendment shall be made which
decreases the cash price per Share or that in any other way adversely affects
the rights of the Company's stockholders (other than termination of the Merger
Agreement) without the approval of such stockholders. The Merger Agreement may
not be amended except by an instrument in writing signed on behalf of the
parties or party intended to be bound thereby.
FEES AND EXPENSES. Except as specifically provided in the Merger Agreement,
each party shall bear its own respective expenses incurred in connection with
the Merger Agreement, the Offer and the Merger, including the preparation,
execution and performance of the Merger Agreement and the transactions
contemplated thereby, and all fees and expenses of investment bankers,
finders, brokers, agents, representatives, counsel and accountants.
16
STOCK OPTION AGREEMENT
The following is a summary of certain provisions of the Stock Option
Agreement, dated as of May 5, 1997 (the "Stock Option Agreement"), between
Parent and the Company, a copy of which is filed herewith as Exhibit 2 and is
incorporated herein by reference. Capitalized terms not otherwise defined in
the following summary of certain provisions of the Stock Option Agreement have
the respective meanings ascribed to them in the Stock Option Agreement.
GRANT OF OPTION. Pursuant to the Stock Option Agreement, the Company granted
to Parent an irrevocable option (the "Termination Option") to purchase, under
certain circumstances, up to 4,225,000 (subject to adjustment as set forth
therein) Shares (the "Option Shares") at a purchase price of $29.00 (subject
to adjustment as set forth therein) per Option Share (the "Purchase Price").
In the event of any change in the Shares by reason of a stock dividend, split-
up, merger, recapitalization, combination, exchange of shares, distribution of
assets, or similar transaction, the type and number of shares or securities
subject to the Termination Option, and the Purchase Price thereof, will be
adjusted appropriately, and proper provision will be made in the agreements
governing such transaction, so that Parent will receive upon exercise of the
Termination Option the number and class of shares or other securities or
property that Parent would have received in respect of the Shares (after
giving effect to such event) if the Termination Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
Subject to the terms of the Stock Option Agreement, upon any issuance of
common stock by the Company (other than as referred to in the preceding
sentence) the number of Shares subject to the Termination Option will be
adjusted so that, after such issuance, it equals 19.9% of the number of Shares
then issued and outstanding, without giving effect to any shares subject to or
issued pursuant to the Termination Option, and the Purchase Price thereof will
be adjusted appropriately.
EXERCISE OF TERMINATION OPTION. Parent may exercise the Termination Option,
with respect to all or any part of the Option Shares at any one time, subject
to the other provisions described in the next sentence, after the occurrence
of any event as a result of which Parent is entitled to receive the
Termination Fee pursuant to Section 8.2(b) of the Merger Agreement (a
"Purchase Event"). Notwithstanding anything to the contrary contained in the
Stock Option Agreement, any exercise of the Termination Option and purchase of
Option Shares is subject to the obtaining or making of any consents,
approvals, orders, notifications or authorizations, the failure of which to
have obtained or made would have the effect of making the issuance of Option
Shares illegal. In the event purchase of the Option Shares is subject to any
such restriction if the Termination Option is otherwise exercisable Parent may
purchase the number of Option Shares that Parent is then permitted to acquire
under the applicable laws and regulations, and if Parent thereafter obtains
the regulatory approvals to acquire the remaining balance of the Option
Shares, then Parent shall be entitled to acquire such remaining balance. The
Company has agreed to use its reasonable best efforts to assist Parent in
seeking any necessary regulatory approvals.
CASH-OUT RIGHT. In the event (i) Parent receives official notice that a
regulatory approval required for the purchase of any Option Shares will not be
issued or granted, (ii) such regulatory approval has not been issued or
granted within six months of the date of the notice exercising the Termination
Option, or (iii) Parent in its sole discretion shall so elect, Parent may
exercise its Cash-Out Right pursuant to the Stock Option Agreement with
respect to the Option Shares for which such regulatory approval will not be
issued or granted or has not been issued or granted.
TERMINATION. The Termination Option will terminate and be of no further
force and effect upon the earliest to occur of (A) the Effective Time, (B)
nine months after the first occurrence of a Purchase Event described in
clauses (i) or (ii) of Section 8.2(b) of the Merger Agreement, (C) termination
of the Merger Agreement in accordance with its terms prior to the occurrence
of a Purchase Event, unless, in the case of clause (C), Parent has, or upon
the occurrence of certain events would have, the right
17
to receive the Termination Fee under clause (iii) of Section 8.2(b) of the
Merger Agreement following such termination, in which case the Termination
Option will not terminate until the later of (x) six months following the time
such Termination Fee becomes payable and (y) the expiration of the period in
which Parent has or may have such right to receive the Termination Fee, and
(D) when the aggregate amount paid by the Company under the "cash out"
provision of the Stock Option Agreement and in connection with the Termination
Fee equals or exceeds $21,231,000. Notwithstanding the termination of the
Termination Option, Parent will be entitled to purchase the Option Shares if
it has exercised the Termination Option in accordance with the terms of the
Stock Option Agreement prior to the termination of the Termination Option, and
the termination of the Termination Option will not affect any rights under the
Stock Option Agreement which by their terms do not terminate or expire prior
to or as of such termination.
OTHER. Pursuant to the Stock Option Agreement, the Company makes certain
representations and warranties to Parent with respect to the authorization and
issuance of the Option Shares and certain other representations and
warranties. Further, Parent may also require the Company to cause the Shares
or other securities to be issued upon exercise of the Termination Option to be
registered under the Securities Act, to qualify such shares or other
securities under any applicable state securities laws and to promptly file an
application to list such shares or other securities on the NYSE (and any such
other national securities exchange or national securities quotation system).
CONFIDENTIALITY AGREEMENT
The following is a summary of certain provisions of the Confidentiality
Agreement, dated as of April 26, 1997, between Parent and the Company (the
"Confidentiality Agreement"). This summary is qualified in its entirety by
reference to the Confidentiality Agreement which is filed herewith as Exhibit
3 and is incorporated herein by reference. The Confidentiality Agreement
contains customary provisions pursuant to which, among other matters, Parent
agreed to keep confidential all nonpublic, confidential or proprietary
information furnished to it by the Company relating to the Company, subject to
certain exceptions (the "Confidential Information"), and to use the
Confidential Information solely for the purpose of evaluating a possible
transaction involving the Company and Parent.
Except as described above or incorporated herein, to the knowledge of the
Company, as of the date hereof, there exists no material contract, agreement,
arrangement, or understanding and no actual or potential conflict of interest
between the Company or its affiliates and (i) the Company, its executive
officers, directors, or affiliates, or (ii) Purchaser or its executive
officers, directors, or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has unanimously approved the Merger
Agreement and the transactions contemplated thereby and determined that the
Offer and the Merger, taken together, are fair to and in the best interests of
the Company and its shareholders. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THE ACCEPTANCE OF THE OFFER AND APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER BY THE SHAREHOLDERS OF THE COMPANY. THIS
RECOMMENDATION IS BASED IN PART UPON AN OPINION OF ALEX. BROWN & SONS,
INCORPORATED ("ALEX. BROWN") THAT THE CONSIDERATION TO BE RECEIVED BY THE
COMPANY'S SHAREHOLDERS IN THE OFFER AND THE MERGER IS FAIR TO THE SHAREHOLDERS
FROM A FINANCIAL POINT OF VIEW (THE "FAIRNESS OPINION"). THE FAIRNESS OPINION
CONTAINS A DESCRIPTION OF THE FACTORS CONSIDERED, THE ASSUMPTIONS MADE, AND
THE SCOPE OF THE REVIEW UNDERTAKEN BY ALEX. BROWN IN RENDERING ITS OPINION.
THE FULL TEXT OF THE OPINION OF ALEX. BROWN IS ATTACHED HERETO AS ANNEX II TO
THIS SCHEDULE 14D-9 AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE
URGED TO READ SUCH OPINION OF ALEX. BROWN IN ITS ENTIRETY.
18
BACKGROUND OF THE MERGER AND THE OFFER
In an effort to meet the competitive demands of the Internet industry, the
Company has, on an ongoing basis, sought to obtain additional sources of
capital and strategic partners to continue to expand the Company's Internet
business and pursue other growth opportunities. In order to facilitate this
effort, in June 1996 the Company authorized Alex. Brown, the Company's
financial advisor, to seek out sources of capital and strategic partners for
the Company, as well as to explore other strategic opportunities.
In addition to exploring several possible joint venturing and strategic
partnering opportunities, a number of potential acquirors were identified,
including Parent. In July, 1996, a representative of Alex. Brown contacted
Robert C. Calafell, Senior Vice President-Corporate Planning and Development
of Parent, regarding the possibility of a strategic opportunity involving
Parent and the Company. Thereafter, representatives of the Company had several
discussions with representatives of Parent concerning a variety of possible
strategic transactions.
On October 22, 1996, George H. Conrades, Chief Executive Officer and
President of the Company and Roger D. Wellington, a director of the Company,
met with Charles R. Lee, Chairman and Chief Executive Officer of Parent, and
Mr. Calafell. No firm proposals resulted from this meeting. On November 26,
1996, the Company and Parent entered into a mutual confidentiality agreement.
Over the period from October 1996 to February 1997, representatives of the
Company met with Parent and also had preliminary meetings with a number of
other potential strategic partners to review the Company's business and
explore possible transactions. As a culmination of this process, Parent and
one other potential acquiror expressed significant interest in acquiring the
Company. Throughout February and March 1997, the Company met with the other
potential acquiror to discuss the Company's business and a possible
acquisition.
On January 20, 1997, James A. Attwood, Vice President--Corporate Planning
and Development for GTE Service Corporation, an affiliate of Parent, and
certain other representatives of Parent, met in Boston with Bruce Linton, a
Vice President of BBN Planet, and discussed, among other things, the Company's
strategic plans. Mr. Calafell and Mr. Attwood met with Mr. Linton on March 5,
1997 and indicated Parent's interest in exploring an acquisition of the
Company. The parties also discussed the possibility of a significant minority
investment by Parent in the Company and the possibility of joint ownership in
the Company's network. Detailed discussions were scheduled and Mr. Calafell
requested that Mr. Linton contact Parent if, as a result of other
opportunities available to the Company, Parent should move quickly in its
review of a possible transaction.
On March 25, 1997, Mr. Conrades met with Mr. Kent B. Foster, President of
Parent, in Dallas, Texas to review the status of discussions between the
parties and to discuss the data telecommunications market generally.
