SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
AFFILIATED COMPUTER SERVICES, INC.
AND
COMPUTER DATA SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
BOARD OF DIRECTORS OF AFFILIATED COMPUTER SERVICES, INC.
AND
BOARD OF DIRECTORS OF COMPUTER DATA SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Affiliated Computer Services, Inc. common stock, par value $.01 per
share (ACS Class A Common Stock)
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(2) Aggregate number of securities to which transaction applies:
12,250,000
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$24.75 per unit price based on the high and low prices of ACS Class A
Common Stock reported on the New York Stock Exchange on September 30,
1997.
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(4) Proposed maximum aggregate value of transaction:
$303,187,500
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(5) Total fee paid:
$60,637.50
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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[LETTERHEAD]
November 14, 1997
Dear Fellow Stockholders:
You are cordially invited to attend the annual meeting of stockholders of
Affiliated Computer Services, Inc., ("ACS") on Tuesday, December 16, 1997, at
10:00 a.m., local time, at CityPlace, 2711 North Haskell Avenue, Dallas, Texas
75204. At this meeting, you will be asked to approve, among other things, the
issuance of ACS Class A Common Stock (the "Stock Issuance") pursuant to the
Agreement and Plan of Merger dated September 20, 1997 between ACS, ACS
Acquisition Corp., a wholly owned subsidiary of ACS, and Computer Data Systems,
Inc. ("CDSI"). Subject to the receipt of the requisite stockholder approvals of
CDSI and ACS and the satisfaction of the other conditions to closing agreed to
by CDSI and ACS, at the closing of the proposed merger, CDSI will become a
subsidiary of ACS and each outstanding share of CDSI Common Stock will be
converted into the right to receive 1.759 shares (the "Exchange Ratio") of ACS
Class A Common Stock.
The accompanying Joint Proxy Statement/Prospectus provides you with detailed
information concerning the annual meeting, the proposed merger, and other
proposals to be considered and voted on at the annual meeting. Please give all
of this information your careful attention.
The Board of Directors has thoroughly reviewed the terms and conditions of
the proposed merger. The Board believes that the combined ACS and CDSI entity
will be well positioned strategically in the market and that this transaction
will broaden ACS's core businesses and provide enhanced and more competitive
services to our customers.
Smith Barney Inc. has rendered to the ACS Board of Directors a written
opinion dated September 20, 1997 to the effect that, as of the date of such
opinion and based on and subject to certain matters stated therein, the Exchange
Ratio was fair, from a financial point of view, to ACS. A copy of such opinion
is attached to the enclosed Joint Proxy Statement/Prospectus and should be read
carefully in its entirety.
THE BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE TERMS OF THE MERGER
AND THE STOCK ISSUANCE ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS OF ACS AND
RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE STOCK ISSUANCE.
Your vote is important, and we respectfully urge all stockholders to
complete, sign, and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action does not limit your right to
revoke your proxy by attending the annual meeting and voting in person.
Sincerely yours,
Darwin Deason Jeffrey A. Rich
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
[LETTERHEAD]
November 14, 1997
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting of stockholders of
Computer Data Systems, Inc., ("CDSI") on Tuesday, December 16, 1997, at 10:00
a.m., local time, at CDSI's headquarters located at One Curie Court, Rockville,
Maryland. At this meeting, you will be asked to approve the merger of CDSI and
Affiliated Computer Services, Inc. ("ACS"). Subject to the receipt of the
requisite stockholder approvals of CDSI and ACS and the satisfaction of the
other conditions to closing agreed to by CDSI and ACS, at the closing of the
transaction CDSI will become a subsidiary of ACS and each outstanding share of
CDSI Common Stock will be converted into the right to receive 1.759 shares of
ACS Class A Common Stock.
The accompanying Joint Proxy Statement/Prospectus provides you with detailed
information concerning the special meeting, the proposed merger and the ACS
Class A Common Stock to be issued in connection with this transaction. Please
give all of this information your careful attention.
The Board of Directors has thoroughly reviewed the terms and conditions of
the proposed merger. The Board believes that the combined CDSI and ACS will be
well positioned strategically in the data processing outsourcing business and
that this transaction will broaden CDSI's core businesses and provide enhanced
and more competitive services to our government and commercial customers.
Legg Mason Wood Walker, Incorporated, the Board's financial adviser in
connection with this transaction, has rendered its written opinion that the
proposed merger is fair, from a financial point of view, to the stockholders of
CDSI. A copy of Legg Mason's opinion is attached to the enclosed Joint Proxy
Statement/Prospectus.
THE BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE TERMS OF THE MERGER
ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS OF CDSI AND RECOMMENDS THAT YOU
VOTE FOR THE PROPOSAL TO APPROVE THE MERGER.
Your vote is important, and we respectfully urge all stockholders to
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action does not limit your right to
revoke your proxy by attending the special meeting and voting in person.
Sincerely yours,
Clifford M. Kendall Peter A. Bracken
Chairman of the Board Chief Executive Officer and President
AFFILIATED COMPUTER SERVICES, INC.
2828 NORTH HASKELL AVENUE
DALLAS, TEXAS 75204
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1997
------------------------
To the Stockholders of Affiliated Computer Services, Inc.:
The Annual Meeting of Stockholders (together with any adjournments, the "ACS
ANNUAL MEETING") of Affiliated Computer Services, Inc. ("ACS") will be held at
CityPlace, 2711 North Haskell Avenue, Dallas, Texas 75204 on December 16, 1997,
at 10:00 a.m., local time, for the following purposes:
1. To approve the issuance of shares of ACS Class A Common Stock, $.01 par
value per share ("ACS CLASS A COMMON STOCK"), to the stockholders of
Computer Data Systems, Inc., a Maryland corporation ("CDSI"), pursuant to
the Agreement and Plan of Merger dated as of September 20, 1997 (the
"MERGER AGREEMENT"), by and among ACS, ACS Acquisition Corp., a Maryland
corporation and wholly-owned subsidiary of ACS ("MERGER SUB"), and CDSI,
providing for the merger of Merger Sub with and into CDSI (the "MERGER")
and the conversion of each outstanding share of CDSI common stock, $.10
par value per share ("CDSI COMMON STOCK"), into the right to receive
1.759 shares of ACS Class A Common Stock;
2. To approve an amendment to the ACS Restated Certificate of
Incorporation, as amended (the "ACS CHARTER") classifying the board of
directors into three classes;
3. To elect a board of directors to serve until each of their respective
successors shall have been duly elected and qualified;
4. To approve an amendment to the bylaws of ACS (the "ACS BYLAWS")
requiring advance notice by stockholders for proposals and nominations
for director to be included for consideration at a meeting of
stockholders;
5. To approve an amendment to the ACS Charter to increase the number of
authorized shares of ACS Class A Common Stock from 75,000,000 to
500,000,000 and of ACS Class B Common Stock, $.01 par value per share
("ACS CLASS B COMMON STOCK"), from 6,405,686 to 14,000,000;
6. To consider and vote upon performance-based incentive compensation to
ACS's executive officers;
7. To consider and vote upon the ACS 1997 Stock Incentive Plan (the "1997
PLAN"); and
8. To transact such other business as may properly come before the ACS
Annual Meeting.
The terms of the Merger Agreement and the Merger are described in detail in
the accompanying Joint Proxy Statement/Prospectus.
The Board of Directors has fixed the close of business on October 22, 1997
as the record date (the "ACS RECORD DATE") for the determination of stockholders
of ACS entitled to notice of, and to vote at, the ACS Annual Meeting. Only
stockholders of record at the close of business on the ACS Record Date are
entitled to notice of, and to vote at, the ACS Annual Meeting. A holder of
shares of the ACS Class A Common Stock is entitled to one vote, in person or by
proxy, for each share of ACS Class A Common Stock on all matters properly
brought before the ACS Annual Meeting, and a holder of shares of ACS Class B
Common Stock is entitled to 10 votes, in person or by proxy, for each share of
ACS Class B Common Stock on all matters properly brought before the ACS Annual
Meeting.
YOU ARE CORDIALLY INVITED TO BE PRESENT AT THE ACS ANNUAL MEETING. ALL
HOLDERS OF ACS CLASS A COMMON STOCK AND ACS CLASS B COMMON STOCK (WHETHER THEY
EXPECT TO ATTEND THE ACS ANNUAL MEETING OR NOT) ARE REQUESTED TO COMPLETE, SIGN,
DATE, AND RETURN PROMPTLY THE PROXY CARD ENCLOSED WITH THIS NOTICE.
By Order of the Board of Directors
David W. Black
SECRETARY
November 14, 1997
COMPUTER DATA SYSTEMS, INC.
ONE CURIE COURT
ROCKVILLE, MARYLAND 20850
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1997
------------------------
To the Stockholders of Computer Data Systems, Inc.:
A Special Meeting of Stockholders (together with any adjournments, the "CDSI
SPECIAL MEETING") of Computer Data Systems, Inc. ("CDSI") will be held at CDSI's
headquarters located at One Curie Court, Rockville, Maryland 20850, on December
16, 1997, at 10:00 a.m., local time, for the following purposes:
1. To consider a proposal to approve, in accordance with the Agreement and
Plan of Merger dated as of September 20, 1997 (the "MERGER AGREEMENT"),
by and among CDSI, Affiliated Computer Services, Inc., a Delaware
corporation ("ACS"), and ACS Acquisition Corp., a Maryland corporation
and wholly-owned subsidiary of ACS ("MERGER SUB"), the merger of Merger
Sub with and into CDSI (the "MERGER") pursuant to which each outstanding
share of CDSI common stock, $.10 par value per share ("CDSI COMMON
STOCK"), will be converted into the right to receive 1.759 shares of ACS
Class A Common Stock, $.01 par value per share ("ACS CLASS A COMMON
STOCK"); and
2. To transact such other business as may properly come before the CDSI
Special Meeting.
The terms of the Merger Agreement and the Merger and the ACS Class A Common
Stock to be issued to stockholders of CDSI in connection with the Merger are
described in detail in the accompanying Joint Proxy Statement/Prospectus.
Only holders of record of shares of CDSI Common Stock at the close of
business on October 22, 1997 (the "CDSI RECORD DATE"), will be entitled to
notice of, and to vote at, the CDSI Special Meeting. A holder of CDSI Common
Stock is entitled to one vote, in person or by proxy, for each share of CDSI
Common Stock on all matters properly brought before the CDSI Special Meeting.
YOU ARE CORDIALLY INVITED TO BE PRESENT AT THE CDSI SPECIAL MEETING. ALL
HOLDERS OF CDSI COMMON STOCK (WHETHER THEY EXPECT TO ATTEND THE CDSI SPECIAL
MEETING OR NOT) ARE REQUESTED TO COMPLETE, SIGN, DATE, AND RETURN PROMPTLY THE
PROXY CARD ENCLOSED WITH THIS NOTICE.
By Order of the Board of Directors
John C. Kezer
SECRETARY
November 14, 1997
JOINT PROXY STATEMENT/PROSPECTUS
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors (the "ACS BOARD") of
Affiliated Computer Services, Inc. ("ACS") for use at the Annual Meeting of
Stockholders of ACS (together with any adjournments, the "ACS ANNUAL MEETING")
to be held on December 16, 1997, at CityPlace, 2711 North Haskell Avenue,
Dallas, Texas 75204, at 10:00 a.m., local time, or any adjournments or
postponements thereof. At the ACS Annual Meeting, ACS stockholders will consider
and vote upon the following proposals: (1) to approve the issuance of shares
(the "STOCK ISSUANCE") of ACS Class A Common Stock, $.01 par value per share
("ACS CLASS A COMMON STOCK"), to the stockholders of Computer Data Systems, Inc.
("CDSI") in connection with the Agreement and Plan of Merger (the "MERGER
AGREEMENT") dated September 20, 1997, relating to the proposed merger (the
"MERGER") of ACS Acquisition Corp., a Maryland corporation and wholly-owned
subsidiary of ACS ("MERGER SUB"), with and into CDSI; (2) to approve an
amendment to the ACS Restated Certificate of Incorporation, as amended (the "ACS
CHARTER") classifying the ACS Board into three classes; (3) to elect a board of
directors to serve until each of their respective successors shall have been
duly elected and qualified; (4) to approve an amendment to the ACS Bylaws
requiring advance notice by stockholders for proposals and nominations for
director to be included for consideration at a meeting of stockholders; (5) to
approve an amendment to the ACS Charter to increase the number of authorized
shares of ACS Class A Common Stock from 75,000,000 to 500,000,000 and of ACS
Class B Common Stock, $.01 par value per share ("ACS CLASS B COMMON STOCK"),
from 6,405,686 to 14,000,000; (6) to approve performance-based incentive
compensation to ACS's executive officers; (7) to approve the ACS 1997 Stock
Incentive Plan (the "1997 PLAN"); and (8) to transact such other business as may
properly come before the ACS Annual Meeting. See "The ACS Annual Meeting of
Stockholders."
This Joint Proxy Statement/Prospectus is also furnished in connection with
the solicitation of proxies by the Board of Directors of CDSI (the "CDSI BOARD")
for use at a Special Meeting of Stockholders of CDSI (together with any
adjournments, the "CDSI SPECIAL MEETING") to be held on December 16, 1997, at
CDSI's headquarters located at One Curie Court, Rockville, Maryland 20850, at
10:00 a.m., local time, or any adjournments or postponements thereof. At the
CDSI Special Meeting, holders of CDSI Common Stock will: (1) consider and vote
upon a proposal to approve the Merger; and (2) transact such other business as
may properly come before the CDSI Special Meeting. See "The CDSI Special Meeting
of Stockholders."
As a result of the Merger, CDSI will become a wholly-owned subsidiary of
ACS. Each outstanding share of CDSI Common Stock, $.10 par value per share
("CDSI COMMON STOCK"), will be converted into the right to receive 1.759 shares
(the "EXCHANGE RATIO") of ACS Class A Common Stock. On November 13, 1997, the
closing sale price of ACS Class A Common Stock on the New York Stock Exchange
("NYSE") was $24 3/16 per share. On November 13, 1997, the closing sale price of
CDSI Common Stock on The NASDAQ Stock Market, National Market System ("NASDAQ")
was $41 1/2 per share. Subject to stockholder approvals, the closing of the
Merger will occur promptly after the satisfaction of the conditions precedent
contained in the Merger Agreement, but in no event later than February 15, 1998,
unless otherwise agreed by ACS and CDSI. See "The Proposed Merger and Related
Transactions--The Merger Agreement."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of ACS
that is part of the Registration Statement on Form S-4 (the "REGISTRATION
STATEMENT") of ACS filed with the Securities and Exchange Commission (the
"COMMISSION") with respect to the issuance of up to approximately 12,250,000
shares of ACS Class A Common Stock to be issued pursuant to the Merger. All
information contained herein with respect to ACS has been furnished by ACS, and
all information contained herein with respect to CDSI has been furnished by
CDSI.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN MATTERS
WHICH SHOULD BE CONSIDERED BY THE STOCKHOLDERS OF ACS WITH RESPECT TO THE STOCK
ISSUANCE AND BY THE STOCKHOLDERS OF CDSI WITH RESPECT TO THE MERGER AND AN
INVESTMENT IN ACS UPON CONSUMMATION OF THE MERGER.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of ACS and CDSI, respectively, on or about
November 14, 1997.
NEITHER THIS TRANSACTION NOR THE SECURITIES OF ACS TO BE ISSUED IN CONNECTION
WITH THE MERGER HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Joint Proxy Statement/Prospectus is November 14, 1997.
DOCUMENTS DELIVERED HEREWITH
This Joint Proxy Statement/Prospectus is delivered to the stockholders of
ACS along with a copy of the ACS 1997 Annual Report to Stockholders.
i
AVAILABLE INFORMATION
ACS and CDSI are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and, in accordance
therewith, file reports, proxy statements, and other information with the
Commission. Such reports, proxy statements, and other information filed by ACS
and CDSI with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a Web site
where reports, proxy statements, and other information filed by publicly traded
companies, including ACS and CDSI, may be retrieved, and the address of such
site is HTTP://WWW.SEC.GOV. ACS Class A Common Stock is listed on the NYSE, and
reports, proxy statements, and other information can also be inspected at the
office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York
10005. CDSI Common Stock is listed on The NASDAQ Stock Market ("NASDAQ"), and
reports, proxy statements, and other information concerning CDSI can also be
inspected at the offices of The NASDAQ Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006. Upon consummation of the Merger, CDSI's Common Stock
listing on NASDAQ will be terminated.
ACS has filed the Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), covering the shares
of ACS Class A Common Stock to be issued as a result of the Merger. This Joint
Proxy Statement/Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, including the schedules and exhibits filed as a part thereof or
incorporated by reference therein. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit hereto or as otherwise filed with the
Commission. The Registration Statement and the exhibits and schedules thereto
may be inspected, without charge, and copies thereof may be obtained at
prescribed rates, at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. After the Merger, registration of CDSI Common Stock
under the Exchange Act will be terminated.
ACS hereby undertakes to supply by means of a post-effective amendment all
information concerning the Merger and ACS that was not the subject of and
included in the Registration Statement when it became effective.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/ PROSPECTUS, OR A SOLICITATION
OF A PROXY FROM ANY PERSON, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES MADE UNDER THIS JOINT PROXY STATEMENT/ PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF ACS OR CDSI AT ANY TIME SUBSEQUENT TO THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
------------------------
ACS was incorporated in Delaware in 1988. The term "ACS" as used herein
includes all subsidiaries and predecessors of ACS, except as the context may
otherwise require. CDSI was incorporated in Maryland in 1968. The term "CDSI" as
used herein includes all subsidiaries and predecessors of CDSI, except as the
context may otherwise require.
ii
TABLE OF CONTENTS
PAGE
---------
DOCUMENTS DELIVERED HEREWITH............................................................................... i
AVAILABLE INFORMATION...................................................................................... ii
SUMMARY.................................................................................................... 1
The Companies............................................................................................ 1
ACS Annual Meeting....................................................................................... 1
CDSI Special Meeting..................................................................................... 2
The Merger............................................................................................... 3
Recommendation of the Board of Directors of ACS.......................................................... 6
Recommendation of the Board of Directors of CDSI......................................................... 7
Comparative Market Price Data............................................................................ 8
Summary ACS Historical Consolidated Financial Data....................................................... 9
Summary CDSI Historical Consolidated Financial Data...................................................... 10
Summary Unaudited Pro Forma Combined Financial Information............................................... 11
Comparative Per Share Data of ACS and CDSI............................................................... 12
Other Proposals to be Presented at the ACS Annual Meeting................................................ 13
Dividend Policy.......................................................................................... 14
RISK FACTORS............................................................................................... 15
Reliance on Significant Customers........................................................................ 15
Competition and Technological Change..................................................................... 16
Investments Related to Significant Customer Contracts.................................................... 16
Impact of Acquisitions................................................................................... 17
Risks Associated with ATM Fee Legislation................................................................ 17
Dependence on Key Personnel.............................................................................. 17
Voting Control by Chairman of the Board of ACS........................................................... 17
Possible Price Volatility................................................................................ 18
Anti-Takeover Effect of Certificate of Incorporation and Bylaws and other Stockholder Protection
Mechanisms............................................................................................. 18
Expected Benefits of Combined Business May Not Be Achieved............................................... 19
Fixed Exchange Ratio..................................................................................... 19
Interests of Certain Persons in the Merger............................................................... 19
Contracts and Contracting................................................................................ 19
Shares Available for Future Sale......................................................................... 20
THE ACS ANNUAL MEETING OF STOCKHOLDERS..................................................................... 20
Place, Date, and Time.................................................................................... 20
Matters to be Considered................................................................................. 20
Record Date and Voting................................................................................... 30
Vote Required............................................................................................ 30
Proxy Solicitation, Revocation, and Expenses............................................................. 31
Dissenters' Appraisal Rights............................................................................. 31
THE CDSI SPECIAL MEETING OF STOCKHOLDERS................................................................... 32
Place, Date, and Time.................................................................................... 32
Matters to be Considered................................................................................. 32
Record Date and Voting................................................................................... 32
Vote Required............................................................................................ 32
Proxy Solicitation, Revocation, and Expenses............................................................. 33
Dissenters' Appraisal Rights............................................................................. 33
iii
PAGE
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THE PROPOSED MERGER AND RELATED TRANSACTIONS............................................................... 33
Description of the Merger................................................................................ 33
Background of the Merger................................................................................. 34
ACS's Reasons for the Merger............................................................................. 35
ACS Board Recommendation of the Stock Issuance........................................................... 36
Opinion of Smith Barney Inc.............................................................................. 36
CDSI's Reasons for the Merger............................................................................ 41
CDSI Board Recommendation of the Merger.................................................................. 43
Opinion of Legg Mason Wood Walker, Incorporated.......................................................... 43
The Merger Agreement..................................................................................... 46
Interests of Certain Persons in the Merger............................................................... 54
Governmental and Regulatory Approvals.................................................................... 56
Accounting Treatment..................................................................................... 56
Dissenters' Appraisal Rights............................................................................. 56
Certain Federal Income Tax Consequences.................................................................. 56
Unaudited Pro Forma Combined Condensed Financial Information............................................. 58
MANAGEMENT AND OPERATIONS AFTER THE MERGER................................................................. 67
SELECTED FINANCIAL INFORMATION............................................................................. 68
Selected ACS Historical Financial Information............................................................ 68
ACS Management's Discussion and Analysis of Financial Condition and Results of Operations................ 69
Selected CDSI Historical Financial Information........................................................... 73
CDSI Management's Discussion and Analysis of Financial Condition and Results of Operations............... 74
MARKET PRICE DATA AND DIVIDEND INFORMATION................................................................. 76
Market And Price Data.................................................................................... 76
Dividend Policy.......................................................................................... 77
INFORMATION CONCERNING ACS................................................................................. 77
Overview................................................................................................. 77
Legal Proceedings........................................................................................ 78
Description of ACS Capital Stock......................................................................... 79
ACS MANAGEMENT............................................................................................. 81
Directors and Executive Officers of ACS.................................................................. 81
Committees and Meetings of the ACS Board................................................................. 83
Section 16(a) Beneficial Ownership Reporting Compliance.................................................. 84
Security Ownership of Certain Beneficial Owners and Management of ACS.................................... 85
Executive Compensation and Other Information............................................................. 87
Director Compensation.................................................................................... 88
Compensation Committee Report on Executive Compensation.................................................. 89
Performance Graph........................................................................................ 90
Certain Relationships and Related Transactions........................................................... 91
Stockholder Proposals for the 1998 ACS Annual Meeting.................................................... 91
INFORMATION CONCERNING CDSI................................................................................ 92
Overview................................................................................................. 92
Legal Proceedings........................................................................................ 92
CDSI MANAGEMENT............................................................................................ 93
Security Ownership of Certain Beneficial Owners and Management of CDSI................................... 93
iv
PAGE
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COMPARATIVE RIGHTS OF STOCKHOLDERS OF ACS AND CDSI......................................................... 95
Authorized Capital....................................................................................... 95
Directors................................................................................................ 95
Removal of Directors..................................................................................... 95
Filling Vacancies on the Board of Directors.............................................................. 95
Amendment to Charter or Certificate of Incorporation..................................................... 96
Amendment of Bylaws...................................................................................... 96
Advance Notice of Director Nominations and New Business.................................................. 96
Stockholder Meetings and Provisions for Notices; Proxies................................................. 96
Voting by Stockholders................................................................................... 97
Stockholder Action Without a Meeting..................................................................... 97
Business Combinations.................................................................................... 97
Control Share Acquisition................................................................................ 98
Indemnification and Limitation of Liability.............................................................. 99
Dissenters' or Appraisal Rights.......................................................................... 100
Dissolution.............................................................................................. 101
Dividends................................................................................................ 101
Right to Examine Stockholder List........................................................................ 102
Interested Director Transactions......................................................................... 102
Preemptive Rights........................................................................................ 102
AFFILIATES' RESTRICTION ON SALE OF ACS CLASS A COMMON STOCK................................................ 103
LEGAL MATTERS.............................................................................................. 103
EXPERTS.................................................................................................... 104
INDEPENDENT ACCOUNTANTS.................................................................................... 104
FINANCIAL STATEMENTS....................................................................................... 104
Consolidated Financial Statements of ACS................................................................. 104
Consolidated Financial Statements of CDSI................................................................ 104
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 104
APPENDICES
Appendix A--Agreement and Plan of Merger................................................................. A-1
Appendix B--Opinion of Smith Barney Inc.................................................................. B-1
Appendix C--Opinion of Legg Mason Wood Walker, Incorporated.............................................. C-1
Appendix D--1997 Stock Incentive Plan.................................................................... D-1
v
SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/ PROSPECTUS DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND THE
APPENDICES ATTACHED HERETO. THE INFORMATION CONTAINED IN THE JOINT PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO ACS AND ITS AFFILIATES HAS BEEN SUPPLIED BY
ACS, AND THE INFORMATION WITH RESPECT TO CDSI AND ITS AFFILIATES HAS BEEN
SUPPLIED BY CDSI. CERTAIN CAPITALIZED TERMS WHICH ARE USED BUT NOT DEFINED IN
THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE COMPANIES
ACS............................... Affiliated Computer Services, Inc., a Delaware
corporation based in Dallas, Texas with offices
throughout the United States of America and in Europe
and Canada, is a nationwide provider of information
technology services and electronic funds transfer
transaction processing. ACS's information technology
services include data processing outsourcing, image
management solutions, and professional services. ACS's
data processing outsourcing services are provided to a
variety of customers nationwide, including retailers,
healthcare providers, telecommunications companies,
wholesale distributors, manufacturers, utilities,
financial institutions, and insurance companies. The
principal executive offices of ACS are located at 2828
North Haskell Avenue, Dallas, Texas 75204, and its
telephone number is (214) 841-6111. See "Information
Concerning ACS."
Merger Sub........................ ACS Acquisition Corp. is a newly formed Maryland
corporation and a wholly-owned subsidiary of ACS. The
principal executive offices of Merger Sub are located at
2828 North Haskell Avenue, Dallas, Texas 75204, and its
telephone number is (214) 841-6111.
CDSI.............................. Computer Data Systems, Inc., a Maryland corporation,
provides information technology services and products,
including applications development and maintenance
services, network engineering and telecommunications
integration, desktop integration, database support, data
center management and processing services, and systems
engineering. The principal executive offices of CDSI are
located at One Curie Court, Rockville, Maryland 20850,
and its telephone number is (301) 921-7000. See
"Information Concerning CDSI."
ACS ANNUAL MEETING
Time and Location................. The ACS Annual Meeting will be held on Tuesday, December
16, 1997, at CityPlace, 2711 North Haskell Avenue,
Dallas, Texas 75204, at 10:00 a.m., local time, for the
purpose of considering and voting on proposals to (i)
approve the Stock Issuance, (ii) amend the ACS Charter
classifying the ACS Board into three classes, (iii)
elect a board of directors to serve until each of their
respective successors shall have been duly elected
1
and qualified, (iv) amend the ACS Bylaws to require
advance notice by stockholders for proposals and
nominations for director to be included for
consideration at a meeting of stockholders, (v) amend
the ACS Charter to increase the number of authorized
shares of ACS Class A Common Stock and ACS Class B
Common Stock, (vi) approve performance-based incentive
compensation to ACS's executive officers, (vii) approve
the 1997 Plan, and (viii) transact such other business
as may properly come before the ACS Annual Meeting. Only
holders of record of shares of ACS Class A Common Stock
and ACS Class B Common Stock at the close of business on
October 22, 1997 will be entitled to notice of and to
vote at the ACS Annual Meeting. See "The ACS Annual
Meeting of Stockholders--Place, Date, and Time;" "The
ACS Annual Meeting of Stockholders--Matters to be
Considered at the ACS Annual Meeting;" "The ACS Annual
Meeting of Stockholders--Record Date and Voting."
Voting............................ The affirmative vote of the holders of shares of ACS
Class A Common Stock and ACS Class B Common Stock,
voting together as a class, having a plurality of the
voting power of ACS, in person or by proxy, is required
to elect directors. The affirmative vote of the holders
of shares of ACS Class A Common Stock and ACS Class B
Common Stock, voting together as a class, having a
majority of the voting power of the total issued and
outstanding common stock of ACS (regardless of the
number of shares actually voting at the ACS Annual
Meeting) in person or by proxy, is required to approve
the Stock Issuance, to approve the proposed amendments
to the ACS Charter, and to approve the proposed
amendments to the ACS Bylaws. The affirmative vote of
the holders of shares of the ACS Class A Common Stock
and ACS Class B Common Stock, voting together as a
class, having a majority of the voting power of the
shares actually voted at the ACS Annual Meeting, either
in person or by proxy, is required to approve the
performance-based incentive compensation to ACS's
executive officers and to approve the 1997 Plan. The
directors and certain executive officers of ACS have
agreed to vote their shares of ACS Class A Common Stock
and ACS Class B Common Stock, as the case may be, in
favor of the Stock Issuance, which vote will be
sufficient under the Delaware General Corporation Law
("DGCL") and the ACS Bylaws to approve the Stock
Issuance. See "The ACS Annual Meeting of
Stockholders--Vote Required."
CDSI SPECIAL MEETING
Time and Location................. The CDSI Special Meeting will be held on Tuesday,
December 16, 1997, at its headquarters located at One
Curie Court, Rockville, Maryland 20850, at 10:00 a.m.,
local time, for the purpose of considering and voting on
a proposal to approve
2
the Merger and to transact such other business as may
properly come before the CDSI Special Meeting. Only
holders of record of shares of CDSI Common Stock at the
close of business on October 22, 1997 will be entitled
to notice of and to vote at the CDSI Special Meeting.
See "The CDSI Special Meeting of Stockholders--Place,
Date, and Time;" "The CDSI Special Meeting of
Stockholders--Matters to be Considered;" "The CDSI
Special Meeting of Stockholders--Record Date and
Voting."
Voting............................ The affirmative vote of at least two-thirds of all the
votes entitled to be cast by holders of CDSI Common
Stock is required to approve the Merger. The directors
and certain executive officers of CDSI have agreed to
vote their shares of CDSI Common Stock in favor of the
Merger. See "The CDSI Special Meeting of
Stockholders--Vote Required."
THE MERGER
General Terms..................... On September 20, 1997, ACS, Merger Sub, and CDSI,
entered into the Merger Agreement, in which the parties
set forth the terms and conditions of the merger of
Merger Sub with and into CDSI. A copy of the Merger
Agreement is included in this Joint Proxy
Statement/Prospectus as Appendix A. See "The Proposed
Merger and Related Transactions--The Merger Agreement."
By virtue of the Merger, each share of CDSI Common Stock
issued and outstanding immediately prior to the
Effective Time of the Merger will automatically be
converted into the right to receive 1.759 shares of ACS
Class A Common Stock (the "EXCHANGE RATIO"). See "The
Proposed Merger and Related Transactions--Description of
the Merger;" "The Proposed Merger and Related
Transactions--The Merger Agreement."
Fractional Shares................. No fractional shares of ACS Class A Common Stock will be
issued in connection with the Merger. Fractional shares
otherwise issuable will be settled for cash, without
interest, based on the closing price per share of ACS
Class A Common Stock as reported on the NYSE on the date
of the Effective Time of the Merger (or, if there is no
trading on such date, on the first trading day
immediately after the Effective Time). See "The Proposed
Merger and Related Transactions--The Merger Agreement."
CDSI Options...................... At the Effective Time, ACS will assume each unexercised
option to purchase CDSI Common Stock and substitute
shares of ACS Class A Common Stock for the shares of
CDSI Common Stock purchasable under each assumed option
at the Exchange Ratio. The exercise price for each
assumed option will be equal to the existing exercise
price set forth in the option divided by the Exchange
Ratio. ACS has agreed to file a registration statement
on Form S-8 with respect to the shares of ACS Class A
Common
3
Stock subject to the assumed options. See "The Proposed
Merger and Related Transactions--The Merger Agreement."
Issuance and Exchange of Share
Certificates.................... At the Effective Time of the Merger, each holder of a
certificate that represented CDSI Common Stock prior to
consummation of the Merger will be entitled, upon
surrender of the certificate, to receive a certificate
or certificates representing the number of whole shares
of ACS Class A Common Stock to which such holder is
entitled pursuant to the Merger Agreement. Certificates
representing shares of ACS Class A Common Stock (along
with cash for fractional shares, if any) will not be
delivered until a CDSI stockholder's certificates
evidencing CDSI Common Stock have been surrendered by
the stockholder or his or her nominee. Promptly after
the Effective Time, CDSI stockholders will be furnished
separately a letter of transmittal to facilitate the
delivery of CDSI Common Stock certificates to ACS or the
transfer agent designated by ACS and the delivery of
certificates of ACS Class A Common Stock to such
stockholders. PLEASE DO NOT DELIVER YOUR STOCK
CERTIFICATES EVIDENCING CDSI COMMON STOCK TO ACS OR THE
TRANSFER AGENT UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM ACS OR THE TRANSFER
AGENT. See "The Proposed Merger and Related
Transactions--The Merger Agreement."
Comparison of Rights of
Stockholders of CDSI and ACS.... The rights of CDSI's stockholders are currently governed
by Maryland law and by CDSI's Charter and bylaws. Upon
the effectiveness of the Merger, CDSI's stockholders
will become stockholders of ACS, a Delaware corporation,
and their rights as ACS stockholders will be governed by
Delaware law and by the ACS Charter and the ACS Bylaws.
See "Comparative Rights of Stockholders of CDSI and
ACS."
Conditions to Merger.............. The obligations of CDSI and ACS to consummate the Merger
are subject to the satisfaction of certain customary and
other conditions set forth in the Merger Agreement,
including, among other things, (i) the registration
statement filed by ACS under the Securities Act
registering the ACS Class A Common Stock to be issued
when the Merger has become effective, (ii) the Merger
has been approved by the requisite vote of holders of
CDSI Common Stock, (iii) the Stock Issuance has been
approved by the requisite vote of ACS stockholders (the
directors and certain executive officers of ACS have
agreed to vote their shares of ACS Class A Common Stock
and ACS Class B Common Stock, as the case may be, in
favor of the Stock Issuance, which vote will be
sufficient under the DGCL and the ACS Bylaws to approve
the Stock Issuance), (iv) that there has been no
material adverse change affecting ACS or CDSI since June
30, 1997, (v) that there is no litigation challenging
the Merger, and (vi) ACS and CDSI shall be advised by
their
4
respective independent accountants that the Merger
should be treated for financial accounting purposes as a
"pooling of interests" transaction. The waiting period
under the Hart-Scott-Rodino Antitrust Improvement Act of
1976 ("HSR ACT") was terminated on October 29, 1997. See
"The Proposed Merger and Related Transactions--The
Merger Agreement."
Termination, Waiver, and
Amendment....................... The Merger Agreement may be terminated at any time prior
to the Effective Time by the mutual written consent of
CDSI and ACS or by either party if (i) the requisite
CDSI or ACS stockholder approval is not obtained, (ii) a
condition precedent to the terminating party's
obligation to consummate the Merger is not fulfilled,
(iii) a party breaches a representation, warranty,
covenant, or other agreement contained in the Merger
Agreement and such breach, individually or in the
aggregate, could reasonably be expected to have a
material adverse effect on the non-breaching party, (iv)
there shall be a final, nonappealable order preventing
the consummation of the Merger, (v) the CDSI Board
modifies or withdraws its recommendation to approve the
Merger or recommends the acceptance of a Competing
Transaction (but CDSI may only terminate the Merger
Agreement if the CDSI Board, after consultation with and
based upon the advice of independent legal counsel,
determines in good faith that such action is necessary
for the board to comply with its fiduciary duties to its
stockholders), or (vi) the Merger is not consummated by
February 15, 1998. See "The Proposed Merger and Related
Transactions--The Merger Agreement."
Except as otherwise required by law or the rules of
NYSE, the Merger Agreement may be amended or modified
and any condition specified therein may be waived
without re-submission to the stockholders of ACS or CDSI
by the mutual consent of ACS or CDSI. See "The Proposed
Merger and Related Transactions--The Merger Agreement."
Termination Fees; Expenses........ Fees and expenses will be borne by the party incurring
such fees and expenses, except that certain expenses
will be shared equally by ACS and CDSI, including
expenses incurred in connection with this Joint Proxy
Statement / Prospectus and filing fees for notification
reports under the HSR Act. If the Merger is not
consummated because of a breach of the covenants or
agreements, or a willful breach of the representations
and warranties by a party to the Merger Agreement, then
the breaching party shall be fully liable for the costs
and expenses of the non-breaching party. Under certain
circumstances, CDSI may be required to pay ACS upon
termination of the Merger Agreement all of ACS's
expenses in connection with the Merger up to $1,000,000,
and, under certain other circumstances, a fee of
$15,000,000, which fee is to be inclusive of all of
ACS's expenses. See "The Proposed Merger and Related
Transactions--The Merger Agreement."
5
Accounting Treatment.............. As a condition to the consummation of the Merger, ACS
and CDSI will be advised by their respective independent
accountants that the Merger should be treated for
financial accounting purposes as a "pooling of
interests" transaction, and each party shall use
reasonable efforts to cause the Merger to be treated as
a "pooling of interests" transaction. See "The Proposed
Merger and Related Transactions--Accounting Treatment."
Tax Consequences of The Merger.... ACS will receive the opinion of its counsel to the
effect that (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of
the United States Internal Revenue Code of 1986, as
amended (the "CODE"), and each party to the Merger will
be a party to the reorganization within the meaning of
Section 368(b) of the Code; and (ii) no gain or loss
will be recognized for federal income tax purposes by
ACS, Merger Sub, or CDSI as a result of the consummation
of the Merger. CDSI will receive the opinion of its
counsel to the effect that (i) the Merger will
constitute a reorganization within the meaning of
Section 368(a) of the Code and each party to the Merger
will be a party to the reorganization within the meaning
of Section 368(b) of the Code; and (ii) no gain or loss
will be recognized for federal income tax purposes by
holders of CDSI Common Stock as a result of the
consummation of the Merger, except for gain or loss
attributable to cash received in lieu of fractional
shares. Receipt of these opinions is a condition
precedent to the consummation of the Merger. See "The
Proposed Merger and Related Transactions--Certain
Federal Income Tax Consequences."
Dissenters' Rights................ Under Maryland General Corporation Law ("MGCL"), the
holders of CDSI Common Stock do not have any rights to
dissent to the Merger and seek a judicial appraisal of
the value of the shares of CDSI Common Stock. See "The
Proposed Merger and Related Transactions--Dissenters'
Appraisal Rights."
Management of CDSI Following the
Merger.......................... The directors of Merger Sub immediately prior to the
Effective Time will be the directors of the surviving
corporation following the Merger (the "SURVIVING
CORPORATION"); the officers of CDSI immediately prior to
the Effective Time will be the officers of the Surviving
Corporation following the Merger; and certain of the
directors of CDSI immediately prior to the Effective
Time will become advisory directors of the Surviving
Corporation following the Merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ACS
Approval by the ACS Board......... The ACS Board has unanimously approved the Merger
Agreement and determined that the Merger Agreement and
the Stock Issuance pursuant to the Merger are fair to
and in the best interests of ACS and its stockholders.
THE ACS BOARD
6
RECOMMENDS THAT ACS STOCKHOLDERS VOTE FOR THE STOCK
ISSUANCE. For a discussion of factors considered by the
ACS Board in reaching its decision, see "The Proposed
Merger and Related Transactions--ACS's Reasons for the
Merger;" "The Proposed Merger and Related
Transactions--ACS Board Recommendation of the Stock
Issuance."
Opinion of Smith Barney Inc....... Smith Barney Inc. ("Smith Barney") has delivered to the
ACS Board a written opinion dated September 20, 1997 to
the effect that, as of the date of such opinion and
based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial
point of view, to ACS. The full text of the written
opinion of Smith Barney dated September 20, 1997, which
sets forth the assumptions made, matters considered, and
limitations on the review undertaken, is attached hereto
as Appendix B to this Joint Proxy Statement/Prospectus
and should be read carefully in its entirety. THE
OPINION OF SMITH BARNEY IS DIRECTED TO THE ACS BOARD AND
RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM
A FINANCIAL POINT OF VIEW TO ACS, DOES NOT ADDRESS ANY
OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY ACS
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT
THE ACS ANNUAL MEETING. See "The Proposed Merger and
Related Transactions--Opinion of Financial Advisor to
ACS." See "The Proposed Merger and Related
Transactions--Opinion of Smith Barney Inc." and Appendix
B--Opinion of Smith Barney Inc.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF CDSI
Approval by the CDSI Board........ The CDSI Board has unanimously approved the Merger
Agreement and the Merger and determined that the Merger
is in the best interests of CDSI and its stockholders.
THE CDSI BOARD RECOMMENDS THAT CDSI STOCKHOLDERS VOTE
FOR APPROVAL OF THE MERGER. For a discussion of the
factors considered by the CDSI Board in reaching its
decision, see "The Proposed Merger and Related
Transactions-- CDSI's Reasons for the Merger;" "The
Proposed Merger and Related Transactions--CDSI Board
Recommendation of the Merger."
Fairness Opinion.................. Among the factors considered by the CDSI Board in
approving the Merger was the opinion of Legg Mason Wood
Walker, Incorporated ("LEGG MASON") that the
consideration to be received by the stockholders of CDSI
in connection with the Merger is fair from a financial
point of view. See "The Proposed Merger and Related
Transactions--Opinion of Financial Advisor to CDSI" and
Appendix C--Fairness Opinion of Legg Mason Wood Walker,
Incorporated.
7
COMPARATIVE MARKET PRICE DATA
Since February 5, 1997, ACS Class A Common Stock has been traded on the NYSE
under the symbol "AFA"; prior to that date, it was traded on NASDAQ. CDSI Common
Stock is traded on NASDAQ under the symbol "CDSI". The following table sets
forth the range of high and low sales prices for ACS Class A Common Stock for
the periods from September 26, 1994 through November 10, 1997, as reported on
NASDAQ through February 5, 1997 and thereafter on the NYSE. ACS per share data
set forth in the table below and elsewhere in this Joint Proxy
Statement/Prospectus reflects a 2-for-1 stock split paid on November 22, 1996.
The table also sets forth the range of high and low sales prices for CDSI Common
Stock for the periods from July 1, 1994 through November 13, 1997, as reported
on NASDAQ. The price quotations on NASDAQ reflect inter-dealer prices, without
adjustment for retail mark-up, mark-down, or commission, and may not necessarily
represent actual transactions.
ACS CDSI
---------------------- ----------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter................................................................ 29 15/16 24 5/16 50 1/4 27
Second Quarter (through November 13, 1997)................................... 26 1/2 22 45 3/4 39
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter................................................................ 32 21 1/8 25 1/8 20
Second Quarter............................................................... 32 24 3/4 32 1/2 22 3/8
Third Quarter................................................................ 30 1/4 19 1/2 38 29 3/8
Fourth Quarter............................................................... 28 5/8 20 3/4 33 3/8 20 1/2
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter................................................................ 16 1/8 13 7/8 11 3/4 9 5/8
Second Quarter............................................................... 19 1/4 14 3/8 16 10
Third Quarter................................................................ 21 1/2 16 7/8 19 1/4 11 3/4
Fourth Quarter............................................................... 26 7/8 20 3/4 24 1/4 15 1/2
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter................................................................ 10 8 1/2 14 1/4 10 3/4
Second Quarter............................................................... 11 3/4 9 5/8 12 1/2 8 3/4
Third Quarter................................................................ 15 1/4 9 7/8 10 1/2 8 1/2
Fourth Quarter............................................................... 15 3/4 12 3/8 11 1/4 9 1/2
On September 19, 1997, the last trading day prior to the public announcement
of the Merger, the closing sale price per share of ACS Class A Common Stock as
reported by the NYSE was $29 3/8. On September 19, 1997, there were 52 holders
of record of ACS Class A Common Stock, and there were 29,495,859 shares of ACS
Class A Common Stock issued and outstanding.
On September 19, 1997, the last trading day prior to the public announcement
of the Merger, the closing sale price per share of CDSI Common Stock as reported
by NASDAQ was $36 1/4. The market price per share of ACS Class A Common Stock
issuable in exchange for one share of CDSI Common Stock, based upon the Exchange
Ratio, would have been approximately $51 5/8 on September 19, 1997. On September
19, 1997, there were 625 holders of record of CDSI Common Stock, and there were
6,286,799 shares of CDSI Common Stock issued and outstanding.
ACS Class A Common Stock was listed on NASDAQ on September 26, 1994, at the
time of ACS's initial public offering. As of February 5, 1997, ACS Class A
Common Stock was delisted on NASDAQ and listed on the NYSE.
Following the Merger, ACS Class A Common Stock will continue to be traded on
the NYSE. Following the Merger, CDSI Common Stock will cease to be traded, and
there will be no further market for the shares of CDSI Common Stock. Because the
market price of ACS Class A Common Stock is subject to fluctuation, the market
value of the shares of ACS Class A Common Stock that holders of CDSI Common
Stock will receive in the Merger may vary from the prices shown above prior to
and after the Effective Time. See "Risk Factors--Fixed Exchange Ratio;" "Risk
Factors--Shares Available for Future Sale."
8
SUMMARY ACS HISTORICAL CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain consolidated historical financial
data of ACS and subsidiaries, and is based on the consolidated financial
statements and selected financial data of ACS, including the notes thereto,
which are incorporated by reference in this Joint Proxy Statement/Prospectus,
and should be read in conjunction therewith. See "Incorporation of Certain
Information by Reference". Interim unaudited data for the three months ended
September 30, 1997 and 1996 reflect, in the opinion of management of ACS, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of such data. Results of the three months ended September 30, 1997
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
STATEMENT OF INCOME DATA
(from continuing operations):
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
Revenues(2).............................. $ 172,475 $ 144,332 $ 624,533 $ 396,509 $ 313,181 $ 271,055 $ 189,064
Income from continuing operations........ 11,009 8,533 38,510 23,756 17,604 11,925 9,318
Earnings per share....................... $ .30 $ .23 $ 1.05 $ .82 $ .69 $ .52 $ .41
Weighted average shares outstanding...... 36,930 36,462 36,567 28,880 25,616 22,826 22,768
BALANCE SHEET DATA
JUNE 30,
SEPTEMBER 30, -----------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
Working capital................................ $ 61,225 $ 65,787 $ 49,961 $ 51,602 $ 50,653 $ 28,958
Total assets................................... 575,149 577,427 533,605 225,731 190,055 187,301
Total long-term debt (less current portion).... 74,532 89,534 57,208 37,940 80,001 61,731
Cumulative redeemable preferred stock.......... -- -- 1,100 1,100 1,100 7,081
Total stockholders' equity..................... 359,503 348,548 302,954 106,624 48,166 55,437
- ------------------------
(1) At the end of fiscal 1994, the Company completed a reorganization and
spin-off of certain businesses unrelated to information processing, which
were accounted for as discontinued operations. The results reflected herein
are from continuing operations. These results also reflect revenues and
expenses related to the Bank of America Texas, N.A. ("B OF A TEXAS")
contract, which expired August 31, 1995. See Note 12 of the Notes to the
Company's Consolidated Financial Statements. Revenues from this contract
were $4.6 million, $35.1 million, $37.2 million, and $28.3 million for
fiscal years 1996, 1995, 1994, and 1993, respectively, while direct expenses
for the same periods were $0.8 million, $7.4 million, $9.5 million, and $7.0
million, respectively. There were no revenues or expenses from this contract
after fiscal year 1996.