Subsequently, Mr. Conrades telephoned Mr. Foster to advise him that a third
party had accelerated discussions regarding an acquisition of the Company and
had indicated that it would make a proposal shortly. Mr. Foster then agreed to
accelerate Parent's scheduled due diligence review.
During early and mid April 1997, both Parent and the other potential
acquiror commenced intensive due diligence reviews of the Company and its
business. On April 9, 1997, Mr. Calafell, Mr. Attwood and other
representatives of Parent met with Mr. Conrades, Ralph A. Goldwasser, Chief
Financial Officer of the Company, and other representatives of the Company to
discuss issues related to a possible acquisition of the Company by Parent,
including issues related to retention and motivation of employees. From April
26, 1997 through April 29, 1997, senior managers of Parent and representatives
of the Company had various due diligence discussions. On April 26, 1997 the
19
Company and Parent entered into an additional Confidentiality Agreement which
included certain standstill and employee non-solicitation commitments on the
part of Parent.
On April 29, 1997, the other potential acquiror confirmed a proposal to
acquire the Company in a stock-for-stock merger to be accounted for as a
pooling of interests. The proposal contained certain significant conditions
which the other potential acquiror indicated would need to be satisfied prior
to signing a definitive agreement.
During the week of April 28, 1997, both Parent and the other potential
acquiror submitted draft merger agreements to the Company for review. The
draft merger agreement from Parent contemplated a cash tender offer for the
Shares, followed by a merger of a subsidiary of Parent into the Company after
completion of the tender offer. No price was proposed in the merger agreement
from Parent.
On May 2, 1997, representatives of the Company, the other potential
acquiror, and their respective legal counsel met to review the stock-for-stock
merger agreement proposed by the other potential acquiror and to discuss the
conditions required by the other potential acquiror.
Following a meeting of Parent's Board of Directors of May 2, 1997, Mr.
Foster telephoned Mr. Conrades and made a proposal pursuant to which Parent,
through a subsidiary, would acquire the Company for $27.00 per share in cash,
subject to the negotiation of mutually acceptable terms and conditions.
On May 2, 1997, the Board of Directors of the Company held a special meeting
to consider the two proposals and review the negotiations. After discussion,
it was agreed that management would continue discussions with both Parent and
the other potential acquiror to improve the economic terms of the proposals
and to refine the terms and conditions of each of the proposals.
Following the meeting of the Company's Board of Directors on May 2, 1997,
representatives of Alex. Brown reported to Goldman, Sachs & Co., Parent's
financial advisor, that Parent's proposal had not been accepted by the
Company, but that the Company was interested in pursuing discussions if Parent
were willing to increase its offer. In a conversation early on May 3, 1997,
Mr. Conrades confirmed to Mr. Foster that Parent's proposal had not been
accepted. On May 3, 1997, Mr. Conrades also informed the other potential
acquiror that the conditions to its proposal were problematic for the Company
and would need to be resolved or removed before the Company could consider the
proposal further.
On May 4, 1997, Mr. Foster called Mr. Conrades and, after discussion,
increased Parent's offer to $29.00 per share cash, provided the terms of the
merger agreement, including terms regarding payment of a termination fee and
the terms of a stock option agreement exercisable when a termination fee is
payable could be finalized to Parent's satisfaction. On May 4, 1997, Mr.
Conrades also spoke with the other potential acquiror and confirmed that the
conditions to the other potential acquiror's proposal had not been removed or
resolved.
The Board of Directors of the Company met later on May 4th to review the
status of discussions. Mr. Conrades informed the Board that Parent had
increased its offer to $29.00 per share and that the other potential acquiror
had confirmed that its stock-for-stock proposal remained outstanding subject
to certain conditions which had not been resolved. After discussion of the
terms of both proposals, representatives of Ropes & Gray, legal counsel to the
Company, described the Board's responsibilities in considering the proposed
acquisition proposals and reviewed the terms of the two proposed merger
agreements, including the stock option termination agreement proposed by
Parent. Alex. Brown then made a presentation to the Board with respect to the
Parent's Offer and subsequently stated that subject to the terms of a final
merger agreement, Alex. Brown was of the opinion that the $29.00 cash price to
be paid in the transaction was fair to the shareholders of the Company from a
financial point
20
of view. The Board instructed management to continue to negotiate the terms of
a merger agreement with Parent.
From May 3, 1997 through May 6, 1997, representatives of Parent and the
Company negotiated the final terms of the Merger Agreement and the other
definitive documents for the transaction.
On the evening of May 5, 1997 the Board of Directors of the Company met to
further consider the Offer from Parent and to review the current terms of the
Merger Agreement and associated documentation. Following a review of the terms
of the Merger Agreement, discussion and a rendering by Alex. Brown of its
fairness opinion, the Board unanimously approved the Merger Agreement and
resolved to recommend the Offer and the Merger to the shareholders of the
Company. On the morning of May 6, 1997, the Board of Directors of the Company
met again to review the final terms of the Merger Agreement. After discussion
and following confirmation by Alex. Brown of its fairness opinion, the Board
of Directors confirmed the resolutions taken at the May 5, 1997 Board meeting.
The Merger Agreement and Stock Option Agreement were finalized and executed
promptly thereafter.
On May 6, 1997, prior to the opening of trading, the Company and Parent
separately announced the transaction. On May 12, 1997, Parent commenced the
Offer.
To the extent any of the foregoing information describes events to which the
Company or its advisors were not a party, it is based on information provided
by Parent.
REASONS FOR THE RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS.
In light of the Board's review of the Company's competitive and financial
position, recent operating results and prospects, the Board determined that
the Offer and the Merger, taken together, are fair to, and in the best
interests of, the Company and its shareholders. In making such recommendation
and in approving the Merger Agreement and the transactions contemplated
thereby, the Board considered a number of factors, including, but not limited
to, the following:
(i) the terms and conditions of the Merger Agreement and associated
agreements;
(ii) the financial condition, results of operations, business, and prospects
of the Company and the need for additional capital for the Company;
(iii) the prospects of the Company if the Company were to remain independent
and the risks inherent in remaining independent;
(iv) the current status of the Internet industry and the competitive
advantage in the industry of large telecommunications companies with
significant distribution capacity, installed infrastructure, compatible
service offerings, and financial resources;
(v) the recent trading price of the shares of Common Stock and that the
$29.00 per Share to be paid in the Offer and as the consideration in the
Merger represents a premium of approximately 28.2% over the $22.63 closing
sale price for the Shares on the New York Stock Exchange on May 5, 1997, the
last trading day prior to the public announcement of the execution of the
Merger Agreement, and a premium of approximately 64.5% over the $17.63 closing
sale price for the Shares on the New York Stock Exchange one month prior, on
April 7, 1997;
(vi) the fact that the proposal made by the other potential acquiror was
contingent on certain significant conditions which had to be satisfied prior
to signing a definitive agreement, and that, although the stock-for-stock
transaction proposed implied a nominally higher price for the Shares based on
the then current market price of the other potential acquiror's stock, the
stock-for-stock
21
proposal was subject to significant risk, including market risk with respect
to the other potential acquiror's stock and potential damage to significant
business relationships of the Company;
(vii) that in view of the efforts of the Company and Alex. Brown to find
strategic partners and potential acquirors, it was not likely that any other
party or Parent would consider a transaction that was more favorable to the
Company and its shareholders;
(viii) the financial presentations of Alex. Brown made on May 4 and May 5,
1997 and the oral opinion of Alex. Brown delivered to the Board at the May 5,
1997 Board meeting (subsequently confirmed orally at the Board meeting on May
6, 1997 and by delivery of a written opinion dated May 6, 1997) to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the cash consideration of $29.00 per Share to be received by
holders of Shares (other than Parent and its affiliates) in the Offer and the
Merger was fair, from a financial point of view, to such holders. Alex.
Brown's opinion is directed only to the fairness, from a financial point of
view, of the cash consideration to be received in the Offer and the Merger to
holders of Shares (other than Parent and its affiliates) and is not intended
to constitute, and does not constitute, a recommendation as to whether any
shareholder should tender Shares pursuant to the Offer. The full text of the
opinion of Alex. Brown is attached hereto as Annex II to this Schedule 14D-9
and is incorporated herein by reference. SHAREHOLDERS ARE URGED TO READ THE
OPINION OF ALEX. BROWN IN ITS ENTIRETY;
(ix) the Merger Agreement permits the Board, in the exercise of its
fiduciary duties, to furnish information and data, and enter into discussions
and negotiations, in connection with an unsolicited acquisition proposal and
recommend an unsolicited acquisition proposal to the Company's shareholders;
(x) the Merger Agreement permits the Board, in the exercise of its fiduciary
duties, to terminate the Merger Agreement in favor of an alternative
acquisition proposal; upon such termination, the Company shall pay Parent a
fee of $13.5 million (representing approximately 2.2% of the total value of
the consideration to be paid in the Offer and the Merger with respect to
currently outstanding Shares) and the Parent will be permitted to exercise an
option to purchase 4,225,000 shares of Common Stock at an exercise price of
$29.00; and
(xi) the transactions contemplated by the Merger Agreement provided for an
all cash payment to shareholders, with no financing condition.
The Board did not assign relative weights to the above factors or determine
that any factor was of particular importance. Rather, the Board viewed its
position and recommendations as being based on the totality of the information
presented to and considered by it. In addition, it is possible that different
members of the Board assigned different weights to the factors.
The Board recognized that, while the consummation of the Offer gives the
Company's shareholders the opportunity to realize a significant premium over
the price at which the Shares were traded prior to the public announcement of
the Offer, tendering in the Offer would eliminate the opportunity for such
shareholders to participate in the future growth and profits of the Company.
The Board believes that the loss of the opportunity to participate in the
growth and profits of the Surviving Corporation was reflected in the Offer
price of $29.00 per Share. The Board also recognized that there can be no
assurance as to the level of growth or profits to be attained by the Surviving
Corporation in the future.
It is expected that, if the Shares are not purchased by Parent in accordance
with the terms of the Offer or if the Merger is not consummated, the Company's
current management, under the general direction of the Board, will continue to
manage the Company as an ongoing business.
22
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
The Company has retained Alex. Brown as its financial advisor in connection
with the Offer and the Merger. Pursuant to the terms of Alex. Brown's
engagement, the Company has agreed to pay Alex. Brown $500,000 for the
delivery of an opinion regarding the fairness of the cash consideration to be
received pursuant to the Offer and the Merger and an additional fee of
approximately $6.5 million upon the consummation of the Offer. The Company
also has agreed to reimburse Alex. Brown for reasonable travel and other out-
of-pocket expenses, including reasonable legal fees and expenses, and to
indemnify Alex. Brown and certain related parties against certain liabilities,
including liabilities under the federal securities laws, arising out of Alex.
Brown's engagement. In the ordinary course of business, Alex. Brown and its
affiliates may actively trade or hold the securities of the Company and Parent
for their own account or for the account of customers and, accordingly, may at
any time hold a long or short position in such securities.
Neither the Company nor any person acting on its behalf has employed,
retained or agreed to compensate any person to make solicitations or
recommendations to the shareholders concerning the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) During the past 60 days, no transactions in Shares have been effected by
the Company or, to the best of the Company's knowledge, by any of its
executive officers, directors or affiliates.
(b) To the best knowledge of the Company, all of its executive officers,
directors, and affiliates currently intend to tender pursuant to the Offer all
Shares (other than shares issuable upon the exercise of Options) which are
owned beneficially by such persons, subject to and consistent with any
fiduciary obligations of such person.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth herein, the Company is not engaged in any
negotiation in response to the Offer which relates to or would result in (i)
an extraordinary transaction, such as a merger or reorganization, involving
the Company; (ii) a purchase, sale or transfer of material amount of assets by
the Company; (iii) a tender offer for or other acquisition of securities by or
of the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as described in Item 3 or 4 above, there are no transactions,
Board resolutions, agreements in principle, or signed contracts in response to
the Offer that relate to or would result in one or more of the events referred
to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
INFORMATION STATEMENT
The Information Statement attached hereto as Annex I is being furnished in
connection with the contemplated designation by Purchaser, pursuant to the
Merger Agreement, of certain persons to be appointed to the Board of Directors
of the Company other than at a meeting of the Company's shareholders following
the purchase by Purchaser of the number of Shares pursuant to the Offer
necessary to satisfy the Minimum Condition.
RIGHTS PLAN AMENDMENT
Prior to the execution of the Merger Agreement, in accordance with the terms
and provisions of the Rights Agreement, the Board of Directors authorized and
the Company and the Rights Agent
23
executed an amendment to the Rights Agreement (the "Rights Agreement
Amendment"). The Rights Agreement Amendment rendered certain provisions of the
Rights Agreement inapplicable to the transactions contemplated by the Merger
Agreement. Except as expressly provided in the Rights Agreement Amendment, the
Rights Agreement remains in full force and effect.
A copy of the Rights Agreement Amendment has been filed as Exhibit 10 to
this Schedule 14D-9 and is incorporated herein by reference, and the foregoing
summary is qualified in its entirety by reference thereto.
6% CONVERTIBLE SUBORDINATED DEBENTURES
Prior to and following the consummation of the Offer but before the Merger,
the Indenture dated as of April 1, 1987 (the "Indenture"), between the Company
and State Street Bank and Trust Company (the "Trustee") relating to the
Company's 6% Convertible Subordinated Debentures due 2012 (the "Subordinated
Notes") shall remain in full force and effect with no change to the rights of
the holders of the Subordinated Notes. Upon the occurrence of the Merger,
however, the Company is required, pursuant to the terms of the Indenture, to
execute with the Trustee a supplemental indenture providing that each
Subordinated Note shall be convertible into the right to receive the amount in
cash, without interest thereon, receivable upon the consummation of the Merger
by a holder of that number of Shares issuable upon conversion of such
Subordinated Note immediately prior to the Merger.
ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
EXHIBIT NO.
Exhibit 1 Agreement and Plan of Merger dated as of May 5, 1997 among Parent,
Purchaser and the Company.
Exhibit 2 Stock Option Agreement dated as of May 5, 1997 between Parent and
the Company.
Exhibit 3 Confidentiality Agreement dated as of April 26, 1997 between Parent
and the Company.
Exhibit 4 Pages 4-8 and 18-31 of the Company's Proxy Statement dated October
2, 1996.
Exhibit 5 Letter to shareholders of the Company dated May 12, 1997.*
Exhibit 6 Press release issued by the Company dated May 6, 1997.
Exhibit 7 Opinion of Alex. Brown & Sons Incorporated dated May 6, 1997
(included as Annex II to this Statement).*
Exhibit 8 Section 6.9 of the Company's Restated Articles of Organization.
Exhibit 9 Section 9 of the Company's By-laws.
Exhibit 10 Amendment to Common Stock Rights Agreement.
- --------
* Included with Schedule 14D-9 mailed to shareholders of the Company.
24
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete, and
correct.
BBN Corporation
By: _________________________
/s/ John Montjoy
Name: John Montjoy
Title: Senior Vice President
Dated: May 12, 1997
25
ANNEX I
BBN CORPORATION
150 CAMBRIDGEPARK DRIVE
CAMBRIDGE, MASSACHUSETTS 02140
----------------
INFORMATION STATEMENT PURSUANT
TO SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
----------------
NO VOTE OR OTHER ACTION OF THE COMPANY'S SHAREHOLDERS
IS REQUIRED IN CONNECTION WITH THIS INFORMATION STATEMENT.
NO PROXIES ARE BEING SOLICITED AND
YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
----------------
This Information Statement, which is being mailed on or about May 12, 1997
to the holders of shares of the common stock, par value $1.00 per share (the
"Common Stock"), of BBN Corporation, a Massachusetts corporation (the
"Company" or "BBN"), is being furnished in connection with the designation by
GTE Massachusetts Incorporated, a Massachusetts corporation (the "Purchaser")
and a wholly owned subsidiary of GTE Corporation, a New York corporation (the
"Parent"), of persons (the "Purchaser Designees") to the Board of Directors of
the Company (the "Board"). Such designation is to be made pursuant to an
Agreement and Plan of Merger dated as of May 5, 1997 (the "Merger Agreement")
among the Company, Parent, and Purchaser.
Pursuant to the Merger Agreement, among other things, Purchaser commenced a
cash tender offer on May 12, 1997 to purchase all of the issued and
outstanding shares of the Common Stock (together with the associated common
stock purchase rights, the "Shares") at a price of $29.00 per Share, net to
the seller in cash, as described in Purchaser's Offer to Purchase dated May
12, 1997 and the related Letter of Transmittal (which Offer to Purchase and
related Letter of Transmittal together constitute the "Offer"). The Offer is
scheduled to expire at 12:00 midnight on Monday, June 9, 1997, unless
extended. The Offer is subject to, among other things, the condition that a
number of Shares representing not less than two-thirds of the Company's
outstanding Shares are validly tendered and not withdrawn prior to the
expiration of the Offer (the "Minimum Condition"). The Merger Agreement also
provides for the merger (the "Merger") of Purchaser with and into the Company
as soon as practicable after consummation of the Offer. Following the
consummation of the Merger (the "Effective Time"), the Company will be the
surviving corporation (the "Surviving Corporation") and a wholly owned
subsidiary of Parent. In the Merger, each Share issued and outstanding
immediately prior to the Effective Time (other than Shares held in the
treasury of the Company or by Parent, Purchaser, or any indirect or direct
wholly owned subsidiary of Parent or the Company, all of which will be
canceled) will be converted into the right to receive cash in an amount of
$29.00.
Following the election or appointment of the Purchaser Designees and prior
to the Effective Time, any amendment of the Merger Agreement or any amendment
to the Restated Articles of Organization or By-laws of the Company
inconsistent with the Merger Agreement, any termination of the Merger
Agreement by the Company, any extension by the Company of the time for the
performance of any of the obligations or other acts of Parent or Purchaser or
any waiver of any of the Company's rights thereunder shall require the
concurrence of a majority of the Continuing Directors (as defined below).
The terms of the Merger Agreement, a summary of the events leading up to the
Offer and the execution of the Merger Agreement and other information
concerning the Offer and the Merger are contained in the Offer to Purchase and
in the Solicitation/Recommendation Statement on Schedule
I-1
14D-9 of the Company (the "Schedule 14D-9") with respect to the Offer, copies
of which are being delivered to shareholders of the Company contemporaneously
herewith. Certain other documents (including the Merger Agreement) were filed
with the Securities and Exchange Commission (the "SEC") as exhibits to the
Schedule 14D-9 and as exhibits to the Tender Offer Statement on Schedule 14D-1
of Purchaser and Parent (the "Schedule 14D-1"). The exhibits to the Schedule
14D-9 and the Schedule 14D-1 may be examined at, and copies thereof may be
obtained from, the regional offices of and public reference facilities
maintained by the SEC (except that the exhibits thereto cannot be obtained
from the regional offices of the SEC) in the manner set forth in Sections 7
and 8 of the Offer to Purchase.
No action is required by the shareholders of the Company in connection with
the election or appointment of the Purchaser Designees to the Board. However,
Section 14(f) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the mailing to the Company's shareholders of the
information set forth in this Information Statement prior to a change in a
majority of the Company's directors otherwise than at a meeting of the
Company's shareholders.
The information contained in this Information Statement concerning Parent,
Purchaser, and Purchaser Designees has been furnished to the Company by such
persons, and the Company assumes no responsibility for the accuracy or
completeness of such information. The Schedule 14D-1 indicates that the
principal executive offices of Purchaser and Parent are located at One
Stamford Forum, Stamford, Connecticut 06904.
GENERAL
The shares of Common Stock are the only class of voting securities of the
Company outstanding. Each share of Common Stock is entitled to one vote. As of
May 5, 1997, there were 21,230,097 shares of Common Stock outstanding. The
Board of Directors of the Company currently consists of three classes, with
regular three year staggered terms. The Board of Directors has fixed at eight
the number of directors that presently constitute the Board. Each director
holds office until his successor is elected and qualified or until his earlier
death, resignation, or removal.
RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES
The Merger Agreement provides that, in the event that Purchaser acquires at
least a majority of the Shares outstanding pursuant to the Offer, Parent shall
be entitled to designate for appointment or election to the Board, upon
written notice to the Company, such number of persons so that the designees of
Parent constitute the same percentage (but in no event less than a majority)
of the Board (rounded up to the next whole number) as the percentage of Shares
acquired pursuant to the Offer. Effective upon such purchase of at least a
majority of the Shares pursuant to the Offer (sometimes referred to herein as
the "consummation" of the Offer), the Company will increase the size of the
Board or obtain the resignation of such number of directors as is necessary to
enable such number of Parent designees to be so elected. Notwithstanding the
foregoing, the parties to the Merger Agreement shall use their respective
reasonable best efforts to ensure that at least two of the members of the
Board shall, at all times prior to the Effective Time be, Continuing
Directors. For these purposes, the term "Continuing Director" shall mean (i)
any member of the Board as of the date of the Merger Agreement, (ii) any
member of the Board who is unaffiliated with, and not a designee or nominee of
Parent or Purchaser, or (iii) any successor of a Continuing Director who is
(A) unaffiliated with, and not a designee or nominee, of Parent or Purchaser,
and (B) recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board, and in each case under clause (iii)
who is not an employee of the Company.