(2) The Company has acquired 24 companies during the periods presented, and
therefore revenues between periods are not comparable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
9
SUMMARY CDSI HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain consolidated historical financial
data of CDSI and subsidiaries, and is based on the consolidated financial
statements and selected financial data of CDSI, including the notes thereto,
which are incorporated by reference in this Joint Proxy Statement/Prospectus,
and should be read in conjunction therewith. See "Incorporation of Certain
Information by Reference". Interim unaudited data for the three months ended
September 30, 1997 and 1996 reflect, in the opinion of management of CDSI, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of such data. Results of the three months ended September 30, 1997
are not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
STATEMENT OF INCOME DATA
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
Revenues................................... $ 92,519 $ 70,073 $ 304,392 $ 251,099 $ 220,667 $ 205,923 $ 180,959
Net income................................. 2,441 2,785 11,156 9,769 8,051 7,729 5,507
Earnings per share......................... $ .38 $ .46 $ 1.80 $ 1.65 $ 1.36 $ 1.31 $ .97
Weighted average shares outstanding........ 6,434 6,118 6,188 5,936 5,902 5,916 5,683
Dividends declared per common share........ $ .06 $ .06 $ .12 $ .11 $ .10 $ .09 $ .08
BALANCE SHEET DATA
JUNE 30,
SEPTEMBER 30, -----------------------------------------------------
1997 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
Working capital......................... $ 44,690 $ 45,079 $ 29,967 $ 26,014 $ 25,930 $ 23,022
Total assets............................ 185,886 187,450 103,054 84,923 77,296 68,189
Total long-term debt (less current
portion).............................. 39,432 41,146 -- -- 4,533 6,133
Total stockholders' equity.............. 81,400 78,934 60,250 50,062 42,273 34,099
10
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary unaudited pro forma combined financial information is
based on the historical consolidated balance sheets and related consolidated
statements of income of ACS and CDSI adjusted to give effect to the Merger using
the "pooling of interests" method of accounting for business combinations, and
based on the Exchange Ratio. The unaudited pro forma combined condensed balance
sheet as of September 30, 1997 assumes that the Merger occurred as of that date.
The unaudited pro forma combined condensed statements of income for the three
months ended September 30, 1997 and 1996 and the three years ended June 30, 1997
assume that the Merger occurred as of July 1, 1994. The unaudited pro forma
financial information is not necessarily indicative of the operating results
that would have occurred had the Merger occurred on or as of the dates indicated
above, nor are they necessarily indicative of future operating results of the
combined companies. See "The Proposed Merger and Related Transactions--
Unaudited Pro Forma Combined Condensed Financial Information."
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1997 1996(1) 1997(1) 1996 1995
--------- --------- --------- --------- ---------
PRO FORMA COMBINED STATEMENT OF INCOME
DATA
Revenues.................................. $ 264,994 $ 214,405 $ 928,925 $ 647,608 $ 533,848
Net income................................ 13,450 11,318 49,666 33,525 25,655
Earnings per common and common equivalent
share................................... $ .28 $ .24 $ 1.05 $ .85 $ .71
SEPTEMBER 30,
1997
-------------
PRO FORMA COMBINED BALANCE SHEET DATA
Total assets.............................................................. $ 759,465
Total long-term debt (less current portion)............................... 113,964
Total stockholders' equity................................................ 433,518
- ------------------------
(1) This data does not reflect the pro forma impact of CDSI's June 18, 1997
acquisition of Analytical Systems Engineering Corporation ("ASEC"). The
effect of this acquisition is indicated on the Pro Forma Combined Condensed
Statement of Income for the Year Ended June 30, 1997. See "The Proposed
Merger and Related Transactions--Unaudited Pro Forma Combined Condensed
Financial Information."
11
COMPARATIVE PER SHARE DATA OF ACS AND CDSI
Set forth below are the net income, cash dividends, and book value per
common share data, of ACS and CDSI on an historical basis, a pro forma basis for
ACS, and an equivalent pro forma basis for CDSI.
The ACS pro forma data was derived by combining historical consolidated
financial information of ACS and CDSI, giving effect to the Merger under the
pooling of interests method of accounting for business combinations. ACS pro
forma dividends per common share assume no dividend payments, which is
consistent with ACS's historical dividend level. The equivalent pro forma data
for CDSI was calculated by multiplying the ACS pro forma combined per share data
by the Exchange Ratio.
The information set forth below should be read in conjunction with the
respective audited consolidated financial statements and related notes of ACS
and CDSI and other information incorporated by reference in this Joint Proxy
Statement/Prospectus and the Unaudited Pro Forma Combined Condensed Financial
Information and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus.
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
ACS
Historical Per Share Data:
Net income................................... $ .30 $ .23 $ 1.05 $ .82 $ .69
Dividends.................................... -- -- -- -- --
Book value at end of period.................. 10.01 9.71
Pro Forma Combined Per Share Data:
Net income................................... .28 .24(1) 1.05(1) .85 .71
Dividends.................................... -- -- -- -- --
Book value at end of period.................. 9.23 8.95
CDSI
Historical Per Share Data:
Net income................................... $ .38 $ .46 $ 1.80 $ 1.65 $ 1.36
Dividends.................................... .06 .06 .12 .11 .10
Book value at end of period.................. 12.95 12.61
Equivalent Pro Forma Per Share Data:
Net income................................... .49 .42(1) 1.85(1) 1.50 1.25
Dividends.................................... -- -- --
Book value at end of period.................. 16.24 15.74
- ------------------------
(1) This data does not reflect the pro forma impact of CDSI's June 18, 1997
acquisition of ASEC. The effect of this acquisition is indicated on the Pro
Forma Combined Condensed Statement of Income for the Year Ended June 30,
1997. See "The Proposed Merger and Related Transactions--Unaudited Pro Forma
Combined Condensed Financial Information."
12
OTHER PROPOSALS TO BE PRESENTED AT THE ACS ANNUAL MEETING
At the ACS Annual Meeting, stockholders of ACS will also be asked to
consider and act upon the following proposals:
Proposal No. 2............... To approve an amendment to the ACS Charter classifying the
ACS Board into three classes. THE BOARD OF DIRECTORS OF ACS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ACS VOTE FOR
THE AMENDMENT TO THE ACS CHARTER. See "The ACS Annual
Meeting of Stockholders-- Matters to be Considered."
Proposal No. 3............... To elect a board of directors to serve until each of their
respective successors shall have been duly elected and
qualified. THE BOARD OF DIRECTORS OF ACS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF ACS VOTE FOR THE
NOMINEES FOR DIRECTOR DESCRIBED HEREIN. See "The ACS Annual
Meeting of Stockholders--Matters to be Considered."
Proposal No. 4............... To approve an amendment to the ACS Bylaws requiring advance
notice by stockholders for proposals and nominations for
director to be included for consideration at a meeting of
stockholders. THE BOARD OF DIRECTORS OF ACS UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF ACS VOTE FOR THE
AMENDMENT TO THE ACS BYLAWS. See "The ACS Annual Meeting of
Stockholders--Matters to be Considered."
Proposal No. 5............... To approve an amendment to the ACS Charter to increase the
number of authorized shares of ACS Class A Common Stock from
75,000,000 to 500,000,000 and of ACS Class B Common Stock
from 6,405,686 to 14,000,000. THE BOARD OF DIRECTORS OF ACS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ACS VOTE FOR
THE AMENDMENT TO THE ACS CHARTER. See "The ACS Annual
Meeting of Stockholders-- Matters to be Considered."
Proposal No. 6............... To consider and vote upon performance-based incentive
compensation to ACS's executive officers. THE BOARD OF
DIRECTORS OF ACS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF ACS VOTE FOR PERFORMANCE-BASED INCENTIVE
COMPENSATION TO ACS'S EXECUTIVE OFFICERS. See "The ACS
Annual Meeting of Stockholders--Matters to be Considered."
Proposal No. 7............... To consider and vote upon the ACS 1997 Stock Incentive Plan.
THE BOARD OF DIRECTORS OF ACS UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF ACS VOTE FOR THE ADOPTION OF THE 1997
STOCK INCENTIVE PLAN. See "The ACS Annual Meeting of
Stockholders--Matters to be Considered."
13
DIVIDEND POLICY
To date, ACS has not paid any cash dividends on its common stock. ACS
intends to continue to retain earnings for use in the operation of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Under the terms of its unsecured revolving credit agreement with Wells
Fargo Bank (Texas), National Association and Bank One, Texas, N.A., as amended
(the "CREDIT FACILITY"), ACS is prohibited from paying dividends in any fiscal
year in a total amount that would exceed 50% of ACS's net income for the
preceding fiscal year. Any future determination to pay dividends will be at the
discretion of the ACS Board and will be dependent upon then existing conditions,
including ACS's financial condition, results of operations, contractual
restrictions, capital requirements, business prospects, and such other factors
as the ACS Board deems relevant.
CDSI has paid semi-annual dividends since 1976. In the event the Merger is
approved and shares of CDSI Common Stock are converted into shares of ACS Class
A Common Stock, the payment and amount of dividends after the Merger, if any,
will be determined by the ACS Board. ACS intends to continue to retain earnings
from CDSI for use in the operation of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. In the event the
Merger is not approved, the payment and amount of any future dividends to
stockholders who continue to own CDSI Common Stock will be dependent upon then
existing conditions, including CDSI's financial condition, results of
operations, contractual restrictions, capital requirements, business prospects,
and other factors.
14
RISK FACTORS
This Joint Proxy Statement/Prospectus contains "forward-looking statements"
within the meaning of Section 21E of the Exchange Act and Section 27A of the
Securities Act. All statements other than statements of historical fact are
"forward-looking statements" for purposes of these provisions, including any
projections of earnings, revenues or other financial items, any statements of
the plans and objectives of management for future operations, any statements
concerning proposed new products or services, any statements regarding future
economic conditions or performance, and any statement of assumptions underlying
any of the foregoing. In some cases, forward-looking statements can be
identified by the use of terminology such as "may," "will," "expects," "plans,"
"anticipates," "estimates," "potential," or "continue," or the negative thereof
or other comparable terminology. Although ACS and CDSI believe that the
expectations reflected in the forward-looking statements contained herein are
reasonable, they can give no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the forward-looking
statements. Future financial condition and results, as well as any
forward-looking statements, are subject to inherent risks and uncertainties,
some of which are summarized in this section.
In addition to the other information set forth in this Joint Proxy
Statement/Prospectus, the following factors should be considered by the ACS
stockholders and the CDSI stockholders before voting on the proposals herein.
RELIANCE ON SIGNIFICANT CUSTOMERS
The success of ACS has been dependent in large part on its retention of
contracts with certain significant customers. The five largest customers of ACS
for the fiscal years ended June 30, 1997, 1996, and 1995 accounted for
approximately 15%, 16%, and 27%, respectively, of its revenues. While ACS
believes its relations with such customers are good and has contracts with each
with remaining terms of approximately one to seven years, the loss of any of
such customers or a material decrease in services provided to any such customers
could have an adverse impact on ACS. ACS provides high speed data capture
services to its largest customer under a contract that renews annually. Although
this customer has renewed this or predecessor agreements for over five years and
ACS considers the relationship with the customer to be good, there can be no
assurance that the relationship will be maintained on a long-term basis. In
addition, ACS recently became aware that this customer has been informed by a
group of unionized employees whose collective bargaining agreement with the
customer has expired that the customer may be subjected to work stoppages. Such
work stoppages could adversely affect ACS's revenues from this customer.
Outsourcing companies such as ACS incur a high level of fixed costs related
to data processing customers. These fixed costs result from significant
investments in data processing centers, including computer hardware platforms,
computer software, facilities, and customer service infrastructure. The loss of
any one significant outsourcing customer can leave an outsourcing company with a
higher level of fixed costs than is necessary to serve remaining customers,
thereby reducing profitability. ACS also incurs a high level of variable costs
related to its image management and professional services customers. Such
variable costs are primarily due to the labor intensive nature of providing
these services.
For the fiscal year ended June 30, 1997, no one customer represented more
than 5% of ACS's revenues. Generally, customers of ACS may be lost due to
merger, business failure, conversion to a competing data processor, or
conversion to an in-house data processing system. There can be no assurance that
ACS will be able to maintain long-term relationships with its significant
customers. ACS could also be vulnerable to reduced processing volumes from its
customers, which reductions might occur due to business downturns, product
liability issues, work stoppages by organized labor, or other business reasons.
Such reduced processing volumes and losses of customers could have an adverse
impact on ACS.
The success of CDSI has been dependent upon contracts with federal
government agencies. The five largest federal government customers of CDSI for
the fiscal years ended June 30, 1997, 1996, and 1995
15
accounted for approximately 78%, 79%, and 76%, respectively, of its revenues.
For the fiscal year ended June 30, 1997, contracts with the Department of
Education accounted for 34% of CDSI's revenues. Generally, CDSI's business with
the federal government is subject to various risks, including the reduction or
modification of contracts due to changing government needs and requirements.
Additionally, the federal government may terminate contracts for convenience. In
the event of such a termination of one or more of CDSI's contracts, CDSI would
be reimbursed for the costs of terminating the contracts. See "Risk
Factors--Contracts and Contracting."
COMPETITION AND TECHNOLOGICAL CHANGE
The markets for ACS and CDSI's services are intensely competitive and highly
fragmented. ACS and CDSI's market share represents a small percentage of the
total information processing market. Many of ACS and CDSI's principal
competitors have greater financial, technical, and operating resources than ACS
and CDSI, respectively, and may be able to use their resources to adapt more
quickly to new or emerging technologies or to devote greater resources to the
promotion and sale of their products and services. In addition, ACS and CDSI's
competitors are expected to continue their practice of investing in or acquiring
assets from large data processing customers in order to obtain outsourcing
contracts. There can be no assurance that ACS and CDSI will be able to compete
successfully in the future or that competition will not have a material adverse
effect on the results of operations of ACS and CDSI, respectively.
The market for information processing services is subject to rapid
technological changes and rapid changes in customer requirements. Technological
advances and competition require ACS and CDSI to commit substantial amounts of
its resources to the operation of multiple hardware platforms, the customization
of third-party software programs, and the training of customer personnel in the
use of such hardware and software. A significant portion of ACS and CDSI's
outsourcing revenue is derived from data processing services performed on
IBM-compatible mainframe systems. Technological advances currently in process
may result in the development of hardware and software products that are able to
manipulate large amounts of data more cost-effectively than existing mainframe
platforms. An acceleration of the shift towards client-server data processing,
in which individual computers or groups of personal computers and mid-range
systems replace mainframe systems, may adversely affect ACS and CDSI. ACS and
CDSI have committed substantial amounts of their resources to the development of
outsourcing solutions for these distributed computing environments. There can be
no assurance that ACS and CDSI will be successful in customizing products and
services that incorporate new technology on a timely basis or will continue to
be able to deliver the services and products demanded by the marketplace. The
primary competitive factors in the market are technical qualifications,
management performance, and price.
INVESTMENTS RELATED TO SIGNIFICANT CUSTOMER CONTRACTS
Large outsourcing agreements often require a significant capital investment.
ACS is sometimes required to purchase certain assets (such as computing
equipment and purchased software), assume certain financial obligations (such as
computer lease and software maintenance obligations), make investments in
certain securities issued by its customers, incur specific capital expenditures,
or incur expenses necessary to provide outsourcing services to a new customer.
These investments and asset purchases have been recorded by ACS at fair market
value, with the remainder of the purchase amount recorded as intangible assets,
which are then amortized over the term of each contract. The termination of a
customer contract or the deterioration of the financial condition of a customer
has in the past and may in the future result in an impairment of the net book
value of the assets recorded. Moreover, there can be no assurance that ACS will
be successful in its ability to both finance and properly evaluate these assets
and investments.
16
IMPACT OF ACQUISITIONS
A significant percentage of ACS's revenues since its inception in June 1988
has been attributable to acquisitions. Since inception, ACS's acquisition
strategy has resulted in the completion of 34 acquisitions. Approximately
two-thirds of the increase in ACS revenues for the five years ended June 30,
1997 is attributable to acquisitions. There can be no assurance that future
acquisition opportunities will become available, that future acquisitions can be
accomplished on favorable terms, or that such acquisitions will result in
profitable operations. Moreover, ACS has incurred substantial debt and non-cash
amortization expenses in connection with past acquisitions, and ACS's business
strategy to pursue additional acquisitions may require ACS to incur additional
debt in the future, may result in potentially dilutive issuance of securities,
and may result in increased goodwill, intangible assets, and amortization
expense.
RISKS ASSOCIATED WITH ATM FEE LEGISLATION
Legislation and regulations have been proposed and may be enacted to
regulate the fees that may be collected by automated teller machine ("ATM")
owners, which could have the effect of reducing the economic viability of many
ATMs. If such or similar legislation or regulations are enacted, the number of
ATMs operated nationwide (or within the geographic areas affected by the
legislation or regulations) could be significantly reduced. This could adversely
affect ACS's results of operations as they relate to ACS's electronic funds
transfer ("EFT ") business. Approximately 15% of ACS revenues for the fiscal
year ended June 30, 1997 were derived from its EFT business.
DEPENDENCE ON KEY PERSONNEL
The success of ACS is largely dependent on the skills, experience, and
performance of certain key members of its management, including Darwin Deason,
Chairman of the Board and Chief Executive Officer of ACS. The loss of the
services of any of these key employees could have an adverse effect on ACS's
business and prospects. ACS has not entered into employment agreements with any
of its key employees, although it has entered into severance agreements with
each of its executive officers.
The success of CDSI is largely dependent on the skills, experience, and
performance of certain key members of its management, including Peter A.
Bracken, Chief Executive Officer and President of CDSI. The loss of the services
of any of these key employees could have an adverse effect on CDSI's business
and prospects. ACS has no plans to enter into employment agreements with any of
CDSI's key employees after the Merger, although ACS may enter into severance
agreements with one or more of CDSI's executive officers.
VOTING CONTROL BY CHAIRMAN OF THE BOARD OF ACS
ACS is controlled by Darwin Deason, its Chairman and Chief Executive
Officer, who has voting control over an aggregate of 6,405,686 shares of ACS
Class B Common Stock, which have an aggregate of 64,056,860 votes, or
approximately 68% of the total voting power of ACS. Accordingly, Mr. Deason
controls virtually all decisions made with respect to ACS by its stockholders,
including decisions relating to the election of directors. Furthermore, as a
result of his control of the voting stock of ACS, Mr. Deason may, except as
otherwise provided by Delaware law or certain provisions of the ACS Charter and
ACS Bylaws requiring an 80% stockholder vote, without the concurrence of the
remaining stockholders, amend the ACS Charter, effect or prevent a merger, sale
of assets, or other business acquisition or disposition and otherwise control
the outcome of all actions requiring stockholder approval. If the Merger is
approved, Mr. Deason will convert approximately 3,143,000 of his shares of ACS
Class B Common Stock into the same number of shares of ACS Class A Common Stock
immediately prior to the Effective Time. This conversion will create a majority
voting class of common stock for the purposes of a "pooling of interests"
transaction. Immediately after the Merger, taking into account the effect of the
issuance of Class A Common Stock to the stockholders of CDSI pursuant to the
Merger and including 10,100 shares of ACS
17
Class A Common Stock owned by Mr. Deason prior to such conversion, Mr. Deason
will have approximately 46% of the total voting power of ACS.
POSSIBLE PRICE VOLATILITY
The price of ACS Class A Common Stock is determined in the marketplace and
may be influenced by many factors, including the depth and liquidity of the
market for the ACS Class A Common Stock, investor perception of ACS and the
industry within which ACS competes, and general economic and market conditions.
Variations in operating results, general trends in the industry, and other
factors could cause the market price of the ACS Class A Common Stock to
fluctuate significantly. In addition, general trends and developments in the
industry, including the announcement of technological innovations by ACS or its
competitors, government regulation and other factors, could have a significant
impact on the price of ACS Class A Common Stock. The stock market has, on
occasion, experienced extreme price and volume fluctuations that have often
particularly affected market prices for smaller companies and that often have
been unrelated or disproportionate to the operating performance of the affected
companies, and the price of ACS Class A Common Stock could be affected by such
fluctuations.
ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION AND BYLAWS AND OTHER
STOCKHOLDER PROTECTION MECHANISMS
Certain provisions of the ACS Charter and ACS Bylaws may delay, defer, or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in such stockholder's best interest, including attempts that might result in
a premium over the market price for the securities. In this regard, the current
ACS Charter provides that the removal of any director or directors, with or
without cause, requires the affirmative vote of at least 80% of the combined
voting stock of ACS, giving effect to the number of votes per share attributable
to such stock. Such ACS Charter provision would restrict the ability of a party
to gain control of the ACS Board by acquiring a majority of the ACS voting
stock, removing all of the directors and then replacing them with the directors
seeking to benefit such party. Additionally, the ACS Bylaws provide that the
number of directors shall be fixed, from time to time, by resolution of the ACS
Board, and the ACS Board recently approved an amendment to the ACS Bylaws, which
is being submitted to the stockholders for approval herewith, providing that
such number of directors of ACS be divided into three classes that are elected
for staggered three-year terms. Thus, in any given year, only a portion of the
ACS directors would be eligible for election, therefore eliminating the ability
of a hostile party to gain control of the ACS Board in a single proxy contest,
making any unsolicited takeover attempt (including an attempt that an ACS
stockholder might consider in such stockholder's best interest) more expensive
and more difficult. The ACS Board has also approved an amendment to the ACS
Bylaws, which is being submitted to the stockholders for approval herewith,
providing for advance notice procedures with respect to the submission by
stockholders of proposals to be acted on at stockholder meetings and of
nominations of candidates for election as directors. See "The ACS Annual Meeting
of Stockholders--Matters to be Considered." The establishment of such procedures
removes any ambiguity with respect to how matters can be so submitted by
stockholders. Further, the ACS Charter permits the ACS Board to establish by
resolution one or more series of preferred stock ("ACS PREFERRED STOCK") and to
establish the powers, designations, preferences and relative, participating,
optional, or other special rights of each series of ACS Preferred Stock. The ACS
Preferred Stock could be issued on terms that are unfavorable to the holders of
ACS Class A Common Stock or that could make a takeover or change in control of
ACS more difficult. Further, ACS has instituted a stockholder rights plan and
has entered into severance agreements with each of its executive officers, which
plan and agreements may have the effect of discouraging an unsolicited takeover
proposal. Moreover, ACS is subject to Section 203 of the DGCL, which places
restrictions on certain business combinations with certain stockholders that
could render more difficult a change in control of ACS. If approved by the ACS
stockholders, the proposed ACS Bylaw Amendments, together with the current ACS
Charter provision setting forth that the removal of directors requires the
affirmative vote of 80% of the combined voting stock of ACS, the stockholder
rights plan and severance agreements
18
and other provisions of the ACS Charter and DGCL, may have the effect of
discouraging a future take-over attempt by a third party that is not approved by
the ACS Board and render the removal of the incumbent management more difficult.
Counterbalancing these effects of such provisions is the positive effect that
these protections contribute to an environment where the interests of the ACS
stockholders and ACS can be addressed in an orderly and well-informed manner.
See "Comparative Rights of Stockholders of ACS and CDSI--Business Combinations."
EXPECTED BENEFITS OF COMBINED BUSINESS MAY NOT BE ACHIEVED
There can be no assurance that the expected benefits of the Merger relative
to the combined businesses as described under "The Proposed Merger and Related
Transactions--ACS's Reasons for the Merger" will be achieved. The integration of
departments, systems, and procedures present significant management challenges,
and there can be no assurance that such actions will be successfully
accomplished within a specified period of time.
FIXED EXCHANGE RATIO
The Exchange Ratio is expressed in the Merger Agreement as a fixed ratio of
1.759 shares of ACS Class A Common Stock for each share of CDSI Common Stock.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of either ACS Class A Common Stock or CDSI
Common Stock. The price of ACS Class A Common Stock at the Effective Time may
vary from its price at the date of the ACS Annual Meeting and the CDSI Special
Meeting. These variations may be the result of changes in the business,
operations, or prospects of ACS or CDSI, market assessments of the likelihood
that the Merger will be consummated and the timing thereof, general market and
economic conditions, and other factors. Because the Effective Time will occur at
a date later than the ACS Annual Meeting or the CDSI Special Meeting, there can
be no assurance that the price of the ACS Class A Common Stock on the date of
the ACS Annual Meeting or the CDSI Special Meeting will be indicative of its
price at the Effective Time. The stockholders of CDSI are urged to obtain
current market quotations for the ACS Class A Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Merger by the CDSI Board, holders
of CDSI Common Stock should be aware that the directors (Messrs. Kendall,
Bracken, Henderson, Hoxeng, Ignatius, Paige and Parker) and certain executive
officers (including Mr. Green and Ms. Mayhew) of CDSI may have certain interests
that are different from or in addition to those interests of the holders of CDSI
Common Stock generally. These interests include the acceleration of the vesting
of stock options held by the directors and certain executive officers as well as
agreements with Mr. Kendall and Mr. Bracken concerning the terms of their
continued relationship with CDSI and their relationship with ACS following the
closing of the Merger. These interests, together with other relevant factors,
were considered by the CDSI Board in recommending the Merger to the holders of
CDSI Common Stock and approving the Merger Agreement. See "The Proposed Merger
and Related Transactions--Interests of Certain Persons in the Merger"
CONTRACTS AND CONTRACTING
Approximately 98% of CDSI's revenues in fiscal 1997 was derived from
contracts with the United States government or agencies thereof (collectively,
the "GOVERNMENT"). CDSI has over 40 active prime contracts and numerous active
subcontracts with the Government, the largest of which accounted for
approximately 34% of 1997 revenues. Loss or termination of one or more large
Government contracts could have a material adverse effect on CDSI.
19
Government contracts are generally subject to audits and investigations by
Government agencies. These audits and investigations involve a review of the
contractor's performance on its contracts, as well as its pricing practices, its
cost structure, and its compliance with applicable laws, regulations, and
standards. If any costs are improperly charged to a contract, the costs are not
reimbursable and, if already reimbursed, will have to be refunded to the
Government. Furthermore, if improper or illegal activities are discovered in the
course of any audits or investigations, the contractor may be subject to various
civil and criminal penalties and administrative sanctions, which may include
termination of contracts, forfeiture of profits, suspension of payments, fines,
and suspensions or debarment from doing business with the Government. In recent
years, the Government has substantially increased the personnel and resources it
devotes to audits and investigations and has encouraged accountants and
investigators to emphasize the detection of fraud or improper activities. CDSI
believes that this high level of industry scrutiny will continue for the
foreseeable future. There can be no assurance that CDSI will not be subject in
the future to penalties and sanctions with respect to CDSI activities, both past
and future. If CDSI became subject to penalties or sanctions, the penalties or
sanctions could have a material adverse effect on CDSI's business and financial
condition.
Government contracts, by their terms, generally can be terminated for
convenience by the Government, which means that the Government may terminate the
contract at any time, without cause, and that CDSI would be entitled to receive
compensation only for the services provided or costs incurred at the time of
termination and a proportionate amount of the total fee or profit on the
contract. In addition, many of the Government contracts awarded to CDSI contain
base periods of one or more years, as well as one or more option periods that
may cover more than half of the potential contract duration. The Government
generally has the right not to exercise option periods and its failure to
exercise option periods could curtail the contract term of certain contracts
held by CDSI.
SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale by former CDSI
shareholders, will have on the market price of ACS Class A Common Stock
prevailing from time to time. Sales of substantial amounts of ACS Class A Common
Stock (including shares issued upon the exercise of stock options), or the
perception that such sales could occur, may adversely affect prevailing market
prices for ACS Class A Common Stock.
THE ACS ANNUAL MEETING OF STOCKHOLDERS
PLACE, DATE, AND TIME
The ACS Annual Meeting will be held at CityPlace, 2711 North Haskell Avenue,
Dallas, Texas 75204, on Tuesday, December 16, 1997, at 10:00 a.m., local time.
MATTERS TO BE CONSIDERED
At the ACS Annual Meeting, the stockholders of ACS will be asked to consider
and vote upon proposals to (i) approve and authorize the Stock Issuance; (ii)
approve an amendment to the ACS Charter classifying the ACS Board into three
classes; (iii) elect a board of directors to serve until each of their
respective successors shall have been duly elected and qualified; (iv) approve
an amendment to the ACS Bylaws requiring advance notice by stockholders for
proposals and nominations for director to be included for consideration at a
meeting of stockholders; (v) approve an amendment to the ACS Charter to increase
the number of authorized shares of ACS Class A Common Stock and ACS Class B
Common Stock; (vi) approve performance-based incentive compensation to ACS's
executive officers; (vii) approve the 1997 Plan; and (viii) transact such other
business as may come before the ACS Annual Meeting or any adjournments or
postponements thereof.
20
PROPOSAL ONE--STOCK ISSUANCE
The Stock Issuance is being submitted to the stockholders of ACS for
approval in accordance with ACS's listing agreement with the NYSE. Among other
things, the NYSE listing agreement generally requires that ACS's stockholders
approve an acquisition transaction or series of related transactions that will
result in the issuance of shares of ACS Class A Common Stock if the new shares
will have 20% or more of the voting power outstanding before such issuance.
Because the issuance of shares of ACS Class A Common Stock pursuant to the
Merger Agreement would exceed 20% of the voting power currently outstanding, the
proposal is being submitted to ACS stockholders for approval in accordance with
the NYSE rules and the listing agreement. See "The Proposed Merger and Related
Transactions."
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS
VOTE FOR THE STOCK ISSUANCE.
PROPOSAL TWO--AMENDMENT TO THE ACS CHARTER CLASSIFYING THE BOARD OF
DIRECTORS INTO THREE CLASSES
On August 5, 1997, the ACS Board approved a proposed amendment to Article
Seventh, Section 1 of the ACS Charter, which will divide the ACS Board into
three classes, with one class having an initial term of one year, one class
having an initial term of two years, and one class having an initial term of
three years. At each annual meeting of ACS stockholders, commencing with the
annual meeting of stockholders to be held in 1998, directors will be elected to
succeed those directors whose terms have expired, and each newly elected
director will serve for a three-year term. As set forth in the ACS Bylaws, any
vacancy occurring in the ACS Board may be filled by the affirmative vote of a
majority of the remaining directors. A director so elected to fill a vacancy
shall serve for the unexpired term of his predecessor in office. ACS believes
that a classified board of directors will help assure the continuity and
stability of the ACS Board and ACS's business strategies and policies. The
classified board provision could increase the likelihood that, in the event of a
takeover of ACS by a third party, incumbent directors will retain their
positions. In addition, the classified board provision will help ensure that the
ACS Board, if confronted with an unsolicited acquisition proposal from a third
party that has acquired a block of the voting stock of ACS, will have sufficient
time to review the proposal and appropriate alternatives and to seek the best
available result for all stockholders.
The proposed amendment to Article Seventh, Section 1 of the ACS Charter
reads as follows:
"SEVENTH: Section 1. NUMBER, ELECTION, AND TERMS OF DIRECTORS. Subject
to the rights, if any, of the holders of any series of Preferred Stock to
elect additional Directors under circumstances specified in a Preferred
Stock designation, the number of the Directors of the Company will not be
less than three nor more than fifteen and will be fixed from time to time in
the manner described in the bylaws of the Company. The directors will be
divided into three classes designated as Class I, Class II, and Class III.
Each Class of directors will stand for election at the 1997 annual
stockholders' meeting for the following terms: Class I directors will be
elected for a three-year term; Class II directors will be elected for a
two-year term; and Class III directors will be elected for a one-year term.
At each following annual stockholders' meeting, commencing with the 1998
annual stockholders' meeting, each of the successors to the directors of the
Class whose term will expire at such annual meeting will be elected for a
term running until the third annual meeting succeeding his or her election
and until his or her successor has been duly elected and qualified."
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS
VOTE FOR THE AMENDMENT TO THE ACS CHARTER.
PROPOSAL THREE--ELECTION OF DIRECTORS
The ACS Annual Meeting will also include the election of directors. In the
event Proposal No. 1 and Proposal No. 2 are approved, the ACS Annual Meeting
will also include the election of two Class I
21
directors to serve for an initial three-year term, four Class II directors to
serve for an initial two-year term, and three Class III directors to serve for
an initial one-year term. Each of the nine nominees for director to the ACS
Board have been nominated by the ACS Board, including Clifford M. Kendall and
Peter A. Bracken (currently members of the CDSI Board) as required by the Merger
Agreement. See "ACS Management--Directors and Executive Officers of ACS;" "CDSI
Management--Security Ownership of Certain Beneficial Owners and Management of
CDSI."
In the event Proposal No. 1 is not approved and Proposal No. 2 is approved,
the ACS Annual Meeting will also include the election of two Class I directors
to serve for an initial three-year term, three Class II directors to serve for
an initial two-year term, and two Class I directors to serve for an initial
one-year term. The seven nominees for director to the ACS Board have been
nominated by the ACS Board. Messrs. Kendall and Bracken are not nominees for the
ACS Board in the event Proposal No. 1 is not approved. See "ACS
Management--Security Ownership of Certain Beneficial Owners and Management of
CDSI."
In the event Proposal No. 1 is approved and Proposal No. 2 is not approved,
the ACS Annual Meeting will also include the election of nine directors to serve
until the next annual meeting of ACS stockholders and until their successors
have been duly elected and qualified. Each of the nine nominees to the ACS Board
have been nominated by the ACS Board, including Clifford M. Kendall and Peter A.
Bracken (currently members of the CDSI Board), as required by the Merger
Agreement. See "ACS Management-- Directors and Executive Officers of ACS;" "CDSI
Management--Security Ownership of Certain Beneficial Owners and Management of
CDSI."
In the event Proposal No. 1 is not approved and Proposal No. 2 is not
approved, the ACS Annual Meeting will also include the election of seven
directors to serve until the next annual meeting of ACS stockholders and until
their successors have been duly elected and qualified. The seven nominees for
directors to the ACS Board have been nominated by the ACS Board. Messrs. Kendall
and Bracken are not nominees for the ACS Board in the event Proposal No. 1 is
not approved. See "ACS Management-- Security Ownership of Certain Beneficial
Owners and Management of CDSI."
The ACS Board's nominees for the ACS Board are Darwin Deason (Class I),
Jeffrey A. Rich (Class I), Henry G. Hortenstine (Class II), Joseph P. O'Neill
(Class II), Frank A. Rossi (Class II), Clifford M. Kendall (Class II), Mark A.
King (Class III), David W. Black (Class III), and Peter A. Bracken (Class III).
All of the nominees, except for Messrs. Kendall and Bracken, are currently
members of the ACS Board. Messrs. Kendall and Bracken are currently members of
the CDSI Board. For more information regarding the nominees for directors to the
ACS Board, see "ACS Management--Directors and Executive Officers of ACS;" "CDSI
Management--Security Ownership of Certain Beneficial Owners and Management of
CDSI."
THE ACS BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR DIRECTOR.
PROPOSAL FOUR--AMENDMENT TO THE ACS BYLAWS IMPLEMENTING AN ADVANCE NOTICE
REQUIREMENT FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
On August 5, 1997, the ACS Board approved a proposed amendment to ACS Bylaw
8(c) and 13(c), which will establish advance notice procedures with regard to
stockholder proposals and the nomination, other than by or at the direction of
the ACS Board or a committee thereof, of candidates for election as directors.
These procedures provide that the notice of stockholder proposals and director
nominations must be in writing and received by the secretary of ACS no later
than (a) with respect to an annual meeting of stockholders, not less than 120
days nor more than 150 days before the first anniversary date of the ACS proxy
statement in connection with the last annual meeting of stockholders or (b) if
no annual meeting has been called after the expiration of more than 30 days from
the date for such meeting contemplated at the time of the previous year's proxy
statement, not less than a reasonable time, as determined by the ACS Board,
prior to the date of the applicable annual meeting. The notice of stockholder
nominations for director must set forth certain information with respect to each
nominee who is not an incumbent director.
22
The proposed amendment to ACS Bylaw 8(c) and 13(c) reads as follows:
BYLAW 8(C):
"(c) In order to properly submit any business to an annual meeting of
stockholders, a stockholder must give timely notice in writing to the
secretary of the Company. To be considered timely, a stockholder's notice
must be delivered either in person or by United States certified mail,
postage prepaid, and received at the principal executive offices of the
Company (a) not less than 120 days nor more than 150 days before the first
anniversary date of the Company's proxy statement in connection with the
last annual meeting of stockholders or (b) if no annual meeting has been
called after the expiration of more than 30 days from the date for such
meeting contemplated at the time of the previous year's proxy statement, not
less than a reasonable time, as determined by the board of directors, prior
to the date of the applicable annual meeting.
The secretary of the Company will deliver any stockholder proposals and
nominations received in a timely manner for review by the board of directors
or a committee designated by the board of directors.
A stockholder's notice to submit business to an annual meeting of
stockholders will set forth (i) the name and address of the stockholder,
(ii) the class and number of shares of stock beneficially owned by such
stockholder, (iii) the name in which such shares are registered on the stock
transfer books of the Company, (iv) a representation that the stockholder
intends to appear at the meeting in person or by proxy to submit the
business specified in such notice, (v) any material interest of the
stockholder in the business to be submitted, and (vi) a brief description of
the business desired to be submitted to the annual meeting, including the
complete text of any resolutions to be presented at the annual meeting, and
the reasons for conducting such business at the annual meeting. In addition,
the stockholder making such proposal will promptly provide any other
information reasonably requested by the Company.
Notwithstanding the foregoing provisions of this Bylaw 8(c), a
stockholder who seeks to have any proposal included in the Company's proxy
statement will comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended."
BYLAW 13(C):
"(c) Nominations by stockholders will be made pursuant to timely notice
in writing to the Secretary of the Company. To be timely, a stockholder's
notice will be delivered to or mailed and received at the principal
executive offices of the Company (a) with respect to an election to be held
at the annual meeting of the stockholders of the Company, not less than 120
nor more than 150 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders of the Company, and (b) with
respect to an election to be held at the special meeting of stockholders of
the Company for the election of directors not later than the close of
business on the tenth day following the date on which notice of the date of
the special meeting was mailed to stockholders of the Company or public
disclosure of the date of the special meeting was made, whichever first
occurs.
Such stockholder's notice to the Secretary will set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election
as a director, all information relating to such person that is required to
be disclosed in solicitations of proxies for election of directors, or is
otherwise required, pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to being
named in the proxy statement as a nominee and to serve as a director if
elected), and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Company's books, of such stockholder and (ii)
the class and number of shares of voting stock of the Company which are
beneficially owned by such stockholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election
23
as a director will furnish to the Secretary of the Company that information
required to be set forth in a stockholder's notice of nomination which
pertains to the nominee. In the event that a person is validly designated as
a nominee to the Board of Directors in accordance with the procedures set
forth in this Bylaw 13(c) and will thereafter become unable or unwilling to
stand for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee.
The presiding officer of the meeting of stockholders will, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in accordance with the procedures prescribed by these bylaws, and if he
should so determine, he will so declare to the meeting and the defective
nomination will be disregarded.
Notwithstanding the foregoing provisions of this Bylaw 13(c), a
stockholder will also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Bylaw 13(c)."
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS
VOTE FOR THE AMENDMENT TO THE ACS BYLAWS.
PROPOSAL FIVE--AMENDMENT TO THE ACS CHARTER INCREASING THE NUMBER OF
AUTHORIZED SHARES OF ACS CLASS A COMMON STOCK AND ACS CLASS B COMMON STOCK
At the ACS Annual Meeting, the ACS stockholders will be asked to consider
and vote upon a proposal to amend the ACS Charter to increase the number of
shares of ACS Class A Common Stock authorized for issuance from 75,000,000 to
500,000,000 and the number of shares of ACS Class B Common Stock authorized for
issuance from 6,405,686 to 14,000,000. This amendment was adopted by the ACS
Board on September 19, 1997, subject to stockholder approval.
ACS's authorized capital stock currently consists of a total of 84,405,686
shares, including 75,000,000 shares of ACS Class A Common Stock, 6,405,686
shares of ACS Class B Common Stock, and 3,000,000 shares of ACS Preferred Stock.
There are no preemptive rights associated with any of ACS's capital stock. As of
the ACS Record Date, there were outstanding 29,901,859 shares of the ACS Class A
Common Stock and 6,405,686 shares of the ACS Class B Common Stock, options to
purchase approximately 2,752,710 shares of the ACS Class A Common Stock, and a
warrant to purchase 793,188 shares of Class A Common Stock. No shares of ACS
Preferred Stock have been issued.
The Merger will require the issuance of approximately 12,250,000 shares
(including shares issuable upon the exercise of CDSI options) of ACS Class A
Common Stock. In addition to the shares of ACS Class A Common Stock issued in
connection with the Merger, the ACS Board believes that it is in the best
interests of ACS to have additional shares of ACS Class A Common Stock available
for issuance at its discretion for possible future acquisitions, stock splits,
stock dividends, employee benefit plans, equity financing, issuance of shares
upon the exercise of rights by ACS stockholders pursuant to the ACS Rights
Agreement, and other corporate purposes.
The additional ACS Class A Common Stock to be authorized by adoption of the
amendment would have rights identical to the currently outstanding ACS Class A
Common Stock. Adoption of the proposed amendment and issuance of ACS Class A
Common Stock would not affect the rights of the holders of currently outstanding
ACS Class A Common Stock, except for effects incidental to increasing the number
of shares of ACS Class A Common Stock outstanding, including possible dilution
of the equity interests of existing stockholders or reduction of the
proportionate voting power of existing stockholders. In addition, the issuance
of additional shares could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of ACS,
thereby delaying, deferring, or preventing a change in control of ACS, although
this is not the intention of this proposal. If the amendment is adopted,
24
it will become effective upon the filing of a Certificate of Amendment to the
ACS Charter with the Secretary of the State of Delaware.
The additional shares of ACS Class A Common Stock may be issued, subject to
certain exceptions, by the ACS Board at such times, in such amounts, and upon
such terms as the ACS Board may determine without further approval of the
stockholders. Stockholders have no preemptive rights to subscribe to additional
shares when issued. To accomplish this proposed increase in ACS Class A Common
Stock, the first sentence of Article Fourth, Section 2 of the ACS Charter must
be amended to be as follows:
"The total number of shares of all classes of capital stock that the
Company shall have the authority to issue is 517,000,000 shares,
consisting of (a) 500,000,000 shares of Class A Common Stock, par value
$0.01 per share ("Class A Common Stock"), (b) 14,000,000 shares of ACS
Class B Common Stock, par value $0.01 per share ("ACS Class B Common
Stock", and together with Class A Common Stock, "Common Stock"), and (c)
3,000,000 shares of Preferred Stock, par value $1.00 per share
("Preferred Stock")."
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS
VOTE FOR THE AMENDMENT TO THE ACS CHARTER.
PROPOSAL SIX--CONSIDER AND VOTE UPON PERFORMANCE-BASED INCENTIVE
COMPENSATION TO EXECUTIVE OFFICERS
Recent changes in the Code limit ACS's tax deduction for expense in
connection with compensation of its chief executive officer and its four other
most highly-compensated executive officers for any fiscal year to the extent
that the remuneration of such person exceeds $1 million during such fiscal year,
excluding remuneration that qualifies as "performance-based compensation."
Section 162(m) of the Code provides that in order for remuneration to be treated
as qualified performance-based compensation, the material terms of the
performance goals must be disclosed to and approved by the stockholders of the
employer.
At the ACS Annual Meeting, the stockholders will be asked to approve the
terms relating to incentive compensation to be paid to ACS's executive officers.
Executive officer compensation for fiscal 1998 will consist of a base salary,
stock option plan, and bonus compensation and will be based on criteria similar
to criteria previously used for the Company's executive officers. See "ACS
Management--Compensation Committee Report on Executive Compensation." Executive
officers will be entitled to receive varying ranges of up to 250% of their base
salaries upon achievement of bonus performance goals, which include ACS's
achievement of four targeted financial measures: consolidated revenues,
consolidated earnings before interest, taxes and acquisition amortization,
consolidated pre-tax earnings, and consolidated earnings per share. The bonus
performance goals have been pre-established by the Compensation Committee for
all executive officers other than any executive officer whose compensation may
exceed $1 million, which other officer's goals have been previously established
by the Special Compensation Committee, which is comprised solely of non-employee
directors, and all of such goals have been approved by the Board of Directors.
ACS believes that the incentive-related provisions provide performance
incentives that are and will be beneficial to ACS and its stockholders.
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS
VOTE FOR AUTHORIZATION OF PERFORMANCE-BASED
INCENTIVE COMPENSATION TO ACS EXECUTIVE OFFICERS.
PROPOSAL SEVEN--APPROVE THE ACS 1997 STOCK INCENTIVE PLAN
The ACS Board, in anticipation of the imminent termination of the 1988 Plan
in 1998, has determined that it is in the best interests of ACS to provide for a
new stock option plan. Accordingly, although there are still currently 1,453,890
shares of ACS Class A Common Stock available for issuance pursuant to new
25
grants of options under the 1988 Plan, in light of, among other things, the
expiration of the term of the 1988 Plan in 1998, the ACS Board, on August 5,
1997, adopted the 1997 Plan, subject to stockholder approval at the ACS Annual
Meeting, and adopted an amendment to the 1988 Plan providing that as of August
5, 1997, no new option grants would be made under such Plan. The ACS Board
believes that the 1997 Plan reflects competitive practices and is necessary to
attract and retain the best available personnel and promote the success of ACS's
business and recommends its approval by the ACS stockholders. At the ACS Annual
Meeting, the ACS stockholders will be asked to consider and vote upon the 1997
Plan.
The complete text of the 1997 Plan is attached as Appendix D hereto, and the
following summary of the 1997 Plan is qualified in its entirety by reference to
such text.
DESCRIPTION OF THE 1997 PLAN
GENERAL. The 1997 Plan is designed to comply with the requirements of
Section 16b of the Exchange Act. The maximum aggregate number of shares of ACS
Class A Common Stock available for issuance under the 1997 Plan will initially
be 3,675,000, which amount is inclusive of shares of Class A Common Stock that
would have continued to be available for grant pursuant to options under the
1988 Plan and which amount, when added to the number of shares of ACS Class A
Common Stock covered by options outstanding under the 1988 Plan (and held by
employees or consultants), equals approximately 12.8% of the total number of
shares of ACS Class A Common Stock and ACS Class B Common Stock which will be
outstanding after giving effect to the number of shares to be issued in
connection with the Merger (such 12.8% being referred to as the "Approved
Amount"). The Approved Amount is the same percentage which was approved by the
stockholders at ACS's 1996 annual meeting of stockholders and is based in part
on the result of a study performed by an independent consulting firm at the
request of the ACS Board. The amount of shares of ACS Class A Common Stock
available for issuance pursuant to options under the 1997 Plan may, at the
discretion of the ACS Board, be increased from time to time as additional shares
of ACS Class A Common Stock are issued from time to time in order to maintain
the number of shares of ACS Class A Common Stock available for grant, and
previously granted and outstanding (and held by Employees and Consultants),
equal to 12.8% of the total number of shares of ACS Class A Common Stock and ACS
Class B Common Stock outstanding from time to time. No more than 3,675,000
shares of ACS Class A Common Stock will be available for the granting of
incentive stock options within the meaning of Section 422 of the Code
("INCENTIVE STOCK OPTIONS").