I-2
Purchaser has informed the Company that it will choose the Purchaser
Designees from the officers of Parent and its affiliates listed in the
following table, which contains certain biographical information regarding
such directors and executive officers:
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE
NAME AGE YEAR EMPLOYMENT HISTORY
---- --- -------------------------------------------------------
Kent B. Foster 53 President of Parent. Mr. Foster served as Vice Chairman
of the Board of Directors of Parent from October 1993
until June 1995 and President of GTE Telephone
Operations Group from January 1989 until June 1995. He
has been a director of Parent since 1992. Since joining
Parent in 1970, Mr. Foster served in a number of
positions of increasing responsibility through the
Parent system. Mr. Foster serves on the Board of
Directors of Campbell Soup Company and New York Life
Insurance Company.
Thomas W. White 51 Executive Vice President--Market Operations since 1997.
Prior to that time he was President, GTE Telephone
Operations, GTE Service Corporation, since July 1995.
Previously, he served as Executive Vice President--
Network Operations for GTE Telephone Operations since
1994. He serves on the Board of Directors for BC TEL.
Gerald K. Dinsmore 47 President--Business Development and Integration for
Parent since 1997. Prior to that time he was Senior
Vice President, Finance and Planning, Telephone
Operations since 1993. Mr. Dinsmore serves on the Board
of Directors of Quebec Telephone and Compania Anomia
Nacional Telefonos de Venezuela.
Robert C. Calafell 55 Senior Vice President--Corporate Planning and
Development of Parent since 1995. Prior to that time he
served as Vice President--Video Services for GTE
Telephone Operations, GTE Service Corporation since
1993.
J. Michael Kelly 40 Senior Vice President--Finance since 1994. Mr. Kelly
served as Vice President and Controller of Parent from
1991 to 1994. He is a director of Allendal Insurance.
Purchaser has informed the Company that each of the directors and officers
listed above has consented to act as a director of the Company, if so
designated. None of such directors and officers (i) is currently a director
of, or holds any position with, the Company, (ii) has a familial relationship
with any of the directors or executive officers of the Company or (iii) to the
best knowledge of Purchaser, beneficially owns any securities (or rights to
acquire any securities) of the Company. The Company has been advised by
Purchaser that, to the best of Purchaser's knowledge, none of such directors
and officers has been involved in any transaction with the Company or any of
its directors, executive officers or affiliates which are required to be
disclosed pursuant to the rules and regulations of the Commission, except as
may be disclosed herein or in the Schedule 14D-9. The business address of each
such person is GTE Corporation, One Stamford Forum, Stamford, Connecticut
06904.
It is expected that the Purchaser Designees may assume office at any time
following the purchase by Purchaser of a majority of outstanding Shares
pursuant to the Offer, and that, upon assuming office, the Purchaser Designees
will thereafter constitute at least a majority of the Board.
I-3
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names of the current directors and executive officers of the Company,
their ages as of May 1, 1997, and certain other information about them are set
forth below. As indicated above, some of the current directors may resign
effective immediately following the purchase of Shares by Purchaser pursuant
to the Offer.
NAME AGE POSITION
George H. Conrades 58 President, Chief Executive Officer and Director
Ralph A. Goldwasser 50 Senior Vice President, Chief Financial Officer and Assistant Treasurer
David N. Campbell 55 Senior Vice President
John Montjoy 52 Senior Vice President and General Counsel
Paul Gudonis 43 Vice President
Paul F. Brauneis 52 Vice President and Controller
Steven R. Levy 57 Director
John M. Albertine 53 Director
Lucie J. Fjeldstad 53 Director
Max D. Hopper 62 Director
Regis McKenna 57 Director
Andrew L. Nichols 61 Director
Roger D. Wellington 70 Director
The executive officers of the Company are elected annually by the Board of
Directors following the annual meeting of shareholders and serve at the
discretion of the Board of Directors.
Mr. Conrades has been the President and Chief Executive Officer of the
Company since January 1994 and has been a director of the Company since 1993.
Prior to that time, he had been employed for over 30 years at International
Business Machines Corporation. During his employment with IBM, Mr. Conrades
held a number of marketing-management and general-management positions,
including most recently senior vice president, corporate marketing and
services and general manager of IBM United States, including hardware,
software, maintenance, and services, with responsibility for all of that
company's customer-related operations in the United States. Mr. Conrades
retired from IBM in March 1992, and after that time and prior to his
appointment as President of the Company, Mr. Conrades was consulting in
venture capital businesses and was on the board of directors of several small
technology ventures, including a subsidiary of the Company. Mr. Conrades is a
director of Westinghouse Electric Corporation, Cubist Pharmaceuticals
Corporation, and CRA Managed Care, Inc.
Mr. Goldwasser has been Senior Vice President of the Company since 1991 and
has served as Chief Financial Officer since 1992. He served as Treasurer of
the Company from 1991 until November 1996, when he assumed the office of
Assistant Treasurer.
Mr. Campbell was elected Senior Vice President of the Company in July 1995,
and has served as President of the Company's BBN Systems and Technologies
Division since that time. Prior to that time, he was with Computer Task Group,
Inc. an international integrated information technology services company, from
1968 to 1994, most recently serving as its chairman and chief executive
officer. Mr. Campbell is a director of Dunn Tire Corp., First Empire State
Corporation, and Gibraltar Steel Corp.
Mr. Montjoy has served as General Counsel of the Company since 1984, served
as Vice President of the Company from 1991 to 1995, and since 1995 has served
as Senior Vice President of the Company.
Mr. Gudonis was elected Vice President of the Company in November 1994, and
has served as President of BBN Planet since that time. From October 1990 to
October 1994, Mr. Gudonis worked at
I-4
Electronic Data Systems Corporation ("EDS"), a worldwide provider of
information technology services, most recently as vice president and general
manager of its Communications Industry Group. At EDS, Mr. Gudonis was
responsible for building a global division of EDS serving the communications
and media industry.
Mr. Brauneis joined BBN in September 1995 and has served as Vice President
and Controller of the Company since November 1995. Prior to joining BBN, Mr.
Brauneis worked from January 1993 to January 1995 at SoftKey International
Inc. (formerly Spinnaker Software Corporation) as chief financial officer and
financial consultant, and from 1980 to 1992 at M/A-Com, Inc., where he served
in the positions of vice president and comptroller, vice president/finance,
and financial consultant.
Mr. Levy is Chairman of the Board Emeritus of the Company and has been a
director of the Company since 1973. Since his retirement as an employee of the
Company in 1995, he has consulted for start-up ventures, in certain of which
he has made private investments. Mr. Levy was an officer of the Company from
1970 to 1995, serving as President and Chief Executive Officer from 1976 to
1983; as Chairman of the Board and Chief Executive Officer from 1983 to 1993;
as Chairman of the Board, President, and Chief Executive Officer in 1993; and
as Chairman of the Board in 1994 and 1995. Mr. Levy is also a director of
Thermo Optek, Inc. and OneWave Inc.
Dr. Albertine has been a director of the Company since 1986. He has been
Chairman of the Board and Chief Executive Officer of Albertine Enterprises,
Inc., economic and public policy consultants, since its organization by him in
1990. Dr. Albertine is also Chairman of the Board of JIAN Group Holdings, LLC,
a financial services consulting and holding company. Dr. Albertine is a
director of Thermo Electron Corporation, American Precision Industries, Inc.,
and Intermagnetics General Corporation.
Ms. Fjeldstad has been a director of the Company since 1994. She has been
the President of the Video and Networking business unit of Tektronix Inc., a
manufacturer of printers, displays, test instrumentation, and video equipment,
since January 1995. During 1993 and 1994, she was President and Chief
Executive Officer of Fjeldstad International, computing, telecommunications,
media/entertainment, and consumer electronics industries consultants. Prior to
that time, she had been employed for 25 years at International Business
Machines Corporation. During her employment with IBM, Ms. Fjeldstad held a
number of senior technical and management positions, including most recently
corporate vice president, and general manager of multimedia (1992 to 1993) and
corporate vice president, and president of the multimedia and education
division (1990 to 1992). Ms. Fjeldstad is a director of Entergy Corporation
and The Gap, Inc.
Mr. Hopper has been a director of the Company since April 1996. He serves as
president and is the principal owner of Max D. Hopper Associates, Inc., an
advanced information technologies consulting firm he founded in 1995. Prior to
that time, Mr. Hopper had been chairman of The SABRE Group (a technology
services group) of AMR Corporation since 1993, and a senior vice president of
AMR (the parent of American Airlines) since 1985. Mr. Hopper is a director of
Centura Software Corporation, Computer Language Research Inc., Gartner Group
Inc., Scopus Technology Corporation, USData Corp., VTEL Corp., and Worldtalk
Corporation.
Mr. McKenna has been a director of the Company since April 1996. He is
chairman of The McKenna Group, a management and marketing strategy firm
specializing in information and telecommunications technologies. He is also a
venture partner with the venture capital firm of Kleiner Perkins Caufield &
Byers. Mr. McKenna is on the board of directors of several pre-public, start-
up companies.
Mr. Nichols has been a director of the Company since 1978. He has been a
partner of the law firm of Choate, Hall & Stewart, Boston, Massachusetts,
since 1969. Choate, Hall & Stewart served as a counsel to the Company in
fiscal 1996 and is serving in such capacity in fiscal 1997.
I-5
Mr. Wellington has been a director of the Company since 1981. He serves as
President and Chief Executive Officer of Wellington Consultants, Inc. and of
Wellington Associates, international business consulting firms he founded in
1994 and 1989, respectively. Prior to 1989, Mr. Wellington served as Chairman
of the Board of Augat Inc., a manufacturer of electromechanical components,
for more than five years. Prior to 1988, he also held the positions of
President and Chief Executive Officer of Augat Inc. Mr. Wellington is a
director of Thermo Electron Corporation and Photoelectron Corporation. Prior
to 1972, Mr. Wellington was a senior vice president of GTE International, Inc.
There is no family relationship between any directors or executive officers
of the Company.
DIRECTORS MEETINGS AND COMMITTEES
Compensation and Other Transactions. During the Company's fiscal year ended
June 30, 1996, the Board of Directors of the Company held a total of 16
meetings. Each director who was not a full-time employee of the Company
received an annual retainer of $10,000 for services as a director, plus $750
for each Board meeting attended by the individual during the year and for each
date (other than the date of a meeting of the Board) on which the individual
attended one or more meetings of committees of the Board, plus $375 for each
date of a meeting of the Board on which the individual also attended one or
more separate meetings of committees of the Board. Each incumbent director
attended not less than 75% of the aggregate of the meetings of the Board and
of the committees of which he or she was a member held during the fiscal year
ended June 30, 1996.
Under the Company's deferred compensation plan for non-employee directors,
each non-employee director has the option to make an annual election to defer
his or her compensation as a director and to receive the deferred amounts in
shares of Common Stock, either after the individual ceases to be a director or
after the individual retires from his or her principal occupation. Deferred
compensation is credited in units of stock of the Company, based on the value
of the Common Stock at the time so credited. Messrs. Albertine and McKenna
currently participate in this plan; until January 1, 1996, Mr. Wellington also
participated in the plan. At July 1, 1996, the three individuals had units
under the plan entitling them to an aggregate of 37,586 shares of Common
Stock.
The Company's 1986 Stock Incentive Plan provides that an option to purchase
3,000 shares of Common Stock is granted automatically on an annual basis to
each non-employee director, on the third business day following the date of
each annual meeting of shareholders at which the eligible director is elected
or continues to serve under an unexpired term. The exercise price of each
option is equal to the fair market value per share of the Common Stock on the
date the option is granted. Options granted to non-employee directors are for
a term of 5 years, and vest in equal annual installments over the first four
years (subject to acceleration in the event of the director's death, mandatory
retirement from the Board by reason of age, or retirement by reason of
disability).
Dr. Albertine has served as a member of the Company's Board of Visitors
since November 1995. The Board of Visitors is a business development group
organized by the Company to seek out new opportunities for government
business. Dr. Albertine has elected to defer his compensation as a member of
the Board of Visitors (currently $2,000 per meeting attended) and to receive
the deferred amounts in shares of Common Stock under the Company's deferred
compensation plan for non-employee directors.
Mr. McKenna provided consulting services relating to marketing and business
communications to the Company and its subsidiaries from September 1994 to
December 1995, for which services he received fees aggregating approximately
$175,000.
Mr. Hopper provided consulting services relating to strategic marketing to
the Company and its subsidiaries from March 1995 to March 1996, for which
services he received fees aggregating approximately $50,000.
I-6
In fiscal 1996 the Company undertook a reorganization program to combine its
Internet and internetworking services operations, and to focus its business
principally on a range of Internet capabilities. A corollary of this focus was
the elimination or sale of subsidiaries. In this connection, the portion of
executive compensation related to subsidiary stock options has been largely
terminated, replaced in most part by a replacement option program for shares
in BBN. In this connection, Messrs. Hopper and McKenna, who each served as a
director of the Company's BBN Planet subsidiary prior to his election as a
director of BBN, received a replacement option for 3,750 shares of BBN Common
Stock in January 1996 in exchange for the termination of BBN Planet options
owned by him. Also in connection with termination of the subsidiary option
programs in BBN Planet Corporation and BBN HARK Systems Corporation, Mr.
Conrades received replacement options as set forth in the table on Option
Grants in Last Fiscal Year under the Caption "Compensation and Certain Other
Transactions Involving Executive Officers" below, and Mr. Levy received a cash
payment aggregating $79,688.
In August and September 1996, each of Messrs. Albertine, Conrades, Hopper,
and McKenna purchased 1,000, 15,000, 5,000, and 3,729 shares of Common Stock,
respectively, from the Company under the Company's 1996 Restricted Stock Plan
at 75% of the fair market value of the shares on the date of sale. The shares
are restricted as to transfer and the individual is required to offer the
shares back to the Company at the price paid if the individual terminates his
service relationship with the Company within 2 years of the date of the
acquisition of the shares.
Audit Committee. The Audit Committee of the Board of Directors held 4
meetings during the fiscal year ended June 30, 1996. In general, the function
of the Audit Committee is to recommend to the Board of Directors the
engagement or discharge of the independent auditors; to consider with the
independent auditors the scope of their audit and their audit fees; to review
with the independent auditors the scope and results of their audit and their
report and management letters; to review non-audit professional services by
generic classification to be provided by the independent auditors, to review
the magnitude of the range of fees for such non-audit services, and to
consider the independence of the independent auditors; to review with the
independent auditors and with the internal auditors and management of the
Company, the Company's policies and procedures with respect to internal
auditing, accounting, and financial controls; and to review the financial
reporting and accounting standards and principles of the Company. Messrs.
Albertine, Nichols, and Wellington, none of whom is or has been an officer or
employee of the Company, currently serve as the Audit Committee.
Compensation Committee; Compensation Committee Interlocks and Insider
Participation. The Compensation and Stock Option Committee of the Board of
Directors (the "Compensation Committee") held 13 meetings during the fiscal
year ended June 30, 1996. In general, the function of the Compensation
Committee is to administer the executive compensation and incentive
compensation and stock option programs of the Company; to establish the
compensation of the chief executive officer of the Company; to review salary
and incentive bonus awards for other executive officers; and to award stock
options.
Ms. Fjeldstad and Messrs. Hatsopoulos and Wellington served on the
Compensation Committee during the fiscal year ended June 30, 1996. None of
these individuals is or has been an officer or employee of the Company.
Customer Relationships Committee. The Board of Directors has a standing
Customer Relationships Committee, the function of which, in general, is to
monitor customer relationship processes, and to evaluate customer satisfaction
criteria. Ms. Fjeldstad and Messrs. Hopper, McKenna, Nichols, and Wellington
currently serve on the Customer Relationships Committee.
Nominating Committee. The Board of Directors has not appointed a standing
nominating committee.
I-7
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of May 5, 1997, there were 21,230,097 shares of Common Stock of the
Company outstanding. The Company knows of no person who may be deemed to own
beneficially more than five percent of the outstanding Common Stock, except as
follows:
AMOUNT PERCENT
NAME AND ADDRESS OF BENEFICIALLY OF
TITLE OF BENEFICIAL OWNER OWNED CLASS
CLASS ------------------------------ ------------ -------
Common Stock............ Kopp Investment Advisors, Inc. 3,365,096(1) 15.9%(1)
6600 France Avenue South
Edina, MN 55435
- --------
(1) Kopp Investment Advisors, Inc., a registered investment advisor, has
informed the Company, by a report dated January 28, 1997 on Schedule 13G,
that at that time, it exercised investment discretion with respect to
3,196,096 of such shares for the benefit of investment accounts managed by
the firm, and as to which accounts it had no voting power but had shared
investment power.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of May 1, 1997 (i)
individually by the Chief Executive Officer, each of the four other most
highly paid executive officers of the Company in fiscal 1996 (the "Named
Executive Officers") and each director of the Company and (ii) by all current
executive officers and directors of the Company as a group:
AMOUNT
TITLE OF BENEFICIALLY PERCENT OF
CLASS NAME OR GROUP OWNED(1)(2) CLASS(3)
-------- ------------------------------- ------------ ----------
Common Stock George H. Conrades(4)(5) 701,952 3.2%
David N. Campbell.............. 66,325
John T. Kish, Jr.(6)........... 0
Paul R. Gudonis (4)............ 96,262
Ralph A. Goldwasser............ 59,986
Steven R. Levy(7).............. 72,227
John M. Albertine(4)(8)........ 37,785
Lucie J. Fjeldstad(9).......... 3,250
Max D. Hopper(4)(10)........... 8,750
Regis McKenna(4)(11)........... 8,304
Andrew L. Nichols(12).......... 15,150
Roger D. Wellington(13)........ 37,077
All current directors
and executive 1,146,175(4)(5)(7) 5.2%(4)(5)(7)
officers as a group (8)(9)(10) (8)(9)(10)
(13 persons)................... (11)(12)(13)(14) (11)(12)(13)(14)
- --------
(1) The inclusion herein of any shares deemed beneficially owned under the
rules of the Securities and Exchange Commission does not constitute an
admission of beneficial ownership of such shares.
(2) The shares shown as owned beneficially by the named individuals include
662,750, 51,325, 86,262, and 49,938 shares, respectively, as to which
Messrs. Conrades, Campbell, Gudonis, and Goldwasser have the right to
acquire ownership through the exercise of those options, held by
I-8
each under the stock option plans of the Company, which are exercisable
within 60 days of May 1, 1997.
(3) If such percentage exceeds 1%.
(4) The shares shown as owned beneficially include 15,000, 10,000, 1,000,
5,000 and 3,729 shares shown as owned by Messrs. Conrades, Gudonis,
Albertine, Hopper and McKenna, respectively, sold to the individual under
the Company's 1996 Restricted Stock Plan at 75% of the fair market value of
the shares on the date of sale. The shares are restricted as to transfer
and the individual is required to offer the shares back to the Company at
the price paid if the individual terminates his service relationship with
the Company within 2 years of the date of acquisition.
(5) The shares shown as owned beneficially by Mr. Conrades include 37,202
shares owned jointly with his spouse, as to which shares Mr. Conrades and
his spouse share voting and investment power, and 2,000 shares owned by Mr.
Conrades' adult child. Mr. Conrades also owns $50,000 principal amount of
the Company's 6% Convertible Subordinated Debentures due 2012.
(6) Mr. Kish is no longer an executive officer or in the employ of the
Company. Where included, information concerning Mr. Kish has been provided
to the Company by Mr. Kish.
(7) The shares shown as owned beneficially by Mr. Levy include 32,995 shares
held in his participant account under the BBN Retirement Trust.
(8) The shares shown as owned beneficially by Dr. Albertine include 324
shares owned by Dr. Albertine's spouse, as to which shares Dr. Albertine
disclaims beneficial ownership, and 2,250 shares as to which Dr. Albertine
has the right to acquire ownership through the exercise of those options,
held by him under the stock option plans of the Company, which are
exercisable within 60 days of May 1, 1997. The shares shown as owned
beneficially also include 18,677 shares represented by units allocated
under the Company's deferred compensation plan for non-employee directors
entitling Dr. Albertine as of March 31, 1997 to receive that number of
shares on or after his deferral termination date.
(9) The shares shown as owned beneficially by Ms. Fjeldstad include 2,250
shares as to which Ms. Fjeldstad has the right to acquire ownership through
the exercise of those options, held by her under the stock option plans of
the Company, which are exercisable within 60 days of May 1, 1997.