ADMINISTRATION. Under its terms, the 1997 Plan may be administered by the
ACS Board or one or more committees of the ACS Board, as permitted by Rule 16b-3
("RULE 16B-3") promulgated under the Exchange Act. Performance-based awards to
the ACS's named executive officers are administered by a committee of outside
directors, as set forth in Section 162(m) of the Code. The ACS Board or
committee administering the 1997 Plan at a particular time (the "ADMINISTRATOR")
determines the individuals eligible to receive awards under the 1997 Plan, the
types and number of awards to be granted, the terms and conditions of such
awards (including, for example, with respect to options, the exercise price,
exercise date, any restrictions on exercise), and prescribes the forms of award
agreements. The Administrator is also responsible for, among other things,
determining the advisability and terms of any buyout of options previously
granted and the reductions, if any, in the exercise prices of previously granted
options.
ELIGIBILITY. Employees (including employee directors) ("EMPLOYEES") of and
consultants ("CONSULTANTS") to ACS and any parent or subsidiary of ACS as well
as outside directors of ACS ("OUTSIDE DIRECTORS") are eligible to receive awards
under the 1997 Plan.
TYPES OF GRANTS. The 1997 Plan permits the grant of nonstatutory stock
options ("NONSTATUTORY STOCK OPTIONS"), "stock purchase rights" ("STOCK PURCHASE
RIGHTS"), stock appreciation rights ("SARS"), deferred stock ("DEFERRED STOCK"),
dividend equivalents ("DIVIDEND EQUIVALENTS") and awards of restricted stock
("RESTRICTED STOCK") to Employees, Consultants and Outside Directors. The 1997
Plan also permits the grant of incentive stock options within the meaning of
Section 422 of the Code ("INCENTIVE STOCK OPTIONS")
26
to Employees. The 1997 Plan further permits the Administrator to designate the
grant of Options or SARs to a "covered employee" (as defined in Section
162(m)(3) of the Code) as a "performance based grant" ("PERFORMANCE BASED
GRANT"). Nonstatutory Stock Options and Incentive Stock Options (collectively,
"OPTIONS") entitle the holders thereof to purchase ACS Class A Common Stock.
All awards under the 1997 Plan will be evidenced by a written agreement in a
form approved by the Administrator. The Administrator may grant awards under the
1997 Plan alone or in addition to, in tandem with or in substitution for any
other award under the 1997 Plan. Awards granted in addition to or in tandem with
other awards under the 1997 Plan may be granted either at the same time or at
different times. Generally, awards under the 1997 Plan will be granted for no
consideration other than services.
OPTIONS. Each Option will be designated in the written option agreement
evidencing its grant whether the option is an Incentive Stock Option or a
Nonstatutory Stock Option. The exercise price of an Incentive Stock Option shall
be no less than 100% of the fair market value of ACS Class A Common Stock at the
time of the grant (110% of fair market value if the grant is made to an employee
that owns stock representing more than 10% of the voting power of all classes of
stock of ACS or any parent or subsidiary of ACS (a "10% HOLDER"). Fair market
value is determined by reference to the stock's closing price on the date of the
grant. Incentive Stock Options shall have a term of no more than 10 years (5
years if granted to a 10% Holder). The exercise price of a Nonstatutory Stock
Option shall be determined by the Administrator.
In the event that an Employee, Consultant or Outside Director is terminated
for cause as set forth in the 1997 Plan, all Options granted to such person
under the 1997 Plan, whether or not vested, are forfeited unless previously
exercised. If an Employee, Consultant or Outside Director's relationship with
ACS terminates other than for cause, a vested Option granted to such person is
exercisable to the extent provided in the agreement granting the Option, but, in
the case of an Incentive Stock Option, shall be exercised within 90 days of the
date of such termination (12 months, if the termination was the result of a
disability) and only to the extent exercisable on the date of such termination.
If there is a change in control of ACS, all Options previously granted,
whether or not vested, shall become fully vested and exercisable, effective the
day immediately prior to the change in control. If the recipient of an Option
dies, the Option may be exercised only to the extent vested at time of death and
only by the estate of the recipient or a person who acquired the Option by
bequest or inheritance. The 1997 Plan also gives the Administrator the authority
to include a similar change of control provision in other grants under the Plan
(i.e., SAR's, Restricted or Deferred Stock, etc.).
STOCK APPRECIATION RIGHTS. The Administrator may award SARs to Employees,
Consultants, and Outside Directors entitling any such persons to receive an
amount equal to (or if the Administrator shall determine at the time of grant,
less than) the excess of the fair market value of a share of ACS Class A Common
Stock on the date of exercise over the fair market value of a share of ACS Class
A Common Stock on the date of grant of the SAR, or, in the case of a grant other
than a Performance Based Grant, such other price as the Administrator
determines, multiplied by the number of shares of ACS Class A Common Stock to
which the SAR is exercised. An SAR may be exercised in accordance with
procedures established by the Administrator, but in no event shall it be
exercisable prior to the first anniversary date of the date of grant.
RESTRICTED AND DEFERRED STOCK. The Administrator may award to Employees,
Consultants and Outside Directors Restricted Stock, generally consisting of
shares of ACS Class A Common Stock that may not be disposed of by the Employee
or Consultant, as the case may be, until certain restrictions established by the
Administrator lapse. The individual receiving Restricted Stock will have certain
rights of an ACS stockholder, including the right to vote the shares of ACS
Class A Common Stock and the right to receive any dividends, except to the
extent limited by the Administrator. The Administrator may also award Deferred
Stock, generally consisting of a right to receive shares of ACS Class A Common
Stock at the end of
27
specified deferral periods. Deferred Stock is subject to such restrictions or
limitations as the Administrator may impose, which restrictions or limitations
may lapse at the end of the deferral period in installments or otherwise.
Deferred Stock carries no voting or dividend rights or other rights associated
with stock ownership. Upon termination of employment during the restriction or
deferral period, Restricted Stock or Deferred Stock will be forfeited subject to
such exceptions, if any, as are authorized by the Administrator in the terms of
the grant.
STOCK PURCHASE RIGHT. The Administrator may award to Employees, Consultants
and Outside Directors Stock Purchase Rights. A Stock Purchase Right will be
evidenced by a written offer advising the offeree of the terms of the offer,
including the number of shares of restricted stock that the offeree is entitled
to purchase, the price to be paid (as determined by the Administrator), and the
time within which the offeree must accept the offer (which shall not exceed 30
days from the date of the offer).
DIVIDEND EQUIVALENTS. The Administrator is authorized to grant Dividend
Equivalents conferring upon Employees, Consultants and Outside Directors the
right to receive, currently or on a deferred basis, cash, ACS Class A Common
Stock, other awards under the 1997 Plan or other property equal in value to
dividends paid on a specific number of ACS Class A Common Stock. Dividend
Equivalents may be paid directly to the grantee, as the case may be, or may be
deemed to be reinvested under the 1997 Plan.
ADJUSTMENTS. The number of shares of ACS Class A Common Stock covered by
each outstanding Option, SAR, or other award, the number of shares of ACS Class
A Common Stock that have been authorized for issuance under the 1997 Plan but as
to which no Options have yet been granted or which have been returned to the
Plan upon the cancellation or expiration of an Option, and the price per share
of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of ACS Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the ACS Class A Common Stock,
or from any other increase or decrease in the number of issued shares of ACS
Class A Common Stock effected without receipt of consideration by ACS. Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive.
TRANSFERABILITY. Generally, no Option is transferable by a recipient except
by will or the laws of descent and distribution. However, the Administrator
shall, with respect to the holder of a Nonstatutory Option who has a severance
agreement with ACS and may, in its discretion with respect to any other holder
of a Nonstatutory Option, permit the transfer and pledge of such options under
limited circumstances.
AMENDMENT TO AND TERMINATION OF THE 1997 PLAN. The ACS Board may amend,
alter, suspend, or discontinue the 1997 Plan at any time. However, no such
amendment, alteration, suspension, or discontinuation shall impair the material
rights of any holder of an Option without such holder's consent. ACS is required
to obtain stockholder approval of any amendment to the Stock Option Plan, if
required under Rule 16b-3, Sections 162(m) or 422 of the Code or any other
applicable law or regulation, including the rules of any established stock
exchange on which ACS securities are traded.
FEDERAL INCOME TAX CONSEQUENCES
The grant of an Incentive Stock Option has no immediate federal income tax
consequences to the optionee or ACS. The exercise of an Incentive Stock Option
while the optionee is an Employee or within three months after termination of
employment generally has no immediate tax consequences to ACS or the optionee.
If the optionee is subject to the alternative minimum tax, however, the exercise
of an Incentive Stock Option would result in an increase in the optionee's
alternative minimum taxable income equal to the excess of the fair market value
of the shares of ACS Class A Common Stock at the time of exercise over the
exercise price. If an optionee holds the shares of ACS Class A Common Stock
acquired pursuant to the exercise of an Incentive Stock Option for the required
holding period, the optionee
28
generally recognizes capital gain or loss upon a subsequent sale of the shares
in the amount of the difference between the amount realized upon the sale and
the exercise price of the shares. In such a case, ACS is not entitled to a
deduction in connection with the grant or exercise of the Incentive Stock Option
or the sale of shares of ACS Class A Common Stock acquired pursuant to such
exercise. If, however, an optionee exercises an Incentive Stock Option more than
three months after termination of employment or disposes of the shares prior to
the expiration of the required holding period, the optionee generally recognizes
ordinary income equal to the excess of the fair market value of the shares of
ACS Class A Common Stock on the date of exercise over the exercise price. The
required holding period is the longer of two years from the date the option was
granted and one year after the date of issuance of the shares upon the exercise
of the option.
The grant of a Nonstatutory Stock Option has no immediate federal income tax
consequences to the optionee or ACS. Upon the exercise of a Nonstatutory Stock
Option, the optionee recognizes ordinary income (subject to wage withholding and
employment taxes) in an amount equal to the excess of the fair market value of
the shares of ACS Class A Common Stock on the date of exercise over the exercise
price, and ACS is entitled to a corresponding deduction if the compensation
constitutes an ordinary and necessary business expense. The optionee's tax basis
in the shares of ACS Class A Common Stock is the exercise price plus the amount
of ordinary income recognized by the optionee, and the optionee's holding period
will commence on the date the shares are received. Upon a subsequent sale of the
shares of ACS Class A Common Stock, any difference between the optionee's tax
basis in the shares and the amount realized on the sale generally is treated as
capital gain or loss.
A SAR should not be taxable income to its holder when it is granted. On
exercise of a SAR, its holder will recognize ordinary income equal to the cash
payment received. Cancellation of a related stock option on exercise does not
affect these tax consequences.
Restricted Stock should not be currently taxable income to a participant for
so long as the stock is subject to a substantial risk of forfeiture and cannot
be transferred free of forfeiture. The recipient of Restricted Stock will
generally be taxed on compensation income equal to the fair market value of the
stock on the date the restrictions on the shares lapse, i.e., the participant
becomes vested. For example, the recipient of Restricted Stock is subject to a
"substantial risk of forfeiture" and is not currently taxed on his stock award
(unless he elects otherwise) if the award provides that the shares will be
forfeited if the participant terminates employment before a specified future
date.
However, the holder of Restricted Stock may elect, under Code Section 83(b),
to be taxed immediately on the value of the shares of ACS Class A Common Stock
awarded as of the date of grant. Such an election must be made within 30 days
after the award of Restricted Stock and must be filed with the Internal Revenue
Service. A holder of Restricted Stock who wishes to make such an election should
consult with his own personal tax advisor. If such holder makes the Section
83(b) election and subsequently forfeits such holder's shares of ACS Class A
Common Stock obtained pursuant to the Restricted Stock
award, no deduction is permitted with respect to the forfeiture.
The holder of Restricted Stock's tax basis in shares of ACS Class A Common
Stock acquired through a Restricted Stock award equals the amount of
compensation income recognized upon vesting (or upon grant, in the case of a
Section 83(b) election). Generally, if such holder subsequently sells such
shares of ACS Class A Common Stock, any gain or loss will be treated as capital
gain or loss, as the case may be.
The grant of Deferred Stock should not be currently taxable to its holder
until the shares of ACS Class A Common Stock to be issued pursuant to such grant
are actually received. Receipt of such stock will result in ordinary income to
the holder equal to the fair market value of the shares at the time of receipt.
FICA tax may be due on the deferred shares credited to the holder's account.
The grant of a Dividend Equivalent should not be currently taxable to its
holder until a payment in cash or other property is actually received by the
holder. Until cash or other property is actually received, a
29
grant of a Dividend Equivalent is merely an unsecured and unfunded promise. Upon
receipt of the cash or other property, the holder of a Dividend Equivalent will
recognize ordinary income equal to the value of the cash or other property
received.
The ACS Board has adopted the 1997 Plan and is submitting it to stockholders
for approval in order to comply with the provisions of Sections 162(m) and 422
of the Code. Section 162(m) limits the tax deduction available to a company with
respect to compensation paid to certain of its executive officers unless, among
other conditions, the compensation is "performance-based" and is paid pursuant
to a plan approved by stockholders.
ADDITIONAL TAX CONSEQUENCES ON CHANGE OF CONTROL
If the right of a participant under the 1997 Plan to exercise certain grants
or with respect to vesting in any benefit under the 1997 Plan is accelerated due
to a Change of Control (as defined in the 1997 Plan), a portion of the
participant's benefit may be subject to a 20% "golden parachute" excise tax in
addition to income tax, and such portion may become nondeductible to the
Company. The portion of the benefit (if any) that is subject to the excise tax
depends on numerous factors, including (i) the participant's income for a prior
base period; (ii) the total amount of "parachute payments" under the 1997 Plan
and any other plan, agreement or arrangement; and (iii) the time the benefit
would have otherwise vested or become exercisable absent a Change of Control.
The Plan gives the Administrator broad discretion to structure grants. The
structure of a particular grant could affect the tax consequences of the grant
and, accordingly, the tax consequences explained above may be different.
THE ACS BOARD RECOMMENDS THAT ACS STOCKHOLDERS VOTE
FOR THE ADOPTION OF THE ACS 1997 STOCK INCENTIVE PLAN.
RECORD DATE AND VOTING
Only holders of record of ACS Class A Common Stock and ACS Class B Common
Stock on the ACS Record Date are entitled to notice of, and to vote at, the ACS
Annual Meeting. There were issued and outstanding 29,901,859 shares of ACS Class
A Common Stock and 6,405,686 shares of ACS Class B Common Stock on the ACS
Record Date. Each holder of ACS Class A Common Stock will be entitled to one
vote, in person or by proxy, for each share of ACS Class A Common Stock standing
in his or her name on the books of ACS on the ACS Record Date on any matter
submitted to a vote of the ACS stockholders. A holder of shares of the Company's
ACS Class B Common Stock will be entitled to 10 votes, in person or by proxy,
for each share of ACS Class B Common Stock standing in his or her name on the
ACS Record Date on any matter submitted to a vote of the ACS stockholders The
presence, in person or by proxy, of holders of record of a majority of the
shares entitled to vote constitutes a quorum for action at the ACS Annual
Meeting. Abstentions and broker nonvotes are counted for purposes of determining
the presence or absence of a quorum for transaction of business. Abstentions are
counted in tabulations of the votes cast on proposals presented to stockholders
to determine total number of votes cast. Abstentions are not counted as votes
for or against any such proposal. Broker nonvotes are not counted as votes cast
for purposes of determining whether a proposal has been approved.
VOTE REQUIRED
The affirmative vote of the holders of shares of ACS Class A Common Stock
and ACS Class B Common Stock, voting together as a class, having a plurality of
the voting power of the Company, in person or by proxy, is required to elect
directors. The affirmative vote of the holders of shares of ACS Class A Common
Stock and ACS Class B Common Stock, voting together as a class, having a
majority of the voting power of the total issued and outstanding common stock of
ACS (regardless of the number of shares actually voting at the ACS Annual
Meeting), in person or by proxy, is required to approve the Stock
30
Issuance, to approve the proposed amendments to the ACS Charter, and to approve
the proposed amendments to the ACS Bylaws. The affirmative vote of the holders
of shares of the ACS Class A Common Stock and ACS Class B Common Stock, voting
together as a class, having a majority of the voting power of the shares
actually voted at the ACS Annual Meeting, either in person or by proxy, is
required to approve the 1997 Plan.
In connection with the execution of the Merger Agreement, the directors and
certain executive officers of ACS agreed not to sell their shares of ACS Class A
Common Stock and ACS Class B Common Stock, as the case may be, prior to the date
of the ACS Annual Meeting and to vote the shares of ACS Class A Common Stock and
ACS Class B Common Stock owned by them at the ACS Annual Meeting in favor of the
Merger. As of the ACS Record Date, the directors and executive officers who
agreed to vote their shares in favor of the Merger owned 130,718 shares of ACS
Class A Common Stock and controlled 6,405,686 shares of ACS Class B Common Stock
(or 68% of the voting shares).
PROXY SOLICITATION, REVOCATION, AND EXPENSES
All proxies that are properly completed, signed, and returned prior to the
ACS Annual Meeting will be voted as indicated on the proxy. If the enclosed
proxy is signed and returned, it may, nevertheless, be revoked at any time prior
to the voting thereof at the pleasure of the stockholder signing it, either by
(i) filing a written notice of revocation received by the person or persons
named therein, (ii) the stockholder attending the ACS Annual Meeting and voting
the shares covered thereby in person, or (iii) delivering another duly executed
proxy statement dated subsequent to the date thereof to the addressee named in
the enclosed proxy.
Shares represented by duly executed proxies in the accompanying form will be
voted in accordance with the instructions indicated on such proxies, and, if no
such instructions are indicated thereon, will be voted "FOR" each of the
proposals considered and of each of the nominees for director named herein.
The expense of preparing, printing, and mailing this Joint Proxy
Statement/Prospectus and the material used in this solicitation of proxies from
ACS stockholders will be borne equally by ACS and CDSI. It is contemplated that
ACS proxies will be solicited through the mail, but officers, directors, and
employees of ACS may solicit proxies personally for the ACS Annual Meeting. ACS
and CDSI will reimburse banks, brokerage houses, and other custodians, nominees,
and fiduciaries for their reasonable expenses in forwarding these proxy
materials to the principals. ACS and CDSI may pay for and utilize the services
of individuals or companies not regularly employed by ACS and CDSI in connection
with the solicitation of proxies for the ACS Annual Meeting if the ACS Board or
CDSI Board determines that this is advisable.
DISSENTERS' APPRAISAL RIGHTS
Holders of ACS Class A Common Stock will not have any dissenters' appraisal
rights in connection with, or as a result of, the matters to be acted upon at
the ACS Annual Meeting. See "The Proposed Merger and Related
Transaction--Dissenters' Appraisal Rights."
31
THE CDSI SPECIAL MEETING OF STOCKHOLDERS
PLACE, DATE, AND TIME
The CDSI Special Meeting will be held at 10:00 a.m., local time, on Tuesday,
December 16, 1997, at CDSI's headquarters located at One Curie Court, Rockville,
Maryland 20850.
MATTERS TO BE CONSIDERED
The purpose of the CDSI Special Meeting is to consider and vote upon a
proposal by the CDSI Board to approve the Merger on the terms and conditions set
forth in the Merger Agreement and such other matters as may properly come before
the CDSI Special Meeting. The Merger will be accomplished in accordance with the
Merger Agreement by a statutory merger of Merger Sub with and into CDSI,
pursuant to which each outstanding share of CDSI Common Stock will be converted
into 1.759 shares of ACS Class A Common Stock. As a result, CDSI will become a
wholly-owned subsidiary of ACS and holders of CDSI Common Stock will become
stockholders of ACS. See "The Proposed Merger and Related Transactions;" and
Appendix A--Agreement and Plan of Merger. Under the MGCL and the CDSI Bylaws, no
substantive business other than that referred to in the accompanying Notice of
Special Meeting of Stockholders may be transacted at the CDSI Special Meeting.
THE CDSI BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER
AND RECOMMENDS THAT CDSI STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER.
RECORD DATE AND VOTING
The CDSI Board has fixed the close of business on October 22, 1997, the CDSI
Record Date, as the record date for the determination of stockholders entitled
to notice of and to vote at the CDSI Special Meeting. On the CDSI Record Date
there were 6,286,799 shares of CDSI Common Stock outstanding held by
approximately 610 stockholders of record.
The presence in person or by proxy of holders of CDSI Common Stock entitled
to cast a majority of all the votes entitled to be cast at the CDSI Special
Meeting will constitute a quorum for the transaction of business. In the event
that a quorum is not present at the CDSI Special Meeting or that the shares of
CDSI Common Stock voting for the proposal to approve the Merger are not
sufficient to approve the Merger, it is anticipated that the CDSI Special
Meeting will be adjourned to solicit additional proxies, unless the shares of
CDSI Common Stock voted against the proposal to approve the Merger are
sufficient to defeat the proposal. In the event the CDSI Special Meeting is
adjourned to solicit additional proxies, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
CDSI Special Meeting, except for proxies that have effectively been revoked or
withdrawn.
VOTE REQUIRED
The affirmative vote of at least two-thirds of all the votes entitled to be
cast by holders of CDSI Common Stock is required to approve the Merger.
In connection with the execution of the Merger Agreement, the directors and
certain executive officers of CDSI agreed not to sell their shares of CDSI
Common Stock prior to the date of the CDSI Special Meeting and to vote the
shares of CDSI Common Stock owned by them at the CDSI Special Meeting in favor
of the Merger. As of the CDSI Record Date, the directors and executive officers
who had agreed to vote their shares in favor of the Merger owned 469,532 shares
of CDSI Common Stock (or 7.47% of the outstanding shares).
32
PROXY SOLICITATION, REVOCATION, AND EXPENSES
Stockholders of record of CDSI Common Stock may vote their shares of CDSI
Common Stock in person or by proxy at the CDSI Special Meeting. All shares of
CDSI Common Stock represented by properly executed proxies received prior to or
at the CDSI Special Meeting and not revoked, will be voted in accordance with
the instructions indicated in such proxies. If no instructions are indicated on
a properly executed and returned proxy, the proxy will be voted "FOR" the
Merger. A properly executed proxy marked "ABSTAIN," although counted for
purposes of determining whether there is a quorum and the number of votes cast,
will not be voted. Because the Merger requires the affirmative vote of at least
two-thirds of the votes entitled to be cast by holders of CDSI Common Stock, a
proxy marked "ABSTAIN" will have the effect of a vote against the Merger. Under
applicable exchange rules, brokers and nominees are precluded from exercising
discretionary voting on the Merger and, as a result, absent specific
instructions from the beneficial owner of shares held in "street" name are not
permitted to vote such shares on the Merger (a "BROKER NON-VOTE"). As a result,
a broker non-vote will have the same effect as a vote against the Merger. Shares
represented by broker non-votes, however, will be counted for purposes of
determining whether there is a quorum at the CDSI Special Meeting.
The expense of preparing, printing, and mailing this Joint Proxy
Statement/Prospectus and the material used in this solicitation of proxies from
CDSI stockholders will be borne equally by ACS and CDSI. It is contemplated that
CDSI proxies will be solicited through the mail, but officers, directors, and
employees of CDSI may solicit proxies personally for the CDSI Special Meeting.
CDSI will reimburse banks, brokerage houses, and other custodians, nominees, and
fiduciaries for their reasonable expenses in forwarding these proxy materials to
the principals. CDSI has engaged D.F. King in connection with the solicitation
of proxies for the CDSI Special Meeting at a cost of approximately $10,000 plus
expenses, which cost will be borne by CDSI.
DISSENTERS' APPRAISAL RIGHTS
Holders of shares of CDSI Common Stock will not have any dissenters'
appraisal rights in connection with, or as a result of, the Merger. See "The
Proposed Merger and Related Transactions--Dissenters' Appraisal Rights."
THE PROPOSED MERGER AND RELATED TRANSACTIONS
This section of the Joint Proxy Statement/Prospectus contains information
furnished by the ACS Board and by the CDSI Board in connection with the ACS
Annual Meeting and the CDSI Special Meeting for the purpose of obtaining
stockholder approval of the Merger and Stock Issuance.
A copy of the Merger Agreement is attached as Appendix A and incorporated
herein by reference. The Merger Agreement contains certain representations and
covenants of ACS, Merger Sub, and CDSI, certain conditions to the consummation
of the Merger, and other terms and provisions respecting the Merger and related
transactions. Capitalized terms which are used but not defined in this section
shall have the meaning assigned to such terms in the Merger Agreement.
SUMMARIES OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT SET FORTH HEREIN DO
NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE PROVISIONS OF THE MERGER AGREEMENT. ALL ACS AND CDSI STOCKHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
merge with and into CDSI, and CDSI will become a wholly owned subsidiary of ACS.
Each outstanding share of CDSI Common Stock will be converted into the right to
receive 1.759 shares of ACS Class A Common Stock.
33
Based on the number of CDSI shares and stock options outstanding on the CDSI
Record Date (as defined herein) and on the assumption that all such stock
options are exercised immediately before the Effective Time, ACS would issue
approximately 12,250,000 (including shares issuable upon exercise of CDSI
options) shares of ACS Class A Common Stock pursuant to the Merger, and holders
of CDSI Common Stock would own approximately 29% of the ACS Class A Common Stock
immediately outstanding after consummation of the Merger.
BACKGROUND OF MERGER
In January 1996, ACS and CDSI discussed the possibility of a merger. These
discussions terminated in February 1996 as the two parties could not reach an
agreement on valuation. No further discussions occurred until June 1997, when
Henry G. Hortenstine, Executive Vice President of ACS, met Peter A. Bracken,
Chief Executive Officer and President of CDSI, at an industry convention. At
this impromptu meeting, Messrs. Hortenstine and Bracken discussed ACS's and
CDSI's respective business outlooks and prospects. Mr. Hortenstine suggested to
Mr. Bracken that ACS and CDSI explore the possibility of engaging in some form
of strategic alliance or of entering into a business combination. Mr. Bracken,
who was interested in expanding CDSI's opportunities in the commercial market,
agreed to explore these possibilities.
During July 1997, ACS executives had numerous internal conversations
concerning the potential benefits and drawbacks of a merger between ACS and
CDSI. On July 20, 1997, Darwin Deason, Chairman and Chief Executive Officer of
ACS, telephoned Clifford M. Kendall, Chairman of the Board of CDSI, to inquire
if Mr. Kendall would entertain conversations about a potential business
combination between ACS and CDSI. No specific terms were discussed during this
call, but Mr. Kendall agreed to provide ACS with CDSI's 5-year financial
forecast upon ACS's execution of a Non-Disclosure Agreement. Deason executed the
Non-Disclosure Agreement on behalf of ACS on July 20, 1997. On July 21, 1997,
CDSI provided to ACS its 5-year financial forecast, which included income
statements, balance sheets, and statements of cash flow.
On August 8, 1997, Mr. Deason called Mr. Kendall to express ACS's interest
in further exploring the potential benefits of a business combination, and they
agreed to meet with other representatives from their respective companies the
following week.
On August 14, 1997, representatives of ACS met with representatives of CDSI
at Mr. Kendall's home. No discussions were held that evening regarding a
business transaction. The following day, August 15, 1997, the same persons met
at the law offices of Miles & Stockbridge, a Professional Corporation ("MILES &
STOCKBRIDGE"), counsel to CDSI, to discuss ACS's and CDSI's businesses, to
discuss a potential business combination between ACS and CDSI, and to review
certain risks and opportunities of the CDSI financial forecasts previously
supplied to ACS. Discussions were held concerning the relative merits of a
transaction, potential cost savings of a transaction, business synergies, and
existing management expertise. No definitive terms or conditions of a potential
transaction were discussed at the meeting; however, the ACS representatives
suggested that the terms of any transaction would include, among others things,
the following: (1) stock for stock consideration; (2) a "pooling of interests"
treatment of the transaction; (3) Messrs. Kendall and Bracken joining the ACS
Board; and (4) CDSI operating as a subsidiary of ACS. Messrs. Kendall and
Bracken suggested to the ACS representatives that 1.85 would be an appropriate
exchange ratio.
On August 27, 1997, representatives of ACS and CDSI met again on behalf of
their respective companies at Miles & Stockbridge. At this meeting, the
representatives for ACS proposed a transaction whereby ACS would offer 1.67
shares of ACS Class A Common Stock for each share of CDSI Common Stock issued
and outstanding in a tax-free "pooling of interests" transaction. In addition,
the ACS representatives presented to the CDSI representatives a summary of
potential benefits of the proposed transaction, including the potential
emergence of new markets, economies of scale, management depth, and
cross-selling services. After the presentation, Mr. Kendall agreed to take the
ACS proposal to the CDSI Board.
34
On August 28, 1997, Mr. Kendall called Mr. Deason with a counter-proposal of
1.759 shares of ACS Class A Common Stock for each share of CDSI Common Stock
issued and outstanding, and Mr. Deason presented the counterproposal to the
senior managers of ACS and the ACS Board. On August 29, 1997, Mr. Deason called
Mr. Kendall and agreed to the 1.759 exchange ratio, subject to ACS due diligence
and approval of the ACS Board.
On September 3, 1997, representatives of ACS began a due diligence
investigation of CDSI at the offices of Miles & Stockbridge. During the next few
weeks, the parties negotiated and drafted the terms of a proposed Merger
Agreement.
On September 11, 1997, ACS engaged Smith Barney to provide to the ACS Board
an opinion as to the fairness of the Exchange Ratio from a financial point of
view to ACS, and CDSI engaged Legg Mason to render a fairness opinion to the
stockholders of CDSI regarding the fairness of the consideration to be received
in the proposed merger. On September 16, 1997, representatives of Smith Barney
and Legg Mason, along with representatives of ACS and CDSI, met at CDSI's
headquarters to conduct a business and financial due diligence review of ACS and
CDSI.
On September 19, 1997, the ACS Board held a special meeting to discuss the
proposed transaction. At the meeting, ACS representatives reviewed the status of
the proposed transaction and the results of ACS's due diligence review;
representatives of Smith Barney reviewed with the ACS Board the financial
analyses performed by Smith Barney in connection with the proposed transaction
(see "The Proposed Merger and Related Transactions--Opinion of Smith Barney
Inc."); and the proposed terms of the Merger Agreement were reviewed. At the
conclusion of the meeting, the ACS Board unanimously approved the Merger
Agreement.
On September 17, 1997, the CDSI Board received drafts of the proposed Merger
Agreement. On September 19, 1997, the CDSI Board held a special meeting to
discuss the proposed transaction. The meeting was suspended and then reconvened
on September 20, 1997. During the course of the meeting the Board reviewed the
status of the proposed transaction and results of CDSI's due diligence review;
representatives of Legg Mason presented an analysis of the financial terms of
the proposed transaction; and the proposed terms of the Merger Agreement were
reviewed. At the conclusion of the meeting the CDSI Board unanimously determined
that the Merger was in the best interests of CDSI and its stockholders and
approved the Merger Agreement. The CDSI Board unanimously recommended that the
stockholders of CDSI vote in favor of the Merger.
ACS'S REASONS FOR THE MERGER
On September 19, 1997, the ACS Board met to consider the advisability of the
proposed Merger and the terms of the proposed Merger Agreement. The ACS Board
concluded that the Merger was advisable and in the best interests of ACS and its
stockholders because the ACS Board believes that the Merger will further ACS's
long-term strategic objectives, which include expanding and strengthening
business lines. The ACS Board's conclusions are based on (i) the potential for
expanding service offerings to new and existing customers, (ii) CDSI's well
known capabilities in its market place, (iii) the judgment, advice, and analyses
of its management; (iv) the financial presentation and opinion of Smith Barney
as to the fairness of the Exchange Ratio from a financial point of view to ACS
(see "The Proposed Merger and Related Transactions--Opinion of Smith Barney
Inc."); (v) the financial condition, results of operations, and cash flows of
ACS and CDSI, both on an historical and a prospective basis; (vi) the synergies,
cost reductions, and operating efficiencies that should become available to the
combined enterprise as a result of the Merger; (vii) the strategic benefits of
the Merger; (viii) the express terms and conditions of the Merger Agreement,
which were viewed as providing an equitable basis of the Merger from the
standpoint of ACS; (ix) historical market prices and trading information with
respect to ACS Class A Common Stock and CDSI Common Stock; (x) the tax effects
of the Merger on ACS; (xi) the significant enhancement of the market position of
the combined enterprise; and (xii) the ability to consummate the Merger as a
"pooling of interests" under generally accepted accounting principles.
35
In connection with Smith Barney's role as financial advisor to ACS, Smith
Barney was provided with certain scenarios of financial projections with respect
to ACS and CDSI which were prepared by the management of the two companies. The
financial projections utilized in Smith Barney's analyses reflected, among other
things, (i) fiscal 1998 revenues for CDSI of approximately $433.6 million and
(ii) fiscal 1998 net income for CDSI of approximately $14.5 million. ACS further
provided Smith Barney with financial projections of each of revenues and net
income through fiscal 2002 based on various assumptions. With respect to the
projections of revenues, ACS assumed a growth rate that was generally consistent
with recent historical growth rates of CDSI. With respect to projections of net
income, ACS considered (i) the financial impact of the ASEC acquisition and
adjusted existing margins to reflect such acquisition, (ii) the anticipated
changes in revenue mix for CDSI, (iii) slight increases in margins that reflect
the potential for higher margins in CDSI's product offerings along with the
achievement of certain economies of scale resulting from CDSI's anticipated
growth, and (iv) the anticipated cost savings and synergies resulting from the
combination, primarily related to the combining of certain data centers and
overhead functions, which, when completed, are expected to have a pre-tax
benefit of approximately $4.1 million. The financial projections also reflect
that the earnings per share of the pro forma combined company for fiscal 1998
and for each fiscal year through 2002 would be higher than the earnings per
share for ACS on a stand alone basis. The ACS and CDSI financial projections
depend on future performance and numerous other factors, including those set
forth under the heading "Risk Factors" and elsewhere in ACS's and CDSI's
Exchange Act filings and in this Joint Proxy Statement/Prospectus. Achievement
of these projections is also dependent on, among other things, the ability of
CDSI to continue to achieve growth rates that are consistent with its recent
historical growth and the ability of both ACS and CDSI to achieve the cost
savings and other potential synergies anticipated to result from the Merger. ACS
and CDSI disclaim any duty to update such projections and make no
representations as to whether such projections will be achieved or otherwise.
These financial projections were provided as a part of ongoing dialogues with
Smith Barney for purposes of its analysis and were not prepared with a view
toward public disclosure. As such, the projections are necessarily incomplete in
that they do not include all of the underlying assumptions and qualifications on
which they were based or any limitations on their predictive value which may
have been communicated to Smith Barney or may otherwise have been understood by
Smith Barney because of Smith Barney's familiarity with the companies in the
industry. No assurance can be given as to future performance, and actual results
may vary materially from these projections.
The foregoing discussion of the information and factors considered and given
weight by the ACS Board is not intended to be exhaustive. In view of the variety
of factors considered in connection with its evaluation of the Merger, the ACS
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors and information considered in reaching
its determination. Further, individual members of the ACS Board may have given
different weights to different factors. In addition, there can be no assurance
that any of the expectations set forth in the preceding paragraphs will be
fulfilled or that any of the expected benefits of the Merger will be realized.
ACS BOARD RECOMMENDATION OF THE STOCK ISSUANCE
For the reasons stated under "ACS's Reasons for the Merger," the ACS Board
believes that the terms of the Merger Agreement and the Merger are fair to, and
in the best interests of, ACS and the stockholders of ACS. All members of the
ACS Board were present at the meeting held on September 19, 1997, and they
unanimously approved the Stock Issuance, the Merger Agreement, and the Merger,
and recommended that the holders of ACS Class A Common Stock and ACS Class B
Common Stock vote "FOR" the approval of the Stock Issuance.
OPINION OF SMITH BARNEY INC.
Smith Barney was retained by ACS to render an opinion as to the fairness,
from a financial point of view, to ACS of the consideration to be paid by ACS in
the Merger. On September 19, 1997, at a meeting of the ACS Board held to
evaluate the proposed Merger, Smith Barney delivered an oral opinion (which
opinion was subsequently confirmed by delivery of a written opinion dated
September 20, 1997, the date of
36
execution of the Merger Agreement) to the ACS Board to the effect that, as of
the date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial point of view, to ACS.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of ACS and certain senior officers and other
representatives and advisors of CDSI concerning the businesses, operations and
prospects of ACS and CDSI. Smith Barney examined certain publicly available
business and financial information relating to ACS and CDSI as well as certain
financial forecasts and other information and data for ACS and CDSI which were
provided to or otherwise discussed with Smith Barney by the respective
managements of ACS and CDSI, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger.
Smith Barney reviewed the financial terms of the Merger as set forth in the
Merger Agreement in relation to, among other things: current and historical
market prices and trading volumes of ACS Common Stock and CDSI Common Stock; the
historical and projected earnings and other operating data of ACS and CDSI; and
the capitalization and financial condition of ACS and CDSI. Smith Barney also
considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which Smith Barney considered
relevant in evaluating the Merger and analyzed certain financial, stock market
and other publicly available information relating to the businesses of other
companies whose operations Smith Barney considered relevant in evaluating those
of ACS and CDSI. Smith Barney also evaluated the potential pro forma financial
impact of the Merger on ACS. In addition to the foregoing, Smith Barney
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as Smith Barney deemed appropriate in
arriving at its opinion. Smith Barney noted that its opinion was necessarily
based upon information available, and financial, stock market and other
conditions and circumstances existing and disclosed, to Smith Barney as of the
date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Smith Barney, the managements of ACS and CDSI advised Smith Barney that
such forecasts and other information and data were reasonably prepared
reflecting the best currently available estimates and judgments of the
respective managements of ACS and CDSI as to the future financial performance of
ACS and CDSI and the strategic implications and operational benefits (including
the amount, timing and achievability thereof) anticipated to result from the
Merger. Smith Barney assumed, with the consent of the ACS Board, that the Merger
will be treated as a "pooling of interests" in accordance with generally
accepted accounting principles and as a tax-free reorganization for federal
income tax purposes. The opinion of Smith Barney, as set forth therein, relates
to the relative values of ACS and CDSI. Smith Barney did not express any opinion
as to what the value of the ACS Common Stock actually will be when issued to
CDSI stockholders pursuant to the Merger or the price at which the ACS Common
Stock will trade subsequent to the Merger. Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of ACS or CDSI nor did Smith Barney make
any physical inspection of the properties or assets of ACS or CDSI. Smith Barney
was not requested to consider, and Smith Barney's opinion does not address, the
relative merits of the Merger as compared to any alternative business strategies
that might exist for ACS or the effect of any other transaction in which ACS
might engage. Smith Barney was not requested to, and did not, participate in the
negotiation or structuring of the proposed Merger. Although Smith Barney
evaluated the Exchange Ratio from a financial point of view, Smith Barney was
not asked to and did not recommend the specific consideration payable in the
Merger, which was determined through negotiation between ACS and CDSI. No other
limitations were imposed by ACS on Smith Barney with respect to the
investigations made or procedures followed by Smith Barney in rendering its
opinion.
37
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED SEPTEMBER 20,
1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND SHOULD BE READ
CAREFULLY IN ITS ENTIRETY. THE OPINION OF SMITH BARNEY IS DIRECTED TO THE ACS
BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL
POINT OF VIEW TO ACS, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ACS ANNUAL MEETING. THE SUMMARY OF THE
OPINION OF SMITH BARNEY SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Smith Barney made
numerous assumptions with respect to ACS, CDSI, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of ACS and CDSI. The estimates contained in such
analyses and the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Smith Barney's
opinion and analyses were only one of many factors considered by the ACS Board
in its evaluation of the Merger and should not be viewed as determinative of the
views of the Board of Directors or management of ACS with respect to the
Exchange Ratio or the proposed Merger.
SELECTED COMPANY ANALYSIS. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
CDSI and six selected publicly traded companies in the government/information
technology services industry: Analysis & Technology, Inc.; BDM International,
Inc.; CACI International Inc.; Computer Sciences Corporation; Nichols Research
Corporation; and Tracor, Inc. (the "GOVERNMENT IT COMPANIES"). Smith Barney
compared market values as a multiple of, among other things, latest 12 months
and estimated calendar 1998 net income, and adjusted market values (market value
of common equity, plus net debt and book value of preferred stock) as multiples
of, among other things, latest 12 months and estimated calendar 1998 revenues,
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
earnings before interest and taxes ("EBIT"). EBITDA (which is not a measure of
financial performance under generally accepted accounting principles ("GAAP"))
is used by investment banking firms as one measure of a company's financial
performance. EBITDA should not be construed as an alternative to operating
income (as determined in accordance with GAAP), as an indicator of a company's
performance or cash flows from operating activities (as determined in accordance
with GAAP) or as a measure of liquidity. All multiples were based on closing
stock prices as of September 17, 1997. Net income estimates for CDSI and the
Government IT Companies were based on estimates of selected investment banking
firms. The range of multiples for the Government IT Companies of latest 12
months and estimated calendar 1998 net income, revenues, EBITDA and EBIT were as
follows: (i) latest 12 months and estimated calendar 1998 net income: 17.8x to
29.3x (with a mean of 22.5x and a median of 21.8x) and 15.3x to 19.8x (with a
mean of 17.8x and a median of 18.3x), respectively; (ii) latest 12 months and
estimated calendar 1998 revenue: 0.43x to 1.09x (with a mean of 0.80x and a
median of 0.82x) and 0.61x to 0.81x (with a mean of 0.74x and a median of
0.79x), respectively; (iii) latest 12 months and estimated calendar 1998 EBITDA:
6.2x to 12.5x (with a mean of 8.8x and a median of 8.4x) and 6.0x to 7.4x (with
a mean of 6.8x and a median of 7.0x), respectively; and (iv) latest 12 months
and
38
estimated calendar 1998 EBIT: 9.0x to 16.5x (with a mean of 12.5x and a median
of 11.8x) and 9.2x to 11.2x (with a mean of 9.9x and a median of 9.4x),
respectively. Multiples of latest 12 months and estimated calendar 1998 net
income and latest 12 months revenue, EBITDA and EBIT for CDSI were 21.5x, 16.5x,
0.76x, 10.1x and 12.2x, respectively. Based on the closing stock price of ACS
Class A Common Stock on September 18, 1997, the Exchange Ratio equated to
implied multiples of latest 12 months and estimated calendar 1998 net income,
revenue, EBITDA and EBIT for CDSI of 29.2x, 18.9x, 1.03x, 0.81x, 13.4x, 8.9x,
18.0x, and 10.9x, respectively.
Using publicly available information, Smith Barney also analyzed, among
other things, the market values and trading multiples of ACS and six selected
publicly traded companies in the commercial/ information technology industry:
American Management Systems; Analysts International Corporation; Computer
Sciences Corporation; Electronic Data Systems Corp.; Fiserv Inc.; and SunGard
Data Systems Inc. (the "COMMERCIAL IT COMPANIES" and, together with the
Government IT Companies, the "SELECTED COMPANIES"). Smith Barney compared market
values as a multiple of, among other things, latest 12 months and estimated
calendar 1998 net income, and adjusted market values (market value of common
equity, plus net debt and book value of preferred stock) as multiples of, among
other things, latest 12 months and estimated calendar 1998 revenues, EBITDA and
EBIT. All multiples were based on closing stock prices as of September 17, 1997.
Net income estimates for the Commercial IT Companies were based on estimates of
selected investment banking firms. The range of multiples for the Commercial IT
Companies of latest 12 months and estimated calendar 1998 net income, revenues,
EBITDA and EBIT were as follows: (i) latest 12 months and estimated calendar
1998 net income: 19.4x to 40.0x (with a mean of 30.5x and a median of 29.5x) and
15.9x to 25.8x (with a mean of 20.9x and a median of 20.6x), respectively; (ii)
latest 12 months and estimated calendar 1998 revenue: 1.02x to 3.38x (with a
mean of 1.89x and a median of 1.39x) and 0.78x to 2.56x (with a mean of 1.54x
and a median of 1.18x), respectively; (iii) latest 12 months and estimated
calendar 1998 EBITDA: 7.2x to 22.1x (with a mean of 12.3x and a median of 10.4x)
and 6.0x to 10.1x (with a mean of 7.3x and a median of 6.2x), respectively; and
(iv) latest 12 months and estimated calendar 1998 EBIT: 12.8x to 24.1x (with a
mean of 18.4x and a median of 17.5x) and 9.0x to 14.4x (with a mean of 11.7x and
a median of 11.2x), respectively. Multiples of latest 12 months and estimated
calendar 1998 net income and latest 12 months revenue, EBITDA and EBIT for ACS
were 29.2x, 20.3x, 1.91x, 11.9x and 17.1x, respectively.
SELECTED MERGER AND ACQUISITION TRANSACTIONS ANALYSIS. Using publicly
available information, Smith Barney analyzed the purchase price and implied
transaction value multiples paid in selected transactions in the
government/information technology services industry, consisting of
(acquiror/target): Northrop Grumman Corp./Logicon, Inc.; CDSI/Analytical Systems
Engineering Corporation; BDM International, Inc./ Largotim Holdings Ltd.;
Tracor, Inc./Cordant, Inc.; Wang Laboratories Inc./I-Net, Inc.; Titan Corp./
Eldyne; Unidyne and Diversified Controls; and Computer Sciences Corp./ARC
Professional Services Group (Sequa Corp.) (collectively, the "SELECTED
TRANSACTIONS"). Smith Barney compared purchase prices in the Selected
Transactions as multiples of latest 12 months net income and transaction values
as multiples of latest 12 months revenue, EBITDA and EBIT. All multiples for the
Selected Transactions were based on information available at the time of
announcement of the transaction. The range of multiples for the Selected
Transactions of latest 12 months net income, revenue, EBITDA and EBIT were 23.0x
to 24.6x (with a mean of 23.8x and a median of 23.9x), 0.40x to 1.19x (with a
mean of 0.71x and median of 0.70x), 9.3x to 10.5x (with a mean and median of
9.9x) and 6.0x to 18.0x (with a mean of 12.1x and a median of 12.2x),
respectively. Based on the closing stock price of ACS Class A Common Stock on
September 18, 1997, the Exchange Ratio equated to implied multiples of latest 12
months and estimated calendar 1998 net income, revenue, EBITDA and EBIT for CDSI
of 29.2x, 18.9x, 1.03x, 0.81x, 13.4x, 8.9x, 18.0x, and 10.9x, respectively.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to ACS, CDSI or the Merger. Accordingly, an analysis of the results of
the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics
39
and other factors that could affect the acquisition, public trading or other
values of the Selected Companies, Selected Transactions or the business segment,
company or transaction to which they are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of CDSI for fiscal years 1998
through 2002, based on internal estimates of the management of CDSI as adjusted
by the management of ACS. The stand-alone discounted cash flow analysis of CDSI
was determined by (i) adding (x) the present value of projected free cash flows
over the five-year period from 1998 to 2002 and (y) the present value of the
estimated terminal value of CDSI in year 2002 and (ii) subtracting the value of
any current net debt, preferred stock and minority interests of CDSI. The range
of estimated terminal values for CDSI at the end of the five-year period was
calculated by applying terminal value multiples ranging from 7.0x to 9.0x to the
projected 2003 EBITDA of CDSI, representing the estimated value of CDSI beyond
the year 2002. The cash flows and terminal values of CDSI were discounted to
present value using discount rates ranging from 13% to 15%. Utilizing such
terminal multiples and discount rates, this analysis resulted in an equity
reference range for CDSI of approximately $47.01 to $64.66 per share, as
compared to the equity value implied by the Exchange Ratio of approximately
$51.34 per share based on a closing stock price of ACS Class A Common Stock on
September 18, 1997.