(10) The shares shown as owned beneficially by Mr. Hopper include 3,750 shares
as to which Mr. Hopper has the right to acquire ownership through the
exercise of those options, held by him under the stock option plans of the
Company, which are exercisable within 60 days of May 1, 1997.
(11) The shares shown as owned beneficially by Mr. McKenna include 3,750
shares as to which Mr. McKenna has the right to acquire ownership through
the exercise of those options, held by him under the stock option plans of
the Company, which are exercisable within 60 days of May 1, 1997. The
shares shown as owned beneficially also include 825 shares represented by
units allocated under the Company's deferred compensation plan for non-
employee directors entitling Mr. McKenna as of March 31, 1997 to receive
that number of shares on or after his deferral termination date.
(12) The shares shown as owned beneficially by Mr. Nichols include 900 shares
owned by a partnership of which Mr. Nichols is a general partner and in
which he has a 50% beneficial interest, and 2,250 shares as to which Mr.
Nichols has the right to acquire ownership through the exercise of those
options, held by him under the stock option plans of the Company, which are
exercisable within 60 days of May 1, 1997.
(13) The shares shown as owned beneficially by Mr. Wellington include 2,250
shares as to which Mr. Wellington has the right to acquire ownership
through the exercise of those options, held by him
I-9
under the stock option plans of the Company, which are exercisable within
60 days of May 1, 1997. The shares shown as owned beneficially also
include 19,827 shares represented by units allocated under the Company's
deferred compensation plan for non-employee directors entitling Mr.
Wellington as of March 31, 1997 to receive that number of shares on or
after his deferral termination date.
(14) The shares shown as beneficially owned include an aggregate of 24,426
shares as to which two executive officers not named in the table have the
right to acquire ownership through the exercise of those options, held by
such officers under stock option plans of the Company, which are
exercisable within 60 days of May 1, 1997.
Information in the table above does not include options to acquire Common
Stock, but does include shares of Common Stock which have not been issued but
which are subject to options which either are currently exercisable or will
become exercisable within 60 days of May 1, 1997. In addition, all In the
Money Options (as defined in the Merger Agreement) will become exercisable
immediately prior to the consummation of the Offer.
I-10
COMPENSATION AND CERTAIN OTHER TRANSACTIONS INVOLVING EXECUTIVE OFFICERS
Compensation. There is set forth below, on an accrual basis, the aggregate
amount of base salary, bonus, and other cash compensation paid by the Company,
and the number of shares of Common Stock of the Company and of common stock of
specified subsidiaries of the Company issuable upon exercise of stock options
granted under the respective company's stock option plans, during the fiscal
years ended June 30, 1996, 1995, and 1994 for services rendered, to the
individual (Mr. Conrades) who served during the fiscal year ended June 30,
1996 as chief executive officer of the Company, and to the four other most
highly compensated individuals (Messrs. Campbell, Kish, Gudonis, and
Goldwasser) who were serving as executive officers of the Company at the end
of the 1996 fiscal year. Mr. Kish is no longer in the employ of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ---------------------
STOCK UNDERLYING
OPTIONS (NUMBER ALL
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OF SHARES OTHER
POSITION YEAR SALARY BONUS COMPENSATION AND COMPANY(1)) COMPENSATION(2)
------------------ ------ -------- -------- ------------ --------------------- ---------------
George H. Conrades, 1996 $400,000 0 $270,928(3) 13,500 (BBN) (4) $ 7,688(5)
President and Chief 1995 400,000 0 176,871(6) 100,000 (PLT) (4) 14,860(5)
Executive Officer 100,000 (HRK) (4)
1994 206,154(7) 0 88,800(8) 800,000 (BBN) 0
100,000 (LSC) (9)
100,000 (DC) (10)
David N. Campbell, 1996 284,230 $150,000 79,600(11) 194,050 (BBN) (4) 0
Senior Vice President 30,000 (PLT) (4)
30,000 (HRK) (4)
30,000 (DC) (10)
John T. Kish, Jr., 1996 270,000 10,241(12) 675 (BBN) (4)(13) 4,500
Vice President 1995 225,000 125,000 170,874(14) 65,000 (BBN) (15) 0
5,000 (PLT) (4)
5,000 (HRK) (4)
1994 786(16) 300,000 (DC) (17) 0
Paul R. Gudonis, 1996 220,833 50,000 153,800 (BBN) (4) 5,625(5)
Vice President 1995 125,000(18) 138,500 50,000 (BBN) 0
350,000 (PLT) (4)
5,000 (DC) (10)
5,000 (HRK) (4)
Ralph A. Goldwasser, 1996 210,000 50,000 42,500 (BBN) (4) 17,688(5)
Senior Vice President 20,000 (HRK) (4)
and Chief Financial 23,000 (DC) (10)
Officer
1995 182,500 25,000 40,000 (BBN) 15,423(5)
30,000 (PLT) (4)
10,000 (HRK) (4)
1994 172,500 0 25,000 (BBN) 12,527
7,000 (LSC) (9)
7,000 (DC) (10)
- --------
(1) In addition to options granted to purchase Common Stock of the Company
(designated in the table as "BBN"), certain executive officers of the
Company have in the past been granted options to
I-11
purchase common stock of specified subsidiaries of the Company, as
compensation for their services related to the subsidiary. Options were
granted during the fiscal years ended June 30, 1996, June 30, 1995, and June
30, 1994 to the specified executive officers in one or more of the following
subsidiaries of the Company: LightStream Corporation (designated in the
table as "LSC"), a majority-owned subsidiary of BBN; BBN Planet Corporation
(designated in the table as "PLT"), formerly a majority-owned subsidiary of
BBN; BBN Domain Corporation, formerly known as BBN Software Products
Corporation (designated in the table as "DC"), formerly a wholly-owned
subsidiary of BBN; and BBN HARK Systems Corporation (designated in the table
as "HRK"), formerly a wholly-owned subsidiary of BBN. In January 1995,
LightStream Corporation sold substantially all of its assets for
approximately $120,000,000 in cash. In connection with that transaction,
stock options held in LightStream by Messrs. Conrades and Goldwasser and
certain other executive officers of the Company were canceled by agreement,
without payment to the individuals. Stock options held by LightStream
employees were, in general, exchanged in that transaction for a cash payment
from LightStream. In fiscal 1996, BBN HARK Systems Corporation was merged
into the Company. In connection with that transaction, stock options held in
BBN HARK by Messrs. Conrades, Campbell, Kish, Gudonis, and Goldwasser and
certain other executive officers of the Company were replaced by options in
the Company's stock under the Company's 1986 Stock Incentive Plan. In fiscal
1996, in connection with the reorganization of the Company's Internet and
internetworking activities, stock options held in BBN Planet Corporation by
Messrs. Conrades, Campbell, Kish, Gudonis, and Goldwasser and certain other
executive officers of the Company were replaced by options in the Company's
stock under the Company's 1986 Stock Incentive Plan. BBN Planet has since
been merged into the Company. In July 1996, BBN Domain Corporation was
recapitalized and the majority of the Company's stock ownership in BBN
Domain was sold; in connection with the recapitalization and sale, stock
options held in BBN Domain by Messrs. Conrades, Campbell, Gudonis, and
Goldwasser and certain other executive officers of the Company who held
options but did not become employees of BBN Domain remain outstanding, to
the extent vested at the time of sale, at a reformulated price of $0.61 per
share. Mr. Kish, who left the employ of the Company in connection with the
sale and remains the president of BBN Domain (now called Domain Solutions
Corporation), continues in his options of Domain Solutions Corporation at
the reformulated price of $0.61 per share.
(2) Except as otherwise noted, indicated amounts are the Company's contribution
to the BBN Retirement Trust, the tax-qualified defined contribution
retirement plan of the Company and its subsidiaries, for the benefit of the
indicated individual.
(3) Amount represents expenses paid by the Company in connection with the
carrying expenses of Mr. Conrades' former residence, assumed by the Company
by agreement in connection with Mr. Conrades' relocation to Massachusetts,
and tax reimbursement for such expenses paid, in the fiscal year.
(4) In fiscal 1996 the Company undertook a program to combine its Internet and
internetworking services operations, and to focus its business principally
on a range of Internet capabilities. A corollary of this focus was the
elimination or sale of subsidiaries. In this connection, the portion of the
executive compensation package related to subsidiary stock options has been
largely terminated, replaced for those employees covered previously by
subsidiary options who remained or became employees of BBN by a replacement
option program for shares in BBN. Replacement options for BBN shares have
been awarded to recipients of options under the plans of BBN Planet and BBN
HARK, in general to the effect that for every 100 shares of stock of BBN
Planet covered by a replaced option, the individual received a BBN option
for 12.5 shares of BBN stock at an exercise price of $18.125 per share, as
to which 50% would vest after 6 months and an additional 50% would vest
after 12 months, and that for every 100 shares of stock of BBN HARK covered
by a replaced option, the individual received a BBN option for 1 share of
BBN stock at an exercise price of $28.875 per share, as to which 25% would
vest after 1 year and an additional 25% would
I-12
vest annually thereafter. As a result, BBN Planet and BBN HARK options have
been canceled, unexercised; replacement options for BBN shares are included
in fiscal 1996 figures.
(5) Includes amounts credited by the Company to the account of the individual
under the Company's non-qualified deferred compensation plan for certain
key executives, established effective April 1, 1995. In general,
participation in the Deferred Compensation Plan is limited to executives
selected from among those with annual base salary in excess of $150,000.
Under the Deferred Compensation Plan, a participant may defer base salary
in excess of the $150,000 limit, plus bonuses; in addition, the Company
can make discretionary retirement contributions. Deferred amounts are
payable at a fixed future date selected in advance by the participant,
upon termination of employment, or in the case of certain hardships.
Accounts are adjusted for notional investment earnings based on
participant choices from among the same range of investment funds (other
than Company stock) as are available under the Company's tax-qualified
BBN Retirement Trust. The Company, although not obligated to do so under
the terms of the Deferred Compensation Plan, has established a trust to
help meet future payment obligations under the Deferred Compensation
Plan. Obligations under the Deferred Compensation Plan are general
obligations of the Company, and the rights of participants to benefits
remain those of general creditors of the Company. In the event of certain
changes in control of the Company, participants would be entitled to
reimbursement for certain costs incurred in enforcing rights under the
Deferred Compensation Plan. To make up for certain limitations imposed by
the Internal Revenue Code on contributions to the BBN Retirement Trust,
the Company credited the following amounts: for the year ended June 30,
1995, $3,750 and $4,313, respectively, for Messrs. Conrades and
Goldwasser; for the year ended June 30, 1996, $6,438, $1,125, and $6,438,
respectively, for Messrs. Conrades, Gudonis, and Goldwasser.