PRO FORMA MERGER ANALYSIS. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected earnings per share ("EPS") of ACS for the fiscal years
ended 1998 through 2002, based on internal estimates of the management of ACS.
The results of the pro forma merger analysis suggested that the Merger could be
accretive to the EPS of ACS in each of the fiscal years analyzed, assuming
approximately $2.0 million of cost savings and other potential synergies
anticipated by the management of ACS to result from the Merger in fiscal year
ended 1998 were achieved and approximately $4.1 million of such pre-tax cost
savings and other potential synergies in each of the fiscal years ended 1999
through 2002 were achieved. The actual results achieved by the combined company
may vary from projected results and the variations may be material.
CONTRIBUTION ANALYSIS. Smith Barney analyzed the respective contributions
of ACS and CDSI to the estimated revenue, EBITDA, EBIT and net income of the
combined company for the latest 12 months and fiscal years 1998 and 1999, based
on internal estimates of the management of ACS and internal estimates of the
management of CDSI as adjusted by the management of ACS, after giving effect to
approximately $2.0 million of pre-tax cost savings and other potential synergies
in fiscal year 1998 and approximately $4.1 million of pre-tax cost savings and
other potential synergies in fiscal year 1999 anticipated by the management of
ACS to result from the Merger. This analysis indicated that (i) for the latest
12 months, ACS would have contributed approximately 62.9% of revenues, 78.4% of
EBITDA, 77.1% of EBIT and 77.0% of net income, and CDSI would have contributed
approximately 37.1% of revenues, 21.6% of EBITDA, 22.9% of EBIT and 23.0% of net
income, of the combined company, (ii) in fiscal year 1998, ACS would contribute
approximately 63.3% of revenues, 77.6% of EBITDA, 75.3% of EBIT and 76.3% of net
income, and CDSI would contribute approximately 36.7% of revenues, 22.4% of
EBITDA, 24.7% of EBIT and 23.7% of net income, of the combined company, and
(iii) in fiscal year 1999, ACS would contribute approximately 64.0% of revenue,
76.7% of EBITDA, 72.7% of EBIT and 73.0% of net income, and CDSI would
contribute approximately 36.0% of revenues, 23.3% of EBITDA, 27.3% of EBIT and
27.0% of net income, of the combined company. Based on the Exchange Ratio,
current stockholders of ACS and CDSI would own approximately 76.1% and 23.9%,
respectively, of the equity value of the combined company upon consummation of
the Merger, and ACS and CDSI would constitute approximately 75.1% and 24.9%,
respectively, of the enterprise value of the combined company.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other comparative
analyses, including, among other things, a review of (i) historical projected
financial results of ACS and CDSI; (ii) the history of trading prices and volume
for ACS Class A Common Stock and CDSI Common Stock and the relationship between
movements of such
40
common stock and movements in the common stock of Selected Companies; (iii) the
historical ratio of the daily closing prices of ACS Class A Common Stock and
CDSI Common Stock over the six-month and 12-month periods ended September 16,
1997; and (iv) selected published analysts' reports on CDSI, including analysts'
estimates as to the earnings growth potential of CDSI.
Pursuant to the terms of Smith Barney's engagement, ACS has agreed to pay
Smith Barney an opinion fee of $500,000, which fee was payable upon delivery of
Smith Barney's opinion. ACS has also agreed to reimburse Smith Barney for travel
and other out-of-pocket expenses incurred by Smith Barney in performing its
services, including the reasonable fees and expenses of its legal counsel, and
to indemnify Smith Barney and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Smith
Barney's engagement.
Smith Barney has advised ACS that, in the ordinary course of business, Smith
Barney and its affiliates may actively trade or hold the securities of ACS and
CDSI 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. In addition, Smith
Barney and its affiliates (including Travelers Group Inc. and its affiliates)
may maintain relationships with ACS and CDSI.
Smith Barney is an internationally recognized banking firm and was selected
by ACS based on its experience and expertise. Smith Barney regularly engages in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
CDSI'S REASONS FOR THE MERGER
On September 19, 1997, the CDSI Board held a special meeting to discuss the
proposed transaction. The meeting was suspended and then reconvened on September
20, 1997. At the conclusion of the meeting the CDSI Board unanimously determined
that the Merger was in the best interests of CDSI and its stockholders and
approved the Merger Agreement. The CDSI Board unanimously recommended that the
stockholders of CDSI vote in favor of the Merger.
The CDSI Board believes that the Merger represents a unique opportunity to
combine the talents of a leading provider of information technology services to
the commercial marketplace with the long-standing reputation for quality
information technology and systems integration services that CDSI enjoys in the
government sector. The CDSI Board believes that the Merger will bring together
the CDSI management team's depth and experience in large outsourcing
transactions to ACS's first-rate data processing outsourcing business and will
allow the combined company to better compete for large commercial outsourcing
business. By combining ACS and CDSI through the Merger rather than CDSI
expanding its own outsourcing capacity through internal capital expenditures or
smaller acquisition transactions, CDSI can significantly accelerate the
timetable for growth that the management of CDSI was pursuing on its own prior
to the announcement that CDSI and ACS had entered into the Merger Agreement. In
addition, the CDSI Board believes that the existing data processing outsourcing
capacity of ACS and the lower cost structure that ACS enjoys will provide the
combined company with a competitive advantage in bidding for many commercial
outsourcing transactions when that capacity and cost structure are combined with
the existing CDSI management. Rather than pursuing a strategy of expanding
gradually from CDSI's traditional government market to the commercial markets,
the Merger will result in the combination of two existing strong competitors in
the commercial and government sectors.
In reaching its determination to recommend the Merger to CDSI's
stockholders, the CDSI Board considered, among other things, the following
factors and information:
1. the judgment, advice and analyses of its management with respect to
the strategic rationale behind the Merger and the financial and operational
benefits and challenges of the Merger, based in part on the business,
financial, accounting and legal due diligence performed with respect to ACS;
41
2. information concerning the financial condition, results of
operations, business, operations, assets and prospects of, and the stock
price performance of, each of CDSI and ACS;
3. the operational opportunities and challenges of operating as a
subsidiary of ACS and the management challenges associated with successfully
combining the cultures and management approaches taken by the two companies
as well as the many companies that have been acquired by ACS over the last
several years;
4. the strategic and competitive benefits of combining the two
companies in the respective markets that CDSI and ACS serve and the
competitive disadvantage associated with smaller competitors in a data
processing outsourcing environment that is highly cost conscious and
competitive;
5. current industry, economic and market conditions;
6. the terms and conditions of the Merger Agreement;
7. the advice of, and the financial analyses prepared by Legg Mason
(see "The Proposed Merger and Related Transactions--Opinion of Financial
Advisor to CDSI" and Appendix C);
8. financial information indicating that the Exchange Ratio represented
$51 2/3 in the form of ACS Class A Common Stock for each share of CDSI
Common stock based on the last reported sale price of ACS Class A Common
Stock on September 19, 1997, the last trading day prior to the execution of
the Merger Agreement;
9. historical market prices and trading information with respect to
CDSI and ACS;
10. the advice of CDSI's independent accountants concerning the ability
of CDSI and ACS to account for the Merger as a "pooling of interests" for
accounting purposes;
11. the advice of counsel that the Merger should be treated as a
tax-free reorganization for federal income tax purposes; and
12. the ability to obtain the required regulatory approvals for the
Merger.
In connection with Legg Mason's role as financial advisor to CDSI, Legg
Mason was provided with certain projected financial data for fiscal years 1998
through 2002 for CDSI and the projected ACS budget for fiscal year 1998. This
data was not prepared with a view to public disclosure or compliance with
published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections.
Neither CDSI nor ACS, or any of their respective financial advisors, assumes any
responsibility for the validity, reasonableness, accuracy or completeness of
this projected data. This projected data is based upon a variety of assumptions
relating to the businesses of CDSI and ACS that may not be realized and is
subject to significant uncertainties and contingencies, many of which are beyond
the control of CDSI and ACS. This projected data is inherently imprecise and,
therefore, there can be no assurance that the projected financial results or any
valuation assumed therein will be realized. It is expected that there will be a
difference between actual and estimated or projected results and actual results
may vary materially from the projected results given to Legg Mason. The CDSI and
ACS financial projections depend on future performance and numerous other
factors, including those set forth under the heading "Risk Factors" and
elsewhere in CDSI's and ACS's Exchange Act filings and in this Joint Proxy
Statement/Prospectus. CDSI and ACS disclaim any duty to update or otherwise
revise these projections and make no representations as to whether such
projections will be achieved or otherwise.
The projected financial data for CDSI that CDSI provided to Legg Mason
assumed revenue growth and margins for fiscal years 1998 through 2002 that
generally are consistent with recent historic growth rates and results, as
adjusted for the recent acquisition of ASEC. The CDSI financial projections
reflected combined CDSI and ASEC fiscal year 1998 revenues of approximately
$433.6 million and EBITDA of approximately $36.5 million. The ACS fiscal year
1998 budget provided by CDSI to Legg Mason assumed fiscal year 1998 revenues and
earnings consistent with consensus analyst estimates at that time.
The foregoing discussion of the factors and information considered by the
CDSI Board is not intended to be exhaustive. In view of the variety of factors
and information considered by the CDSI Board
42
in connection with its evaluation of the Merger, the CDSI Board did not find it
practicable to assign and did not qualify or assign relative weights to the
specific factors and information considered in reaching its conclusion that the
Merger is in the best interests of CDSI and its stockholders and in its
recommendation that the CDSI stockholders vote "FOR" the Merger. In addition,
individual members of the CDSI Board may have given or assigned different weight
to the factors and information listed above as well as any other factors and
information considered in reaching their respective decisions.
CDSI BOARD RECOMMENDATION OF THE MERGER
For the reasons stated under "CDSI's Reasons for the Merger," the CDSI Board
believes that the Merger Agreement is fair to, and in the best interests of,
CDSI and the holders of CDSI Common Stock. All members of the CDSI Board
approved the Merger Agreement and recommended that the holders of CDSI Common
Stock vote "FOR" approval of the Merger. In considering the recommendation of
the CDSI Board, holders of CDSI Common Stock should be aware that certain
officers and directors of CDSI have direct and indirect interests in the
consummation of the Merger, apart from their interests as stockholders of CDSI,
which are not identical to those of unaffiliated stockholders of CDSI. See "The
Proposed Merger and Related Transactions--Interests of Certain Persons in the
Merger."
OPINION OF LEGG MASON WOOD WALKER, INCORPORATED
Legg Mason has delivered its opinion to the Board of Directors on September
20, 1997, and issued a written opinion dated October 1, 1997, that, as of
September 20, 1997, and subject to certain assumptions, factors and limitations
set forth in such opinion as described below, the Merger consideration is fair
to CDSI's stockholders.
THE FULL TEXT OF THE WRITTEN OPINION OF LEGG MASON DATED OCTOBER 1, 1997,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX C TO
THIS JOINT PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS ARE URGED TO READ THIS
OPINION IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE AND MATTERS CONSIDERED BY LEGG MASON IN RENDERING SUCH OPINION.
LEGG MASON'S OPINION IS DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED BY
STOCKHOLDERS PURSUANT TO THE MERGER AGREEMENT AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF LEGG MASON SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In connection with its opinion, Legg Mason reviewed, among other things, (a)
the Merger Agreement, (b) the Annual Reports to Stockholders and the Annual
Reports on Form 10-K of CDSI for the five fiscal years ended June 30, 1996; (c)
the Annual Reports to Stockholders and the Annual Reports on Form 10-K of ACS
for the five fiscal years ended June 30, 1996; (d) draft copies of the Annual
Reports on Form 10-K for CDSI and ACS for the fiscal year ended June 30, 1997;
(e) certain interim reports to stockholders and Quarterly Reports on Form 10-Q
of CDSI and ACS; and (f) certain other communications from CDSI and ACS to their
respective stockholders. Legg Mason also had discussions with members of the
senior management of CDSI and ACS regarding the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, Legg Mason reviewed the reported price and trading
activity for the shares of CDSI Common Stock and the shares of ACS Class A
Common Stock, compared certain financial and stock market information for CDSI
and ACS with similar information for certain other companies the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the information technology services industry
specifically, and in other industries generally, and performed such other
studies and analyses as Legg Mason considered appropriate.
Legg Mason relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by them for
purposes of their opinion. Legg Mason did not make an independent evaluation or
appraisal of the assets and liabilities of CDSI or ACS or any of their
subsidiaries and they were not furnished with any such evaluation or appraisal.
The following is a summary of the financial analyses Legg Mason utilized in
connection with providing its written opinion to the Board of Directors.
43
(a) STOCK TRADING HISTORY. Legg Mason examined the history of the
trading prices and volumes for the shares of CDSI Common Stock. This
examination showed that during the four month period from May 23, 1997 to
September 19, 1997, the trading price of CDSI Common Stock ranged from
$24.50 per share to $36.25 per share. This range may be compared to the
Merger Consideration. In addition, this examination showed that over the
period from January 1, 1996 to May 23, 1997, the trading price of CDSI
Common Stock ranged from $12.25 per share to $36.75 per share. Legg Mason
also examined the history of the trading prices and volumes for the shares
of ACS Class A Common Stock. This examination showed that during the four
month period from May 23, 1997 to September 19, 1997, the trading price of
ACS Class A Common Stock ranged from $25.125 per share to $29.375 per share.
This range may be compared to the closing price of the ACS Class A Common
Stock on September 19, 1997 of $29.375 per share, which was used as the
price for the (prior to the date of this Joint Proxy Statement/Prospectus)
exchange rate in the Merger Agreement. In addition, this examination showed
that over the period from January 1, 1996 to May 23, 1997, the trading price
of ACS Class A Common Stock ranged from $16.875 per share to $31.75 per
share.
(b) COMPARISON OF SELECTED PEER COMPANIES. Legg Mason compared
selected historical stock market and balance sheet data and financial ratios
for CDSI and ACS to the corresponding data and ratios of the following
groups of selected information technology services companies and selected
systems integration/outsourcing companies: (a) Information Technology
Services Group: BDM International, CACI International, Computer Sciences
Corp., Nichols Research Corp. and Tracor; and (b) Systems
Integration/Outsourcing Group: Automatic Data Processing, The BISYS Group,
Ceridian, Computer Sciences Corp., Equifax, Electronic Data Systems
Corporation, First Data Corp., Fiserv and SunGard Data Systems. The
multiples of CDSI and ACS were calculated using a price of $36.25 per share
for CDSI Common Stock and a price of $29.375 per share of ACS Common Stock,
the closing prices as of September 19, 1997. Such data and ratios included,
among other things, levered market capitalization (current stock price
multiplied by shares outstanding, plus debt, less cash and cash
equivalents), levered market capitalization to latest twelve months ("LTM")
sales, LTM earnings before interest, tax, depreciation and amortization
("EBITDA") and LTM earnings before interest and taxes ("EBIT"), as well as
Fiscal Year 1998 (year ended June 30, 1998) and Fiscal Year 1999 (year ended
June 30, 1999) estimated price-to-earnings ("P/E") ratios estimates provided
by First Call Analysts' Research and FactSet Data Systems. EBITDA (which is
not a measure of financial performance under GAAP is used by investment
banking firms as one measure of a company's financial performance. EBITDA
should not be construed as an alternative to operating income (as determined
in accordance with GAAP), as an indicator of a company's performance or cash
flows from operating activities (as determined in accordance with GAAP) or
as a measure of liquidity.
INFORMATION TECHNOLOGY SERVICES GROUP. An analysis of levered market
capitalization to LTM sales yielded a range of 0.73x to 1.11x with a mean
and median of 0.86x and 0.80x, respectively, as compared to 0.87x for CDSI.
An analysis of levered market capitalization to LTM EBITDA yielded a range
of 7.7x to 15.4x with a mean and median of 10.6x and 9.3x, respectively, as
compared to 11.6x for CDSI. An analysis of levered market capitalization to
LTM EBIT yielded a range of 9.9x to 20.8x with a mean and median of 15.4x
and 15.8x, respectively, as compared to 14.2x for CDSI. An analysis of
fiscal 1998 estimated P/E ratios yielded a range of 17.2x to 23.3x with a
mean and median of 20.1x and 21.0x, respectively, as compared to 19.5x for
CDSI. An analysis of fiscal 1999 estimated P/E ratios yielded a range of
15.3x to 17.5x with a mean and median of 16.6x and 16.6x, respectively, as
compared to 16.3x for CDSI.
SYSTEMS INTEGRATION/OUTSOURCING GROUP. An analysis of levered market
capitalization to LTM sales yielded a range of 1.11x to 3.84x with a mean
and median of 2.62x and 2.97x, respectively, as compared to 1.86x for ACS.
An analysis of levered market capitalization to LTM EBITDA yielded a range
of 9.0x to 15.3x with a mean and median of 11.9x and 12.0x, respectively, as
compared to 11.3x for ACS. An analysis of levered market capitalization to
LTM EBIT yielded a range of 12.6x to 19.8 with a mean and median of 16.7x
and 16.9x, respectively, as compared to 16.3x for ACS. An analysis of Fiscal
Year 1998 estimated P/E ratios yielded a range of 14.8x to 30.0x with a mean
and median of 21.8x and 23.0x, respectively, as compared to 23.5x for ACS.
An analysis of Fiscal Year 1999 estimated
44
P/E ratios yielded a range of 14.4x to 28.1x with a mean and median of 19.1x
and 18.0x, respectively, as compared to 19.5x for ACS.
(c) SELECTED TRANSACTIONS ANALYSIS. Legg Mason analyzed certain
information relating to selected transactions in the information technology
services industry (the "SELECTED TRANSACTIONS"). Such analysis indicated
that for the Selected Transactions, (i) aggregate consideration as a
multiple of LTM sales ranged from 0.52x to 1.31x with a median of 0.72x and
a mean of 0.61x compared to 1.20x for the contemplated transaction, (ii)
aggregate consideration as a multiple of current year EBIT ranged from 8.9x
to 17.0x with a mean and median of 12.6x and 12.3x, respectively, as
compared to 19.5x for the contemplated transaction (iii) aggregate
consideration as a multiple of LTM net income ranged from 16.5x to 26.5x
with a mean and median of 21.9x and 22.8x, respectively, as compared to
32.7x for the contemplated transaction.
No company, transaction, or business used in the "Comparison of Selected
Peer Companies" or "Selected Transaction Analysis" as a comparison is
identical to CDSI, ACS or the Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical. Instead, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Peer Companies, Selected
Transactions or the business segment, company or transaction to which they
are being compared.
(d) DISCOUNTED CASH FLOW ANALYSIS. Legg Mason performed a discounted
cash flow analysis of CDSI. Legg Mason calculated a net present value of
estimated free cash flows for the years 1998 through 2002 using discount
rates ranging from 10% to 14%. Legg Mason calculated CDSI's terminal values
in the year 2002 based on multiples ranging from 6.0x EBIT to 8.0x EBIT.
These terminal values were then discounted to present value using discount
rates from 10% to 14%. Using the foregoing terminal values and discounted
cash flows for CDSI, the equity value per share ranged from $39.93 to $51.39
per share as compared to the equity value implied by the Exchange Ratio of
approximately $51.67 per share based on a closing stock price of ACS Class A
Common Stock on September 19, 1997.
(e) PRO FORMA MERGER ANALYSIS. Legg Mason prepared pro forma analyses
of the financial impact of the Merger. Legg Mason performed this analysis
based on the Exchange Ratio of 1.759 shares of ACS Class A Common Stock for
each share of CDSI Common Stock. Based on such analyses, the proposed Merger
would be either non-dilutive or accretive to ACS's stockholders on a
historical basis, and before giving effect to any synergies that may be
achieved. The actual results achieved by the combined company may vary from
projected results and such variations may be material.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to practical analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Legg Mason's opinion. In arriving at its fairness determination, Legg
Mason considered the results of all such analyses. The analyses were prepared
solely for purposes of Legg Mason providing its opinion to the Board of
Directors as to the fairness of the Merger Consideration pursuant to the Merger
Agreement to the holders of shares of CDSI Common Stock and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Analyses based forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisers, none of CDSI,
ACS, Legg Mason or any other person assumes responsibility if future results are
materially different from those forecast.
As described above, Legg Mason's opinion to the Board of Directors was one
of the many factors taken into consideration by the Board of Directors in making
its determination to approve the Merger Agreement. The foregoing summary does
not purport to be a complete description of the analyses performed by Legg Mason
and is qualified by reference to the written opinion of Legg Mason set forth in
Appendix C hereto.
45
Legg Mason, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. CDSI selected Legg
Mason as its financial adviser because Legg Mason is a nationally recognized
investment banking firm that has substantial experience in transactions similar
to the Merger.
Legg Mason provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of CDSI and/or ACS for its own account and for the account of
customers.
Pursuant to a letter agreement dated September 18, 1997 (the "ENGAGEMENT
LETTER"), CDSI engaged Legg Mason to act as its financial adviser in connection
with the possible merger of CDSI and ACS. Pursuant to the terms of the
Engagement Letter, CDSI has agreed to pay Legg Mason upon delivery of a written
fairness opinion a fee of $450,000. CDSI has agreed to reimburse Legg Mason for
its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify Legg Mason against certain liabilities, including certain liabilities
under federal securities law.
THE MERGER AGREEMENT
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that the Merger will become effective at such
time as the Articles of Merger are filed with the State Department of
Assessments and Taxation of the State of Maryland. It is anticipated that if the
Merger Agreement is approved at the ACS Annual Meeting and the CDSI Special
Meeting and all other conditions to the Merger have been satisfied or waived,
the Effective Time will occur within two business days after the date on which
the last of the conditions to closing contained in the Merger Agreement is
fulfilled or waived or at such other time as ACS and CDSI shall agree. See "The
Proposed Merger and Related Transactions--The Merger Agreement."
MANNER AND BASIS FOR CONVERTING SHARES
At the Effective Time, each outstanding share of CDSI Common Stock will be
converted into the right to receive 1.759 shares of ACS Class A Common Stock.
Promptly after the Effective Time, ACS will mail or cause ChaseMellon
Shareholder Services, LLC, which will act as transfer agent (the "TRANSFER
AGENT"), to mail to each record holder of CDSI Common Stock immediately prior to
the Effective Time, a letter of transmittal and other information advising such
holder of the consummation of the Merger and instructions for use in effecting
the surrender of CDSI Common Stock certificates in exchange for ACS Class A
Common Stock certificates and cash in lieu of fractional shares. Letters of
transmittal will also be available following the Effective Time at the offices
of the Transfer Agent. At and after the Effective Time, there will be no further
registration of transfers on the stock transfer books of CDSI of shares of CDSI
Common Stock that were outstanding immediately prior to the Effective Time.
SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY STOCKHOLDERS OF
CDSI PRIOR TO APPROVAL OF THE MERGER AND THE RECEIPT OF A LETTER OF TRANSMITTAL.
No fractional shares of ACS Class A Common Stock will be issued in the
Merger. Each holder of CDSI Common Stock otherwise entitled to a fractional
share will receive an amount in cash equal to the value of such fractional share
based upon the closing sale price of ACS Class A Common Stock as reported by the
NYSE on the date of the Effective Time (or, if no trading occurs on such date,
the first trading day immediately following the Effective Time). No interest
will be paid on such amount, and all shares of CDSI Common Stock held by a
record holder will be aggregated for purposes of computing the number of shares
of ACS Class A Common Stock to be issued in the Merger.
46
Until such time as a holder of CDSI Common Stock surrenders his or her
outstanding stock certificate to the Transfer Agent, together with the letter of
transmittal, the shares of CDSI Common Stock represented thereby will be deemed
from and after the Effective Time, for all corporate purposes, to evidence the
ownership of the number of full shares of ACS Class A Common Stock into which
such shares shall have been converted. Unless and until such outstanding
certificates are surrendered, no dividends payable to the holders of ACS Class A
Common Stock, as of any time on and after the Effective Time, will be paid to
the holders of such outstanding certificates. Upon surrender of the certificates
previously representing shares of CDSI Common Stock, the holder thereof will
receive certificates representing the whole number of shares of ACS Class A
Common Stock to which he or she is entitled, cash in lieu of fractional shares,
and the amount of any dividends payable which theretofore became payable to
holders of ACS Class A Common Stock on or after the Effective Time with respect
to such shares, without interest thereon.
CDSI OPTIONS
The Merger Agreement provides that ACS will assume each unexpired and
unexercised CDSI option ("ASSUMED OPTION") at the Effective Time. The shares of
ACS Class A Common Stock purchasable upon exercise of an Assumed Option shall be
equal to the number of shares of CDSI Common Stock that could have been
purchased under the Assumed Option multiplied by the Exchange Ratio, at a price
per share equal to the Assumed Option exercise price divided by the Exchange
Ratio, and subject to the same terms and conditions as the CDSI options. ACS
will assume all of CDSI's obligations with respect to the Assumed Options as so
amended and shall, from and after the Effective Time, make available for
issuance upon exercise of any such Assumed Options, all shares of ACS Class A
Common Stock covered thereby. The terms of all outstanding CDSI options provide
that such options become vested when the stockholders of CDSI consider or are
asked to consider the Merger.
REGISTRATION RIGHTS AND LISTING
The ACS Class A Common Stock to be issued in the Merger will be registered
under the Securities Act. ACS has agreed to prepare and file with the Commission
the Registration Statement and any other documents required by the Securities
Act in connection with the Merger. ACS has also agreed to take any action
required to be taken under any applicable state securities or "blue sky" laws in
connection with the issuance of the ACS Class A Common Stock in connection with
the Merger.
ACS has agreed to file a listing application with the NYSE covering the
shares of ACS Class A Common Stock which are issuable upon consummation of the
Merger. ACS has agreed to use all reasonable efforts to obtain, prior to the
Effective Time of the Merger, approval for the listing of such ACS Class A
Common Stock, subject to official notice of issuance.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, ACS and CDSI have made various customary and other
representations and warranties relating to, among other things, their respective
businesses and financial condition, the accuracy of their various filings with
the Commission, the satisfaction of certain legal requirements for the Merger,
and the absence of undisclosed liabilities or material litigation matters. The
representations and warranties of each of the parties to the Merger Agreement
will expire upon consummation of the Merger.
DIRECTOR AND OFFICER INDEMNIFICATION
The Merger Agreement provides that for a period of six years after the
Effective Time, ACS will not amend or modify the Charter and Bylaws of CDSI in a
manner that would adversely affect the rights thereunder of any individuals who
at any time prior to the Effective Time were directors or officers of CDSI or
any of its subsidiaries in respect of acts or omissions occurring at or prior to
the Effective Time,
47
unless such amendment or modification is required by law. For a period of six
years after the Effective Time, ACS shall cause the Surviving Corporation in the
Merger to maintain officers' and directors' liability insurance for all persons
currently covered under CDSI's officers' and directors' liability insurance
policies, in their capacities as officers and directors, on terms no less
favorable to the covered persons than such existing insurance.
CONDUCT OF THE BUSINESS OF THE COMBINED COMPANIES FOLLOWING THE MERGER
At the Effective Time, Merger Sub shall be merged with and into CDSI. As a
result of the Merger, the separate corporate existence of Merger Sub shall
cease, and CDSI shall continue as the Surviving Corporation.
At the Effective Time, the Charter of CDSI, as in effect immediately prior
to the Effective Time, shall be the Charter of the Surviving Corporation and
thereafter shall continue to be its Charter until amended as provided therein
and pursuant to Maryland Law. The Bylaws of CDSI, as in effect immediately prior
to the Effective Time, shall be the bylaws of the Surviving Corporation and
thereafter shall continue to be its bylaws until amended as provided therein and
pursuant to Maryland Law. The directors of Merger Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, each to hold
office in accordance with the Charter and bylaws of the Surviving Corporation,
and the officers of CDSI immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, each to hold office in accordance with
the bylaws of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified. Certain of the directors
of CDSI immediately prior to the Effective Time will become advisory directors
of the Surviving Corporation. It is anticipated that the specific duties and
responsibilities of the advisory directors will be determined at or about the
time of the closing of the Merger.
CONDUCT OF CDSI'S BUSINESS PRIOR TO THE MERGER
Prior to the Effective Time, unless otherwise expressly contemplated by the
Merger Agreement or consented to in writing by ACS, CDSI will and will cause its
subsidiaries to: (a) operate its business in all material respects in the usual
and ordinary course consistent with past practices; (b) use all reasonable
efforts to preserve substantially intact its business organization, maintain its
material rights and franchises, retain the services of its respective officers
and key employees, and maintain its relationships with its material customers
and suppliers; (c) maintain and keep its material properties and assets in as
good repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice; and (d) use all reasonable efforts to keep in full force and
effect insurance and bonds comparable in amount and scope of coverage to that
currently maintained. Unless otherwise expressly contemplated by the Merger
Agreement, CDSI has also agreed that prior to the Effective Time CDSI will not
and will not permit any of its subsidiaries to (a) (i) increase the compensation
payable to or to become payable to any director or executive officer, unless
such increase results from the operation of compensation arrangements in effect
prior to the date of the Merger Agreement; (ii) grant any severance or
termination pay (other than pursuant to the normal severance policy of CDSI or
its subsidiaries as in effect on the date of the Merger Agreement or as
otherwise disclosed in the Merger Agreement) to, or enter into or amend any
employment or severance agreement with, any director, officer, or employee;
(iii) establish, adopt, or enter into any employee benefit plan or arrangement;
or (iv) except as may be required by applicable law and actions that are not
inconsistent with the provisions of SECTION 6.08 of the Merger Agreement, amend
in any material respect, or take any other actions with respect to, any of the
Benefit Plans or any of the plans, programs, agreements, policies, or other
arrangements described in SECTION 3.10(D) of the Merger Agreement; (b) declare
or pay any dividend on, or make any other distribution in respect of,
outstanding shares of capital stock, except for dividends by a wholly owned
subsidiary of CDSI to CDSI or another wholly owned subsidiary of CDSI and except
for regular semi-annual dividends with respect to CDSI Common Stock in an amount
not to exceed $0.11 per
48
share; (c) (i) except as described in SCHEDULE 3.03(B)(II) of the CDSI
Disclosure Schedule to the Merger Agreement, redeem, purchase, or otherwise
acquire any shares of its or any of its subsidiaries' capital stock or any
securities or obligations convertible into or exchangeable for any shares of its
or its subsidiaries' capital stock (other than any such acquisition directly
from any wholly owned subsidiary of CDSI in exchange for capital contributions
or loans to such subsidiary), or any options, warrants, or conversion or other
rights to acquire any shares of its or its subsidiaries' capital stock or any
such securities or obligations (except in connection with the exercise of
outstanding stock options or warrants in accordance with their terms); (ii)
effect any reorganization or recapitalization; or (iii) split, combine, or
reclassify any of its or its subsidiaries' capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its or its subsidiaries' capital stock; (d) (i)
except as described in SCHEDULE 3.03(B)(I) of the CDSI Disclosure Schedule to
the Merger Agreement, issue, deliver, award, grant, or sell, or authorize or
propose the issuance, delivery, award, grant, or sale (including the grant of
any security interests, liens, claims, pledges, limitations in voting rights,
charges, or other encumbrances) of, any shares of any class of its or its
subsidiaries' capital stock (including shares held in treasury), any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants, or options to acquire any such shares (except as permitted
pursuant to SECTION 6.08 of the Merger Agreement or for the issuance of shares
upon the exercise of outstanding stock options or warrants); (ii) amend or
otherwise modify the terms of any such rights or options the effect of which
shall be to make such terms more favorable to the holders thereof; or (iii)
except as contemplated by the terms of existing Stock Options, take any action
to accelerate the exercisability of Stock Options; (e) acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity interest in
or a portion of the assets of, or by any other manner, any business or any
corporation, partnership, association, or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets of any
other person (other than the purchase of assets from suppliers or vendors in the
ordinary course of business and consistent with past practice); (f) sell, lease,
exchange, mortgage, pledge, transfer, or otherwise dispose of, or agree to sell,
lease, exchange, mortgage, pledge, transfer, or otherwise dispose of, any of its
material assets or any material assets of any of its subsidiaries, except for
dispositions of inventories and of assets in the ordinary course of business and
consistent with past practice; (g) initiate, solicit, or encourage (including by
way of furnishing information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal relating to, or that may
reasonably be expected to lead to, any Competing Transaction (as defined in the
Merger Agreement), or enter into discussions or negotiate with any person or
entity in furtherance of such inquiries or to obtain a Competing Transaction, or
agree to or endorse any Competing Transaction, or authorize or permit any of the
officers, directors, or employees of CDSI or any of its subsidiaries or any
investment banker, financial advisor, attorney, accountant, or other
representative retained by CDSI or any of CDSI's subsidiaries to take any such
action, and CDSI shall promptly notify ACS of all relevant terms of any such
inquiries and proposals received by CDSI or any of its subsidiaries or by any
such officer, director, investment banker, financial advisor, attorney,
accountant, or other representative relating to any of such matters and if such
inquiry or proposal is in writing, CDSI shall promptly deliver or cause to be
delivered to ACS a copy of such inquiry or proposal; PROVIDED, HOWEVER, that
nothing contained in such subsection (g) shall prohibit the Board of Directors
of CDSI from (i) furnishing information to, or entering into discussions or
negotiations with, or following termination of the Merger Agreement in
connection with Section 8.01 thereof, entering into an agreement with, any
person or entity in connection with an unsolicited bona fide written proposal by
such person or entity to acquire CDSI pursuant to a merger, consolidation, share
exchange, business combination, or other similar transaction or to acquire a
substantial portion of the assets of CDSI or any of its significant
subsidiaries, if, and only to the extent that (A) the Board of Directors of
CDSI, after consultation with and based upon the advice of independent legal
counsel (who may be CDSI's regularly engaged independent legal counsel),
determines in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law and (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity CDSI (x) provides one
day's prior written notice to ACS to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
49
person or entity and (y) enters into with such person or entity a
confidentiality agreement in reasonably customary form on terms not more
favorable to such person or entity than the terms contained in that certain
Confidentiality Agreement dated as of July 20, 1997 between ACS and CDSI (the
"CONFIDENTIALITY AGREEMENT"); (ii) complying with Rule 14e-2 or Rule 14a-9
promulgated under the Exchange Act with regard to a Competing Transaction; or
(iii) failing to make or withdrawing or modifying its recommendation referred to
in SECTION 6.02(A) of the Merger Agreement if there exists a Competing
Transaction and the Board of Directors of CDSI, after consultation with and
based upon the advice of independent legal counsel (who may be CDSI's regularly
engaged independent legal counsel), determines in good faith that such action is
necessary for such Board of Directors to comply with its fiduciary duties to
stockholders under applicable law; (h) release any third party from its
obligations, or grant any consent, under any existing standstill provision
relating to a Competing Transaction or otherwise under any confidentiality or
other agreement relating thereto, or fail to fully enforce any such agreement;
(i) adopt or propose to adopt any amendments to its charter or bylaws, which
would have an adverse impact on the consummation of the transactions
contemplated by the Merger Agreement; (j) (A) change any of its methods of
accounting in effect at June 30, 1997, or (B) make or rescind any express or
deemed election relating to taxes, settle or compromise any claim, action, suit,
litigation, proceeding, arbitration, investigation, audit, or controversy
relating to taxes or change any of its methods of reporting income or deductions
for federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ending June 30, 1997, except, in
each case, as may be required by Law or generally accepted accounting
principles; (k) incur any obligation for borrowed money or purchase money
indebtedness, whether or not evidenced by a note, bond, debenture or similar
instrument, except in the ordinary course of business consistent with past
practice or pursuant to CDSI's existing credit facility and in no event in
excess of $250,000 in the aggregate (unless such borrowings are incurred under
CDSI's principal existing credit facility and relate to working capital or
capital expenditures in the ordinary course of business); (l) enter into any
arrangement, agreement or contract material to CDSI and its subsidiaries taken
as a whole with any third party (other than customers in the ordinary course of
business) which provides for an exclusive arrangement with that third party or
is substantially more restrictive on CDSI or substantially less advantageous to
CDSI than arrangements, agreements or contracts existing on the date of the
Merger Agreement; or (m) agree in writing or otherwise to do any of the
foregoing.
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the Merger and the other
transactions contemplated by the Merger Agreement are subject to the
satisfaction of the following conditions: (a) the Registration Statement on Form
S-4 shall have been declared effective by the Commission under the Securities
Act, no stop order suspending the effectiveness of the Registration Statement
shall have been issued by the Commission, no proceedings for that purpose shall
have been initiated by the Commission, and ACS shall have received all Blue Sky
and other authorizations necessary to consummate the transactions contemplated
by the Merger Agreement; (b) the Merger Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of CDSI and the
issuance of the ACS Class A Common Stock in connection with the Merger shall
have been approved by the requisite vote of the stockholders of ACS; (c) no
governmental entity or federal or state court of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger; and no such governmental entity shall have initiated or threatened to
initiate any proceeding seeking any of the foregoing that reasonably could be
expected to prevent the Merger or otherwise result in an ACS Material Adverse
Effect or CDSI Material Adverse Effect; (d) the applicable waiting period under
the HSR Act with respect to the transactions contemplated by the Merger
Agreement shall have expired or been terminated; and (e) the receipt of letters
from Price Waterhouse LLP and Ernst & Young LLP,
50
independent accountants for ACS and CDSI, respectively, to the effect that the
Merger should be treated for financial accounting purposes as a "pooling of
interests transaction."
The obligations of ACS to effect the Merger and the other transactions
contemplated by the Merger Agreement are also subject to the satisfaction, at or
prior to the date of consummation of the transactions contemplated by the Merger
Agreement (the "CLOSING DATE"), of, among other things, the following
conditions: (a) each of the representations and warranties of CDSI contained in
the Merger Agreement shall be true and correct as of the Closing Date as though
made on and as of the Closing Date (except to the extent such representations
and warranties specifically relate to an earlier date, in which case such
representations and warranties shall be true and correct as of such earlier
date) except as, individually or in the aggregate, could not reasonably be
expected to have a CDSI Material Adverse Effect (defined as any change or effect
that, individually or when taken together with all other such changes or effects
(but after giving effect to application of insurance proceeds or other rights of
indemnification in respect of such change or effect), could reasonably be
expected to be materially adverse to the business, operations, assets, financial
condition, results of operations, or prospects of CDSI and its subsidiaries,
taken as a whole), and ACS shall have received a certificate of the President
and the Chief Financial Officer of CDSI, dated the Closing Date, to such effect;
(b) CDSI shall have performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by it on or prior to the Closing Date, and ACS shall have received
a certificate of the President and the Chief Financial Officer of CDSI, dated
the Closing Date, to that effect; (c) since June 30, 1997, there shall have been
no change, occurrence or circumstance in the financial condition, results of
operations, business, operations, or prospects of CDSI or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a CDSI Material Adverse Effect, and ACS shall have received a
certificate of the President and the Chief Financial Officer of CDSI, dated the
Closing Date, to such effect; (d) there shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, by any governmental entity in connection with the
grant of a regulatory approval necessary, in the reasonable business judgment of
ACS, to the continuing operation of the current or future business of CDSI,
which imposes any condition or restriction upon ACS or Merger Sub or the
business or operations of CDSI which, in the reasonable business judgment of
ACS, would be materially burdensome in the context of the transactions
contemplated by this Agreement; and (e) Hughes & Luce, L.L.P. shall have
delivered to ACS its written opinion as of the date that the Joint Proxy
Statement / Prospectus is first mailed to ACS stockholders substantially to the
effect that (i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, (ii) ACS, Merger Sub, and CDSI will each be a
party to that reorganization within the meaning of Section 368(b) of the Code,
and (iii) ACS, Merger Sub, and CDSI will not recognize any gain or loss for U.S.
federal income tax purposes as a result of the Merger, and such opinion shall
not have been withdrawn or modified in any material respect.
The obligations of CDSI to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions: (a) each of the representations and
warranties of ACS contained in the Merger Agreement shall be true and correct as
of the Closing Date as though made on and as of the Closing Date (except to the
extent such representations and warranties specifically relate to an earlier
date, in which case such representations and warranties shall be true and
correct as of such earlier date), except as, individually or in the aggregate,
could not reasonably be expected to have an ACS Material Adverse Effect (defined
as any change or effect that, individually or when taken together with all such
changes or effects (but after giving effect to application of insurance proceeds
or other rights of indemnification in respect of such change or effect), could
reasonably be expected to be materially adverse to the business, operations,
assets, financial condition, results of operations, or prospects of ACS and its
subsidiaries, taken as a whole), and CDSI shall have received a certificate of
the President and the Chief Financial Officer of ACS, dated the Closing Date, to
such effect; (b) ACS and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by them on or prior to the Closing
Date, and CDSI shall have received a certificate of the President and the Chief
Financial Officer
51
of the ACS, dated the Closing Date, to that effect; (c) since June 30, 1997,
there shall have been no change, occurrence or circumstance in the financial
condition, results of operations, business, operations, or prospects of ACS or
any of its subsidiaries having or reasonably likely to have, individually or in
the aggregate, a material adverse effect on the financial condition, results of
operations, business, operations or prospects of ACS and its subsidiaries, taken
as a whole, and CDSI shall have received a certificate of the President and the
Chief Financial Officer of each of ACS and Merger Sub, dated the Closing Date,
to such effect; (d) there shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger, by any governmental entity in connection with the grant of a regulatory
approval necessary, in the reasonable business judgment of CDSI, to the
continuing operation of the current or future business of ACS, which imposes any
condition or restriction upon ACS or the business or operations of ACS which, in
the reasonable business judgment of CDSI, would be materially burdensome in the
context of the transactions contemplated by the Merger Agreement; (e) the shares
of ACS Class A Common Stock to be issued in the Merger shall have been approved
for listing (subject to official notice of issuance) on the NYSE; and (f) Miles
& Stockbridge shall have delivered to CDSI its written opinion as of the date
that the Joint Proxy Statement/Prospectus is first mailed to CDSI stockholders
substantially to the effect that (i) the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, (ii) ACS, Merger Sub, and CDSI
will each be a party to that reorganization within the meaning of Section 368(b)
of the Code, and (iii) no gain or loss for U.S. federal income tax purposes will
be recognized by the holders of CDSI Common Stock upon receipt of shares of ACS
Class A Common Stock in the Merger, except with respect to any cash received in
lieu of a fractional share interest in ACS Class A Common Stock, and such
opinion shall not have been withdrawn or modified in any material respect.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Merger Agreement and
the Merger by the holders of CDSI Common Stock, under certain circumstances,
including (a) the mutual consent of ACS and CDSI, (b) either by ACS or CDSI upon
a breach of any representation, warranty, covenant, or agreement on the part of
either ACS or CDSI, or if any representation or warranty of either ACS or CDSI
shall have become untrue, in either case such that the conditions to the Merger
could not be satisfied by February 15, 1998, by either ACS or CDSI, if there
shall be any Order which is final and nonappealable preventing the consummation
of the Merger, except if the party relying on such Order to terminate the Merger
Agreement has not complied with its obligations under SECTION 6.03 of the Merger
Agreement, by (i) either ACS or CDSI, if the Merger shall not have been
consummated before February 15, 1998, except if the terminating party failed to
comply with its covenants and agreements under the Merger Agreement and the
failure to consummate the Merger is a result of such breach or violation, or
(ii) by either ACS or CDSI, if the Merger Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the stockholders of CDSI
at CDSI's stockholders' meeting or if the issuance of the ACS Class A Common
Stock in connection with the Merger shall fail to receive the requisite vote for
approval by the stockholders of ACS at the ACS stockholders' meeting; (c) by ACS
(i) if the Board of Directors of the CDSI withdraws, modifies, or changes its
recommendation of the Merger Agreement or the Merger in a manner adverse to ACS
or shall have resolved to do any of the foregoing, (ii) if the Board of
Directors of CDSI shall have recommended to the stockholders of CDSI any
Competing Transaction or shall have resolved to do so, (iii) if a tender offer
or exchange offer for 20% or more of the outstanding shares of capital stock of
CDSI is commenced, and the Board of Directors of CDSI recommends that
stockholders tender their shares into such tender or exchange offer; or (iv) if
any person (other than ACS or an affiliate thereof) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term is used in Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of, 20% or
more of the then outstanding shares of capital stock of CDSI; or (d) by CDSI if
the Board of Directors of CDSI (i) fails to make or withdraws its recommendation
to vote in favor
52
of the Merger and the Merger Agreement if there exists at such time a Competing
Transaction, or (ii) recommends to CDSI's stockholders approval or acceptance of
a Competing Transaction, in each case only if the Board of Directors of CDSI,
after consultation with and based upon the advice of independent legal counsel
determines in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law.
AMENDMENT. The Merger Agreement may be amended by the parties by action
taken by or on behalf of their respective Boards of Directors at any time prior
to the Effective Time; PROVIDED, HOWEVER, that, after approval of the Merger by
the stockholders of CDSI, (i) no amendment, which under applicable law may not
be made without the approval of the stockholders of CDSI, may be made without
such approval, and (ii) no amendment, which under the applicable rules of the
NYSE may not be made without the approval of the stockholders of ACS, may be
made without such approval. The Merger Agreement may not be amended except by an
instrument in writing signed by the parties thereto.
TERMINATION FEE. CDSI has agreed to pay to ACS a termination fee of
$15,000,000, inclusive of all of ACS's expenses, in the event that the Merger
Agreement is terminated under the following circumstances: (a) by ACS, upon a
willful breach of a representation, warranty, covenant, or agreement on the part
of CDSI, which breach could reasonably be expected to have a CDSI Material
Adverse Effect, and CDSI shall have entered into negotiations relating to a
Competing Transaction; (b) by either ACS or CDSI, (i) because the Merger and the
Merger Agreement fail to receive the requisite vote for approval and adoption by
the stockholders of CDSI at the CDSI Stockholders' Meeting, (ii) at the time of
such CDSI Stockholders' Meeting a Competing Transaction exists, (iii) the
conditions to CDSI's obligations to close have been otherwise satisfied, and
(iv) within nine months of the CDSI Stockholders' Meeting, CDSI or its Board of
Directors enters into an agreement with the same party, or an affiliate of that
party, as involved in the Competing Transaction, which agreement relates to (x)
any merger, consolidation, share exchange, business consolidation or similar
transaction, or (y) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition of 20% or more of the assets of CDSI and its subsidiaries,
taken as a whole (PROVIDED, HOWEVER, that (1) certain conditions to the mutual
obligations of ACS and CDSI under the Merger Agreement have been satisfied, (2)
certain conditions to the obligations of CDSI to be satisfied by ACS have indeed
been satisfied, (3) ACS and CDSI have been advised that but for the failure of
the CDSI's stockholders to approve the Merger or other actions or inactions by
CDSI or an affiliate of CDSI, or within the control of either, the Merger would
be treated for financial accounting purposes as a pooling transaction, and (4)
but for the failure of the CDSI's stockholders to approve the Merger or other
actions or inactions by CDSI or an affiliate of CDSI, or within the control of
either, the Merger would constitute a reorganization within the meaning of
Section 368(a) of the Code); (c) by ACS, if the CDSI Board withdraws, modifies,
or changes its recommendation of the Merger Agreement or the Merger in a manner
adverse to ACS or shall have resolved to do any of the foregoing, and at such
time there exists a Competing Transaction; (d) by ACS, if the CDSI Board shall
have recommended to the stockholders of CDSI any Competing Transaction or shall
have resolved to do so; (e) by ACS, if a tender offer or exchange offer for 20%
or more of the outstanding shares of capital stock of CDSI is commenced, and the
CDSI Board recommends that stockholders tender their shares into such tender or
exchange offer; or (f) by CDSI, if the CDSI Board (i) fails to make or withdraws
its recommendation of the Merger, if there exists at such time a Competing
Transaction, or (ii) recommends to CDSI's stockholders approval or acceptance of
a Competing Transaction, in each case only if the CDSI Board, after consultation
with and based upon the advice of independent legal counsel (who may be CDSI's
regularly engaged independent legal counsel), determines in good faith that such
action is necessary for such Board of Directors to comply with its fiduciary
duties to stockholders under applicable law.
MERGER EXPENSES
All expenses incurred by CDSI and ACS, respectively, in connection with the
Merger will be borne by the party that has incurred such expenses; PROVIDED,
HOWEVER, that ACS and CDSI will each pay one-half of (i) all expenses incurred
relating to the printing, filing and mailing the Registration Statement and the
53
Joint Proxy Statement / Prospectus and (ii) all filing fees under the HSR Act.
Further, in the event that the CDSI stockholders fail to adopt and approve by
the requisite vote the Merger and the Merger Agreement at the CDSI Stockholders'
Meeting, and at the time of such meeting there does not exist a Competing
Transaction, then CDSI will pay all of ACS's expenses up to $1,000,000 in
connection with the Merger, if, but only if, (i) certain conditions to the
mutual obligations of ACS and CDSI under the Merger Agreement have been
satisfied, (ii) certain conditions to the obligations of CDSI to be satisfied by
ACS have indeed been satisfied, (iii) ACS has been advised that but for the
failure of the CDSI's stockholders to approve the Merger or other actions or
inactions by CDSI or an affiliate of CDSI, or within the control of either, the
Merger would have been treated for financial accounting purposes as a pooling
transaction, and (iv) but for the failure of the CDSI's stockholders to approve
the Merger or other actions or inactions by CDSI or an affiliate of CDSI, or
within the control of either, the Merger would have constituted a reorganization
within the meaning of Section 368(a) of the Code.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STOCK OPTIONS
The CDSI 1991 Long-Term Incentive Plan, as amended (the "1991 LTIP"),
permits grants to selected employees of CDSI of awards consisting of stock
options, stock appreciation rights, restricted stock, deferred stock,
performance awards, dividend equivalents or other stock-based compensation, and
any other right or interest relating to shares of CDSI Common Stock or cash. The
CDSI Board has granted stock options to certain officers and key employees of
CDSI under the 1991 LTIP. Those stock options entitle the officers and employees
to purchase a specified number of shares of CDSI Common Stock for a specified
period of time at a price per share not less than the fair market value on the
date of grant. The 1991 LTIP also provides for the grant of stock options to
non-employee directors of CDSI at the time they are first elected or appointed
to serve as a director and at each anniversary of the effective date of the 1991
LTIP.
Under the terms of the 1991 LTIP, all stock options and other awards become
fully exercisable upon the event of a "Change in Control" (as defined in the
1991 LTIP). A "Change in Control" is defined in the 1991 LTIP to include a
number of events, including the stockholders of CDSI considering or being asked
to consider a transaction such as the Merger. Based on the stock options
outstanding as of the date on which the Merger Agreement was approved by the
CDSI Board, the vesting of options to purchase 485,625 shares of CDSI Common
Stock will be accelerated. The table below sets forth the options held by each
of the directors and the five most highly compensated executive officers as well
as all executive officers as a group and the aggregate value of those options
based on the closing price of CDSI Common Stock on the NASDAQ on September 19,
1997.
NUMBER OF UNEXERCISED VALUE OF
OPTIONS HELD ON UNEXERCISED
RECORD DATE OPTIONS(1) ON
------------------------ SEPTEMBER 19,
NAME EXERCISABLE UNEXERCISABLE 1997
- -------------------------------------------------- ----------- ----------- -----------------
Peter A. Bracken.................................. 0 70,000 $ 635,000
Thomas A. Green................................... 20,250 33,750 886,500
James W. Henderson................................ 0 15,000 75,000
Raymond B. Hoxeng................................. 0 2,000 10,625
Paul R. Ignatius.................................. 6,500 2,000 161,063
Clifford M. Kendall............................... 9,250 31,750 560,125
Mary Ann Mayhew................................... 14,250 33,750 721,500
Hilliard W. Paige................................. 6,500 2,000 161,063
James A. Parker................................... 6,500 2,000 161,063
Wyatt D. Tinsley(2)............................... 21,500 28,500 883,750
All directors and executive officers as a group
(13 persons).................................... 99,625 262,375 $ 4,920,002
- ------------------------
(1) The aggregate value is calculated by subtracting the exercise price of each
option from the closing price of CDSI Common Stock on the NASDAQ on
September 19, 1997, multiplied by the numbers
54
and shares of CDSI Common Stock underlying the option, and is not reduced
for any taxes or other costs or expenses that may be incurred by the
directors or executive officers.
(2) In October 1997, Mr. Tinsley resigned as a director and executive officer of
CDSI. While the terms of a severance arrangement have not been finalized, it
is expected that he will remain as an employee of CDSI through December
1997.
ARRANGEMENTS WITH MR. KENDALL
Clifford M. Kendall, the Chairman of the Board of CDSI, is a party to a
split-dollar life insurance agreement dated as of July 17, 1990 (the "KENDALL
INSURANCE AGREEMENT"). Under the terms of the Kendall Insurance Agreement, upon
his retirement from CDSI Mr. Kendall has the option of either (i) purchasing
CDSI's interests in the split-dollar life insurance policies taken out by CDSI
on the life of Mr. Kendall, or (ii) electing to be paid in the form of a 10-year
annuity in return for forfeiting the net death benefit of the policies that
would have been paid out to his estate upon his death.
Upon election of Mr. Kendall to the ACS Board, ACS will grant to Mr. Kendall
options to purchase 50,000 shares of ACS Class A Common Stock. The stock options
granted to Mr. Kendall will vest 20% each year in accordance with the terms of
ACS's stock option plans. Such grant is generally consistent with grants to
non-employee directors upon election to the ACS Board. Upon the consummation of
the Merger, Mr. Kendall will no longer be employed by CDSI. As a result, he will
receive a one-time $800,000 severance payment. Such payment, and the amount
thereof, is consistent with payments to people of Mr. Kendall's experience,
stature and position in similar transactions.
AGREEMENT WITH PETER A. BRACKEN
In connection with the negotiation of the Merger Agreement, ACS indicated
that the continued employment of Peter A. Bracken as Chief Executive Officer and
President of CDSI was important to ACS's ability to achieve the Exchange Ratio
which the CDSI Board believed was appropriate. Although the Merger Agreement
does not include as a closing condition a provision requiring ACS and Mr.
Bracken to enter into an employment agreement, ACS and Mr. Bracken have reached
an agreement in principle with respect to Mr. Bracken's continued employment as
the Chief Executive Officer and President of CDSI. Under that agreement in
principle, Mr. Bracken's salary will be reduced from $315,000 to $250,000 to
more closely reflect the salary structure of ACS's executive officers. The
agreement in principle, however, also provides that Mr. Bracken will be entitled
to an annual incentive bonus of up to 150% of his salary and ACS has agreed to
grant Mr. Bracken options to purchase 200,000 shares of ACS Class A Common Stock
at an exercise price equal to the fair market value of the ACS Class A Common
Stock on the Closing Date of the Merger, both of which are consistent with
bonuses and grants to officers of ACS at a level comparable to that of Mr.
Bracken. The stock options granted to Mr. Bracken generally will vest 60% after
three years and 20% each year thereafter in accordance with the terms of ACS's
stock option plans. The vesting of the 60% portion of the option will be
accelerated by one-third for each year to the extent that (a) CDSI achieves
revenue and pre-tax income growth over the previous year of at least 20% for any
of the first three fiscal years ending after the Closing Date and (b) Mr.
Bracken has identified and/ or hired an adequately trained successor to the
reasonable satisfaction of ACS. Mr. Bracken's options will be exercisable from
the date they become vested until the 10th anniversary of the Closing Date of
the Merger. In connection with the agreement in principle, ACS also has agreed
to provide Mr. Bracken with a change in control severance agreement, which
provides for a lump sum payment in cash to Mr. Bracken upon a change of control
(defined to be certain takeover type events that have not been approved and
recommended by the ACS Board) equal to (i) three times the sum of Mr. Bracken's
(A) then current base salary and (B) bonus for the immediately preceding fiscal
year and (ii) a percentage of Mr. Bracken's target bonus for the current fiscal
year based on the period of employment for the year up to the date of the change
of control.
55
SURVIVING CORPORATION ADVISORY BOARD
Upon consummation of the Merger, Hilliard Paige, Paul Ignatius, and James
Parker, each of whom are current directors of CDSI, will become advisory
directors to the board of the Surviving Corporation. Although the precise role
and responsibilities of the advisory board have not been established, it is
anticipated that the members of the advisory board will be asked to continue to
provide guidance and advice to ACS and CDSI with respect to the Surviving
Corporation. As advisory directors, each of Messrs. Paige, Ignatius, and Parker
will be entitled to receive $3,000 for each board meeting attended. In addition,
Messrs. Paige, Ignatius, and Parker, upon appointment as advisory directors,
shall receive a grant of options to purchase 2,000 shares of ACS Class A Common
Stock.
GOVERNMENTAL AND REGULATORY APPROVALS
Certain federal or state regulatory approvals are required and must be
complied with in order to effect the Merger, including the expiration or
termination of the waiting period applicable under the HSR Act, the approval of
the Joint Proxy Statement/Prospectus by the Commission, the declaration by the
Commission of the effectiveness of the Registration Statement under the
Securities Act, Blue Sky authorization from state authorities, and the filing of
the Articles of Merger with the State Department of Assessments and Taxation of
the State of Maryland.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a "pooling of
interests" transaction in accordance with generally accepted accounting
principles. The "pooling of interests" method of accounting assumes that the
combining companies have been merged from inception, and the historical
financial statements for the periods prior to the consummation of the Merger are
restated as though the companies have been combined from inception.
The Merger Agreement provides that a condition to the consummation of the
Merger is the receipt of letters from Price Waterhouse LLP and Ernst & Young
LLP, independent accountants for ACS and CDSI, respectively, to the effect that
the Merger should be treated for financial accounting purposes as a "pooling of
interests" transaction.
DISSENTERS' APPRAISAL RIGHTS
Under the DGCL, holders of ACS Class A Common Stock are not entitled to
demand appraisal of, or payment for, their shares as a result of the Merger or
the issuance of shares to CDSI stockholders.
Under the MGCL, holders of CDSI Common Stock are not entitled to demand
appraisal of, or payment for, their shares as a result of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary addresses certain material federal income tax
consequences of the Merger to ACS, CDSI, and to stockholders of CDSI who are
residents or citizens of the United States. The summary is based on current
provisions of the Code, Treasury regulations, current administrative
pronouncements of the Internal Revenue Service (the "IRS"), and judicial
decisions now in effect, all of which are subject to change (possibly
retroactively). This summary does not address foreign, state, or local tax
consequences, nor does it address estate or gift tax considerations. The
discussion does not purport to be a complete analysis or listing of all
potential tax effects relevant to ACS, CDSI, or their stockholders nor does it
address the tax consequences that may be relevant to particular categories of
shareholders subject to special treatment under certain federal income tax laws.
Accordingly, each stockholder is urged to contact his or her own tax advisor
regarding the tax consequences of the Merger in his or her particular situation.
Neither ACS nor CDSI has requested, nor will they request, a ruling from the
IRS in connection with the Merger or any matters discussed herein. This
discussion is not binding on the IRS or the courts, and there can be no
assurance that the IRS or the courts will not take one or more contrary
positions.
56
ACS will receive from its counsel, Hughes & Luce, L.L.P., an opinion to the
effect that (i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code and that each party to the Merger will be a party
to the reorganization within the meaning of Section 368(b) of the Code and (ii)
ACS, Merger Sub, and CDSI will not recognize any gain or loss for U.S. federal
income tax purposes as a result of the Merger. CDSI will receive the opinion of
its counsel, Miles & Stockbridge, a Professional Corporation, to the effect that
(i) the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and each party to the Merger will be a party to the
reorganization within the meaning of Section 368(b) of the Code and (ii) no gain
or loss will be recognized for federal income tax purposes by holders of CDSI
Common Stock as a result of the consummation of the Merger, except for gain or
loss attributable to cash received in lieu of fractional sales. The opinions of
Hughes & Luce, L.L.P. and Miles & Stockbridge, a Professional Corporation are
collectively referred to herein as the "OPINIONS."
The Opinions are subject to certain qualifications and assumptions as noted
therein and are based on certain representations of ACS, Merger Sub, and CDSI.
These representations may include, among others, the following: (i) following
the Merger, CDSI will hold at least 90% of the fair market value of its net
assets, at least 70% of the fair market value of its gross assets, at least 90%
of the fair market value of Merger Sub's net assets, and at least 70% of the
fair market value of Merger Sub's gross assets held immediately prior to the
Merger; (ii) after the Merger CDSI will either continue CDSI's historic business
or use a significant portion of CDSI's business assets in a business; and (iii)
to the best of the knowledge of the management of CDSI, there is no present plan
or intention of CDSI's shareholders to sell or otherwise dispose of the ACS
Class A Common Stock to be received by them in the Merger in exchange for their
CDSI Common Stock that would reduce the ownership of CDSI's stockholders in ACS
to a number of shares having a value of less than 45% of the value of all CDSI
Common Stock outstanding immediately prior to the Merger.
Assuming the Merger qualifies as a reorganization under Section 368(a) of
the Code, the following Federal income tax consequences will occur:
(a) no gain or loss will be recognized by ACS, Merger Sub, or CDSI in
connection with the Merger;
(b) no gain or loss will be recognized by a stockholder of CDSI Common
Stock who exchanges all of his shares of CDSI Common Stock solely for shares
of ACS Class A Common Stock in the Merger;
(c) the aggregate tax basis of the shares of ACS Class A Common Stock
received by a CDSI stockholder in the Merger (including any fractional share
interest to which they may be entitled) will be the same as the aggregate
tax basis of the CDSI Common Stock surrendered in exchange therefor;
(d) the holding period of the shares of ACS Class A Common Stock
received by a CDSI stockholder in the Merger (including any fractional share
interest to which they may be entitled) will include the holding period of
the shares of CDSI Common Stock surrendered in exchange therefor, provided
that such shares of CDSI Common Stock are held as capital assets at the
Effective Time; and
(e) a CDSI stockholder receiving cash in lieu of a fractional share will
recognize gain or loss upon such payment equal to the difference, if any,
between such stockholder's basis in the fractional share (as described in
paragraph (c) above) and the amount of cash received. Such gain or loss will
be a capital gain or loss if the CDSI Common Stock is held as a capital
asset at the Effective Time.
A successful challenge by the IRS to the tax-free reorganization status of
the Merger would result in a CDSI shareholder recognizing taxable gain or loss
with respect to the difference between the stockholder's basis in his or her
shares and the fair market value, as of the Effective Date, of the ACS Class A
Common Stock received in exchange therefor. In such event, a stockholder's basis
in the ACS Class A Common Stock so received would equal its fair market value
and the holding period for such stock would begin on the Effective Date.
57
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS NOT
TAX ADVICE AND CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, WITHOUT CONSIDERATION OF
THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH SHAREHOLDER'S SITUATION.
ACCORDINGLY, EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX AND
FINANCIAL ADVISORS AS TO MATTERS DESCRIBED HEREIN AND ALSO AS TO ANY ESTATE,
GIFT, STATE OR LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined financial position or results of operations of future periods or
the results that actually would have been realized had ACS and CDSI been a
combined company during the specified periods. The unaudited pro forma combined
condensed financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with, the
historical consolidated financial statements of ACS and CDSI, including the
notes thereto, incorporated herein by reference.
The following unaudited pro forma combined condensed financial statements
give effect to the proposed Merger of ACS and CDSI on a "pooling of interests"
basis. The unaudited pro forma combined condensed financial statements are based
on the respective historical consolidated financial statements, including the
respective notes thereto, of ACS and CDSI, which are incorporated herein by
reference.
The unaudited pro forma combined condensed balance sheet assumes that the
Merger took place on September 30, 1997 and combines ACS's and CDSI's September
30, 1997 consolidated balance sheets. The unaudited pro forma combined condensed
statements of income assume that the Merger took place as of the beginning of
the periods presented and combine ACS's consolidated statements of income for
the three month periods ended September 30, 1997 and 1996, and for the fiscal
years ended June 30, 1997, 1996 and 1995 with CDSI's consolidated statements of
income for the same periods. The unaudited pro forma combined condensed
statement of income for the fiscal year ended June 30, 1997 has also been
adjusted to give pro forma effect to CDSI's June 18, 1997 acquisition of
Analytical Systems Engineering Corporation ("ASEC") as if it had occurred on
July 1, 1996.
58
ACS AND CDSI
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ACS CDSI(A) ADJUSTMENTS COMBINED
---------- ---------- ------------- -----------
ASSETS
Current assets:
Cash, cash equivalents and ATM cash......................... $ 16,794 $ 7,235 $ $ 24,029
Accounts receivable, net.................................... 116,071 86,372 202,443
Inventory................................................... 9,444 -- 9,444
Other current assets........................................ 24,001 7,009 31,010
---------- ---------- ------------- -----------
Total current assets...................................... 166,310 100,616 266,926
Property, equipment and purchased software, net............... 107,748 33,396 (880)(c) 140,264
Goodwill and intangibles, net................................. 294,362 45,779 (690)(d) 339,451
Other long-term assets........................................ 6,729 6,095 12,824
---------- ---------- ------------- -----------
Total assets.............................................. $ 575,149 $ 185,886 $ (1,570) $ 759,465
---------- ---------- ------------- -----------
---------- ---------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................... $ 68,358 $ 28,976 $ 3,788(e) $ 101,122
Accrued compensation and benefits........................... 12,149 19,601 2,027(f) 33,777
Notes payable and current portion of long-term debt......... 11,176 6,854 18,030
Other current liabilities................................... 13,402 495 13,897
---------- ---------- ------------- -----------
Total current liabilities................................. 105,085 55,926 5,815 166,826
Long-term debt................................................ 74,532 39,432 113,964
Other long-term liabilities................................... 36,029 9,128 45,157
---------- ---------- ------------- -----------
Total liabilities......................................... 215,646 104,486 5,815 325,947
---------- ---------- ------------- -----------
Stockholders' equity:
Common stock................................................ 359 629 (518)(g) 470
Additional paid-in capital.................................. 258,799 17,469 518(g) 276,786
Retained earnings........................................... 100,345 63,302 (7,385)(g) 156,262
---------- ---------- ------------- -----------
Total stockholders' equity................................ 359,503 81,400 (7,385) 433,518
---------- ---------- ------------- -----------
Total liabilities and stockholders' equity................ $ 575,149 $ 185,886 $ (1,570) $ 759,465
---------- ---------- ------------- -----------
---------- ---------- ------------- -----------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
59
ACS AND CDSI
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
--------------------- PRO FORMA PRO FORMA
ACS CDSI(A) ADJUSTMENTS(B) COMBINED
---------- --------- -------------- -------------
Revenues................................................... $ 172,475 $ 92,519 $ $ 264,994
Operating expenses:
Wages and benefits....................................... 64,247 49,797 114,044
Services and supplies.................................... 45,127 32,770 77,897
Rent, lease and maintenance.............................. 38,492 2,473 40,965
Depreciation and amortization............................ 8,609 1,994 10,603
Other operating expenses................................. 2,430 145 2,575
---------- --------- ------- -------------
Total operating expenses............................... 158,905 87,179 246,084
---------- --------- ------- -------------
Operating income......................................... 13,570 5,340 18,910
Interest and other expenses (income), net.................. (5,010) 923 (4,087)
---------- --------- ------- -------------
Pretax profit............................................ 18,580 4,417 22,997
Income tax expense......................................... 7,571 1,976 9,547
---------- --------- ------- -------------
Net income............................................... $ 11,009 $ 2,441 $ $ 13,450
---------- --------- ------- -------------
---------- --------- ------- -------------
Earnings per common and common equivalent
share.................................................... $ .30 $ .28
---------- -------------
---------- -------------
Weighted average shares outstanding........................ 36,930 48,383(h)
---------- -------------
---------- -------------
Earnings per common share assuming full dilution........... $ .30 $ .28
---------- -------------
---------- -------------
Weighted average shares outstanding assuming full
dilution................................................. 36,930 48,247(h)
---------- -------------
---------- -------------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
60
ACS AND CDSI
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
--------------------- PRO FORMA PRO FORMA
ACS CDSI(A) ADJUSTMENTS(B) COMBINED
---------- --------- -------------- -------------
Revenues................................................... $ 144,332 $ 70,073 $ $ 214,405
Operating expenses:
Wages and benefits....................................... 56,361 36,980 93,341
Services and supplies.................................... 31,829 26,051 57,880
Rent, lease and maintenance.............................. 31,546 1,296 32,842
Depreciation and amortization............................ 6,597 935 7,532
Other operating expenses................................. 2,243 187 2,430
---------- --------- ------- -------------
Total operating expenses............................... 128,576 65,449 194,025
---------- --------- ------- -------------
Operating income......................................... 15,756 4,624 20,380
Interest and other expenses (income), net.................. 1,354 (8) 1,346
---------- --------- ------- -------------
Pretax profit............................................ 14,402 4,632 19,034
Income tax expense......................................... 5,869 1,847 7,716
---------- --------- ------- -------------
Net income............................................... $ 8,533 $ 2,785 $ $ 11,318
---------- --------- ------- -------------
---------- --------- ------- -------------
Earnings per common and common equivalent
share.................................................... $ .23 $ .24
---------- -------------
---------- -------------
Weighted average shares outstanding........................ 36,462 46,905(h)
---------- -------------
---------- -------------
Earnings per common share assuming full dilution........... $ .23 $ .24
---------- -------------
---------- -------------
Weighted average shares outstanding assuming full
dilution................................................. 36,570 47,331(h)
---------- -------------
---------- -------------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
61
ACS AND CDSI
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA FOR THE MERGER
----------------------------------------------- ACQUISITION PRO FORMA
---------------------------
HISTORICAL PRO FORMA PRO FORMA
-------------------- MERGER ASEC COMBINED
ACS CDSI(A) ADJUSTMENTS(B) COMBINED ADJUSTMENTS(J) WITH ASEC
--------- --------- -------------- --------- -------------- -----------
Revenues................................... $ 624,533 $ 304,392 $ $ 928,925 $ 66,265 $ 995,190
Operating expenses:
Wages and benefits....................... 237,538 158,242 395,780 28,395 424,175
Services and supplies.................... 147,933 116,171 264,104 28,275 292,379
Rent, lease and maintenance.............. 127,042 5,795 132,837 1,783 134,620
Depreciation and amortization............ 31,266 4,244 35,510 2,774 38,284
Other operating expenses................. 9,345 1,083 10,428 264 10,692
--------- --------- -------------- --------- ------- -----------
Total operating expenses............... 553,124 285,535 838,659 61,491 900,150
--------- --------- -------------- --------- ------- -----------
Operating income......................... 71,409 18,857 90,266 4,774 95,040
Interest and other expenses, net........... 6,414 282 6,696 3,180 9,876
--------- --------- -------------- --------- ------- -----------
Pretax profit............................ 64,995 18,575 83,570 1,594 85,164
Income tax expense......................... 26,485 7,419 33,904 1,697 35,601
--------- --------- -------------- --------- ------- -----------
Net income............................... $ 38,510 $ 11,156 $ $ 49,666 $ (103) $ 49,563
--------- --------- -------------- --------- ------- -----------
--------- --------- -------------- --------- ------- -----------
Earnings per common and common equivalent
share.................................... $ 1.05 $ 1.05 $ 1.04
--------- --------- -----------
--------- --------- -----------
Weighted average shares outstanding........ 36,567 47,452(h) 47,777(h)
--------- --------- -----------
--------- --------- -----------
Earnings per common share assuming full
dilution................................. $ 1.05 $ 1.04 $ 1.04
--------- --------- -----------
--------- --------- -----------
Weighted average shares outstanding
assuming full dilution................... 36,640 47,535(h) 47,860(h)
--------- --------- -----------
--------- --------- -----------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
62
ACS AND CDSI
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ACS CDSI(A) ADJUSTMENTS(B) COMBINED
---------- ---------- -------------- -----------
Revenues..................................................... $ 396,509 $ 251,099 $ $ 647,608
Operating expenses:
Wages and benefits......................................... 158,619 140,040 298,659
Services and supplies...................................... 100,625 84,925 185,550
Rent, lease and maintenance................................ 76,412 5,902 82,314
Depreciation and amortization.............................. 15,031 3,419 18,450
Other operating expenses................................... 5,070 982 6,052
---------- ---------- -------------- -----------
Total operating expenses............................... 355,757 235,268 591,025
---------- ---------- -------------- -----------
Operating income........................................... 40,752 15,831 56,583
Interest and other expenses (income), net.................... 833 (167) 666
---------- ---------- -------------- -----------
Pretax profit.............................................. 39,919 15,998 55,917
Income tax expense........................................... 16,163 6,229 22,392
---------- ---------- -------------- -----------
Net income................................................. $ 23,756 $ 9,769 $ $ 33,525
---------- ---------- -------------- -----------
---------- ---------- -------------- -----------
Earnings per common and common equivalent share.............. $ .82 $ .85
---------- -----------
---------- -----------
Weighted average shares outstanding.......................... 28,880 39,321(h)
---------- -----------
---------- -----------
Earnings per common share assuming full dilution............. $ .81 $ .84
---------- -----------
---------- -----------
Weighted average shares outstanding assuming full dilution... 29,150 39,809(h)
---------- -----------
---------- -----------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
63
ACS AND CDSI
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
---------------------- PRO FORMA PRO FORMA
ACS CDSI(A) ADJUSTMENTS(B) COMBINED
---------- ---------- -------------- -----------
Revenues..................................................... $ 313,181 $ 220,667 $ $ 533,848
Operating expenses:
Wages and benefits......................................... 106,966 141,714 248,680
Services and supplies...................................... 77,613 55,124 132,737
Rent, lease and maintenance................................ 80,250 7,411 87,661
Depreciation and amortization.............................. 11,847 2,937 14,784
Other operating expenses................................... 4,963 645 5,608
---------- ---------- -------------- -----------
Total operating expenses............................... 281,639 207,831 489,470
---------- ---------- -------------- -----------
Operating income........................................... 31,542 12,836 44,378
Interest and other expenses (income), net.................... 1,755 (347) 1,408
---------- ---------- -------------- -----------
Pretax profit.............................................. 29,787 13,183 42,970
Income tax expense........................................... 12,183 5,132 17,315
---------- ---------- -------------- -----------
Net income................................................. $ 17,604 $ 8,051 $ $ 25,655
---------- ---------- -------------- -----------
---------- ---------- -------------- -----------
Earnings per common and common equivalent share.............. $ .69 $ .71
---------- -----------
---------- -----------
Weighted average shares outstanding.......................... 25,616 35,998(h)
---------- -----------
---------- -----------
Earnings per common share assuming full dilution............. $ .68 $ .71
---------- -----------
---------- -----------
Weighted average shares outstanding assuming full dilution... 25,838 36,243(h)
---------- -----------
---------- -----------
See accompanying Notes to Pro Forma Combined Condensed Financial Statements.
64
ACS AND CDSI
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On September 20, 1997, ACS and CDSI entered into a definitive agreement that
provides for the merger of CDSI into ACS. Under the terms of the agreement, each
outstanding share of CDSI will be converted into the right to receive 1.759
shares of ACS Class A Common Stock. The business combination is to be accounted
for using the "pooling of interests" method of accounting for business
combinations.
The unaudited pro forma combined condensed balance sheet combines the ACS
and CDSI consolidated balance sheets as of September 30, 1997. For the unaudited
pro forma combined condensed statements of income, the ACS consolidated
statements of income for the three months ended September 30, 1997 and 1996 and
the fiscal years ended June 30, 1997, 1996 and 1995 have been combined with the
CDSI consolidated statements of income for the same periods. There were no
material transactions between ACS and CDSI during any period presented, and
there are no material differences in the accounting policies of ACS and CDSI.
2. NON-RECURRING ITEMS ATTRIBUTABLE TO THE TRANSACTION
ACS and CDSI expect that certain adjustments will be recorded subsequent to
the Merger to accrue for specific and identifiable costs related to the Merger.
These adjustments are expected to include direct transaction expenses such as
investment banking, legal, accounting, financial printing and related fees,
integration expenses such as severance and costs associated with consolidating
redundant facilities and equipment, and other costs. These pretax costs are
estimated to be $11 million. Because the transaction has not been completed,
this amount is a preliminary estimate and is subject to revision as more
information becomes available.
Adjustments for these costs have been included, net of the estimated tax
benefits, in the accompanying unaudited pro forma combined condensed balance
sheet. These adjustments have not been included in the accompanying unaudited
pro forma combined condensed statements of income as they are non-recurring and
not expected to be replicated in future periods.
ACS expects to achieve cost savings primarily through the consolidation of
certain data processing, marketing and administrative functions. The cost
savings are expected to be achieved in varying amounts over varying periods of
time. No adjustments have been reflected in the unaudited pro forma combined
condensed statements of income for these anticipated cost savings.
3. PRO FORMA ADJUSTMENTS
There were no intercompany transactions between ACS and CDSI during the
periods presented.
(A) PRO FORMA COMBINED FINANCIAL STATEMENTS - Certain reclassifications have
been made to conform CDSI's financial statements to those of ACS.
(B) PRO FORMA ADJUSTMENTS - Adjustments for costs related to the Merger have
not been included in the unaudited pro forma combined condensed
statements of income as they result directly from the transaction and are
not expected to be included in the combined net income beyond the twelve
months succeeding the transaction.
(C) PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE, NET - Certain equipment,
software and building improvements have been written off primarily as a
result of consolidating redundant data processing facilities.
(D) GOODWILL AND INTANGIBLES, NET - Certain start-up costs of a foreign
operation capitalized in CDSI's balance sheet have been written off.
(E) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - A liability has been
established for estimated transaction and integration costs relating to
the Merger.
65
ACS AND CDSI
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. PRO FORMA ADJUSTMENTS (CONTINUED)
(F) ACCRUED COMPENSATION AND BENEFITS - A liability has been established for
employee severance costs related to the Merger.
(g) STOCKHOLDERS' EQUITY - Stockholders' equity has been adjusted to reflect
the following:
(I) COMMON STOCK - Common stock has been adjusted to reflect the exchange
of 6,286,799 shares of CDSI common stock, for 11,058,479 shares of
ACS Class A Common Stock. The transaction also contemplates the
conversion of ACS Class B Common Stock into Class A Common Stock in a
number sufficient for Class A Common Stock to be the majority voting
class. Because the Class A Common Stock and Class B Common Stock each
have a par value of $.01, the conversion has no effect on the
reported balance of Common Stock.
(II) ADDITIONAL PAID-IN CAPITAL - Adjustments to additional paid-in
capital are limited to those necessary to offset the adjustments to
the par value of common stock discussed above.
(III) RETAINED EARNINGS - Retained earnings has been adjusted for the net
effect of the estimated transaction, integration, and other costs
related to the Merger.
(H) EARNINGS PER SHARE - Pro forma weighted average common shares
outstanding for all periods presented are based on ACS's and CDSI's
combined historical weighted average shares, after adjustment of CDSI's
historical number of shares by the Exchange Ratio of 1.759. In addition,
pro forma weighted average common shares outstanding for the period ended
June 30, 1997, for purposes of the combination including ASEC, are
adjusted for CDSI shares issued in connection with the acquisition of
ASEC as if these shares were issued July 1, 1996.
(J) PRO FORMA ASEC ACQUISITION ADJUSTMENTS - Amounts represent ASEC's
unaudited consolidated statement of income for the period July 1, 1996 to
June 17, 1997 (the day prior to acquisition by CDSI), adjusted for the
following:
(I) REVENUES - Increase of $.5 million reflects recognition of previously
reserved contract revenues.
(II) WAGES AND BENEFITS - Decrease of $.9 million reflects savings
expected as a result of certain ASEC officers being paid in
accordance with new employee contracts.
(III) DEPRECIATION AND AMORTIZATION - Increase of $.9 million reflects
the additional amortization expense of approximately $2.8 million
resulting from the allocation of the excess cost of the acquisition
to intangible assets, after recording the fair value of the assets
acquired and the liabilities assumed, and the net reduction in
depreciation and amortization expense of approximately $1.9 million
as a result of recording ASEC's assets at their respective fair
values. Of the $2.8 million amortization expense, approximately $1.0
million relates to an intangible asset whose amortization period is
principally one year.
(IV) OTHER OPERATING EXPENSES - Decrease of $.6 million reflects the
reduction in outside services paid to consultants for duplicate
services.
(V) INTEREST AND OTHER EXPENSES, NET - Increase of $2.6 million reflects
$3.2 million in interest expense for the financing of the transaction
based upon the terms of CDSI's term loan funded specifically for this
acquisition, and a $.6 million reduction in interest expense on
ASEC's debt that was extinguished in connection with the closing of
the acquisition.
(VI) INCOME TAX EXPENSE - Increase of $.5 million reflects the income tax
effect for the pro forma adjustments at ASEC's effective tax rate
after consideration of the nondeductibility of certain intangible
amortization.
66
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, the Charter of CDSI, as in effect immediately prior
to the Effective Time, shall be the Charter of the Surviving Corporation, and
the Bylaws of CDSI, as in effect immediately prior to the Effective Time, shall
be the bylaws of the Surviving Corporation.
The directors of Merger Sub immediately prior to the Effective Time shall be
the directors of the Surviving Corporation, each to hold office in accordance
with the Charter and Bylaws of CDSI until their successors are duly elected or
appointed and qualified. The officers of CDSI immediately prior to the Effective
Time shall be the officers of the Surviving Corporation, each to hold office in
accordance with the Charter and bylaws of CDSI until their successors are duly
elected or appointed and qualified. Certain of the directors of CDSI immediately
prior to the Effective Time shall be advisory directors of the Surviving
Corporation. Although the precise role and responsibilities of the advisory
board of CDSI have not been established, it is anticipated that the members of
the advisory board will be asked to continue to provide guidance and advice to
ACS and CDSI with respect to the business of the Surviving Corporation.
Management of ACS and CDSI believe that, as a result of the Merger, the
combined ACS and CDSI (the "COMBINED COMPANY") will have a strong presence in
both the commercial and governmental sectors and will be well positioned to
capitalize on the anticipated growth in government outsourcing. Management of
ACS and CDSI believe that the Combined Company will have a more diversified
service offering and a stronger collection of information technology skills,
processes, and resources. ACS's customer base is primarily in the commercial
sector, whereas CDSI's customer base is almost exclusively focused on the
government market. Management of ACS and CDSI further believe that the Merger
will allow both ACS and CDSI to strengthen their competitive positions in their
respective markets, as well as to provide a sharing of successful commercial and
government processes. As a result of the Merger, management of ACS and CDSI
believe the Combined Company will also have a greater critical mass for pursuing
larger commercial and government opportunities.
Management of ACS and CDSI believe that certain costs savings and synergies
will result from the combination, primarily related to the combining of certain
data centers and overhead functions. These expense reductions, when completed,
are expected to have a pre-tax benefit of approximately $4.1 million.
For a discussion of the background of the Merger and the recommendations of
the respective boards of directors of ACS and CDSI relating thereto, see "The
Proposed Merger and Related Transactions." For a discussion of the expected
dividend policy of ACS after the Merger, see "Market Price Data and Dividend
Information--Dividend Policy."
67
SELECTED FINANCIAL INFORMATION(1)
SELECTED ACS HISTORICAL FINANCIAL INFORMATION
The selected balance sheet data at September 30, 1997 and the selected
income statement data for the three months ended September 30, 1997 and 1996 are
derived from unaudited financial statements, which, in the opinion of management
of ACS, reflect all adjustments, consisting only of normal, recurring
adjustments necessary to present fairly the information set forth therein. The
results for the three months ended September 30, 1997 are not indicative of the
results that may be expected for any other interim period or for the year as a
whole. The selected consolidated financial data set forth below for the fiscal
years ended June 30, 1997, 1996, 1995, 1994, and 1993, are derived from the
Consolidated Financial Statements of ACS, which were audited by Price Waterhouse
LLP, independent accountants, and which are, for fiscal years ended June 30,
1997, 1996, and 1995, incorporated herein by reference to the ACS Annual Report
on Form 10-K for the fiscal year ended June 30, 1997. The following selected
consolidated financial data of ACS are qualified by reference to, and should be
read in conjunction with, the Consolidated Financial Statements of ACS and
accompanying Notes thereto incorporated by reference herein and "Selected
Financial Information--ACS Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
(from continuing operations):
Revenues (2)............................. $ 172,475 $ 144,332 $ 624,533 $ 396,509 $ 313,181 $ 271,055 $ 189,064
Operating expenses:
Wages and benefits..................... 64,247 56,361 237,538 158,619 106,966 91,117 62,902
Services and supplies.................. 45,127 31,829 147,933 100,625 77,613 74,947 48,983
Rent, lease and maintenance............ 38,492 31,546 127,042 76,412 80,250 66,075 45,972
Depreciation and amortization.......... 8,609 6,597 31,266 15,031 11,847 8,524 6,731
Other operating expenses............... 2,430 2,243 9,345 5,070 4,963 5,582 7,101
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................. 158,905 128,576 553,124 355,757 281,639 246,245 171,689
--------- --------- --------- --------- --------- --------- ---------
Operating income......................... 13,570 15,756 71,409 40,752 31,542 24,810 17,375
Interest and other expenses (income),
net.................................... (5,010) 1,354 6,414 833 1,755 4,598 1,620
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes............... 18,580 14,402 64,995 39,919 29,787 20,212 15,755
Income tax expense....................... 7,571 5,869 26,485 16,163 12,183 8,287 6,437
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations........ 11,009 8,533 $ 38,510 $ 23,756 $ 17,604 $ 11,925 $ 9,318
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share....................... $ .30 $ .23 $ 1.05 $ .82 $ .69 $ .52 $ .41
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares outstanding...... 36,930 36,462 36,567 28,880 25,616 22,826 22,768
SEPTEMBER JUNE 30,
30, -----------------------------------------------------
1997 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital...................... $ 61,225 $ 65,787 $ 49,961 $ 51,602 $ 50,653 $ 28,958
Total assets......................... 575,149 577,427 533,605 225,731 190,055 187,301
Total long-term debt (less current
portion)........................... 74,532 89,534 57,208 37,940 80,001 61,731
Cumulative redeemable preferred
stock.............................. -- -- 1,100 1,100 1,100 7,081
Total stockholders' equity........... 359,503 348,548 302,954 106,624 48,166 55,437
- ------------------------------
(1) At the end of fiscal 1994, ACS completed a reorganization and spin-off of
certain businesses unrelated to information processing, which were accounted
for as discontinued operations. The results reflected herein are from
continuing operations. These results also reflect revenues and expenses
related to the B of A Texas contract, which expired August 31, 1995. See
Note 12 of the Notes to the ACS Consolidated Financial Statements. Revenues
from the contract were $4.6 million, $35.1 million, $37.2 million, and $28.3
million for fiscal years 1996, 1995, 1994, and 1993, respectively, while
direct expenses for the same periods were $0.8 million, $7.4 million, $9.5
million, and $7.0 million, respectively. There were no revenues or expenses
from the contract after fiscal year 1996.
(2) ACS has acquired 24 companies during the periods presented, and therefore
revenues between periods are not comparable. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
68
ACS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
ACS derives its revenues from information technology services and electronic
commerce services primarily in the United States. ACS's information technology
services include data processing outsourcing, image management solutions, and
professional services. A substantial portion of ACS's revenues is derived from
recurring monthly charges to its customers under service contracts with initial
terms that vary from one to ten years. For the year ended June 30, 1997,
approximately 88% of ACS's revenues were recurring. Recurring revenues are
defined by ACS as revenues derived from services that are used by ACS's
customers each year in connection with their ongoing businesses, and accordingly
exclude conversion and deconversion fees, software license fees, product
installation fees, and hardware sales. From inception through September 30,
1997, ACS has purchased 34 information processing companies, which has resulted
in geographic expansion, growth, and diversification of ACS's customer base,
expansion of services offered, and increased economies of scale. Approximately
two-thirds of the increase in revenues since 1988 (the year ACS was formed) has
been attributable to these acquisitions.
RESULTS OF OPERATIONS
The following table sets forth certain items from ACS's Consolidated
Statements of Income expressed as a percentage of revenues:
PERCENTAGE OF REVENUES
-----------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED JUNE 30,
-------------------- -------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
Operating expenses:
Wages and benefits.................................. 37.2 39.0 38.0 40.0 34.2
Services and supplies............................... 26.2 22.0 23.7 25.4 24.8
Rent, lease and maintenance......................... 22.3 21.9 20.3 19.3 25.6
Depreciation and amortization....................... 5.0 4.6 5.1 3.8 3.8
Other operating expenses............................ 1.4 1.6 1.5 1.2 1.5
--------- --------- --------- --------- ---------
Total operating expenses.............................. 92.1 89.1 88.6 89.7 89.9
--------- --------- --------- --------- ---------
Operating income...................................... 7.9 10.9 11.4 10.3 10.1
Interest and other expenses (income), net............. (2.9) .9 1.0 0.2 0.6
--------- --------- --------- --------- ---------
Pretax profit......................................... 10.8 10.0 10.4 10.1 9.5
Income tax expense.................................... 4.4 4.1 4.2 4.1 3.9
--------- --------- --------- --------- ---------
Net income............................................ 6.4% 5.9% 6.2% 6.0% 5.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues increased $28.2 million, or 20%, to $172.5 million in the quarter
ended September 30, 1997 (the first quarter of the Company's 1998 fiscal year),
from $144.3 million in the first quarter of fiscal 1997, due to the signing of
new contracts, growth in the electronic commerce business line, formerly known
as EFT, and acquisitions. This growth was achieved despite the fact that the
Company's largest customer experienced a two week work stoppage in August as a
result of a strike, as discussed in more detail in the following paragraph. Of
the 20% increase in revenue, approximately 11% was from internal growth and 9%
was from acquisitions. During the first quarter of fiscal 1998, the Company
benefited from several large contracts signed during the second and third
quarters of fiscal 1997, as well as continued growth in its electronic commerce
line of business. The Company acquired one business during the quarter, which
had
69
historical annual revenues of approximately $1.6 million. Five business
acquisitions have occurred since the first quarter of fiscal 1997. Revenues from
these acquisitions were approximately $12.4 million for the quarter ended
September 30, 1997.
As noted above, the Company's largest customer experienced a work stoppage
in August as a result of a national strike by a teamsters union. The strike
lasted for approximately two weeks, resulting in minimal operations for the
customer and, in turn, significantly reduced volumes for ACS, representing a
revenue loss of over $2.0 million. Although revenues have returned to pre-strike
levels, the Company has been informed that the customer also faces labor
negotiations with its pilots, who have threatened work stoppages in early 1998.
Total operating expenses were $158.9 million in the first quarter of fiscal
1998, an increase of 23.6% from $128.6 million in the first quarter of fiscal
1997. Operating expenses as a percentage of revenues increased from 89.1% in the
first quarter of fiscal 1997 to 92.1% in the first quarter of fiscal 1998. This
increase is primarily a result of a non-recurring $6.0 million charge to rent,
lease and maintenance expense for a binding commitment to a hardware lessor to
terminate a computer lease obligation prior to the expiration of its term in
December 1999. This computer will be replaced with newer CMOS technology,
providing improved client service and positively impacting operating income
beginning in the first quarter of fiscal 1999. Exclusive of this charge,
operating expenses as a percentage of revenues would have been 88.6%. Wages and
benefits decreased from 39.0% of revenues in the first quarter of fiscal 1997 to
37.2% of revenues in the first quarter of fiscal 1998. The decrease is primarily
a result of growth in the electronic commerce business line which offset the
growth in our more labor intensive professional services businesses. Services
and supplies increased to 26.2% of revenues in the first quarter of fiscal 1998,
compared to 22.0% of revenues in the first quarter of fiscal 1997. The increase
is primarily the result of growth in the Company's professional services and
electronic commerce business lines. Rent, lease and maintenance increased to
22.3% of revenues in the first quarter of fiscal 1998, compared to 21.9% of
revenues in the first quarter of fiscal 1997 as a result of the non-recurring
technology upgrade charge. Depreciation and amortization increased to 5.0% of
revenues in the first quarter of fiscal 1998, compared to 4.6% of revenues in
the first quarter of fiscal 1997, due to capital expenditures for computer
hardware and software and goodwill recorded in connection with the five
acquisitions made in the last twelve months.
Before the non-recurring charge mentioned previously, operating income
increased $3.8 million, or 24.1%, to $19.6 million in the first quarter of
fiscal 1998, compared to $15.8 million in the first quarter of fiscal 1997.
Operating income for the quarter as a percentage of revenues was 11.4% before
the charge, compared with 10.9% for the first quarter of fiscal 1997.
Net interest and other expenses (income) changed from a $1.4 million expense
in the first quarter of fiscal 1997 to $5.0 million of income in the first
quarter of fiscal 1998. This change is attributable to the recognition of a $6.7
million gain upon the redemption of the Company's investment in a customer's
preferred stock.
The Company's effective tax rate of approximately 41% exceeded the federal
statutory rate of 35%, due primarily to the amortization of certain
acquisition-related costs that are non-deductible for tax purposes, plus the net
effect of state income taxes.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Revenues increased $228.0 million, or 58%, to $624.5 million for fiscal
1997. Revenues from acquisitions contributed $170.9 million, while revenues from
internally generated sales contributed $57.1 million to the overall increase.
Outsourcing services revenues increased 61% over fiscal 1996, primarily as a
result of the effect of a full year's contribution of The Genix Group, Inc.