(6) Amount includes expenses incurred by the Company in connection with the
sale of Mr. Conrades' former residence, assumed by the Company by
agreement in connection with Mr. Conrades' relocation to Massachusetts,
aggregating $170,346. Amount also includes interim local living expenses
prior to Mr. Conrades' relocation to Massachusetts paid, and tax
reimbursement for interim local living expenses paid, in the fiscal year,
aggregating $6,525.
(7) Payments primarily constituting six months salary, at an annualized rate
of $400,000 per year.
(8) Amount includes interim local living expenses prior to Mr. Conrades'
relocation to Massachusetts paid, and tax reimbursement for interim local
living expenses paid, in the fiscal year, aggregating $51,300. Amount
also includes $37,500, the amount of the difference between the price
paid by Mr. Conrades for 20,202 shares of Common Stock of the Company
purchased from the Company upon Mr. Conrades joining the employ of the
Company, and the fair market value of such shares on the date of
purchase.
(9) Canceled by agreement, without compensation to the individual, upon sale
of the business of LightStream Corporation.
(10) Options for employees of BBN Domain were reformulated upon the
recapitalization and sale by BBN of the majority of the stock of that
company in July 1996. Following the sale, stock options in BBN Domain
held by certain executive officers of BBN who held options but did not
become employees of BBN Domain, remain outstanding, to the extent vested
at the time of the sale, at a reformulated price of $0.61 per share.
(11) Amount represents relocation expenses related to Mr. Campbell's
relocation to Massachusetts paid in the fiscal year, aggregating $41,000,
and expenses incurred by the Company in connection with the sale of Mr.
Campbell's former residence, assumed by the Company by agreement in
connection with Mr. Campbell's relocation to Massachusetts, aggregating
$38,600.
(12) Amount represents relocation expenses related to Mr. Kish's relocation to
Massachusetts and related tax reimbursement paid in the fiscal year.
(13) Options for 362 of such shares were unvested at, and terminated upon, Mr.
Kish's leaving the employ of the Company in July 1996.
I-13
(14) Amount represents relocation expenses related to Mr. Kish's relocation to
Massachusetts and related tax reimbursement paid in the fiscal year,
aggregating $115,747, and expenses incurred by the Company in connection
with the sale of Mr. Kish's former residence, assumed by the Company by
agreement in connection with Mr. Kish's relocation to Massachusetts,
aggregating $55,127.
(15) Options for 46,250 of such shares were unvested at, and terminated upon,
Mr. Kish's leaving the employ of the Company in July 1996.
(16) Mr. Kish joined the employ of the Company in June 1994.
(17) In connection with the recapitalization and sale of a majority of the
stock of BBN Domain Corporation by the Company in July 1996, option was
continued at a reformulated price of $0.61 per share.
(18) Payments consisting of seven and one-half months of salary, at an
annualized rate of $200,000 per year.
The aggregate incremental cost of personal benefits provided by the Company
in each of fiscal 1996, 1995, and 1994, to each of the individuals named in
the Summary Compensation Table (other than to Messrs. Conrades, Campbell, and
Kish), did not exceed the lesser of $50,000 or 10% of the indicated amount of
total annual salary and bonus reported for the named individual in the Summary
Compensation Table.
Employment Agreements, Loans, and Separation Pay Arrangements.
The agreement with Mr. Conrades provides that if his employment is
terminated by the Company without cause, the Company will pay him an amount
equal to one year's base salary, as full termination benefits.
In connection with the sale by the Company of the majority of the stock of
BBN Domain Corporation, of which Mr. Kish serves as president, Mr. Kish left
the employ of the Company on July 31, 1996, after 2 years of service. At that
time Mr. Kish received $135,000 in incentive pay and the Company agreed that
in the event his employment with BBN Domain (the name of which has been
changed in connection with the sale to Domain Solutions Corporation) is
involuntarily terminated for any reason other than cause within 1 year
following July 31, 1996, and if the total severance package paid to him in
connection with such termination has a value of less than $270,000, BBN will
pay Mr. Kish at the time of such termination the difference between such value
and $270,000. In addition, the exercisability of options held by Mr. Kish for
15,000 shares of Common Stock of the Company granted in August 1994 was
accelerated to become exercisable through the period ending September 29,
1996. BBN also agreed with Domain Solutions Corporation to sell to Domain
Solutions Corporation, at the exercise price of $0.61 per share, a portion of
its shares of Domain Solutions Corporation necessary to fund the exercise by
Mr. Kish of the outstanding and vested options for 150,000 shares of common
stock of Domain Solutions Corporation held by Mr. Kish at the date of
termination, as well as for a supplemental grant to Mr. Kish by Domain
Solutions Corporation, if made, for 25,000 shares.
In connection with his relocation to Massachusetts to join the employ of the
Company, Mr. Kish borrowed from the Company in August 1994 an aggregate of
$150,000 to bridge the purchase of a house in Massachusetts pending the sale
of his previous home in California. The borrowing was represented by a term
note, due in two equal installments on August 1, 1995 and 1996, given by Mr.
Kish, which note carried simple interest at 8% per annum. The principal amount
of $75,000 outstanding at July 31, 1996, together with accrued interest, was
forgiven by the Company following the termination of employment with BBN of
Mr. Kish.
As part of the bonus payments made to Mr. Gudonis in the 1995 fiscal year,
$88,500 was paid to him to reimburse him for forfeitures under a bonus plan at
his former employer. Mr. Gudonis'
I-14
agreement with the Company provides that in the event that he resigns from BBN
during the first four years of employment, he is responsible for reimbursing a
pro-rata share of this payment made to him.
Stock Option Grants. The table below sets forth information with respect to
stock options granted in fiscal year 1996 to the individuals named in the
Summary Compensation Table above; the options listed below are reflected in
the Summary Compensation Table. Information presented in the table below is
with respect to employee stock option plans; neither the Summary Compensation
Table above nor the tables on option grants and option exercises below
includes information related to the Company's employee stock purchase plan,
which is generally available to employees of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM (9)
------------------------------
NUMBER
OF SHARES
UNDERLYING
OPTIONS % OF TOTAL
GRANTED TO OPTIONS
PURCHASE COMMON GRANTED TO
STOCK OF BBN EMPLOYEES EXERCISE MARKET EXPIRATION
OR SPECIFIED IN FISCAL PRICE PRICE DATE
NAME SUBSIDIARIES (1)(4)(5) YEAR (6) ($/SH)(7) ($/SH)(8) (2)(3)(4)(5) 0% 5% 10%
---- ----------------------------------- --------- --------- ------------ -------- --------- ----------
George H.
Conrades.......... 1,000 (BBN) (2) 0.05% $28.875 1/17/01 $ 7,978 $ 17,628
12,500 (BBN) (3) 0.6 18.125 $28.875 1/17/00 $134,375 212,159 301,886
David N. Campbell. 150,000 (BBN) 7.7 35.75 7/24/02 2,183,074 5,087,457
30,000 (PLT) (10) 11.1 8.00 7/27/05 (10) (10)
30,000 (HRK) (11) 17.2 1.00 8/4/05 (11) (11)
30,000 (DC) (12) 9.0 3.50 8/7/05 66,033(12) 167,339(12)
300 (BBN) (2) 0.0 28.875 1/17/01 2,393 5,288
3,750 (BBN) (3) 0.2 18.125 28.875 1/17/00 40,312 63,648 90,565
40,000 (BBN) 2.1 27.50 5/6/03 447,810 1,043,581
John T. Kish,
Jr. .............. 50 (BBN) (2) 0.0 28.875 1/17/01 399 881
625 (BBN) (3) 0.0 18.125 28.875 1/17/00 6,718 10,608 15,094
Paul R. Gudonis... 50 (BBN) (2) 0.0 28.875 1/17/01 399 881
43,750 (BBN) (3) 2.2 18.125 28.875 1/17/00 470,312 742,558 1,056,601
110,000 (BBN) 5.7 28.875 1/17/03 1,293,053 3,013,363
Ralph A.
Goldwasser........ 20,000 (HRK) (11) 11.4 1.00 8/4/05 (11) (11)
23,000 (DC) (12) 6.9 3.50 8/7/05 50,626(12) 128,293(12)
300 (BBN) (2) 0.0 28.875 1/17/01 2,393 5,288
3,750 (BBN) (3) 0.2 18.125 28.875 1/17/00 40,312 63,648 90,565
38,450 (BBN) 2.0 27.50 5/6/03 430,457 1,003,142
INDIVIDUAL GRANTS
- --------
(1) BBN Corporation is designated in the table as "BBN"; BBN HARK Systems
Corporation, formerly a wholly-owned subsidiary of BBN, is designated in
the table as "HRK"; BBN Planet Corporation, formerly a majority-owned
subsidiary of BBN, is designated in the table as "PLT"; and BBN Domain
Corporation, formerly a wholly-owned subsidiary of BBN, is designated in
the table as "DC".
(2) These options for BBN shares were granted under the Company's 1986 Stock
Incentive Plan replacing options previously granted under the subsidiary
option plan for BBN HARK Systems Corporation. These BBN stock options are
exercisable as to 25% after one year from grant, an additional 25% after
two years, an additional 25% after three years, and the remainder after
four years from grant, if the optionee is employed by BBN at the
respective date. These options were granted for a term of 5 years.
I-15
(3) These options for BBN shares were granted under the Company's 1986 Stock
Incentive Plan replacing options previously granted under the subsidiary
option plan for BBN Planet Corporation. These BBN stock options are
exercisable as to 50% after 6 months from grant, and the remainder after
12 months from grant, if the optionee is employed by BBN at the
respective date. These options were granted for a term of 4 years. The
fair market value of the BBN Common Stock on the date of grant was
$28.875.