("GENIX"), which was acquired in June 1996. In addition, a portion of the
increase was attributable to new contracts signed in fiscal 1997 and the effect
of a full year's contribution from contracts signed in fiscal 1996. Revenues
from the image management business line increased 50% to $145.5 million, as a
result of the effect of a full year's
70
contribution of Unibase Technologies, Inc. ("UNIBASE"), which was acquired in
February 1996 and the subsequent revenue growth in that subsidiary. Revenues
from professional services increased 90% to $92.7 million primarily due to four
acquisitions completed in fiscal 1997. Revenues generated by EFT services
increased 36% to $92.9 million due to an 82% increase in the number of automated
teller machines ("ATMS") processed, primarily low volume ATMs located in retail
establishments.
Total operating expenses increased $197.4 million, or 55%, to $553.1 million
for fiscal 1997, as a result of ACS's higher revenues. The changes from year to
year in the various operating expense categories, as a percentage of revenues,
are primarily due to the mix of acquired companies across ACS's four business
lines. Acquisitions in the professional services and image management business
lines are relatively more labor intensive, such that wages and benefits as a
percentage of revenues will generally increase while the other operating expense
categories will reflect a corresponding decrease. Acquisitions in the
outsourcing business line, such as Genix, will have a larger proportion of
expenses related to computer hardware and software and, therefore, rent, lease,
and maintenance as a percentage of revenues will increase, while the other
operating expense categories will reflect a corresponding decrease. Wages and
benefits expense and services and supplies expense, as a percentage of revenues,
decreased from fiscal 1996 due primarily to the Genix acquisition. Rent, lease,
and maintenance expense, as a percentage of revenues, increased due to the Genix
acquisition and increased demand for data processing in the outsourcing services
business line. Depreciation and amortization expense, as a percentage of
revenues, increased due to the Genix acquisition and six acquisitions completed
in fiscal 1997. During fiscal 1997, ACS recorded a charge of $6.0 million ($4.6
million in other operating expenses and $1.4 million in depreciation and
amortization) relating to the consolidation of two of its mainframe data centers
and the upgrading of certain computer hardware and software to newer technology.
Also, during fiscal 1997, the Texas Supreme Court, in a unanimous decision,
overturned a lower court's judgment against ACS for which ACS had previously
accrued approximately $6 million. During the third quarter of fiscal 1997, ACS
reversed this accrual to other operating expenses.
Operating income for fiscal 1997 increased $30.7 million, or 75%, to $71.4
million. Operating income as a percentage of revenues for fiscal 1997 was 11.4%
compared with 10.3% for fiscal 1996. Interest and other expenses increased as a
percentage of revenues as a result of debt incurred to finance the Genix
acquisition as well as the acquisitions completed in fiscal 1997. The effective
tax rates for fiscal 1997 and fiscal 1996 were 41% and 40%, respectively, and
exceeded the federal statutory rate of 35% due to certain non-deductible
acquisition-related costs and the net effect of state income taxes.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
In August 1995, ACS ceased providing services to its largest customer at
that time, B of A Texas at the expiration of their contract, due to their
migration of data processing and EFT transaction processing from ACS to their
parent's systems. For the years ended June 30, 1996 and 1995, revenues from B of
A Texas accounted for approximately 1% and 11% of ACS's consolidated revenues,
respectively. In connection with the contract expiration, management of ACS
successfully completed a cost reduction program and eliminated approximately $24
million of direct and indirect costs of ACS (see Note 12 to ACS's Consolidated
Financial Statements).
Revenues increased $83.3 million, or 27%, to $396.5 million for fiscal 1996,
due primarily to internally generated sales growth and acquisitions. Excluding
revenues from B of A Texas, fiscal 1996 revenues increased almost 41% over
fiscal 1995.
Outsourcing services revenues, excluding B of A Texas, increased 21% due to
an increase in new accounts processed and higher volumes processed for existing
significant commercial outsourcing customers. Fiscal 1996 revenues for
outsourcing services were $182.4 million, which included $3.8 million in
revenues from B of A Texas. Revenues earned from the image management business
line increased 47% to $96.7 million due to the acquisition of Unibase in
February 1996 and three acquisitions consummated by Dataplex Corporation, a
wholly-owned subsidiary of ACS. Professional services, which was created with
the January 1995 acquisition of The Systems Group, Inc. ("TSG", later named
Technical Directions, Inc.),
71
contributed $48.9 million to consolidated revenues, an increase of 462% over
fiscal 1995, due to the full year effect of the TSG acquisition as well as three
other acquisitions made during fiscal 1996. Revenues earned from EFT transaction
processing, excluding B of A Texas, increased by 22% due primarily to an
increase in the number of ATMs processed, primarily low-volume ATMs. Fiscal 1996
revenues for EFT transaction processing were $68.5 million, which included $0.9
million in revenues from B of A Texas.
Total operating expenses were $355.8 million in fiscal 1996, an increase of
26% over fiscal 1995, which is consistent with the increase in revenues. Wages
and benefits as a percentage of revenues increased due to the growth in the
professional services line of business and the acquisition of Unibase, all of
which are labor intensive businesses. Excluding the effect of these businesses,
wages and benefits were unchanged as a percentage of revenues. The net 6%
decrease in rent, lease, and maintenance as a percentage of revenues was due
primarily to the acquisitions in fiscal 1996 of the labor intensive businesses
described above and economies of scale within commercial outsourcing services.
In addition, fiscal 1996 rent, lease, and maintenance expense was reduced by
$3.0 million of amortization of the B of A Texas accrual compared to $8.5
million of additional expenses accrued in fiscal 1995 (see Note 12 to ACS's
Consolidated Financial Statements).
Operating income increased $9.2 million, or 29%, in fiscal 1996 compared to
fiscal 1995 due to internal growth and acquisitions. Interest and other net
expenses decreased slightly as a percentage of revenues due to a decrease in
average debt outstanding in fiscal 1996 as a result of the stock offerings
completed by ACS in fiscal 1996 and 1995, offset by an increase in minority
interest expense resulting from certain fiscal 1996 and 1995 acquisitions. The
effective tax rates for fiscal 1996 and fiscal 1995 were approximately 40% and
41%, respectively, and exceeded the statutory rate of 35% due to certain non-
deductible acquisition-related costs and the net effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's liquid assets, consisting of cash and
cash equivalents, totaled $16.8 million compared to $21.3 million at June 30,
1997. These liquid assets included $7.5 million ($6.7 million at June 30, 1997)
borrowed under a revolving credit facility (the "ATM CASH FACILITY") for use in
the Company's automated teller machines. Working capital was $61.2 million and
$65.8 million at September 30, 1997 and June 30, 1997, respectively, a decrease
of $4.6 million primarily due to the accrual of the non-recurring charge for
upgrading to newer technology.
Net cash provided by operating activities was $5.5 million for the first
three months of fiscal 1998, compared with $9.1 million provided by operating
activities during the first three months of fiscal 1997. The decline is
primarily due to changes in ATM cash balances during the two periods. The
Company generated $4.0 million in cash from investing activities for the quarter
ended September 30, 1997, due to the $12.6 million received from the redemption
of a preferred stock investment offset by $6.6 million in capital expenditures
and other uses of cash during the quarter. During the first quarter of fiscal
1997, the Company used $23.6 million in cash for investing activities, including
$15.5 million for acquisitions and $9.1 million for capital expenditures. Cash
flow from financing activities decreased $21.3 million in the first quarter of
fiscal 1998 as compared to the first fiscal quarter of 1997 due primarily to
repayments of long-term debt of $15.8 million in the current period versus net
borrowings of $11.0 million in the prior period.
During the first quarter of fiscal 1998, the Company increased its available
line of credit from $125 million to $200 million under an unsecured revolving
credit facility (the "CREDIT FACILITY"). Borrowings under the Credit Facility as
of September 30, 1997 were $67.7 million. After considering outstanding letters
of credit, the Company has approximately $130.2 million available for use under
the Credit Facility. The Company has an ATM Cash Facility of $11 million, of
which $7.5 million was outstanding as of September 30, 1997. This facility
expires December 1997 at which time the Company expects to renew or replace the
facility at comparable terms. The Company also has two vault cash custody
agreements with financial institutions which provide the use of up to $52.0
million in cash for use in Company-owned ATMs. The amount of cash outstanding
under the cash custody agreements at September 30, 1997 was approximately $32.0
million and is not an asset or liability of the Company and therefore not
recorded on
72
the Company's consolidated balance sheets. Recently enacted federal regulations
governing financial institutions' cash requirements have allowed financial
institutions to significantly reduce their vault cash reserves. Accordingly,
this may limit ACS's ability to secure similar cash custody agreements when its
current arrangements expire in July 1998 and January 1999.
The Company's management believes that available cash and cash equivalents,
together with cash generated from operations and available borrowings under its
credit facilities, will provide adequate funds for the Company's anticipated
needs, including working capital, capital expenditures and ATM cash
requirements. Management also believes that cash provided by operations will be
sufficient to satisfy all existing debt obligations as they become due.
Additional acquisition opportunities, however, requiring significant commitments
of capital may arise. In order to pursue such opportunities, the Company may be
required to incur debt or to issue additional potentially dilutive securities in
the future. No assurance can be given as to the Company's future acquisition and
expansion opportunities and how such opportunities would be financed.
SELECTED CDSI HISTORICAL FINANCIAL INFORMATION
The selected consolidated financial data set forth below for the three month
periods ended September 30, 1997 and September 30, 1996 are derived from
unaudited financial statements, which, in the opinion of management of CDSI,
reflect all adjustments, consisting only of normal, recurring adjustments
necessary to present fairly the information set forth. The results for the three
months ended September 30, 1997 are not indicative of the results that may be
expected for any other interim period or for the year as a whole. The selected
consolidated financial data for the fiscal years ended June 30, 1997, 1996,
1995, 1994, and 1993, respectively, are derived from the Consolidated Financial
Statements of CDSI, which were audited by Ernst & Young LLP, independent
accountants, and which are, for fiscal years ended June 30, 1997, 1996, and
1995, incorporated herein by reference to the CDSI Annual Report on Form 10-K
for the fiscal year ended June 30, 1997. The following selected consolidated
financial data of CDSI are qualified by reference to, and should be read in
conjunction with, the Consolidated Financial Statements of CDSI and accompanying
Notes thereto incorporated by reference herein and "Selected Financial
Information-- CDSI Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THREE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED JUNE 30
-------------------- -----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.......................... $ 92,519 $ 70,073 $ 304,392 $ 251,099 $ 220,667 $ 205,923 $ 180,958
Costs and expenses................ 87,184 65,455 285,667 235,369 207,904 193,706 172,246
--------- --------- --------- --------- --------- --------- ---------
Income from operations............ 5,335 4,618 18,725 15,730 12,763 12,217 8,712
Interest income and expense, net.. (757) 14 51 268 420 290 71
Minority interest................. (161) -- (200) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes........ 4,417 4,632 18,576 15,998 13,183 12,507 8,783
Income tax expense................ 1,976 1,847 7,420 6,229 5,132 4,778 3,276
--------- --------- --------- --------- --------- --------- ---------
Net Income........................ $ 2,441 $ 2,785 $ 11,156 $ 9,769 $ 8,051 $ 7,729 $ 5,507
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net Income per Common Share....... $ .38 $ .46 $ 1.80 $ 1.65 $ 1.36 $ 1.31 $ .97
Dividends per Common Share........ $ .06 $ .06 $ .12 $ .11 $ .10 $ .09 $ .08
Total assets...................... $ 185,886 $ 107,966 $ 187,450 $ 103,054 $ 84,923 $ 77,296 $ 68,189
Long-term debt.................... $ 39,432 -- $ 41,146 -- -- $ 4,533 $ 6,133
73
CDSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the quarter ended September 30, 1997 were $92,519,100 as
compared to $70,073,200 in the comparable quarter last year. Revenues increased
32%, of which 22% derived from the June 1997 acquisition of ASEC.
Costs and expenses grew by 33%, a slightly higher rate compared to the
increase in revenues. This was due primarily to $670,300 of amortization of the
intangible assets that were created in the ASEC acquisition. The amortization
expense in the first year is higher than it will be in subsequent year because a
portion of the intangible assets were attributed to ASEC's existing contracts.
This value is being amortized over the contracts' periods of performance.
Income from operations increased due to the higher revenues noted above.
Operating margins decreased due primarily to the amortization referenced above.
Interest income and expense, net decreased due to the interest expense of
$796,600, arising primarily from the debt incurred to finance the ASEC
acquisition.
The provision for income taxes increased as a result of higher federal and
state effective tax rates due to the nondeductibility of the amortization of the
intangibles arising from the ASEC acquisition.
Net income declined from last year's comparable quarter primarily due to the
impact of the ASEC acquisition, which resulted in higher amortization expense,
interest expense, and effective tax rates.
COMPARISON OF FISCAL 1997 TO FISCAL 1996
Revenues in fiscal year 1997 increased approximately 21% over fiscal 1996.
The increase was primarily due to increased requirements on the CDSI Business
Application Solutions' ("CDSI BAS") contract with Department of Education, which
accounted for approximately 66% of the revenue increase. The remainder of the
revenue increase was principally due to increased requirements on CDSI's two
General Services Administration contracts and to a lesser extent added revenues
from CDSI's subsidiaries, GuaranTec, LLP ("GUARANTEC") and ASEC. In fiscal year
1997, CDSI Information Technology Solutions ("CDSI ITS") accounted for 55% of
consolidated revenues and 33% of income from operations. CDSI BAS accounted for
41% of consolidated revenues and 67% of income from operations. The shift in
income from operations on a percent basis from ITS to BAS is principally
attributable to reduced margins to date on some of CDSI's recent recompetition
wins.
Costs and expenses increased slightly more than 21% in fiscal year 1997. The
major contributor to the increase in costs was the increase in subcontractor
costs primarily related to CDSI BAS. CDSI also continued to incur costs related
to a CDSI subsidiary's contract with the Banco Social de Cordoba, in Cordoba,
Argentina (the "ARGENTINA CONTRACT") without any corresponding increase in
revenue. In addition, costs related to the startup of CDSI Solutions, Inc.
("CDSI SOLUTIONS"), the operations of GuaranTec, and the acquisition of ASEC
were incurred for the first time.
Income from operations grew to $18,724,700 as compared to $15,730,100 in
fiscal 1996, a 19% increase, primarily due to the increase in revenues.
Operating margins decreased slightly from 6.3 to 6.2%. This decrease was due to
the lower margins on contract recompetes and the startup investment in CDSI
Solutions.
Interest income and expense, net decreased principally as a result of the
interest and amortization charges relating to the ASEC acquisition, and
continued periodic line of credit borrowings to fund accounts receivable growth
and other working capital needs.
The provision for income taxes increased due to higher operating income
before income taxes.
Net income increased by $1,387,200 due to the increase in operating revenues
resulting from the ability to sustain operating margin levels while achieving
revenue growth.
74
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Revenues in fiscal year 1996 increased approximately 14% from 1995. The
increase resulted primarily from the CDSI BAS' Department of Education contract.
CDSI BAS revenues grew 95% primarily as a result of $42 million growth in the
Department of Education contract. The expiration of a large CDSI ITS contract
during 1995 and the reduced scope on the Department of Energy contract partially
offset the increase in revenues. In fiscal year 1996, CDSI ITS accounted for 65%
of consolidated revenues and 60% of income from operations. CDSI BAS accounted
for 35% of consolidated revenues and 40% of income from operations for the year.
Costs and expenses increased approximately 13%. Costs which contributed to
the increase in expenses included a significant increase in subcontractor costs
primarily related to CDSI BAS' Department of Education contract, investments in
software for CDSI's internal systems, and continued emphasis on marketing
initiatives.
Income from operations was $15,730,100 compared to $12,763,200 in the prior
period. Operating margins increased to 6.3% from 5.7%. Margins increased
principally as a result of higher volume levels on contracts in both segments.
Concurrent with the higher revenue volumes, reductions in I.E.FARS-Registered
Trademark-proprietary development costs, proposal protest costs, and proposal
costs related to the Argentina Contract aided the margin improvement.
Interest income and expense, net decreased by $152,000 due to higher
investment gains more than offset by increased interest expense arising from
larger borrowing under CDSI line of credit for equipment commitments on the
Argentina Contract and accounts receivable growth.
The provision for income taxes increased due to higher operating income
before income taxes.
Net income increased by $1,718,300 due to improved operating results.
LIQUIDITY
Total assets were $185,885,600 at September 30, 1997, as compared to
$187,450,000 at June 30, 1997, a change of less than 1%. Working capital
basically remained stable, decreasing by approximately $389,000 since June 30,
1997. The decrease is attributed primarily to the quarterly debt service on the
note payable arising from the ASEC acquisition.
For the three months ended September 30, 1997, the Company expects to cover
investing and financing cash needs from cash flow from operations. Working
capital of $44.7 million at September 30, 1997 is substantially unchanged from
$45.1 million at June 30, 1997. The improvement in cash from operations is
primarily attributable to accounts receivable collections.
In June 1997, CDSI entered into a bank credit facility, including a $50
million term loan for the purchase of ASEC. The term loan is repayable quarterly
based on a seven-year straight-line amortization schedule, with a final maturity
in June 2002. In the quarter ended September 30, 1997, the primary financing
activity was the quarterly debt repayment, which was made in September.
The primary investing activity is capital expenditures. The Company expects
capital expenditures to be in the $4,000,000 range for the 1998 fiscal year. The
planned expenditures are for completion of the implementation of a subsidiary's
contract with the Banco Social de Cordoba, in Cordoba, Argentina and other
internal uses. These expenditures are anticipated to be funded from internally
generated working capital and existing credit facilities.
To provide for short-term fluctuations in cash needs, as well as flexibility
for financing future acquisitions, the Company has $25 million available under a
three-year revolving line of credit.
75
MARKET PRICE DATA AND DIVIDEND INFORMATION
MARKET AND PRICE DATA
Since February 5, 1997, ACS Class A Common Stock has been traded on the NYSE
under the symbol "AFA"; prior to that date, it was traded on NASDAQ. CDSI Common
Stock is traded on NASDAQ under the symbol "CDSI." The following table sets
forth the range of high and low sales prices for ACS Class A Common Stock for
the periods from July 1, 1994 through November 10, 1997, as reported on NASDAQ
through February 5, 1997 and thereafter on the NYSE. The table also sets forth
the range of high and low sales prices for CDSI Common Stock for the periods
from July 1, 1994 through November 10, 1997, as reported on NASDAQ. The price
quotations on NASDAQ reflect inter-dealer prices, without adjustment for retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
ACS CDSI
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter.................................... $2915/16 $245/16 $501/4 $27
Second Quarter (through November 10, 1997) 261/2 22 453/4 39
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter.................................... 32 211/8 251/8 20
Second Quarter................................... 32 243/4 321/2 223/8
Third Quarter.................................... 301/4 191/2 38 293/8
Fourth Quarter................................... 285/8 203/4 333/8 201/2
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter.................................... 161/8 137/8 113/4 95/8
Second Quarter................................... 191/4 143/8 16 10
Third Quarter.................................... 211/2 167/8 191/4 113/4
Fourth Quarter................................... 267/8 203/4 241/4 151/2
FISCAL YEAR ENDED JUNE 30, 1995
First Quarter.................................... 10 81/2 141/4 103/4
Second Quarter................................... 113/4 95/8 121/2 83/4
Third Quarter.................................... 151/4 97/8 101/2 81/2
Fourth Quarter................................... 153/4 123/8 111/4 91/2
On September 19, 1997, the last trading day prior to the public announcement
of the Merger, the closing sale price per share of ACS Class A Common Stock as
reported by the NYSE was $29 3/8. On September 19, 1997, there were 52 holders
of record of ACS Class A Common Stock, and there were 29,495,859 shares of ACS
Class A Common Stock issued and outstanding.
On September 19, 1997, the last trading day prior to the public announcement
of the Merger, the closing sale price per share of CDSI Common Stock as reported
by NASDAQ was $36 1/4. The market price per share of ACS Class A Common Stock
issuable in exchange for one share of CDSI Common Stock, based upon the Exchange
Ratio would have been approximately $51 5/8 on September 19, 1997. On September
19, 1997, there were 625 holders of record of CDSI Common Stock, and there were
6,286,799 shares of CDSI Common Stock issued and outstanding.
ACS Class A Common Stock was listed on NASDAQ on September 26, 1994, at the
time of ACS's initial public offering. As of February 5, 1997, ACS Class A
Common Stock was delisted on NASDAQ and listed on the NYSE.
Following the Merger, ACS Class A Common Stock will continue to be traded on
the NYSE. Following the Merger, CDSI Common Stock will cease to be traded, and
there will be no further market
76
for such stock. Because the market price of ACS Class A Common Stock is subject
to fluctuation, the market value of the shares of ACS Class A Common Stock that
holders of CDSI Common Stock will receive in the Merger may increase or decrease
prior to the Effective Date. See "Risk Factors--Fixed Exchange Ratio;" "Risk
Factors--Shares Available for Future Sale."
DIVIDEND POLICY
To date, ACS has not paid any cash dividends on its common stock. ACS
intends to continue to retain earnings for use in the operation of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. Under the terms of its unsecured revolving Credit Facility, ACS is
prohibited from paying dividends in any fiscal year in a total amount that would
exceed 50% of ACS's net income for the preceding fiscal year. Any future
determination to pay dividends will be at the discretion of the ACS Board and
will be dependent upon ACS's financial condition, results of operations,
contractual restrictions, capital requirements, business prospects, and such
other factors as the ACS Board deems relevant.
CDSI has paid semi-annual dividends since 1976. In the event the Merger is
approved and shares of CDSI Common Stock are converted into shares of ACS Class
A Common Stock, the payment and amount of dividends after the Merger, if any,
will be determined by the ACS Board. ACS intends to continue to retain earnings
from CDSI for use in the operation of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. In the event the
Merger is not approved, the payment and amount of any future dividends to
stockholders who continue to own CDSI Common Stock will necessarily depend upon
then existing conditions, including CDSI's earnings, financial condition,
working capital requirements, and other factors.
INFORMATION CONCERNING ACS
The following is a summary of certain information contained in the ACS
Annual Report on Form 10-K, which is incorporated by reference herein, and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information contained in the ACS Annual Report on Form 10-K.
OVERVIEW
ACS is a nationwide provider of information technology services and EFT
transaction processing. ACS's information technology services include data
processing outsourcing, image management, and professional services. ACS
services are provided to customers with time-critical, transaction-intensive
information processing needs.
ACS's data processing outsourcing services are provided to a variety of
commercial customers nationwide, including retailers, healthcare providers,
telecommunications companies, wholesale distributors, manufacturers, utilities,
financial institutions, and insurance companies. ACS utilizes a variety of
proprietary and third party industry-standard software packages that can be
matched with the appropriate hardware platform to provide flexible and
cost-effective solutions to customer requirements. ACS is capitalizing on the
trend toward client-server computing by providing consulting and transitional
outsourcing services, including network and desktop computer management, to
companies that are changing to these distributed platform environments. ACS
offers image management services such as electronic imaging, document imaging,
record storage and retrieval services, micrographics processing services, and
high speed data capture services. ACS's professional services include contract
programming and technical support, as well as network design and systems
integration. ACS's EFT transaction processing business consists primarily of the
operation of a proprietary ATM network consisting of ACS owned ATMs as well as
ATMs owned by third parties. According to an industry publication, ACS's
MoneyMaker-SM- ATM network ("MONEYMAKER") is the second largest non-bank ATM
network in the United States. ACS operates
77
a national network of host and remote data centers that enables ACS to process
transactions for its outsourcing and EFT customers in a rapid, cost-effective
manner.
ACS was formed in 1988 as a Delaware corporation and on September 26, 1994
completed an initial public offering ("IPO") of 2.3 million shares of ACS Class
A Common Stock (which number is not adjusted to reflect the November 1996 2 for
1 stock split of ACS Class A Common Stock) after having completed a
restructuring in connection with the IPO, which included the spin-off of certain
subsidiaries to its stockholders effective June 30, 1994. ACS completed two
secondary offerings, in March 1996 and June 1996, respectively, for an aggregate
of approximately 4.1 million new shares of ACS Class A Common Stock, (which
number is not adjusted to reflect the November 1996 2 for 1 stock split of ACS
Class A Common Stock) primarily to repay debt incurred with fiscal 1996
acquisitions, including debt incurred in connection with its acquisition of
Genix on June 21, 1996.
LEGAL PROCEEDINGS
On February 21, 1997, the Texas Supreme Court, in a unanimous decision,
overturned a lower court judgment against ACS, its Chairman, and a former
director. The judgment originated from a matter styled ACS INVESTORS, INC., ET.
AL. V. THOMAS MCLAUGHLIN AND JOHN LAZOVICH, where the trial court had rendered a
verdict in favor of Messrs. McLaughlin and Lazovich on causes of action for
tortious interference with a 1986 agreement related to the acquisition of an
electronic benefit transfer business. The total amount of the judgment was
approximately $9.5 million, including pre- and post-judgment interest. ACS
pursued its appeal of the judgment through the Fifth District Court of Appeals
in Dallas, Texas and then with the Texas Supreme Court, culminating in the
favorable decision in February 1997. The plaintiffs' motion for reconsideration
by the Texas Supreme Court was subsequently denied.
Eighteen former employees of Gibraltar Savings Association and/or First
Texas Savings Association (collectively, "GSA/FTSA") have brought suit in Texas
state court alleging entitlement to 336,864 shares of ACS's Class A Common Stock
pursuant to options issued to GSA/FTSA employees in 1988 in connection with a
former data processing services agreement between GSA/FTSA and ACS. ACS has
received demands from two other former GSA/FTSA employees with respect to
similarly situated options covering 38,801 shares of ACS's Class A Common Stock,
and there are seven other former GSA/FTSA employees who were issued similarly
situated options allegedly covering 129,631 shares of ACS's Class A Common
Stock. The per share exercise price for each of these options, as adjusted for
the Company's 1994 reclassification and its 1996 two-for-one stock split, is
alleged to be $.38. ACS believes that it has meritorious defenses to all or
substantial portions of these matters and plans to vigorously defend against
them. However, should the proceedings not be favorably resolved, ACS may be
subject to a material non-cash charge.
On October 10, 1995, ACS filed a counterclaim against National Convenience
Stores, Incorporated ("NCS") alleging that NCS had breached a contract with ACS
and seeking unspecified damages. This counterclaim was filed in response to an
action filed by NCS against ACS in the 101st Judicial District Court in Dallas,
Texas seeking a declaratory judgment that NCS is not contractually obligated to
allow ACS to review and match any third party proposal to process automated
teller machines in NCS stores upon expiration of the contract with ACS, pursuant
to its terms, on December 1, 1995. On March 12, 1997, ACS added NCS's and ACS's
former mutual commercial banker as a defendant in the counterclaim. ACS intends
to vigorously oppose this action and to pursue the claims asserted in the
counterclaim.
In addition to the foregoing, ACS is subject to certain other legal
proceedings, claims, and disputes which arise in the ordinary course of its
business. Although ACS cannot predict the outcomes of these legal proceedings,
ACS's management does not believe these actions will have a material adverse
effect on ACS's financial position, results of operations, or liquidity.
However, if unfavorably resolved, these proceedings could have a material
adverse effect on ACS's financial position, results of operations, and
liquidity.
78
DESCRIPTION OF ACS CAPITAL STOCK
ACS is currently authorized to issue up to 75,000,000 shares of ACS Class A
Common Stock, up to 6,405,686 shares of ACS Class B Common Stock, and up to
3,000,000 shares of ACS Preferred Stock. As of September 19, 1997, ACS had
issued and outstanding 29,495,859 shares of ACS Class A Common Stock held by 52
stockholders of record and 6,405,686 shares of ACS Class B Common Stock held by
one holder of record. As of September 19, 1997, there were no shares of
Preferred Stock issued and outstanding. At the ACS Annual Meeting, the ACS
stockholders will consider an amendment to the ACS Charter to increase the
number of authorized shares of ACS Class A Common Stock from 75,000,000 to
500,000,000 and of ACS Class B Common Stock from 6,405,686 to 14,000,000.
The relative rights and limitations of the ACS Class A Common Stock, the ACS
Class B Common Stock, and the ACS Preferred Stock are summarized below. The
following summary description of the ACS capital stock is qualified in its
entirety by reference to the ACS Charter and the ACS Bylaws, copies of which
have been filed as exhibits to ACS's reports or registration statements filed
with the Commission.
ACS PREFERRED STOCK
The ACS Board has the authority, without further action by the stockholders,
to issue up to 3,000,000 shares of ACS Preferred Stock in one or more series and
to fix the rights, preferences, privileges, and restrictions granted to or
imposed upon any unissued shares of ACS Preferred Stock and to fix the number of
shares constituting any series and the designations of such series. The issuance
of ACS Preferred Stock could adversely affect the voting power of the holders of
common stock and the likelihood that such holders will receive dividend
payments, and payments upon liquidation and may have the effect of delaying,
deferring, or preventing a change in control of ACS.
ACS CLASS A COMMON STOCK AND ACS CLASS B COMMON STOCK
VOTING RIGHTS. Each share of ACS Class A Common Stock is entitled to one
vote and each share of ACS Class B Common Stock is entitled to ten votes per
share on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, ACS Class A Common Stock and ACS Class B Common Stock
vote together as a single class on all matters presented for a vote of the
stockholders. Neither class of ACS Class A Common Stock has cumulative voting
rights.
CONVERSION. ACS Class A Common Stock has no conversion rights. Each Share
of ACS Class B Common Stock is convertible at any time, at the option of and
without cost to the stockholder, into one share of ACS Class A Common Stock upon
surrender to ACS's Transfer Agent of the certificate or certificates evidencing
the ACS Class B Common Stock to be converted, together with a written notice of
the election of such stockholder to convert such shares into ACS Class A Common
Stock. Shares of ACS Class B Common Stock will also be automatically converted
into shares of ACS Class A Common Stock on the occurrence of certain events
described below. Once shares of ACS Class B Common Stock are converted into
shares of ACS Class A Common Stock, such shares may not be converted back into
ACS Class B Common Stock.
RESTRICTION ON TRANSFER OF ACS CLASS B COMMON STOCK. No person or entity
holding shares of ACS Class B Common Stock (a "CLASS B HOLDER") may transfer
such shares, whether by sale, assignment, gift, bequest, appointment, or
otherwise, except to a Permitted Transferee (as hereinafter defined). In the
case of a Class B Holder who is a natural person and the beneficial owner of
shares of ACS Class B Common Stock to be transferred, a Permitted Transferee
consists of (i) such Class B Holder's spouse; provided, however, that upon
divorce, any ACS Class B Common Stock held by such spouse shall automatically be
converted into ACS Class A Common Stock, (ii) any lineal descendant of any
great-grandparent of such Class B Holder, including adopted children, and such
descendant's spouse (such descendants and their spouses, together with such
Class B Holder's spouse, are referred to as "family members"), (iii) the trustee
of a trust for the sole benefit of such Class B Holder or any of such Class B
Holder's family members,
79
(iv) any charitable organization established by such Class B Holder or any of
such Class B Holder's family members, and (v) any partnership made up
exclusively of such Class B Holder and any of such Class B Holder's family
members or any corporation wholly-owned by such Class B Holder and any of such
Class B Holders' family members; provided that, if there is any change in the
partners of such partnership or in the stockholders of such corporation that
would cause such partnership or corporation no longer to be a Permitted
Transferee, any ACS Class B Common Stock held by such partnership or corporation
shall automatically be converted into ACS Class A Common Stock. In the case of a
Class B Holder that is a partnership or corporation, a Permitted Transferee
consists of (i) such partnership's partners or such corporation's stockholders,
as the case may be, (ii) any transferor to such partnership or corporation of
shares of ACS Class B Common Stock after the record date of the initial
distribution of ACS Class B Common Stock and (iii) successors by merger or
consolidation. In the case of a Class B Holder that is an irrevocable trust on
the record date of the distribution of ACS Class B Common Stock, a Permitted
Transferee consists of (i) certain successor trustees of such trust, (ii) any
person to whom or for whose benefit principal or income may be distributed under
the terms of such trust or any person to whom such trust may be obligated to
make future transfers, provided such obligation exists prior to the date such
trust becomes a holder of ACS Class B Common Stock, and (iii) any family member
of the creator of such trust. In the case of a Class B Holder that is any trust
other than an irrevocable trust on the date of the distribution of ACS Class B
Common Stock, a Permitted Transferee consists of (i) certain successor trustees
of such trust and (ii) the person who established such trust and such person's
Permitted Transferees. Upon the death or permanent incapacity of any Class B
Holder, such Holder's ACS Class B Common Stock will automatically convert into
shares of Class A Common Stock. Upon the expiration of ninety days after the
death or permanent incapacity of Darwin Deason or upon the conversion by Mr.
Deason of all the ACS Class B Common Stock beneficially owned by him, any and
all shares of ACS Class B Common Stock will automatically convert into shares of
ACS Class A Common Stock.
Subject to compliance with applicable securities laws, shares of ACS Class B
Common Stock are freely transferable among Permitted Transferees, but any other
transfer of ACS Class B Common Stock will result in its automatic conversion
into ACS Class A Common Stock. The restriction on transfers of shares of ACS
Class B Common Stock to other than a Permitted Transferee may preclude or delay
a change in control of the Company.
DIVIDENDS AND LIQUIDATION RIGHTS. The holders of ACS Class A Common Stock
and ACS Class B Common Stock are entitled to receive dividends out of assets
legally available therefor at such times and in such amounts as the ACS Board
may from time to time determine. Upon liquidation and dissolution of ACS, the
holders of ACS Class A Common Stock and ACS Class B Common Stock are entitled to
receive all assets available for distribution to stockholders.
OTHER RIGHTS. The holders of ACS Class A Common Stock and ACS Class B
Common Stock are not entitled to preemptive or subscription rights, and there
are no redemption or sinking fund provisions applicable to such common stock.
WARRANT
In January 1989, ACS entered into a ten-year data processing contract and
issued a warrant to a data processing customer under an agreement (the "WARRANT
AGREEMENT"), which became exercisable in part in January 1996. The Warrant
Agreement entitles the customer to purchase 793,188 shares of ACS Class A Common
Stock for an aggregate purchase price equal to (i) $4,700,000 plus (ii) $230,000
for each full 12-month period that has elapsed from December 31, 1988. In
addition, the aggregate purchase price is increased by 10% per annum, accrued
daily but not compounded. Shares of ACS Class A Common Stock may be purchased
under the Warrant Agreement in increments which commenced on January 1, 1996, as
follows: up to 198,298 shares from January 1, 1996 through December 31, 1996; up
to 198,298 shares from January 1, 1997 through December 31, 1997, plus any
shares not purchased in the prior year; up to 198,296 shares from January 1,
1998 through December 31, 1998, plus any shares not purchased in the prior two
80
years; and up to 198,296 shares on January 2, 1999, plus any shares not
purchased in the prior three years. As of September 19, 1997, no shares have
been purchased pursuant to the Warrant Agreement. The purchase price for any
shares purchased in 1997 would be $16.02 per share, plus accrued daily interest,
$17.91 per share for shares purchased in 1998, plus accrued daily interest; and
$19.99 per share for shares purchased through January 2, 1999, plus accrued
daily interest. The Warrant Agreement expires on the earlier of (i) January 2,
1999 or (ii) any termination of the customer's data processing contract with
ACS. In connection with entering into the data processing contract, the customer
also acquired 793,188 shares of ACS Class A Common Stock, which shares were
subject to certain forfeiture provisions relating to any early termination of
the data processing contract.
RIGHTS AGREEMENT
On August 5, 1997, ACS entered into a rights agreement (the "RIGHTS
AGREEMENT") and authorized and declared a dividend distribution of one right (a
"RIGHT") for each share of ACS Class A Common Stock and one Right for each share
of ACS Class B Common Stock, each as outstanding at the close of business on
August 25, 1997. ACS Class A Common Stock and ACS Class B Common Stock issued
after August 25, 1997 will be issued with an associated Right. Each Right
entitles the registered holder to purchase from ACS one share of ACS Class A
Common Stock at an exercise price of $150.00 per share, subject to adjustment
from time to time.
The description and terms of the Rights are set forth in the Rights
Agreement attached as an exhibit to each of the ACS Current Report on Form 8-K
dated August 20, 1997 and Registration Statement on Form 8-A dated August 21,
1997, which documents are incorporated by reference herein.
ACS MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF ACS
The following table sets forth certain information about the current
directors, nominees for director, and executive officers of ACS.
NOMINEES FOR ELECTION AS DIRECTOR
The following table lists the name and principal occupation of each nominee
and the year in which each nominee was first elected as a director of ACS.
SERVED AS
DIRECTOR
NAME PRINCIPAL OCCUPATION SINCE
- ------------------------------------ ----------------------------------------------------------------- -----------
Darwin Deason*...................... Chairman of the Board and Chief Executive Officer 1988
Jeffrey A. Rich*.................... President and Chief Operating Officer 1991
Henry G. Hortenstine**.............. Executive Vice President 1996
Joseph P. O'Neill**................. President and Chief Executive Officer, Public Strategies, 1994
Washington, Inc.
Frank A. Rossi**.................... Chairman of the Board, FAR Holdings Company, L.L.C. 1994
Clifford M. Kendall**............... Chairman of the Board, CDSI --
Mark A. King***..................... Executive Vice President and Chief Financial Officer 1996
David W. Black***................... Executive Vice President, Secretary and General Counsel 1995
Peter A. Bracken***................. Chief Executive Officer and President, CDSI --
- ------------------------
* Nominee for Class I director
** Nominee for Class II director
*** Nominee for Class III director
81
BUSINESS EXPERIENCE OF NOMINEES
Set forth below is certain information with respect to each of the nominees
for the office of director.
DARWIN DEASON, age 57, has served as Chairman of the Board and Chief
Executive Officer of ACS since its formation in 1988. Prior to the formation of
ACS, Mr. Deason spent 20 years with MTech Corp ("MTECH"), a data processing
subsidiary of MCorp, a bank holding corporation based in Dallas, Texas
("MCORP"), serving as MTech's Chief Executive Officer and Chairman of the Board
from 1978 until April 1988, and served on the board of various subsidiaries of
MTech and MCorp. Prior to that, Mr. Deason was employed in the data processing
department of Gulf Oil in Tulsa, Oklahoma. Mr. Deason has over 30 years of
experience in the information technology services industry.
JEFFREY A. RICH, age 37, has served as President and Chief Operating Officer
of ACS since April 1995 and as a director of ACS since August 1991. Mr. Rich
joined ACS in 1989 as Senior Vice President and Chief Financial Officer and was
named Executive Vice President in 1991. Prior to joining ACS, Mr. Rich served as
a Vice President of Citibank N.A. from March 1986 through June 1989, and also
served as an Assistant Vice President of InterFirst Bank Dallas, N.A. from 1982
until March 1986.
HENRY G. HORTENSTINE, age 53, has served as Executive Vice President of ACS
since March 1995 and as a director of ACS since September 1996. Prior to that
time, he served as Senior Vice President--Business Development from July 1993 to
March 1995. Mr. Hortenstine was engaged by ACS as a consultant providing various
business and corporate development services from 1990 to July 1993. Prior to
that, he was Senior Executive Vice President of Lomas Mortgage USA, a subsidiary
of Lomas Financial Corporation, from 1987 to 1989.
JOSEPH P. O'NEILL, age 50, has served as a director of ACS since November
1994 and also serves as a consultant to ACS. Mr. O'Neill has served as President
and Chief Executive Officer of Public Strategies Washington, Inc., a public
affairs and consulting firm, since March 1991, and from 1985 through February
1991, served as President of the National Retail Federation, a national
association representing United States retailers. Mr. O'Neill also is a director
of Careerstaff, Inc.
FRANK A. ROSSI, age 59, has served as a director of ACS since November 1994
and also serves as a consultant to ACS. Mr. Rossi has served as Chairman of FAR
Holdings Company, L.L.C., a private investment firm, since February 1994, and
before that was employed by Arthur Andersen & Co. for over 35 years. Mr. Rossi
served in a variety of capacities for Arthur Andersen since 1959, including
Managing Partner/Chief Operating Officer and as a member of the firm's Board of
Partners and Executive Committee.
CLIFFORD M. KENDALL, age 66, has been with CDSI since its founding in 1968
and is currently Chairman of the Board of Directors of CDSI. From 1970 to 1991,
Mr. Kendall served as Chief Executive Officer of CDSI. Mr. Kendall also
currently serves as the Chairman of the Board of Objective Communications, Inc.
MARK A. KING, age 40, has served as Executive Vice President and Chief
Financial Officer of ACS since May 1995 and as a director since May 1996. Mr.
King joined ACS in November 1988 as Chief Financial Officer of various ACS
subsidiaries. Prior to joining ACS, Mr. King was Vice President and Assistant
Controller of MTech. Mr. King has over 18 years of finance and accounting
experience, including over 11 years of experience with the information
technology services industry.
DAVID W. BLACK, age 35, has served as Executive Vice President, Secretary,
and General Counsel and as a director of ACS since May 1995. Mr. Black joined
ACS in February 1995 as Associate General Counsel. Prior to that time, Mr. Black
was an attorney engaged in private practice in Dallas from 1986 through January
1995.
PETER A. BRACKEN, age 56, joined CDSI in May 1996 as Chief Executive Officer
and President. From 1986 to 1996, Mr. Bracken was employed by Martin Marietta
Corporation (now Lockheed Martin Corporation), most recently as President of the
Information Sciences Group. Before joining Martin
82
Marietta in 1986, Mr. Bracken served as Director of Mission Operation and Data
Systems for NASA's Goddard Space Flight Center.
Except as set forth above, none of the nominees holds a directorship in any
company with a class of securities registered pursuant to Section 12 of the
Exchange Act, or subject to the requirements of Section 15(d) of the Exchange
Act, or any company registered as an investment company under the Investment
Company Act of 1940, as amended.
BUSINESS EXPERIENCE OF OTHER EXECUTIVE OFFICERS
Set forth below is certain information with respect to other executive
officers of ACS:
THOMAS G. CONNOR, age 55, has served as Executive Vice President of ACS
since July 1988 and is also Chairman of the Board and Chief Executive Officer of
Dataplex Corporation, ACS's image management subsidiary. Prior to joining ACS,
Mr. Connor served as Executive Vice President and General Manager of MTech's
Northern Region. Mr. Connor has over 30 years of experience in the information
technology services industry.
PAMELA A. SIMMONS, age 40, has served as Executive Vice President of ACS
since July 1997. Ms. Simmons joined ACS in July 1989 as Human Resources Manager.
Prior to joining ACS, Ms. Simmons was Human Resources Manager at Southern Union
Company.
COMMITTEES AND MEETINGS OF THE ACS BOARD
The standing committees of the ACS Board are the Audit Committee, the
Compensation Committee, the Special Compensation Committee, the Independent
Directors Committee, and the Special Transactions Committee. The Audit Committee
is composed of Messrs. Rossi (Chairman) and O'Neill. The Audit Committee was
formed in 1994 and given general responsibility for meeting periodically with
representatives of ACS's independent public accountants and electronic data
processing ("EDP") accountants to review the general scope of audit coverage,
including consideration of ACS's accounting and EDP practices and procedures and
the adequacy of ACS's system of internal controls, and to report to the ACS
Board with respect thereto. The Audit Committee also is responsible for
recommending to the ACS Board the appointment of the ACS independent public
accountants and EDP accountants.
The ACS Board's Compensation Committee was formed in May 1994. The members
of the Compensation Committee during fiscal 1997 were Messrs. Deason, Ford, and
O'Neill. Mr. Ford resigned from the ACS Board as of July 7, 1997. The
Compensation Committee currently consists of Messrs. Deason, Rossi, and O'Neill.
The Compensation Committee is responsible for recommending to the ACS Board
policies and plans concerning the salaries, bonuses, and other compensation of
the executive officers of ACS, including reviewing the salaries of the executive
officers and recommending bonuses and other forms of additional compensation for
the executive officers and the administration of and grant of awards under the
1988 Plan, and if adopted, the 1997 Plan. In connection with ACS's establishment
of certain procedures to comply with the requirements of Section 162(m) of the
Code so that compensation to executive officers whose compensation exceeds $1
million may be deductible by ACS for federal income tax purposes, ACS formed the
Special Compensation Committee in August 1996. The members of the Special
Compensation Committee for fiscal 1997 were Messrs. Ford and O'Neill. The
Special Compensation Committee currently consists of Messrs. Rossi and O'Neill.
The Special Compensation Committee will be responsible for reviewing the
compensation of the executive officers whose compensation exceeds $1 million,
including reviewing salaries, recommending bonuses and other forms of additional
compensation, including grants of awards under the 1988 Plan, and if adopted,
the 1997 Plan.
In addition, the ACS Board has an Independent Directors Committee, on which
Messrs. O'Neill, and Rossi serve. Mr. Ford previously served on the committee
until his resignation. The Independent Directors Committee was formed in May
1994 to review annually the prices and terms of the services, forms, and
83
supplies provided between ACS and Precept Business Products, Inc. ("PRECEPT"),
an affiliate of ACS, pursuant to ACS's reciprocal services agreement and other
related party transactions.
In addition, the ACS Board formed a Special Transactions Committee in August
1997 on which Mr. Deason serves. The Special Transactions Committee has the
responsibility of considering, evaluating, and approving the negotiation of
potential transactions resulting in the acquisition of assets, businesses, or
stock of third parties for cash, ACS Class A Common Stock, or other
consideration with a dollar value of up to the greater of $50,000,000 or 10% of
ACS's consolidated assets.
During the fiscal year ended June 30, 1997, there were four regular meetings
of the ACS Board. No incumbent directors attended fewer than 75% of the
aggregate of (i) the ACS Board meetings held during the fiscal year and (ii) the
meetings held by all committees of the ACS Board on which he served. There were
three meetings held by the ACS Audit Committee during the fiscal year, eight
meetings held by the ACS Compensation Committee, two meetings held by the ACS
Special Compensation Committee, and one meeting held by the ACS Independent
Directors Committees during the fiscal year.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To ACS's knowledge, all statements of beneficial ownership required to be
filed with the Commission for the fiscal year ended June 30, 1997 have been
timely filed.
84
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF ACS
The following table sets forth, as of the ACS Record Date, certain
information with respect to the shares of ACS Class A Common Stock and the ACS
Class B Common Stock beneficially owned by stockholders known to ACS to own more
than 5% of the outstanding shares of such classes and the shares of ACS Class A
Common Stock and ACS Class B Common Stock beneficially owned by each of ACS's
directors and executive officers and by all of ACS's executive officers and
directors as a group:
AMOUNT AND PERCENT OF PERCENT OF
NATURE OF TOTAL AMOUNT AND PERCENT OF TOTAL SHARES
BENEFICIAL SHARES OF NATURE OF TOTAL SHARES OF CLASS A
OWNERSHIP CLASS A BENEFICIAL OF CLASS B AND CLASS B PERCENT OF
OF CLASS A COMMON OWNERSHIP OF COMMON STOCK COMMON STOCK TOTAL
COMMON STOCK OWNED CLASS B OWNED OWNED VOTING
DIRECTORS AND EXECUTIVE OFFICERS STOCK BENEFICIALLY COMMON STOCK BENEFICIALLY BENEFICIALLY POWER (1)
- ---------------------------------------- ----------- ----------- ------------ ------------- ------------ -----------
Darwin Deason(2)........................ 17,410 * 6,405,686 100% 17.51% 67.93%
Jeffrey A. Rich(3)...................... 33,186 * -- -- * *
Joseph P. O'Neill....................... 23,810 * -- -- * *
Frank A. Rossi.......................... 5,000 * -- -- * *
Henry G. Hortenstine.................... -- * -- -- * *
David W. Black(4)....................... 5,254 * -- -- * *
Mark A. King(5)......................... 46,058 * -- -- * *
All Executive Officers and Directors as 153,711 * 6,405,686 100% 17.88% 68.07%
a Group
(nine persons)(6).....................
BENEFICIAL OWNERS OF MORE THAN 5% OF THE COMPANY'S STOCK
T. Rowe Price Associates, Inc.(7) ...... 3,861,000 12.77% -- -- 10.54% 4.09%
100 E. Pratt Street
Baltimore, Maryland 21202
Putnam Investments(7) .................. 3,560,000 11.76% -- -- 9.71% 3.77%
1 Post Office Square
Boston, Massachusetts 02109
Massachusetts Financial Services 3,223,000 10.65% -- -- 8.79% 3.42%
Company(7) ...........................
500 Boylston Street
Boston, Massachusetts 02116
AIM Management(7) ...................... 1,821,000 6.02% -- -- 4.97% 1.93%
82 Devonshire Street
Boston, Massachusetts 02109
Fidelity Financial Services(7) ......... 1,671,000 5.52% -- -- 4.56% 1.77%
14651 Dallas Parkway
Suite 200
Dallas, Texas 75240
- ------------------------
* Less than 1%.
(1) In calculating the percent of total voting power, the voting power of shares
of ACS Class A Common Stock (one vote per share) and ACS Class B Common
Stock (ten votes per share) is aggregated.
(2) 6,332,958 of the shares of ACS Class B Common Stock listed are owned by The
Deason International Trust (the "TRUST"), and 72,728 of the shares of ACS
Class B Common Stock are owned by the Deason
85
Foundation (the "FOUNDATION"). Mr. Deason holds the sole voting power with
respect to such shares through an irrevocable proxy granted by the Trust and
the Foundation. The investment power with respect to such shares is held by
the Trust and the Foundation. The shares of ACS Class A Common Stock include
7,310 shares owned by Mr. Deason's spouse and spouse's daughter, to which
Mr. Deason disclaims beneficial ownership.
(3) Includes 28,186 shares of ACS Class A Common Stock issuable pursuant to
options that are currently exercisable.
(4) Includes 254 shares of ACS Class A Common Stock owned by Mr. Black through
the ACS 401(k) Plan.
(5) Includes 4,679 shares of ACS Class A Common Stock owned by Mr. King's
spouse, to which Mr. King disclaims beneficial ownership; 744 shares of ACS
Class A Common Stock contained in the ACS 401(k) Plan, and 1,823 shares of
ACS Class A Common Stock granted to Mr. King under the ACS Employee Stock
Purchase Plan.
(6) Includes 28,186 shares of ACS Class A Common Stock issuable pursuant to
options that are currently exercisable; 1,037 shares of ACS Class A Common
Stock owned through the ACS 401(k) Plan; and 3,335 shares of ACS Class A
Common Stock granted under the Employee Stock Purchase Plan.
(7) Based on filings by the stockholder with the Commission.
86
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth certain information regarding compensation
paid for all services rendered to ACS in all capacities during fiscal years
1997, 1996, and 1995 by the ACS chief executive officer and the four other most
highly compensated executive officers of ACS whose total annual salary and bonus
exceeded $100,000, based on salary and bonuses earned during fiscal year 1997
(collectively, the "NAMED EXECUTIVE OFFICERS").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------- -----------------------------------------
OTHER PAYOUTS
ANNUAL RESTRICTED -------------
COMPENSA- STOCK AWARDS OPTIONS/ LTIP PAYOUTS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) TION ($)(1) ($)(2) SARS (3) ($)(2)
- --------------------------------- --------- ----------- ---------- ----------- --------------- --------- -------------
Darwin Deason ................... 1997 450,000 1,125,000 -- -- -- --
Chairman of the Board and 1996 403,918 807,836 -- -- -- --
Chief Executive Officer 1995 403,918 776,473 -- -- -- --
Jeffrey A. Rich.................. 1997 274,995 550,000 -- -- 60,000 --
President and Chief 1996 222,385 437,500 -- -- 200,000 --
Operating Officer 1995 155,322 149,291 -- -- 222,050 --
Henry G. Hortenstine............. 1997 200,000 250,000 40,000
Executive Vice President 1996 166,000 166,000 -- -- 120,000 --
1995 144,600 60,856 92,914(4) -- 103,970 --
Mark A. King..................... 1997 175,000 218,750 -- -- 40,000 --
Executive Vice President 1996 125,000 125,000 -- -- 80,000 --
and Chief Financial Officer 1995 104,735 120,147 -- -- 40,014
David W. Black................... 1997 150,000 159,375 -- -- 30,000
Executive Vice President 1996 133,004 133,004 -- -- -- --
and General Counsel 1995 54,118 46,905 -- -- 44,000 --
ALL OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION ($)
- --------------------------------- ---------------
Darwin Deason ................... --
Chairman of the Board and --
Chief Executive Officer --
Jeffrey A. Rich.................. --
President and Chief --
Operating Officer --
Henry G. Hortenstine.............
Executive Vice President --
--
Mark A. King..................... --
Executive Vice President --
and Chief Financial Officer
David W. Black...................
Executive Vice President --
and General Counsel --
- --------------------------
(1) None of the Named Executive Officers received personal benefits, securities,
or property in excess of the lesser of $50,000 or 10% of such individual's
reported salary and bonus during fiscal years 1997, 1996, and 1995.
(2) ACS did not grant any restricted stock awards or long-term incentive plan
payouts to the Named Executive Officers during fiscal years 1997, 1996, and
1995.
(3) ACS did not grant any stock appreciation rights ("SARS") during fiscal years
1997, 1996, and 1995.
(4) Represents commissions received during the year.
87
The following table sets forth the number of options granted during the
fiscal year ended June 30, 1997 to the Named Executive Officers to purchase
shares of ACS Class A Common Stock and the potential realizable value of these
options.
OPTION GRANTS DURING FISCAL YEAR 1997
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS
-------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (1)
OPTIONS/SARS EMPLOYEES IN EXERCISE OR EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR (%) BASE PRICE ($) DATE 5% ($) 10% ($)
- ---------------------------------------- ------------- ----------------- --------------- ----------- --------- ----------
Darwin Deason........................... -- 0.0% -- -- -- --
Jeffrey A. Rich......................... 60,000 10.5% 21.13 4/7/07 797,124 2,020,069
Henry G. Hortenstine.................... 40,000 7.0% 21.13 4/7/07 531,416 1,346,712
Mark A. King............................ 40,000 7.0% 21.13 4/7/07 531,416 1,346,712
David W. Black.......................... 30,000 5.2% 21.13 4/7/07 398,562 1,010,034
- ------------------------
(1) The amounts in these columns are the result of calculations at the 5% and
10% rates set by the Commission and are not intended to forecast possible
future appreciation, if any, of ACS's stock price.
The following table provides information related to options exercised by the
Named Executive Officers during fiscal year 1997 and the number and value of
options held at fiscal year end. ACS does not have any SARS outstanding.
AGGREGATE OPTIONS/SAR EXERCISES IN FISCAL 1997
AND FISCAL YEAR END 1997 OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FISCAL SARS AT FISCAL
SHARES VALUE YEAR END (#) YEAR END ($)(2)
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
Darwin Deason............................ -- -- -- -- -- --
Jeffrey A. Rich.......................... 25,000 686,625 28,186 482,050 777,652 6,606,644
Henry G. Hortenstine..................... 43,036 1,222,653 -- 263,970 -- 3,468,464
Mark A. King............................. -- -- -- 160,014 -- 1,880,250
David W. Black........................... -- -- -- 74,000 -- 988,250
- ------------------------
(1) Represents the value realized upon exercise calculated as the number of
options exercised times the difference between the average of the high and
low stock trading price from the trading day immediately prior to the
exercise date and the exercise price.
(2) Represents the value of unexercised options calculated as the number of
unexercised option times the difference between the closing price at June
30, 1997 and the exercise price.
DIRECTOR COMPENSATION
Effective November 1994, each member of the ACS Board who is not employed by
ACS receives compensation in the amount of $3,000 for attendance at each ACS
Board meeting. Directors are reimbursed for their travel expenses incurred in
connection with the meetings. On November 30, 1994, ACS and each of Messrs.
O'Neill and Rossi entered into consulting agreements in which Messrs. O'Neill
and Rossi agreed to provide, among other things, certain corporate development
services to ACS. Such
88
agreements are terminable by either party with 30 days notice. Pursuant to such
agreements, in exchange for such services, ACS has agreed to compensate Messrs.
O'Neill and Rossi a DE MINIMIS amount, respectively, and has agreed to reimburse
both Messrs. O'Neill and Rossi for their out-of-pocket expenses. ACS granted
Messrs. Rossi and O'Neill options to purchase 50,000 and 20,000 shares of ACS
Class A Common Stock, respectively. Such options vest ratably over five years.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has been responsible for administering the 1988
Plan and approving compensation for the senior executives of ACS, including
recommending to the ACS Board policies and plans concerning the salaries,
bonuses, and other compensation for all executive officers. The Compensation
Committee will administer the 1997 Plan if such plan is adopted by the ACS
stockholders at the ACS Annual Meeting. The objective of the ACS executive
compensation program is to attract and retain qualified, motivated executives
and to closely align their financial interests with both the short and long-term
interests of the ACS stockholders. The executive compensation program is
intended to provide the executive officers of ACS with overall levels of
compensation that are competitive within the information industry, as well as
within a broader spectrum of companies of size and complexity.
The three principal components of the ACS executive compensation program are
base salary, annual incentive bonus opportunities, and stock options.
BASE SALARIES
Each executive officer's base salary is reviewed annually and is subject to
adjustment on the basis of individual, corporate, and business unit performance,
as well as competitive and inflationary considerations.
INCENTIVE BONUS
Incentive bonus payments for executive officers other than the Chief
Executive Officer and Chief Operating Officer are made at the end of each fiscal
year based upon the achievement of consolidated financial criteria, business
unit financial criteria, and the attainment of individual goals, all of which
are established by the Chief Executive Officer and the Chief Operating Officer
of ACS subject to approval by the Compensation Committee of the ACS Board at the
beginning of each fiscal year. Compensation for the Chief Executive Officer and
Chief Operating Officer of ACS consisted of a base salary and bonus
compensation. Bonus compensation was substantially dependent on the achievement
of four targeted financial measures: consolidated revenues, consolidated
earnings before interest, taxes and depreciation, consolidated pre-tax earnings,
and consolidated earnings per share. During fiscal year 1997, ACS achieved 100%
of such measures. The Chief Executive Officer and Chief Operating Officer did
not participate in the Committee's decisions regarding their own compensation.
For fiscal year 1997, executive officers were eligible to receive maximum
bonuses of between 125% and 250% of salary provided certain financial goals were
met.
STOCK OPTION PLAN
The 1988 Plan has been administered by the Compensation Committee and the
Special Compensation Committee of the ACS Board. Under its terms, the 1988 Plan
may be administered by the ACS Board or another body, if permitted by Rule
16b-3. The Compensation Committee and the Special Compensation Committee have
determined the individuals eligible to receive grants of options under the 1988
Plan, the type of option granted, the number of shares of ACS Class A Common
Stock subject to a grant and the terms of the grant, including exercise price,
exercise date, and any restrictions on exercise. The Compensation Committee and
the Special Compensation Committee also have been responsible for determining
the
89
advisability and terms of any buyout of options previously granted and the
reductions, if any, in the exercise prices of previously granted options.
The 1988 Plan also provides for the issuance of stock purchase rights. When
the Compensation Committee determines to grant a stock purchase right, it
advises the recipient of the grant of the terms and conditions of the grant,
including any restrictions on the grant, the number of shares subject to the
grant, the exercise price of the grant, and the time within which the grant must
be accepted by the recipient. The maximum amount of time that a recipient may
have to accept the grant is 30 days. The purchase price of stock acquired
pursuant to a stock purchase right shall not be less than 50% of the fair market
value of ACS Class A Common Stock at the time of grant. There have been no stock
purchase rights granted through June 30, 1997.
Submitted by the Compensation
Committee
of the Board of Directors:
DARWIN DEASON
FRANK A. ROSSI
JOSEPH P. O'NEILL
PERFORMANCE GRAPH
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ACS NASDAQ MARKET NASDAQ INDUSTRY S&P 500 S&P SOFT. & SVCS.
9/26/1994(IPO Date) 100.0 100.0 100.0 100.0 100.0
6/30/95 190.6 123.1 147.5 119.8 144.8
6/30/96 293.8 161.0 194.6 150.2 192.2
6/30/97 350.0 195.7 245.5 199.9 295.5
The above graph compares cumulative total stockholder return on ACS Class A
Common Stock from the IPO date of September 26, 1994 through June 30, 1997 with
the Standard & Poor's 500 Stock Index and the Standard & Poor's Computer
Software & Services Index. The stock comparison is also included for the NASDAQ
Computer & Data Processing Index and NASDAQ Market Index, which were presented
90
in proxies for fiscal years 1995 and 1996. Future stock performance comparisons
will utilize only the Standard & Poor's 500 Stock Index and the Standard &
Poor's Computer Software & Services Index.
The graph assumes the investment of $100 and the reinvestment of all
dividends. The stock price performance shown on the graph is not necessarily
indicative of future stock price performance.
THE ABOVE REPORT OF THE COMPENSATION COMMITTEE AND THE STOCK PERFORMANCE
GRAPH WILL NOT BE DEEMED TO BE SOLICITING MATERIAL OR TO BE FILED WITH OR
INCORPORATED BY REFERENCE INTO ANY FILING BY THE COMPANY UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES SUCH REPORT OR
GRAPH BY REFERENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the reorganization of ACS on June 30, 1994, ACS and
Precept entered into a reciprocal services agreement pursuant to which Precept
would sell business forms and supplies, and provide courier and certain other
administrative services to ACS, and ACS would provide office space and certain
administrative services to Precept. Mr. Deason is a director and holds voting
control of Precept. The prices for all services, forms and supplies provided by
Precept to ACS under such agreement must be no less favorable than could be
obtained from an independent third party and are subject to review from time to
time by the Independent Directors Committee of ACS. The prices for all services
provided by ACS to Precept will be at no less than ACS's direct cost. The costs
incurred by ACS for services provided by Precept covered by such reciprocal
services agreement, which are believed to approximate fair market value, were
approximately $5.4 million for fiscal year 1997. Precept's payments to ACS under
the reciprocal services agreement were approximately $0.4 million for fiscal
year 1997.
Effective April 1996, ACS sold all of the outstanding capital stock of ACS
Merchant Services, Inc. ("MERCHANT SERVICES"), a wholly owned subsidiary formed
as a start-up operation of the EFT business line, to Thomas M. Rouse, a former
executive officer and director of ACS, for a promissory note in the principal
amount of $500,000. The promissory note bears interest at the prime lending rate
of Wells Fargo Bank, N.A. Amortization of principal begins in 1999. There was no
gain or loss recognized on the sale. Simultaneously with the sale, ACS
contributed an additional $1,500,000 and the unpaid balance of an intercompany
note due from Merchant Services of approximately $712,000 in exchange for 1,000
shares of 5% cumulative redeemable convertible preferred stock of Merchant
Services. This preferred stock is convertible after five years into
approximately 55% of the common stock of Merchant Services on a fully diluted
basis. ACS provides guarantees to two banks on Merchant Services' debt up to
$7,500,000.
STOCKHOLDER PROPOSALS FOR THE 1998 ACS ANNUAL MEETING OF STOCKHOLDERS
If any stockholder of ACS intends to present a proposal for consideration at
the 1998 Annual Meeting of Stockholders and desires to have such proposal in the
proxy statement and form of proxy distributed by the ACS Board with respect to
such meeting, such proposal must be received at ACS's principal executive
offices, 2828 North Haskell Avenue, Dallas, Texas 75204, Attention: David W.
Black, Corporate Secretary, not later than August 18, 1998.
If the proposed amendment to the ACS Bylaw 8(c) is approved by the requisite
shareholder vote at the ACS Annual Meeting, any such stockholder proposal must
be received by ACS no sooner than July 21, 1998 and no later than August 18,
1998.
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INFORMATION CONCERNING CDSI
The following is a summary of certain information contained in the CDSI
Annual Report on Form 10-K, which is incorporated by reference herein, and is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information contained in the CDSI Annual Report on Form 10-K.
OVERVIEW
CDSI was incorporated in the State of Maryland in 1968. CDSI provides
information technology services and products, including applications development
and maintenance services, network engineering and telecommunications
integration, desktop integration, data base support, data center management and
processing services, and systems engineering. CDSI's products include financial
and accounting software, debt management, loan and mortgage processing, and
biometric identification systems. CDSI's 3,900 employees serve a wide array of
government and private industry customers with information technology expertise,
systems, and products. CDSI provides information technology solutions on more
than 100 current contracts from 34 office locations.
CDSI's operations are concentrated in two business segments: professional
services and processing services.
Within the professional services segment, CDSI ITS primarily markets its
expertise in software programming and network engineering to those federal
government agencies that demand highly technical information technology
solutions. CDSI ITS applies proven information technology to design, implement,
and operate data center facilities, networks, imaging systems, interactive
databases, and information management and reporting systems. CDSI ITS also
provides solutions for government and commercial customers in critical areas
such as client/server development, network and telecommunications integration
and desktop automation. ASEC, which was acquired by CDSI in June 1997, also
operates within the professional services segment. ASEC is a federal
government-focused engineering and technical services firm headquartered in
Burlington, Massachusetts. ASEC specializes in expert systems engineering and
integration services, information systems, intelligence systems support and
advanced technology applications primarily for government agencies with missions
related to national defense or intelligence.
Within the processing services segment, CDSI BAS provides financial systems
and services to include debt collection, pension trust fund support, loan
processing, cash management, mortgage servicing, and fulfillment systems and
services. In addition, CDSI BAS markets CDSI's proprietary software packages.
CDSI Solutions, a wholly-owned subsidiary of CDSI which began operations in July
1997, also operates within the processing services segment. CDSI Solutions
operates CDSI's modern data center, which services the information processing
requirements, both mainframe and client-server, of numerous federal and
commercial clients. Data center services include the full range of associated
technical support: LAN administration, system and data security, data integrity,
user training, office automation support, hotline support, and courier services.
Most contracts are awarded on the basis of competitive bidding and are
generally structured as time-and-materials, cost-plus-fixed-fee, fixed-price, or
unit-price contracts. Such contracts include specific objectives and performance
periods ranging upwards of several years.
Under time-and-materials contracts, CDSI receives a fixed hourly rate
intended to cover salary costs attributable to work performed under the
contract, including related expenses and a specified profit margin. Under
cost-plus-fixed-fee contracts, CDSI is reimbursed for allowable costs and is
paid a negotiated fee. Under fixed-priced and unit-priced contracts, CDSI bears
the risk of increased or unexpected costs and benefits if its costs are lower
than estimated. Key factors in the award of such contracts have been technical
expertise, past performance, and pricing.
LEGAL PROCEEDINGS
CDSI is party to various legal proceedings arising in the normal course of
its business. The management of CDSI does not believe that the outcome of any of
these proceedings will have a material adverse effect on CDSI.
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CDSI MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CDSI
DIRECTORS AND EXECUTIVE OFFICERS OF CDSI
The following table sets forth certain information regarding beneficial
ownership of CDSI Common Stock as of the CDSI Record Date by: (i) each director
of CDSI, (ii) each of the five most highly compensated executive officers of
CDSI, and (iii) all directors and executive officers of CDSI as a group. This
table is based on information provided by CDSI's directors and executive
officers. Unless otherwise indicated in the footnotes below, and subject to the
community property laws where applicable, each of the named persons exercises
sole voting and dispositive power over his or her shares.
PERCENTAGE OF
AMOUNT OF OUTSTANDING
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP (SHARES) STOCK
- --------------------------------------------------------- ------------------- -----------------
Peter A. Bracken......................................... 11,000(1) *
Thomas A. Green.......................................... 31,753(2) *
James W. Henderson....................................... 111,011(3) 1.77%
Raymond B. Hoxeng........................................ 33,500(4) *
Paul R. Ignatius......................................... 12,700(5) *
Clifford M. Kendall...................................... 269,536(6) 4.29%
Mary Ann Mayhew.......................................... 20,208(7) *
Hilliard W. Paige........................................ 18,500(8) *
James A. Parker.......................................... 9,011(9) *
All directors and executive officers as a group (12
persons)............................................... 542,160(10) 8.62%
- ------------------------
* Less than one percent
(1) Does not include 70,000 shares subject to acquisition upon the exercise of
stock options by virtue of the transaction contemplated by the Merger
Agreement.
(2) Includes 20,250 shares subject to acquisition by the exercise of options
within 60 days, but does not include 33,750 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
(3) Does not include 15,000 shares subject to acquisition upon the exercise of
stock options by virtue of the transaction contemplated by the Merger
Agreement.
(4) Shares are held in two revocable trusts, one in Dr. Hoxeng's name (21,500
shares) and one in the name of Dr. Hoxeng's spouse (12,000 shares). Dr.
Hoxeng and his spouse are co-trustees of both trusts. Does not include 2,000
shares subject to acquisition upon the exercise of other stock options by
virtue of the transactions contemplated by the Merger Agreement.
(5) Includes 6,500 shares subject to acquisition by the exercise of options
within 60 days, but does not include 2,000 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
(6) Includes 120,364 shares held by Mr. Kendall's spouse and 9,250 shares
subject to acquisition by the exercise of options within 60 days, but does
not include 31,750 shares subject to acquisition upon the exercise of other
stock options by virtue of the transactions contemplated by the Merger
Agreement.
(7) Includes 14,250 shares subject to acquisition by the exercise of options
within 60 days, but does not include 33,750 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
93
(8) Includes 6,500 shares subject to acquisition by the exercise of options
within 60 days, but does not include 2,000 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
(9) Includes 6,500 shares subject to acquisition by the exercise of options
within 60 days, but does not include 2,000 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
(10) Includes 78,125 shares subject to acquisition by the exercise of options
within 60 days, but does not include 233,875 shares subject to acquisition
upon the exercise of other stock options by virtue of the transactions
contemplated by the Merger Agreement.
CERTAIN OTHER STOCKHOLDERS
The stockholders named in the following table are those known to CDSI to be
the beneficial owners of 5% or more of CDSI's Common Stock based on filings made
by the respective stockholders with the Commission. Unless otherwise indicated,
the information is as of July 29, 1997. Except as otherwise indicated, to the
knowledge of CDSI, each owner listed below exercises sole voting and dispositive
power over their shares.
PERCENTAGE OF
AMOUNT OF OUTSTANDING
BENEFICIAL COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(SHARES) STOCK
- --------------------------------------------------------- ------------------- -----------------
FMR Corporation ......................................... 623,600(1) 9.93%
82 Devonshire Street
Boston, Massachusetts 02109
Calvin S. Koonce ........................................ 445,106(2) 7.09%
6229 Executive Boulevard
Rockville, Maryland 20852
Dimensional Fund Advisors, Inc. ......................... 371,400(3) 5.92%
1099 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Avenir Corporation ...................................... 342,800(4) 5.46%
1725 K Street, N.W., Suite 410
Washington, D.C. 20006
- ------------------------
(1) As reported on Schedule 13G, dated June 9, 1997. Includes sole dispositive
power over 623,600 shares. FMR Corporation beneficially owns the shares
through its wholly-owned subsidiary, Fidelity Management and Research
Corporation ("FIDELITY"), an investment adviser to several investment
companies registered under the Investment Corporation Act of 1940 that own
shares of CDSI (the "FIDELITY FUNDS"). The Board of Trustees of the Fidelity
Funds has the authority to vote or direct the voting of the shares under the
written guidelines established by the Board of Trustees of the Fidelity
Funds. FMR Corporation, through control of Fidelity, and each of the
Fidelity Funds has sole power to dispose of shares held by the Fidelity
Funds. Mr. Edward C. Johnson, Chairman of FMR Corporation, reported in a
statement on Schedule 13G sole dispositive power with respect to the shares
owned by FMR Corporation.
(2) As reported on Schedule 13D, dated April 27, 1992. Number of shares adjusted
to reflect CDSI's August 1993, 2-for-1 stock split effected in the form of a
dividend.
(3) As reported on Form 13F-E, dated April 18, 1997.
(4) As reported on Schedule 13G, dated May 16, 1997.
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COMPARATIVE RIGHTS OF STOCKHOLDERS OF ACS AND CDSI
CDSI is organized under the laws of the State of Maryland and ACS is
organized under the laws of the State of Delaware. The following discussion
summarizes certain differences between (a) the CDSI Charter and Bylaws and the
ACS Charter and ACS Bylaws and (b) certain provisions of the MGCL and the DGCL
affecting stockholders' rights.
AUTHORIZED CAPITAL
The total number of authorized shares of capital stock of CDSI is 30,000,000
shares of common stock, with a par value of $0.10 per share and an aggregate par
value of $3,000,000. The total number of authorized shares of capital stock of
ACS is (a) 81,405,686 shares of common stock, with a par value of $0.01 per
share and an aggregate par value of $814,056.86, consisting of (i) 75,000,000
shares of ACS Class A Common Stock and (ii) 6,405,686 shares of ACS Class B
Common Stock (collectively, the "COMMON STOCK"), and (b) 3,000,000 shares of
Preferred Stock. If the ACS stockholders approve Proposal No. 2, the total
number of authorized shares of capital stock of ACS will be (a) 514,000,000
shares of common stock, with a par value of $.01 per share and an aggregate par
value of $5,140,000, consisting of (i) 500,000,000 shares of ACS Class A Common
Stock and (ii) 14,000,000 shares of Class B Common stock and (b) 3,000,000
shares of Preferred Stock.
DIRECTORS
The CDSI Bylaws provide for a minimum of three and a maximum of 25
directors, with the exact number of directors to be fixed from time to time by
the CDSI Board. There are currently eight directors serving on the CDSI Board.
The ACS Charter provides for a minimum of three and a maximum of 15 directors,
with the exact number to be fixed from time to time by the ACS Board. There are
currently 7 directors serving on the ACS Board. Under the Bylaws of both CDSI
and ACS, a plurality of stockholder votes cast is sufficient to elect directors.
Both Bylaws also provide that a majority of the entire board of directors shall
constitute a quorum for the transaction of business.
If Proposal No. 2 is approved, the ACS Board will be divided into three
classes, with one class having an initial term of one year, one class having an
initial term of two years, and one class having an initial term of three years.
At each annual meeting of ACS stockholders, commencing with the annual meeting
of stockholders to be held in 1998, directors will be elected to succeed those
directors whose terms have expired, and each newly elected director will serve
for a three-year term.
REMOVAL OF DIRECTORS
The CDSI Bylaws provide that at any meeting of stockholders at which a
quorum is present, the stockholders may, by the affirmative vote of a majority
of the votes entitled to be cast, remove any director or directors from office.
The ACS Charter provides that at any annual meeting or special meeting of the
stockholders, the notice of which states that the removal of a director or
directors is among the purposes of the meeting, the affirmative vote of the
holders of at least 80% of the combined voting stock of ACS (giving effect to
the number of votes per share attributable to such stock), voting together as a
single class, may remove such director or directors with or without cause. The
amendment to the ACS Bylaws regarding staggered three-year terms being submitted
to the ACS stockholders at the ACS Annual Meeting, combined with the foregoing
ACS Charter provision, increases the likelihood that, in the event of a takeover
of ACS by a third party, the incumbent directors will retain their positions.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the MGCL, stockholders may elect a successor to fill a vacancy on the
board of directors which results from the removal of a director. Otherwise, a
majority of the remaining directors, whether or not sufficient to constitute a
quorum, may fill a vacancy on the board of directors which results from any
cause
95
except an increase in the number of directors, which requires a majority of the
remaining directors. Under the DGCL, vacancies and newly created directorships
may be filled by a majority of the directors then in office or a sole remaining
director (even though less than a quorum) unless otherwise provided in the
certificate of incorporation or bylaws. The DGCL also provides that if the
directors then in office constitute less than a majority of the corporation's
board of directors, upon application by stockholders representing at least 10%
of outstanding shares entitled to vote for such directors, the Delaware Court of
Chancery may order an election of directors to be held.
AMENDMENT TO CHARTER OR CERTIFICATE OF INCORPORATION
Under MGCL, the affirmative vote of at least two-thirds of the votes
entitled to be cast is required to amend a corporation's charter, provided that
the corporation may require in its charter a greater or lesser proportion of the
votes cast to approve a charter amendment as long as the vote is not less than a
majority of the votes entitled to be cast. The CDSI Charter includes no such
provision. Under the DGCL, the affirmative vote of a majority of the outstanding
shares entitled to vote is required to amend a corporation's certificate of
incorporation. Under the DGCL, amendments that make changes relating to a class
or series of capital stock by increasing or decreasing the rights of such class,
also must be approved by the majority vote of each class or series of stock
affected, even if such shares ordinarily would not have such voting rights.
AMENDMENT OF BYLAWS
Under the MGCL, the power to adopt, amend, or repeal a corporation's bylaws
is vested in the corporation's stockholders, except to the extent the
corporation's charter or bylaws vest it in the board of directors. The CDSI
Bylaws provide that the Bylaws may be amended, altered, or repealed by the board
of directors, except that only the stockholders, by the vote of a majority of
the votes entitled to be cast, may change the provisions relating to amendments
of the Bylaws. Under the DGCL, the bylaws may be amended by the action of the
board of directors or by the affirmative vote of a majority of the outstanding
shares of stock, voting as a single class.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Under the ACS Bylaws, nominations of persons for election as directors of
ACS may be made only at an annual meeting of stockholders by or at the direction
of the board of directors or by any stockholder who is a stockholder of record
at the time of giving of notice. Nominations by stockholders shall be made
pursuant to timely notice in writing to the Secretary of ACS. Under the ACS
Bylaws, to be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of ACS not less than 60 calendar
days prior to the annual meeting of stockholders. If the ACS stockholders
approve Proposal No. 4, notice of stockholder proposals and director nominations
must be in writing and received by the secretary of ACS no later than (a) with
respect to an annual meeting of stockholders, not less than 120 days nor more
than 150 days before the first anniversary date of the ACS proxy statement in
connection with the last annual meeting of stockholders or (b) if no annual
meeting has been called after the expiration of more than 30 days from the date
for such meeting contemplated at the time of the previous year's proxy
statement, not less than a reasonable time, as determined by the ACS Board,
prior to the date of the applicable annual meeting. The notice of stockholder
nominations for director must set forth certain information with respect to each
nominee who is not an incumbent director.
The CDSI Bylaws do not include any similar advance notice provisions.
STOCKHOLDER MEETINGS AND PROVISIONS FOR NOTICES; PROXIES
Under the MGCL and the DGCL, stockholder meetings may be held at any place,
as provided in the bylaws. However, the MGCL requires the meetings to be held in
the United States. The DGCL has no
96
such requirement. Under both the MGCL and the DGCL, written notice of a
stockholders meeting must state the place, date, and time of the meeting, and if
a special meeting, the purpose or purposes for which the meeting is to be held.
Under the CDSI Bylaws, not less than 10 days nor more than 90 days before the
date of every stockholders' meeting, the CDSI Secretary shall give to each
stockholder entitled to vote at the meeting, written or printed notice stating
the time and place of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, either by mail or by
presenting it to him personally or by leaving it at his residence or usual place
of business. The ACS Bylaws further provide that written notice of every meeting
of the stockholders, stating the place, date, and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, will be given not less than 10 nor more than 60 calendar days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting.
Under the MGCL, proxies are valid for 11 months from their date, unless the
proxy otherwise provides. Under the DGCL, however, stockholder proxies are valid
for three years from their date unless the proxy provides for a longer period.
VOTING BY STOCKHOLDERS
The CDSI Bylaws provide that, in all elections for directors, every
stockholder shall have the right to vote, in person or by proxy, the shares owed
of record by the stockholder. At all meetings of stockholders, the proxies and
ballots shall be received by the chairman of the meeting. If demanded by 20% of
the stockholders, or if ordered by the Chairman, the voting shall be conducted
by two inspectors. The stockholders at any meeting may choose the inspectors,
however, no candidate for election as a director at a meeting shall serve as an
inspector at any meeting of stockholders.
Under the ACS Bylaws, each holder of shares of Class A Common Stock is
entitled at every meeting of the stockholders to one vote for each share of
stock having voting power standing in the name of such stockholder; holders of
shares of Class B Common Stock are entitled to 10 votes per share. Votes are
counted by inspectors appointed by the ACS Board to act as judges of the voting
and to determine those entitled to vote at any meeting of the stockholders. When
a quorum is present, the affirmative vote of a majority of the votes cast by
stockholders present in person or by proxy generally is the act of the
stockholders.
STOCKHOLDER ACTION WITHOUT A MEETING
Under the DGCL, unless otherwise provided in the certificate of
incorporation, actions may be taken by the stockholders of a Delaware
corporation by written consent, provided that the written consent is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote on the matter were present and voted. The ACS
Charter includes no such provisions limiting the ability of stockholders to act
by written consent. Under the MGCL, stockholders may act by written consent only
if all stockholders entitled to vote on the matter that is the subject of the
written consent sign the consent.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and (i) any person who beneficially owns 10% or more of the voting
power of the corporation's shares, (ii) an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (in either case, an "INTERESTED STOCKHOLDER"),
or (iii) any affiliate of an Interested Stockholders, are prohibited for five
years after the most recent date on which the Interested Stockholder became an
Interested Stockholder, and thereafter must be recommended by the
97
board of directors of the Maryland corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of its
outstanding voting shares, and (b) two-thirds of the votes entitled to be cast
by holders of such outstanding voting shares, other than shares held by the
interested stockholder with whom the business combination is to be effected;
unless, among other things, the corporation's stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
stockholder for its shares. These provisions of the MGCL do not apply to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the "interested stockholder" becomes an
"interested stockholder."
Under Section 203 of the DGCL ("SECTION 203"), certain "business
combinations" with "interested stockholders" (each as defined in Section 203) of
Delaware corporations are subject to a three-year moratorium unless specified
conditions are met.
CONTROL SHARE ACQUISITION
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders in the election of directors, excluding shares of stock as to which
the acquiring person, officers of the corporation, and directors of the
corporation who are employees of the corporation are entitled to exercise or
direct the exercise of the voting power of the shares in the election of
directors. "CONTROL SHARES" are voting shares of stock which, if aggregated with
all other shares of stock previously acquired by such person, would entitle the
acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more or less than one-third,
(ii) one-third or more but less than a majority, or (iii) a majority of all
voting power. Control shares do not include shares that the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A "CONTROL SHARE ACQUISITION" means the acquisition, directly or indirectly, of
control shares, subject to certain exceptions.
A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares.
If voting rights are not approved at the meeting or if the acquirer does not
deliver an acquiring person statement as required by the statute, then subject
to certain conditions and limitations, the corporation may redeem any or all of
the control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to voting rights, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions generally applicable to the exercise of appraisal
rights do not apply in the context of a control share acquisition.
The "control share acquisition" statute does not apply to shares acquired in
a merger, consolidation, or share exchange if the corporation is a party to the
transaction or to acquisitions approved or excepted by the charter or the bylaws
of the corporation.
The DGCL has no comparable control share acquisition statute.
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INDEMNIFICATION AND LIMITATION OF LIABILITY
Delaware and Maryland have similar laws respecting the indemnification by a
corporation of its officers, directors, employees, and other agents. The laws of
both states also permit, with certain exceptions, corporations to adopt a
provision in their certificate of incorporation or charter eliminating the
liability of a director to the corporation or its stockholders for monetary
damages for breach of the director's fiduciary duty of care. There are
nonetheless certain differences between the laws of the two states respecting
indemnification and limitation of liability.
The CDSI Charter limits the monetary liability of both officers and
directors to the maximum extent permissible under the MGCL. The exceptions to
such a liability limitation in the charter of a Maryland corporation generally
are to the extent that (a) it is proved that the person received an improper
benefit or profit in money, property or services, for the amount of benefit or
profit so received, and (b) a judgment or other final adjudication adverse to
the person is entered in a proceeding based on a finding that the person's
action or failure to act was the result of active and deliberate dishonesty and
was material to the cause of action. Under the MGCL, unless limited by the
charter, indemnification is mandatory if a director or an officer has been
successful on the merits or otherwise in the defense of any proceeding arising
from his or her service as a director unless such indemnification is not
otherwise permitted as described in the following sentence. Indemnification is
permissive unless it is established that (a) the act or omission of the director
was material to the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate dishonesty, (b) the
director actually received an improper personal benefit in money, property or
services, or (c) in the case of a criminal proceeding, the director had
reasonable cause to believe his or her act or omission was unlawful. In addition
to the foregoing, a court of appropriate jurisdiction may under certain
circumstances order indemnification if it determines that the director or
officer is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not the director or officer has met the
standards of conduct set forth in the preceding sentence or has been adjudged
liable on the basis that a personal benefit was improperly received in a
proceeding charging improper personal benefit to the director or the officer. If
the proceeding was an action by or in the right of the corporation or involved a
determination that the director or officer received an improper personal
benefit, however, no indemnification may be made if the individual is adjudged
liable to the corporation, except to the extent of expenses approved by a court
of appropriate jurisdiction.
Under the MGCL, where indemnification is permissible it must be authorized
(a) by a majority vote of a quorum of the board of directors consisting of
directors who are not parties to the proceeding (or if such a quorum cannot be
obtained, the determination may be made by a majority vote of a committee of the
board which consists solely of two or more directors who are not parties to the
proceeding and who were designated to act by a majority of the full board), (b)
by special legal counsel selected by the board of directors or by a committee of
the board (or if the requisite quorum of the board cannot be obtained and the
committee cannot be established, a majority of the full board, including
directors who are parties, may select the special counsel), or (c) by a vote of
the stockholders other than those stockholders who are directors and a party to
the proceedings.
In Maryland, expenses may be advanced to a director, or to an officer,
employee, or agent who is not a director to the same extent that they may be
advanced to a director unless limited by the charter. Advances to officers,
employees, and agents may be generally authorized in the corporation's charter
or bylaws, by action of the board of directors, or by contract. Delaware law
permits such general authorization of advances to directors and officers but
requires approval by the directors of advances to employees and agents of the
corporation.
The ACS Charter eliminates the liability of directors to the fullest extent
permissible under the DGCL, as such law exists currently or as it may be amended
in the future. Such provision may not eliminate or limit a director's monetary
liability for (a) breaches of the director's duty of loyalty to the corporation
or its stockholders; (b) acts or omissions not in good faith or involving
intentional misconduct
99
or knowing violations of law; (c) the payment of unlawful dividends or unlawful
stock repurchases or redemptions; or (d) transactions in which the director
received an improper personal benefit. The DGCL provides that indemnification is
mandatory where a director, officer, employee, or agent acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, or with respect to any criminal action or
proceeding, where there was no reason to believe his or her conduct was
unlawful, or where he or she has been successful on the merits or otherwise in
the defense of any proceeding covered by the indemnification statute.
The DGCL generally permits and the ACS Charter and ACS Bylaws require
indemnification for expenses incurred in the defense or settlement of derivative
or third-party actions, provided there is a determination by a quorum of
directors who were not parties to the action, or if such quorum is unobtainable
or if directed in such quorum by independent legal counsel or by a majority vote
of a quorum of the stockholders, that the person seeking indemnification acted
in good faith and in a manner reasonably believed to be in, or not opposed to,
the best interests of the corporation, or in a criminal proceeding that the
person had no reason to believe his or her conduct to be unlawful. Without court
approval, however, no indemnification may be made in respect of any derivative
action in which such person is adjudged liable. The DGCL states that the
indemnification provided by statute shall not be deemed exclusive of any rights
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
DISSENTERS' OR APPRAISAL RIGHTS
Under the MGCL, stockholders have the right to demand and to receive payment
of the fair value of their stock in the event of (a) a merger or consolidation,
(b) a share exchange, (c) certain sales of all or substantially all of the
assets of the corporation, (d) a charter amendment altering contract rights of
outstanding stock, as expressly set forth in the charter, and substantially
adversely affecting the stockholders' rights (unless, as is the case with the
CDSI Charter, the right to do so is reserved in the charter), or (e) certain
business combinations with interested stockholders which are subject to or
exempted from the MGCL's business combination statute and in connection with the
approval of voting rights of certain stockholders under the MGCL's control share
acquisition statute. Except with respect to certain business combinations and in
connection with appraisal and dissenters' rights existing as a result of the
MGCL's control share acquisition statute, the right to demand and receive
payment of fair value does not apply to (a) stock listed on a national
securities exchange or a national market system security designated on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., (b) stock of the successor in a merger (unless the merger alters the
contract rights of the stock or converts the stock in whole or in part into
something other than stock, cash, scrip or other interests) or (c) stock of an
open-end investment company registered with the Commission under the Investment
Company Act of 1940 and the stock is valued in the transaction at its net asset
value. Except in the case of appraisal and dissenters' rights existing as a
result of the MGCL's control share acquisition statutes, these rights are
available only when the stockholder (a) files with the corporation a timely,
written objection to the transaction and (b) does not vote in favor of the
transaction. In addition, the stockholder must make a demand on the successor
corporation for payment of the stock within 20 days of the acceptance of
articles by the State Department of Assessments and Taxation of the State of
Maryland.
Under the DGCL, stockholders of a corporation who do not consent to certain
major corporate transactions may, under varying circumstances, be entitled to
dissenters' or appraisal rights pursuant to which such stockholders may receive
cash in the amount of the fair market value of their shares in lieu of the
consideration which otherwise would have been received in the transaction.
Unless the corporation's certificate of incorporation provides otherwise, such
appraisal rights are not available in certain circumstances, including without
limitation, (a) with respect to the sale, lease, or exchange of all or
substantially all of the assets of a corporation, (b) with respect to a merger
or consolidation by a corporation the shares of which are either listed on a
national securities exchange or are held of record by more than 2,000
100
holders if such stockholders receive only shares of the surviving corporation or
shares of any other corporation which are either listed on a national securities
exchange or held of record by more than 2,000 holders, plus cash in lieu of
fractional shares, or (c) to stockholders of a corporation surviving a merger if
no vote of the stockholders of the surviving corporation is required to approve
the merger because the merger agreement does not amend the existing certificate
of incorporation, each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the merger
and if certain other conditions are met.
DISSOLUTION
The MGCL provides for the voluntary dissolution of a corporation by a
resolution adopted by a majority of the corporation's board of directors. A vote
of two-thirds of all votes entitled to be cast on the matter generally is
necessary to approve the dissolution, but, in accordance with the MGCL, a
corporation's charter may reduce the stockholder vote required to approve a
dissolution to a majority of the votes entitled to be cast on the matter. The
CDSI Charter includes no such provisions reducing the required stockholder vote.
The MGCL also provides that stockholders entitled to cast at least 25% of
all the votes entitled to be cast in the election of directors may petition a
court of equity for an involuntary dissolution of the corporation on the ground
that (a) the directors are so divided respecting the management of the
corporation's affairs that the votes required for action by the board cannot be
obtained, or (b) the stockholders are so divided that directors cannot be
elected. Any stockholder entitled to vote in the election of directors of a
Maryland corporation, however, may petition a court of equity to dissolve the
corporation on the grounds that (a) the stockholders are so divided that they
have failed, for a period which includes at least two consecutive annual meeting
dates, to elect successors to directors whose terms would have expired on the
election and qualification of their successors, or (b) the acts of the directors
or those in control of the corporation are illegal, oppressive or fraudulent.
Under the DGCL, unless the board of directors approves the proposal to
dissolve, dissolution of the corporation must be approved by all stockholders
entitled to vote thereon. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation's
stockholders.
Under the DGCL, the Court of Chancery, upon application by any stockholder,
may appoint a custodian or receiver (a) if the stockholders are so divided that
they have failed to elect successors to directors whose terms have expired, (b)
if the business of the corporation is suffering or is threatened with
irreparable injury because of a deadlock of directors, or (c) if the corporation
has abandoned its business but has not liquidated. Upon the order of the Court
of Chancery or in the event of clause (c) above, the corporation may be
liquidated and its assets distributed.
DIVIDENDS
The MGCL permits a corporation to make a distribution, including dividends,
redemptions or stock repurchases, unless prohibited by its charter or if
following such distribution, the corporation would not be able to pay its debts
in the ordinary course as they become due or the corporation's total assets
would be less than the sum of its liabilities and, unless the charter provides
otherwise, senior liquidation preferences. For purposes of determining whether a
distribution is lawful, the corporation's assets may be based upon fair value or
any other method of valuation that is reasonable under the circumstances.
The DGCL permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by the
issued and outstanding stock of all
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classes having a preference upon the distribution of assets. In addition, the
DGCL generally provides that a corporation may redeem or repurchase its shares
only if such redemption or repurchase would not impair the capital of the
corporation or if it repurchases shares having a preference upon the
distribution of any of its assets that it retires such shares upon acquisition
(and provided, that after any reduction in capital made in connection with such
retirement of shares, the corporation's remaining assets are sufficient to pay
any debts not otherwise provided for).
RIGHT TO EXAMINE STOCKHOLDER LIST
Under the MGCL, any one or more persons who for a least six months have been
the record holders of at least 5% of any class of stock are entitled to inspect
and copy (among other things) the corporation's stock ledger and if the
corporation does not maintain its stock ledger at its principal place of
business, to request in writing a stockholder list. Following such request, the
corporation has 20 days to produce a stockholder list with names, addresses and
number of shares owned.
The DGCL provides that stockholders have a right for a period of 10 days
prior to any stockholder meeting and during such meeting, to examine a list of
stockholders of the corporation, arranged in alphabetical order and showing the
address and the number of shares held by such stockholder, for any purpose
germane to such meeting. Further, under the DGCL, any stockholder, following a
written request, has the right to inspect the corporation's books and records,
including the stockholder list, during usual business hours for a proper
purpose.
INTERESTED DIRECTOR TRANSACTIONS
Under both the DGCL and the MGCL, certain contracts or transactions in which
one or more of a corporation's directors has an interest are not invalid or
voidable because of such interest provided that certain conditions are met.
Under the DGCL and the MGCL, any such contract or transaction may be ratified by
the stockholders (as set forth below) or a majority of disinterested members of
the board of directors or a committee thereof if (a) the material facts are
disclosed or known thereto, or (b) the contract or transaction was fair (and
under the MGCL, reasonable) to the corporation at the time it was approved.
Under the DGCL, any ratification of such a contract or transaction by the
stockholders must be made by a majority of all stockholders in good faith. Under
the MGCL, such ratification must be made by a majority of the disinterested
stockholders.