(4) All BBN options (other than the BBN Planet replacement options) granted
in fiscal 1996 to named individuals vest 25% after one year from grant,
an additional 25% after two years, an additional 25% after three years,
and the remainder after four years from grant, if the optionee is
employed by BBN at the respective date. All BBN options (other than the
BBN Planet and BBN HARK replacement options) were each granted for terms
of 7 years. In general, all BBN options, including the BBN Planet and BBN
HARK replacement options granted to Messrs. Conrades, Campbell, Kish,
Gudonis, and Goldwasser, are subject to termination 60 days following
termination of the optionee's employment (180 days, in the event of
death). All BBN options (other than the BBN Planet replacement options)
were granted at fair market value (closing price of the Company's Common
Stock on the New York Stock Exchange) at date of grant. The BBN options
replacing options previously granted under the subsidiary option plan of
BBN Planet were granted at a reduced price from fair market value, which
took into consideration the spread in the estimated BBN Planet stock
value and the replaced option's exercise price. The exercise price and
tax withholding obligations related to exercise of all BBN options may be
paid by delivery of already-owned shares or by offset of the underlying
shares, subject to certain conditions.
(5) All subsidiary options granted in fiscal 1996 vested as to 25% after one
year from grant, an additional 25% after two years, an additional 25%
after three years, and the remainder after four years from grant, if the
optionee was employed at the respective date. None of the options was
exercisable until 90 days after the respective company's stock becomes
publicly traded. The options were each granted for terms of 10 years,
subject to termination 60 days following termination of the optionee's
employment (180 days, in the event of death), or if later, 90 days after
the company's stock becomes publicly traded. In general, options were
granted at the estimated fair value of the company's stock at the date of
grant. The exercise price and tax withholding obligations relating to
exercise could be paid by delivery of already owned shares or by offset
of the underlying shares, subject to certain conditions.
(6) Percentage figure is of the total options of shares of the respective
company granted in the fiscal year.
(7) Under the terms of the Company's stock option plans, the Committee or the
respective board retains the discretion, subject to plan limits, to
modify the terms of outstanding options and to reprice the options.
(8) Market price of the underlying security on the date of grant, if in
excess of the exercise price.
(9) Gains are calculated net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates
of appreciation only. Actual gains, if any, in stock option exercises are
dependent upon the future performance of the respective common stock, as
well as the optionee's continued employment through the vesting period,
and for subsidiary options, on the respective company's stock becoming
publicly traded during the option period. The amounts reflected in these
columns may not necessarily be achieved.
(10) These options have been replaced by options for BBN shares. See footnote
3 above.
(11) These options have been replaced by options for BBN shares. See footnote
2 above.
(12) In connection with the recapitalization of BBN Domain Corporation and the
July 31, 1996 sale by the Company of the majority of the stock of that
company, options for 25% of the optioned shares, at a reformulated price
of $0.61 per share, were vested; the remainder were unvested, and were
canceled upon the termination of the service relationship of the
individual with BBN Domain Corporation.
I-16
Stock Option Exercises and Options Outstanding. The table below sets forth
information with respect to stock options exercised by the individuals named in
the Summary Compensation Table in fiscal year 1996, and the number and value of
unexercised options held by such persons on June 30, 1996.
OPTION EXERCISES IN FISCAL YEAR 1996 AND YEAR-END OPTION VALUES
COMPANY AND
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT JUNE 30, 1996 AT JUNE 30, 1996
------------------------------------ ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED COMPANY(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ---------- ------------------------- ----------------------------
George H. Conrades...... 0 -- BBN 500,000 313,500 $ 4,687,500(2) $ 2,857,813(2)
DC 0 100,000(4) (3) (3)(4)
David N. Campbell....... 0 -- BBN 0 194,050 0 13,594(2)
DC 0 30,000(4) 0 (3)(4)
John Kish............... 0 -- BBN 3,750 61,925(5) 13,594(2) 424,297(2)(5)
DC 0 300,000 (3) (3)
Paul R. Gudonis......... 0 -- BBN 0 203,800 0 302,344(2)
DC 0 5,000(4) (3) (3)(4)
Ralph A. Goldwasser..... 28,500 $779,625 BBN 19,000 90,000 164,125(2) 310,906(2)
DC 0 30,000(4) (3) (3)(4)
- -------
(1) BBN Corporation is designated in the table as "BBN"; and BBN Domain
Corporation, formerly a wholly-owned subsidiary of BBN, is designated in
the table as "DC".
(2) Represents the excess, if any, between the closing price of the Company's
Common Stock on June 28, 1996 and the exercise price of the options.
(3) These options were vested as to 50,000 shares, 0 shares, 150,000 shares,
1,250 shares, and 3,500 shares, respectively, for each of Messrs. Conrades,
Campbell, Kish, Gudonis, and Goldwasser at June 30, 1996 but are
unexercisable until following public trading of the related common stock,
and no public market currently exists for the shares underlying these
options. Accordingly, no value in excess of the exercise price has been
attributed to these options.
(4) Option amounts in excess of the then-vested portion (vested as to 50,000
shares, 7,500 shares, 1,250 shares, and 9,250 shares, respectively, for
each of Messrs. Conrades, Campbell, Gudonis, and Goldwasser) were canceled,
unexercised under the terms of the options following the sale by BBN of the
majority of the stock of BBN Domain Corporation in July 1996.
(5) The exercisability of the options to the extent of 15,000 shares was
accelerated upon Mr. Kish leaving the employ of the Company in July 1996,
and the remaining unvested options were terminated at that time. Vested
options held by Mr. Kish at the date of termination of his employment
(aggregating 19,063 shares) were exercisable by Mr. Kish through the period
ended September 27, 1996. Of that amount, options for a total of 15,000
shares were exercised by Mr. Kish in September 1996, with a value realized
(representing the difference between the closing price of the Company's
Common Stock on the date of exercise and the exercise price of the options)
aggregating $48,750. The remaining options for 4,063 shares terminated
unexercised.
Change-of-Control Arrangements. The Company has termination agreements
with the individuals named in the Summary Compensation Table above, which
agreements obligate the respective employee to remain in the employ of the
Company during the pendency of any change-of-control proposal. In
consideration for such agreement, the Company agrees to pay severance
benefits to each such individual, consisting of payment of approximately
three times his then most recent five-year average annual salary and cash
bonus, together with certain other benefits (including the acceleration of
the exercisability of outstanding stock options and continued
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participation for one year in accident and health insurance) and payment of
an amount equal to a "gross-up" payment with respect to any excise taxes
payable by the individual as a result of the severance benefits. The
benefits are payable in the case of Mr. Conrades if his employment
terminates (including a voluntary termination on his part) for any reason
other than death, disability, normal retirement, or as the result of
commission by him of a felony; the benefits are payable in the case of each
of the other named individuals only if his employment is terminated by the
Company for any reason other than for "cause" or is terminated by such
individual as the result of specified justification, in all cases during a
period of two years following a "change of control" of the Company. A
change of control is defined to include the acquisition of 30% or more of
the Company's then-outstanding stock, and other changes of control as
determined by regulatory authorities. Such severance payments would not be
reduced for compensation received by the individual from any new
employment. The agreements provide that five years after commencement, the
change-of-control payment rights may be canceled by the Company by notice
given more than 30 days prior to the change of control. The five-year
period has run for Mr. Goldwasser. Under the agreements, based upon the
average annual compensation paid by the Company to the individual with
respect to the last five calendar years or shorter period he has been with
the Company (and assuming no gross-up payment), change-of-control cash
severance payments would, if payable, be approximately $1,200,000,
$900,000, $900,000, $800,000, and $515,000, respectively, for Messrs.
Conrades, Campbell, Kish, Gudonis, and Goldwasser. The agreement with Mr.
Kish has terminated as a result of his termination of employment with the
Company effective July 31, 1996.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company, during the fiscal year ended June 30, 1996,
all Section 16(a) filing requirements applicable to its officers, directors
and greater-than-ten-percent beneficial owners were complied with.
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[ALEX. BROWN LETTERHEAD]
ANNEX II
May 6, 1997
BBN Corporation
150 Cambridge Park Drive
Cambridge, MA 02140
Dear Sirs:
BBN Corporation (the "Company"), GTE Corporation ("Buyer") and GTE
Massachusetts Incorporated, a Massachusetts corporation and a wholly owned
subsidiary of Buyer ("Purchaser"), have entered into the Agreement and Plan of
Merger dated as of May 5, 1997 (the "Agreement"). Pursuant to the Agreement,
Purchaser shall commence a tender offer (the "Offer") to purchase all shares
of the Company's common stock issued and outstanding at a price of $29.00 per
share, net to the seller in cash (the "Cash Consideration"). Thereafter,
Purchaser shall be merged with and into the Company and the Company shall
continue as the surviving corporation as a subsidiary of Buyer (the "Merger").
Stockholders of the Company other than Buyer shall receive the Cash
Consideration in the Merger. You have requested our opinion as to whether the
Cash Consideration is fair, from a financial point of view, to the Company's
stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors
of the Company in connection with the transaction described above and will
receive a fee for our services, a portion of which is contingent upon the
consummation of the Offer. We have also acted as placement agent for a private
offering of the Company's common stock and as the Company's financial advisor
with respect to the sale of Lightstream Corporation, the divestiture of a
majority interest in its BBN Domain subsidiary and general advisory services.
Alex. Brown regularly publishes research reports regarding the communications
services industry and the businesses and securities of the Company and other
publicly owned companies in the communications services industry. In the
ordinary course of business, Alex. Brown may actively trade the securities of
both the Company and the Buyer for our own account and the account of our
customers and, accordingly, may at any time hold a long or short position in
securities of the Company and the Buyer.
In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning the Company and Buyer
and certain internal analyses and other information furnished to us by the
Company. We have also held discussions with the members of the senior
management of the Company regarding the business and prospects of the Company.
In addition, we have (i) reviewed the reported prices and trading activity for
the common stock of the Company, (ii) compared certain financial and stock
market information for the Company with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which we deemed comparable in
whole or in part, (iv) reviewed the terms of the Agreement, and (v) performed
such other studies and analyses and considered such other factors as we deemed
appropriate.
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We have not independently verified the information described above, and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of the
Company, we have assumed that such information reflects the best currently
available judgments and estimates of the management of the Company as to the
likely future financial performance of the Company. In addition, we have not
made an independent evaluation or appraisal of the assets of the Company and
Buyer, nor have we been furnished with any such evaluations or appraisals. Our
opinion is based on market, economic and other conditions as they exist and
can be evaluated as of the date of this letter.
Our advisory services and the opinion expressed herein were prepared for the
use of the Board of Directors of the Company and do not constitute a
recommendation to the Company's stockholders as to whether they should tender
their shares in the Offer. We hereby consent, however, to the inclusion of
this opinion in its entirety in any filing required to be made by the Company
with the Securities and Exchange Commission with respect to the Offer and the
Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Cash Consideration is fair, from a financial point of
view, to the Company's stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ Alex. Brown & Sons
Incorporated
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