PREEMPTIVE RIGHTS
Under the MGCL as in effect prior to October 1, 1995, subject to several
statutory exceptions and the power of the corporation to deny preemptive rights
in its charter, stockholders were entitled to preemptive rights. Although the
MGCL was amended to deny preemptive rights unless such rights are specifically
provided for in the charter as of October 1, 1995, CDSI remains subject to the
provisions of the MGCL in respect of preemptive rights that existed prior to
that date. The CDSI Charter denies preemptive rights to holders of any class of
stock. Under the DGCL, stockholders have no preemptive rights unless such rights
are provided for in the certificate of incorporation.
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AFFILIATES' RESTRICTION ON SALE OF ACS CLASS A COMMON STOCK
The shares of ACS Class A Common Stock to be issued pursuant to the Merger
will be registered under the Securities Act by a Registration Statement on Form
S-4, thereby allowing such securities to be traded without restriction by any
former holder of CDSI securities who is not deemed to be an "affiliate" of CDSI
prior to the consummation of the Merger, as "affiliate" is defined for purposes
of Rule 145 under the Securities Act, and who does not become an "affiliate" of
ACS after the consummation of the Merger.
Shares of ACS Class A Common Stock received by persons who are deemed to be
affiliates of CDSI prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act or as otherwise permitted under the Securities Act. Rule 145,
as currently in effect, imposes restrictions in the manner in which such
affiliates, and others with whom they might act in concert, may sell ACS Class A
Common Stock within any three-month period. Persons who may be deemed to be
affiliates of CDSI generally include individuals or entities that control, are
controlled by, or are under common control with CDSI and may include certain
officers and directors as well as principal stockholders of CDSI. CDSI
stockholders who are identified as affiliates will be so advised by CDSI prior
to the Effective Time.
Each of ACS and CDSI will use all reasonable efforts to cause each and any
CDSI stockholder who is an affiliate to agree not to make any public sale of any
ACS Class A Common Stock received upon consummation of the Merger except in
compliance with Rule 145 under the Securities Act or otherwise in compliance
with the Securities Act. In general, Rule 145, as currently in effect, imposes
restrictions on the manner in which such affiliates may make resales of ACS
Class A Common Stock and also on the quantity of resales that such stockholders,
and others with whom they may act in concert, may make within any three-month
period for a period of two (2) years after consummation of the Merger. In
addition, officers and directors of ACS following the Merger will be subject to
the resale restrictions of Rule 144 as it applies to affiliates of an issuer.
Commission guidelines regarding qualifying for the "pooling of interests"
method of accounting also limit sales by affiliates of either ACS or CDSI.
Commission guidelines indicate that the "pooling of interests" method of
accounting generally would not be challenged on the basis of sales by affiliates
of ACS or CDSI if the affiliates do not dispose of any of the shares they own or
shares they receive in connection with the Merger during the period beginning 30
days before the Effective Time and ending at such time as financial results
covering at least 30 days of combined operations of ACS and CDSI have been
publicly filed by ACS after the Merger. The Merger Agreement requires ACS and
CDSI to use all reasonable efforts to cause each of its affiliates to execute a
written agreement prohibiting such affiliates from selling, transferring or
otherwise disposing of, or acquiring or selling any options or other securities
relating to securities of ACS or CDSI that would be intended to reduce such
affiliate's risk relative to, any shares of ACS Class A Common Stock or CDSI
Common Stock beneficially owned by such affiliate during such period.
LEGAL MATTERS
Certain legal matters with respect to the validity of the ACS Class A Common
Stock to be issued in connection with the Merger and with respect to certain
federal income tax consequences of the Merger are being passed upon for ACS by
Hughes & Luce, L.L.P., Dallas, Texas. Certain legal matters with respect to
certain federal income tax consequences of the Merger are being passed upon for
CDSI by Miles & Stockbridge, a Professional Corporation.
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EXPERTS
The consolidated financial statements of ACS incorporated in this Joint
Proxy Statement/Prospectus and Registration Statement by reference to the Annual
Report on Form 10-K for the year ended June 30, 1997, have been so incorporated
in reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of CDSI incorporated in this Joint
Proxy Statement/Prospectus and Registration Statement by reference from the
Annual Report on Form 10-K for the year ended June 30, 1997, have been so
incorporated in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, independent certified public accountants, has been
selected by the ACS Board as ACS's independent accountant for the fiscal year
1998. Price Waterhouse LLP was also ACS's independent accountant for the fiscal
year 1997. A representative of Price Waterhouse LLP is expected to be present at
the ACS Annual Meeting. That representative will have the opportunity to make a
statement, if desired, and will be available to respond to appropriate
questions.
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF ACS
The consolidated audited financial statements of ACS for the three-year
period ended June 30, 1997 are set forth in the ACS 1997 Annual Report to
Stockholders and are hereby incorporated by reference.
CONSOLIDATED FINANCIAL STATEMENTS OF CDSI
The consolidated audited financial statements of CDSI for the three-year
period ended June 30, 1997 are set forth in the CDSI Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 and are hereby incorporated by
reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
ACS incorporates herein by reference the following documents filed by it
with the Commission pursuant to the Exchange Act: (i) its Annual Report on Form
10-K for the fiscal year ended June 30, 1997, as amended by Amendment No. 1
thereto on Form 10-K/A (ii) the description of ACS Class A Common Stock
contained in its Registration Statement on Form 8-A dated September 26, 1994,
(iii) the description of the Rights Agreement on Form 8-K dated August 20, 1997
and Registration Statement on Form 8-A dated August 21, 1997, (iv) its current
report on Form 8-K filed with the Commission on September 25, 1997, and (v) its
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
CDSI incorporates herein by reference the following documents filed by it
with the Commission pursuant to the Exchange Act (i) its Annual Report on Form
10-K for the fiscal year ended June 30, 1997, (ii) its current Report on Form
8-K filed with the Commission on June 27, 1997, as amended on August 29, 1997;
(iii) its current Report on Form 8-K filed with the Commission on September 25,
1997, (iv) its Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, and (v) the description of CDSI's Common Stock contained in the Form 10
filed with the Commission June 2, 1969, including any amendment or report
updating such description.
All documents filed by ACS and CDSI pursuant to Section 13(a), 13(c), 14, or
15(d) of the Exchange Act subsequent to the date of this Joint Proxy
Statement/Prospectus and prior to the date of the ACS Annual Meeting and the
CDSI Special Meeting shall be deemed to be incorporated by reference in this
Joint Proxy Statement/Prospectus and to be a part hereof from the date of filing
of such documents. All
104
information appearing in this Joint Proxy Statement/Prospectus is qualified in
its entirety by the information and financial statements (including notes
thereto) appearing in the documents incorporated by reference herein.
Any statement contained in a document incorporated or deemed incorporated by
reference herein shall be modified or superseded, for purposes of this Joint
Proxy Statement/Prospectus, to the extent that a statement contained herein or
in any subsequently filed document that is deemed to be incorporated herein
modifies or supersedes any such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Joint Proxy Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. ACS AND CDSI HEREBY
UNDERTAKE TO PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM A COPY OF THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN
DELIVERED, ON WRITTEN OR ORAL REQUEST BY ANY SUCH PERSON, A COPY OF ANY AND ALL
OF THE DOCUMENTS REFERRED TO ABOVE THAT HAVE BEEN OR MAY BE INCORPORATED BY
REFERENCE, OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS). DOCUMENTS RELATING
TO ACS ARE AVAILABLE UPON REQUEST FROM AFFILIATED COMPUTER SERVICES, INC., 2828
NORTH HASKELL AVENUE, DALLAS, TEXAS 75204, ATTENTION: DAVID W. BLACK, SECRETARY,
(214) 841-6152. DOCUMENTS RELATING TO CDSI ARE AVAILABLE UPON REQUEST FROM
COMPUTER DATA SYSTEMS, INC., ONE CURIE COURT, ROCKVILLE, MARYLAND 20850-4389,
ATTENTION: JOHN C. KEZER, SECRETARY, (301) 921-7017.
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
AFFILIATED COMPUTER SERVICES, INC.,
A DELAWARE CORPORATION,
ACS ACQUISITION CORP.,
A MARYLAND CORPORATION,
AND
COMPUTER DATA SYSTEMS, INC.,
A MARYLAND CORPORATION
TABLE OF CONTENTS
ARTICLE I
THE MERGER
SECTION 1.01. The Merger............................................................. 2
SECTION 1.02. Closing; Closing Date; Effective Time.................................. 2
SECTION 1.03. Effect of the Merger................................................... 2
SECTION 1.04. Articles of Incorporation; Bylaws...................................... 2
SECTION 1.05. Directors and Officers................................................. 2
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Merger Consideration; Conversion and Cancellation of Securities........ 3
SECTION 2.02. Exchange and Surrender of Certificates................................. 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Organization and Qualification; Subsidiaries........................... 6
SECTION 3.02. Charter and Bylaws..................................................... 6
SECTION 3.03. Capitalization......................................................... 7
SECTION 3.04. Authority.............................................................. 8
SECTION 3.05. No Conflict; Required Filings and Consents............................. 8
SECTION 3.06. Permits; Compliance.................................................... 9
SECTION 3.07. SEC Reports; Financial Statements...................................... 10
SECTION 3.08. Absence of Certain Changes or Events................................... 10
SECTION 3.09. Absence of Litigation 11
SECTION 3.10. Employee Benefit Plans; Labor Matters.................................. 11
SECTION 3.11. Taxes.................................................................. 14
SECTION 3.12. Tax Matters; Pooling................................................... 16
SECTION 3.13. Affiliates............................................................. 17
SECTION 3.14. Certain Business Practices............................................. 17
SECTION 3.15. Environmental Matters.................................................. 18
SECTION 3.16. Vote Required.......................................................... 19
SECTION 3.17. Brokers................................................................ 19
SECTION 3.18. Insurance.............................................................. 19
SECTION 3.19. Properties............................................................. 19
SECTION 3.20. Certain Material Contracts............................................. 20
SECTION 3.21. Principal Customers; Competing Interests............................... 21
SECTION 3.22. Intellectual Property Rights........................................... 21
SECTION 3.23. Information Supplied................................................... 22
SECTION 3.24. Opinion of Financial Advisor........................................... 22
SECTION 3.25. [Reserved]............................................................. 22
SECTION 3.26. Federal Government Contracts........................................... 22
SECTION 3.27 Parent Stock Ownership................................................. 23
ii
TABLE OF CONTENTS
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
SECTION 4.01. Organization and Qualification......................................... 23
SECTION 4.02. Charter and Bylaws..................................................... 23
SECTION 4.03. Capitalization......................................................... 23
SECTION 4.04. Authority.............................................................. 25
SECTION 4.05. No Conflict; Required Filings and Consents............................. 25
SECTION 4.06. Permits; Compliance.................................................... 26
SECTION 4.07. SEC Reports; Financial Statements...................................... 26
SECTION 4.08. Absence of Certain Changes or Events................................... 27
SECTION 4.09. Absence of Litigation.................................................. 27
SECTION 4.10. Tax Matters; Pooling................................................... 28
SECTION 4.11. Vote Required.......................................................... 28
SECTION 4.12. Brokers................................................................ 28
SECTION 4.13. Information Supplied................................................... 28
SECTION 4.14. Opinion of Financial Advisor........................................... 29
SECTION 4.15. [Reserved]............................................................. 29
SECTION 4.16. Employee Benefit Plans; Labor Matters.................................. 29
SECTION 4.17. Certain Business Practices............................................. 30
SECTION 4.18. Environmental Matters.................................................. 30
SECTION 4.19. Insurance.............................................................. 31
SECTION 4.20. Intellectual Property Rights........................................... 31
SECTION 4.21. Credit Facilities...................................................... 32
SECTION 4.22. Company Common Stock................................................... 32
ARTICLE V
COVENANTS
SECTION 5.01. Affirmative Covenants of the Company................................... 32
SECTION 5.02. Negative Covenants of the Company...................................... 32
SECTION 5.03. Affirmative and Negative Covenants of Parent........................... 36
SECTION 5.04. Access and Information................................................. 38
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Meetings of Stockholders............................................... 39
SECTION 6.02. Registration Statement; Proxy Statements............................... 39
SECTION 6.03. Appropriate Action; Consents; Filings.................................. 41
SECTION 6.04. Affiliates; Pooling; Tax Treatment..................................... 43
SECTION 6.05. Public Announcements................................................... 43
SECTION 6.06. NYSE Listing........................................................... 43
SECTION 6.07. Comfort Letters........................................................ 43
SECTION 6.08. Stock Option Plans..................................................... 44
SECTION 6.09. Merger Sub............................................................. 44
SECTION 6.10. Indemnification; Insurance............................................. 45
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TABLE OF CONTENTS
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. Conditions to Obligations of Each Party Under This Agreement........... 45
SECTION 7.02. Additional Conditions to Obligations of the Parent Companies........... 46
SECTION 7.03. Additional Conditions to Obligations of the Company.................... 47
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination............................................................ 49
SECTION 8.02. Effect of Termination.................................................. 50
SECTION 8.03. Amendment.............................................................. 50
SECTION 8.04. Waiver................................................................. 51
SECTION 8.05. Fees, Expenses and Other Payments...................................... 51
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations, Warranties and Agreements............ 53
SECTION 9.02. Notices................................................................ 53
SECTION 9.03. Certain Definitions.................................................... 54
SECTION 9.04. Headings............................................................... 56
SECTION 9.05. Severability........................................................... 56
SECTION 9.06. Entire Agreement....................................................... 56
SECTION 9.07. Assignment............................................................. 56
SECTION 9.08. Parties in Interest.................................................... 56
SECTION 9.09. Specific Performance................................................... 56
SECTION 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative.................. 56
SECTION 9.11. Governing Law.......................................................... 57
SECTION 9.12. Counterparts........................................................... 57
SECTION 9.13. Disclosure............................................................. 57
SECTION 9.14. Voting................................................................. 57
EXHIBITS
Exhibit A..... Company Affiliate's Agreement
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of September 20, 1997 (this
"Agreement"), is by and among Affiliated Computer Services, Inc., a Delaware
corporation ("Parent"), ACS Acquisition Corp., a Maryland corporation and wholly
owned subsidiary of Parent ("Merger Sub"), and Computer Data Systems, Inc., a
Maryland corporation (the "Company"). Parent and Merger Sub are sometimes
referred to herein as the "Parent Companies."
WHEREAS, the parties hereto desire that Merger Sub, upon the terms and
subject to the conditions of this Agreement and in accordance with the Maryland
General Corporation Law ("Maryland Law"), merge with and into the Company (the
"Merger"), and pursuant thereto, the issued and outstanding shares of common
stock, $0.10 par value, of the Company ("the Company Common Stock") not owned
directly or indirectly by the Company or the Parent Companies or their
respective subsidiaries be converted into the right to receive shares of Class A
common stock, $0.01 par value, of Parent (the "Parent Common Stock"), as set
forth herein;
WHEREAS, the Board of Directors of the Company has determined that the
Merger is advisable and in the best interests of the Company and its
stockholders and has authorized the execution of this Agreement and the
consummation of the transactions contemplated hereby;
WHEREAS, the Board of Directors of Parent has determined that the Merger is
fair to, and in the best interests of, Parent and its stockholders and has
approved and adopted this Agreement and the transactions contemplated hereby;
WHEREAS, the Board of Directors of Merger Sub has approved and adopted this
Agreement and Parent, as the sole stockholder of Merger Sub, will adopt this
Agreement promptly after the execution hereof by the parties hereto;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the United
States Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Merger is intended to be treated as a "pooling of interests"
for financial accounting purposes;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Maryland Law, at the Effective
Time (as defined in SECTION 1.02 of this Agreement), Merger Sub shall be merged
with and into the Company. As a result of the Merger, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation of the Merger (the "Surviving Corporation"). Certain terms
used in this Agreement are defined in SECTION 9.03 hereof.
SECTION 1.02. CLOSING; CLOSING DATE; EFFECTIVE TIME. Unless this Agreement
shall have been terminated pursuant to SECTION 8.01, and subject to the
satisfaction or waiver of the conditions set forth in Article VII, the
consummation of the Merger and the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Hughes & Luce,
L.L.P., 1717 Main Street, Dallas, Texas as soon as practicable (but in any event
within two business days) after the satisfaction or waiver of the conditions set
forth in ARTICLE VII, or at such other date, time and place as Parent and the
Company may agree; provided, that the conditions set forth in ARTICLE VII shall
have been satisfied or
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waived at or prior to such time. The date on which the Closing takes place is
referred to herein as the "Closing Date." As promptly as practicable on the
Closing Date, the parties hereto shall cause the Merger to be consummated by
filing Articles of Merger with the State Department of Assessments and Taxation
of the State of Maryland, in such form as required by, and executed in
accordance with the relevant provisions of, Maryland Law (the date and time of
such filing, or such later date or time agreed upon by Parent and the Company
and set forth therein, being the "Effective Time"). For all Tax purposes, the
Closing shall be effective at the end of the day on the Closing Date.
SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Maryland Law.
SECTION 1.04. ARTICLES OF INCORPORATION; BYLAWS. At the Effective Time,
the charter of the Company, as in effect immediately prior to the Effective
Time, shall be the charter of the Surviving Corporation and thereafter shall
continue to be its charter until amended as provided therein and pursuant to
Maryland Law. At the Effective Time, the bylaws of the Company, as in effect
immediately prior to the Effective Time, shall be the bylaws of the Surviving
Corporation and thereafter shall continue to be its bylaws until amended as
provided therein and pursuant to Maryland Law.
SECTION 1.05. DIRECTORS AND OFFICERS. In connection with the Merger, the
parties hereto shall take such actions as may be necessary or appropriate to
cause (i) the directors of Merger Sub immediately prior to the Effective Time to
be the directors of the Surviving Corporation immediately after the Effective
Time, each to hold office in accordance with the charter and bylaws of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified; (ii) the officers of the Company immediately
prior to the Effective Time to be the officers of the Surviving Corporation
immediately after the Effective Time, each to hold office in accordance with the
bylaws of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified; and (iii) the directors
of the Company immediately prior to the Effective Time (each such director
having resigned from the CDSI board of directors as of the Effective Time) to be
advisory directors of the Surviving Corporation immediately after the Effective
Time, each to hold office in accordance with the bylaws of the Surviving
Corporation, in each case until their respective successors are duly elected or
appointed and qualified. In connection with the Merger, at the Effective Time or
immediately thereafter, Parent shall take such action as may be necessary or
appropriate to cause Clifford Kendall and Peter Bracken to be directors of
Parent immediately after the Effective Time (and, in the event a staggered board
is approved at the 1997 Annual Meeting of Stockholders, for two-year and
one-year terms, respectively), each to hold office in accordance with the
charter and bylaws of Parent, in each case until their respective successors are
duly elected or appointed and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the Merger and without any
further action on the part of the Parent Companies, the Company or their
respective stockholders:
(a) Subject to the other provisions of this ARTICLE II, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time (excluding any Company Common Stock described in SECTION
2.01(B) of this Agreement) shall be converted into the right to receive
1.759 shares of Parent Common Stock (the "Exchange Ratio"). Notwithstanding
the foregoing, if between the date of this Agreement and the Effective Time
the outstanding shares of Parent Common Stock or Company Common Stock shall
have been changed into a different number of shares or a different class, by
reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Exchange
Ratio shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
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(b) Notwithstanding any provision of this Agreement to the contrary,
each share of Company Common Stock owned by Parent or any direct or indirect
wholly owned subsidiary of Parent or of the Company immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof and no payment shall be made with respect thereto.
(c) All shares of the Company Common Stock shall cease to be outstanding
and shall automatically be canceled and retired, and each certificate
previously evidencing the Company Common Stock outstanding immediately prior
to the Effective Time (other than Company Common Stock described in SECTION
2.01(B) of this Agreement) ("Converted Shares") shall thereafter represent
the right to receive, subject to SECTION 2.02(E) of this Agreement, that
number of shares of Parent Common Stock determined pursuant to the Exchange
Ratio and, if applicable, cash pursuant to SECTION 2.02(E) of this Agreement
(the "Merger Consideration"). The holders of certificates previously
evidencing Converted Shares shall cease to have any rights with respect to
such Converted Shares except as otherwise provided herein or by law. Such
certificates previously evidencing Converted Shares shall be exchanged for
certificates evidencing whole shares of Parent Common Stock upon the
surrender of such Certificates in accordance with the provisions of SECTION
2.02 of this Agreement, without interest. No fractional shares of Parent
Common Stock shall be issued in connection with the Merger and, in lieu
thereof, a cash payment shall be made pursuant to SECTION 2.02(E) of this
Agreement.
(d) Each share of common stock, par value $0.01 per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock, par value $0.10 per
share, of the Surviving Corporation.
SECTION 2.02. EXCHANGE AND SURRENDER OF CERTIFICATES.
(a) As soon as practicable after the Effective Time, each holder of a
certificate previously evidencing Converted Shares shall be entitled, upon
surrender thereof to Parent or an exchange agent designated by Parent (as
specified in the letter of transmittal described in SECTION 2.02(C)), to receive
in exchange therefor a certificate or certificates representing the number of
whole shares of Parent Common Stock into which the Converted Shares so
surrendered shall have been converted as aforesaid, in such denominations and
registered in such names as such holder may request. Each holder of Converted
Shares who would otherwise be entitled to a fraction of a share of Parent Common
Stock shall, upon surrender of the certificate or certificates representing such
shares held by such holder as aforesaid, be paid an amount in cash in accordance
with the provisions of SECTION 2.02(E). Until so surrendered and exchanged, each
certificate previously evidencing Converted Shares shall represent solely the
right to receive Parent Common Stock and cash in lieu of fractional shares that
the holder thereof is entitled to receive hereunder. Unless and until any such
certificates shall be so surrendered and exchanged, no dividends or other
distributions payable to the holders of record of Parent Common Stock as of any
time on or after the Effective Time shall be paid to the holders of such
certificates previously evidencing Converted Shares; provided, however, that,
upon any such surrender and exchange of such certificates, there shall be paid
to the record holders of the certificates issued and exchanged therefor (i) the
amount, without interest thereon, of dividends and other distributions, if any,
with a record date on or after the Effective Time theretofore paid with respect
to such whole shares of Parent Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions, if any, with a record date
on or after the Effective Time but prior to surrender and a payment date
occurring after surrender, payable with respect to such whole shares of Parent
Common Stock. Notwithstanding the foregoing, except as otherwise provided by
applicable law, no party hereto (or Parent's exchange agent) shall be liable to
any former holder of Converted Shares for any cash, Parent Common Stock or
dividends or distributions thereon delivered to a public official pursuant to
applicable abandoned property, escheat or similar law.
(b) All shares of Parent Common Stock issued upon the surrender for exchange
of certificates previously representing Converted Shares in accordance with the
terms hereof (including any cash paid pursuant to SECTION 2.02(E)) shall be
deemed to have been issued in full satisfaction of all rights pertaining
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to such Converted Shares. At and after the Effective Time, there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of Company Common Stock that was outstanding immediately prior to
the Effective Time. If, after the Effective Time, certificates which previously
evidenced Converted Shares are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this ARTICLE II.
(c) As promptly as practicable after the Effective Time, Parent will send or
cause to be sent to each record holder of Company Common Stock at the Effective
Time a letter of transmittal and other appropriate materials for use in
surrendering certificates as contemplated hereby.
(d) If any certificate for shares of Parent Common Stock is to be issued in
a name other than that in which the certificate surrendered in exchange therefor
is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed, with signatures
guaranteed, and otherwise in proper form for transfer and that the person
requesting such exchange shall have paid to Parent or its exchange agent any
transfer or other taxes required by reason of the issuance of a certificate for
shares of Parent Common Stock in any name other than that of the registered
holder of the certificate surrendered, or established to the satisfaction of
Parent or its transfer agent that such tax has been paid or is not payable.
(e) No certificates or scrip evidencing fractional shares of Parent Common
Stock shall be issued upon the surrender for exchange of certificates, and such
fractional share interests will not entitle the owner thereof to any rights of a
stockholder of Parent. In lieu of any such fractional shares, each holder of a
certificate previously evidencing Converted Shares, upon surrender of such
certificate for exchange pursuant to this ARTICLE II, shall be paid an amount in
cash (without interest), rounded to the nearest cent, determined by multiplying
(a) the per share closing price as reported on the New York Stock Exchange (the
"NYSE") Composite Tape of Parent Common Stock on the date of the Effective Time
(or, if shares of Parent Common Stock do not trade on the NYSE on such date, the
first date of trading of Parent Common Stock on the NYSE after the Effective
Time) by (b) the fractional interest to which such holder would otherwise be
entitled (after taking into account all Converted Shares held of record by such
holder at the Effective Time).
(f) Parent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of Converted
Shares such amounts as Parent (or any affiliate thereof) is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Parent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the former holder of the Converted Shares
in respect of which such deduction and withholding was made by Parent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent Companies that:
SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the
Company and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as it is now being conducted
and is duly qualified and in good standing to do business in each jurisdiction
in which the nature of the business conducted by it or the ownership or leasing
of its properties makes such qualification necessary, other than where the
failure to be so duly qualified and in good standing could not reasonably be
expected to have a Company Material Adverse Effect. The term "Company Material
Adverse Effect" as used in this Agreement shall mean any change or effect that,
individually or when taken together with all other such
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changes or effects (but after giving effect to application of insurance proceeds
or other rights of indemnification in respect of such change or effect), could
reasonably be expected to be materially adverse to the business, operations,
assets, financial condition results of operations or prospects of the Company
and its subsidiaries, taken as a whole. SCHEDULE 3.01 of the disclosure schedule
delivered to Parent by the Company on the date hereof (the "Company Disclosure
Schedule") sets forth, as of the date of this Agreement, a true and complete
list of all the Company's directly or indirectly owned subsidiaries, together
with the jurisdiction of incorporation or organization of each subsidiary and
the percentage of each subsidiary's outstanding capital stock or other equity
interests owned by the Company or another subsidiary of the Company. Except as
set forth in SCHEDULE 3.01 of the Company Disclosure Schedule, neither the
Company nor any of its subsidiaries owns an equity interest in any other
partnership or joint venture arrangement or other business entity.
SECTION 3.02. CHARTER AND BYLAWS. The Company has heretofore furnished or
made available to Parent complete and correct copies of the charter and the
bylaws or the equivalent organizational documents, in each case as amended or
restated, of the Company and each of its subsidiaries. Except as set forth in
SCHEDULE 3.02 of the Company Disclosure Schedule, neither the Company nor any of
its subsidiaries is in violation of any of the provisions of its charter or
bylaws (or equivalent organizational documents).
SECTION 3.03. CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 30,000,000
shares of Company Common Stock, of which as of July 1, 1997 (i) 6,260,311 shares
were issued and outstanding, (ii) 431,617 shares were reserved for future
issuance pursuant to outstanding stock options ("Stock Options") granted
pursuant to the 1991 Long Term Incentive Plan (the "Option Plan") and (iii)
314,437 shares were reserved for future issuance pursuant to stock options
eligible for grant pursuant to the Option Plan. Except as described in this
SECTION 3.03 or in SCHEDULE 3.03(A) of the Company Disclosure Schedule, as of
the date of this Agreement, no shares of capital stock of the Company are
reserved for any purpose. Except as described in SCHEDULE 3.03(A) of the Company
Disclosure Schedule, each of the outstanding shares of capital stock of, or
other equity interests in, each of the Company and its subsidiaries is duly
authorized, validly issued, and, in the case of shares of capital stock, fully
paid and nonassessable, and has not been issued in violation of (nor are any of
the authorized shares of capital stock of, or other equity interests in such
entities subject to) any preemptive or similar rights created by statute, the
charter or bylaws (or the equivalent organizational documents) of the Company or
any of its subsidiaries, or any agreement to which the Company or any of its
subsidiaries is a party or bound, and such outstanding shares or other equity
interests owned by the Company or a subsidiary of the Company are owned free and
clear of all security interests, liens, claims, pledges, agreements, limitations
on the Company's or such subsidiary's voting rights, charges or other
encumbrances of any nature whatsoever.
(b) Except as set forth in SECTION 3.03(A) above or in SCHEDULE 3.03(B)(I)
to the Company Disclosure Schedule, there are no options, warrants or other
rights, agreements, arrangements or commitments of any character to which the
Company or any of its subsidiaries is a party relating to the issued or unissued
capital stock of the Company or any of its subsidiaries or obligating the
Company or any of its subsidiaries to grant, issue or sell any shares of the
capital stock of the Company or any of its subsidiaries, by sale, lease, license
or otherwise. Except as set forth in SCHEDULE 3.03(B)(II) to the Company
Disclosure Schedule, there are no obligations, contingent or otherwise, of the
Company or any of its subsidiaries to (A) repurchase, redeem or otherwise
acquire any shares of the Company Common Stock or other capital stock of the
Company, or the capital stock or other equity interests of any subsidiary of the
Company; or (B) (other than advances to subsidiaries in the ordinary course of
business) provide material funds to, or make any material investment in (in the
form of a loan, capital contribution or otherwise), or provide any guarantee
with respect to the obligations of, any subsidiary of the Company or any other
person. Except as described in SCHEDULE 3.01 or SCHEDULE 3.03(B)(III) to the
Company Disclosure Schedule, neither the Company nor any of its subsidiaries (x)
directly or indirectly owns, (y) has agreed to purchase or otherwise acquire or
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(z) holds any interest convertible into or exchangeable or exercisable for 5% or
more of the capital stock of any corporation, partnership, joint venture or
other business association or entity (other than the subsidiaries of the Company
set forth in SCHEDULE 3.01 of the Company Disclosure Schedule). Except as set
forth in SCHEDULE 3.03(B)(IV) of the Company Disclosure Schedule and except for
any agreements, arrangements or commitments between the Company and its
subsidiaries or between such subsidiaries, there are no agreements, arrangements
or commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of the Company or any of its
subsidiaries. There are no voting trusts, proxies or other agreements or
understandings to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound with respect to the voting
of any shares of capital stock of the Company or any of its subsidiaries.
(c) The Company has delivered or made available to Parent complete and
correct copies of (i) the Option Plan and the forms of Stock Options issued
pursuant to the Option Plan, including all amendments thereto and (ii) all Stock
Options which are not in the respective forms thereof provided under clause (i)
above. SCHEDULE 3.03(C) to the Company Disclosure Schedule sets forth a complete
and correct list of all outstanding Stock Options, including any not granted
pursuant to the Option Plan, setting forth as of the date hereof (i) the number
and type of Stock Options outstanding, (ii) the exercise price of each
outstanding Stock Option, (iii) the number of Stock Options exercisable, and
(iv) assuming no amendment or waiver of the terms thereof, the number of Stock
Options which will become exercisable on account of the Merger or any other
transaction contemplated hereby.
SECTION 3.04. AUTHORITY. The Company has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the approval of the Merger by the stockholders of
the Company as described in SECTION 3.16 hereof). The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (subject to, with respect to the Merger, the approval of the
Merger by the stockholders of the Company as described in SECTION 3.16 hereof).
This Agreement has been duly executed and delivered by the Company and, assuming
the due authorization, execution and delivery thereof by the Parent Companies,
constitutes the legal, valid and binding obligation of the Company.
SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Except as set forth in SCHEDULE 3.05 of the Company Disclosure Schedule,
the execution and delivery of this Agreement by the Company does not, and the
consummation of the transactions contemplated hereby will not (i) conflict with
or violate the charter or bylaws, or the equivalent organizational documents, in
each case as amended or restated, of the Company or any of its subsidiaries,
(ii) conflict with or violate any federal, state, foreign or local law, statute,
ordinance, rule, regulation, order, judgment or decree (collectively, "Laws")
applicable to the Company or any of its subsidiaries or by which any of their
respective properties is bound or subject or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or require payment under, or result
in the creation of a lien or encumbrance on any of the properties or assets of
the Company or any of its subsidiaries pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any of its subsidiaries is a
party or by or to which the Company or any of its subsidiaries or any of their
respective properties is bound or subject, except in the case of clauses (ii)
and (iii) where such conflict, violation, breach, default, right, requirement,
lien or encumbrance could not reasonably be expected to have a Company Material
Adverse Effect. The Board of Directors of the Company has taken all actions
necessary under Maryland Law, including approving the transactions contemplated
by this Agreement and taking appropriate actions
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under any stockholder protection laws applicable to the Company or any of its
subsidiaries, to ensure that restrictions on business combinations or the owning
or voting of the capital stock of the Company or any of its subsidiaries do not,
and will not apply with respect or as a result of the transactions contemplated
by this Agreement.
(b) The execution and delivery of this Agreement by the Company does not,
and consummation of the transactions contemplated hereby will not, require the
Company to obtain any consent, license, permit, approval, waiver, authorization
or order of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign (collectively, "Governmental
Entities"), except for applicable requirements, if any, of the Securities Act of
1933, as amended (the "Securities Act"), and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), state securities or blue sky laws ("Blue
Sky Laws"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and those matters referenced in Schedule 3.05(b) of the Company
Disclosure Schedule, and the filing and recordation of appropriate merger
documents as required by Maryland Law.
SECTION 3.06. PERMITS; COMPLIANCE. Except as set forth in SCHEDULE 3.06 of
the Company Disclosure Schedule, each of the Company and its subsidiaries is in
possession of all material franchises, grants, authorizations, licenses,
permits, easements, variances, exemptions, consents, certificates, approvals and
orders necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted (collectively, the "Company Permits"), and
there is no action, proceeding or investigation pending or, to the knowledge of
the Company, threatened regarding suspension or cancellation of any of the
Company Permits. Except as set forth in SCHEDULE 3.06 of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is in material
conflict with, or in material default or violation of (a) any Law applicable to
the Company or any of its subsidiaries or by or to which any of their respective
properties is bound or subject or (b) any of the Company Permits. Except as set
forth in SCHEDULE 3.06 of the Company Disclosure Schedule, since June 30, 1995,
neither the Company nor any of its subsidiaries has received from any
Governmental Entity any written notification with respect to possible material
conflicts, defaults or violations of Laws.
SECTION 3.07. SEC REPORTS; FINANCIAL STATEMENTS.
(a) Since June 30, 1995, the Company and its subsidiaries have filed all
forms, reports, statements and other documents required to be filed with the
Securities and Exchange Commission (the "SEC") including, without limitation,
(l) all Annual Reports on Form l0-K, (2) all Quarterly Reports on Form l0-Q, (3)
all proxy statements relating to meetings of stockholders (whether annual or
special), (4) all Current Reports on Form 8-K and (5) all other reports,
schedules, registration statements or other documents (collectively referred to
as the "Company SEC Reports"). The Company SEC Reports, including all the
Company SEC Reports filed after the date of this Agreement and prior to the
Effective Time, (i) were or will be prepared in all material respects in
accordance with the requirements of applicable Law and (ii) did not at the time
they were filed, or will not at the time they are filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports filed prior to
the Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except (A) to the extent required by changes in generally accepted
accounting principles, (B) as may be indicated in the notes thereto, or (C) for
consolidated financial statements included in Quarterly Reports on Form 10-Q,
which are not prepared in accordance with GAAP) and (ii) fairly present or will
fairly present the consolidated financial position of the Company and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated (including reasonable
estimates of normal and recurring year-end adjustments), except that (x) any
unaudited interim financial statements were or will be subject to normal and
recurring year-end adjustments and (y) any pro forma
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financial statements contained in such consolidated financial statements are not
necessarily indicative of the consolidated financial position of the Company and
its subsidiaries as of the respective dates thereof and the consolidated results
of operations and cash flows for the periods indicated.
SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Company SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in SCHEDULE 3.08 of the Company
Disclosure Schedule, since June 30, 1997, the Company and its subsidiaries have
conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice and there has not been: (i) any material
damage, destruction or loss (whether or not covered by insurance) with respect
to any material assets of the Company or any of its subsidiaries; (ii) any
material change by the Company or its subsidiaries in their accounting methods,
principles or practices (other than changes contemplated by GAAP or applicable
SEC regulations); (iii) except for dividends by a subsidiary of the Company to
the Company or another subsidiary of the Company, dividends paid by a subsidiary
prior to the time it became a subsidiary, and except for regular semi-annual
dividends with respect to the Company Common Stock in an amount not to exceed
$0.07 per share, any declaration, setting aside or payment of any dividends or
distributions in respect of shares of the Company Common Stock or the shares of
stock of, or other equity interests in, any majority owned subsidiary of the
Company, or any redemption, purchase or other acquisition by the Company or any
of its subsidiaries of any of the Company's securities or any of the securities
of any subsidiary of the Company; (iv) any increase in the benefits under, or
the establishment or amendment of, any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any increase in the compensation payable or to become
payable to directors, officers or employees of the Company or its subsidiaries,
except for (A) increase in salaries or wages payable or to become payable in the
ordinary course of business and consistent with past practice or (B) the
granting of stock options pursuant to the Option Plans in the ordinary course of
business to employees of the Company or its subsidiaries who are not directors
or executive officers of the Company; (v) any revaluation by the Company or any
of its subsidiaries of any of their assets, including the writing down of the
value of inventory or the writing down or off of notes or accounts receivable,
other than in the ordinary course of business and consistent with past
practices; (vi) any entry by the Company or any of its subsidiaries into any
commitment or transaction material to the Company and its subsidiaries, taken as
a whole (other than this Agreement and the transactions contemplated hereby or
other than in the ordinary course of business); (vii) any material increase in
indebtedness for borrowed money; or (viii) any Company Material Adverse Effect.
SECTION 3.09. ABSENCE OF LITIGATION. Except as set forth in SCHEDULE 3.09
of the Company Disclosure Schedule, there is no claim, action, suit, litigation,
proceeding, arbitration or, to the knowledge of the Company, investigation of
any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries or any properties or rights of
the Company or any of its subsidiaries (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which could not
reasonably be expected to have a Company Material Adverse Effect), and neither
the Company nor any of its subsidiaries is subject to any continuing order of,
consent decree, settlement agreement or other similar written agreement with,
or, to the knowledge of the Company, continuing investigation by, any
Governmental Entity, or any judgment, order, writ, injunction, decree or award
of any Government Entity or arbitrator, including, without limitation,
cease-and-desist or other orders.
SECTION 3.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) Set forth in SCHEDULE 3.10 to the Company Disclosure Schedule is a
complete and correct list of all "employee benefit plans" (as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all
plans or policies providing for "fringe benefits" (including but not limited to
vacation, paid holidays, personal leave, employee discount, educational benefit
or similar programs), and
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each other bonus, incentive compensation, deferred compensation, profit sharing,
stock, severance, retirement, health, life, disability, group insurance,
employment, stock option, stock purchase, stock appreciation right, supplemental
unemployment, layoff, consulting, or any other similar plan, agreement, policy
or understanding (whether written or oral, qualified or nonqualified, currently
effective or terminated), and any trust, escrow or other agreement related
thereto, which (a) is or has been established, maintained or contributed to by
the Company or any ERISA Affiliate and with respect to which the Company or any
ERISA Affiliate has any liability, or (b) provides benefits, or describes
policies or procedures applicable, to any officer, employee, director, former
officer, former employee or former director of the Company or any ERISA
Affiliate, or any dependent thereof, regardless of whether funded (each, an
"Employee Plan," and collectively, the "Employee Plans").
(b) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
no written or oral representations have been made to any employee or officer or
former employee or officer of the Company or its subsidiaries promising or
guaranteeing any coverage under any employee welfare plan for any period of time
beyond the end of the current plan year (except to the extent of coverage
required under Code Section 4980B). Except as set forth in SCHEDULE 3.10 of the
Company Disclosure Schedule, the consummation of the transactions contemplated
by this Agreement will not accelerate the time of payment or vesting, or
increase the amount of compensation (including amounts due under Employee Plans)
due to any employee, officer, former employee or former officer of the Company,
or its subsidiaries.
(c) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
all employees of the Company and its subsidiaries are terminable at the will of
the Company, and neither the Company, nor any present or former director, or
officer, employee or agent of the Company has made any binding commitments of
the Company or any of its subsidiaries, written or verbal, to any present or
former director, officer, agent or employee concerning his term, condition,
benefits or employment.
(d) With respect to each Employee Plan, the Company has furnished or made
available to Buyer true, correct and complete copies of (i) the plan documents
and summary plan description; (ii) the most recent determination letter received
from the Internal Revenue Service; (iii) the annual reports required to be filed
for the three most recent plan years of each such Employee Plan; (iv) all
related trust agreements, insurance contracts or other funding agreements which
implement such Employee Plan; and (v) all other documents, records or other
materials related thereto reasonably requested by Buyer.
(e) The Retirement Plan for Employees of Computer Data Systems, Inc., the
401(k) Savings Plan for Employees of Computer Data Systems, Inc., the
Supplemental Deferred Compensation Plan and the Supplementary Benefit Plan for
Computer Data Systems, Inc. Non-Exempt Employees Assigned to Central Zone
Contract No. GS04K96DED0100 are (i) the only employee pension benefit plans
maintained by the Company or any ERISA Affiliate that are intended to qualify
under Code Section 401; and (ii) meet the qualification requirements of the Code
in form and operation; and such plans, and each trust (if any) forming a part
thereof, has received a favorable determination letter from the Internal Revenue
Service as to the qualification under the Code of such plan and the tax-exempt
status of such related trust, and, except as set forth in SCHEDULE 3.10 to the
Company Disclosure Statement, nothing has occurred since the date of such
determination letter that may adversely affect the qualification of such plan or
the tax-exempt status of such related trust. Except as set forth in SCHEDULE
3.10 of the Company Disclosure Schedule, all Employee Plans purporting to
qualify for special tax treatment under any provision of the Code, including,
without limitation, Code Sections 79, 105, 106, 125, 127, 129, 132, 421 or
501(c)(9) meet the requirement of such sections in form and in operation. All
reports, returns or filings required by any government agency have been timely
filed in accordance with all applicable requirements, except as could not
reasonably be expected to have a Company Material Adverse Effect.
(f) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
no condition exists that would subject the Company, any ERISA Affiliate or
Parent to any excise tax, penalty tax or fine related to any Employee Plan,
except as could not reasonably be expected to have a Company Material Adverse
Effect.
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(g) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
there are no agreements which will or may provide payments to any officer,
employee, stockholder, or highly compensated individual which, in connection
with or as a result of the Merger and the transactions contemplated by this
Agreement, will be "parachute payments" under Code Section 280G that are
nondeductible to the Company or subject to tax under Code Section 4999 for which
the Company or any ERISA Affiliate would have withholding liability.
(h) There is no Employee Plan that is subject to Part 3 of Title I of ERISA
or Title IV of ERISA; each Employee Plan has been operated in all material
respects in compliance with ERISA, the Code and all other applicable laws; none
of the Employee Plans is a "multiple employer plan" or "multiemployer plan" (as
described or defined in ERISA or the Code), nor has the Company or any ERISA
Affiliate ever contributed or been required to contribute to any such plan;
there are no material unfunded liabilities existing under any Employee Plans,
and each Employee Plan could be terminated as of the Closing Date without any
material liability to the Parent, the Company or any ERISA Affiliate.
(i) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
there are no material actions, suits, claims, audits, or investigations pending
or, to the knowledge of the Company, threatened against, or with respect to, any
of the Employee Plans or their assets, other than benefit claims in the normal
course of plan operations; and except as set forth in SCHEDULE 3.10 of the
Company Disclosure Schedule and except as could not reasonably be expected to
have a Company Material Adverse Effect, all contributions required to be made to
the Employee Plans have been made.
(j) Neither the Company nor any of its subsidiaries is a party to any
collective bargaining or other labor union contract. No collective bargaining
agreement is being negotiated by the Company or any of its subsidiaries. Except
as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule, the Company
and its subsidiaries are in compliance in all material respects with all
applicable laws respecting employment, employment practices and wages and hours.
There is no pending or threatened labor dispute, strike or work stoppage against
the Company or any of its subsidiaries which may materially interfere with the
respective business activities of the Company or any of its subsidiaries. None
of the Company, its subsidiaries or any of their respective representatives or
employees has committed any material unfair labor practices in connection with
the operation of the respective businesses of the Company or its subsidiaries,
and there is no material pending or threatened charge or complaint against the
Company or any of its subsidiaries by the National Labor Relations Board or any
comparable state agency.
(k) Except as set forth in SCHEDULE 3.10 of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries is a party to or is bound by any
severance agreements, programs, policies, plans or arrangements, whether or not
written. SCHEDULE 3.10(D) of the Company Disclosure Schedule sets forth, and the
Company has provided or made available to Parent true and correct copies of, (i)
all employment agreements with officers or employees of the Company or its
subsidiaries; (ii) all agreements with consultants of the Company or its
subsidiaries obligating the Company or any subsidiary to make annual cash
payments in an amount exceeding $50,000; and (iii) all non-competition
agreements with the Company.
(l) Set forth on SCHEDULE 3.10 of the Company Disclosure Schedule is a
complete listing of all employee benefit plans that are currently being reviewed
by the Internal Revenue Service or Department of Labor under an Amnesty Program.
Amnesty Program includes, but is not limited to any voluntary or involuntary
entry into the Voluntary Compliance Resolutions programs (VCR), Closing
Agreement Programs (CAP), or any other amnesty-type programs.
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SECTION 3.11. TAXES.
(a) Except for such matters as would not have a Company Material Adverse
Effect, and except as set forth on SCHEDULE 3.11(A) to the Company Disclosure
Schedule, (i) all returns and reports ("Tax Returns") of or with respect to any
Tax which is required to be filed on or before the Closing Date by or with
respect to the Company or any its subsidiaries have been or will be duly and
timely filed, (ii) all items of income, gain, loss, deduction and credit or
other items required to be included in each such Tax Return have been or will be
so included and all information provided in each such Tax Return is true,
correct and complete in all material respects, (iii) all Taxes which have become
or will become due with respect to the period covered by each such Tax Return
have been or will be timely paid in full, (iv) all withholding Tax requirements
imposed on or with respect to the Company or any of its subsidiaries have been
or will be satisfied in full in all material respects, and (v) no penalty,
interest or other charge is or will become due with respect to the late filing
of any such Tax Return or late payment of any such Tax, except where such
penalty, interest or charge could not reasonably be expected to have a Company
Material Adverse Effect.
(b) All Tax Returns of or with respect to the Company or any of its
subsidiaries, with unexpired or extended statutes of limitations, which have not
been audited by the applicable governmental authority are set forth in Schedule
3.11(b) to the Company Disclosure Schedule.
(c) Except as set forth on SCHEDULE 3.11(C) to the Company Disclosure
Schedule, there is not in force any extension of time with respect to the due
date for the filing of any Tax Return of or with respect to the Company or any
its subsidiaries or any waiver or agreement for any extension of time for the
assessment, collection or payment of any Tax of or with respect to the Company
or any of its subsidiaries.
(d) There are no pending audits, actions, proceedings, investigations,
disputes or claims with respect to or against the Company or any of its
subsidiaries for or with respect to any Taxes, no assessment, deficiency or
adjustment has been assessed or, to the Company's knowledge, proposed with
respect to any Tax Return of or with respect to the Company or any of its
subsidiaries, and there is no reasonable basis on which any claim for material
Taxes can be asserted against the Company or any of its subsidiaries, other than
those disclosed on SCHEDULE 3.11(D) to the Company Disclosure Schedule (true and
correct copies of all such audit or similar reports having been made available
to Parent) or which could not reasonably be expected to have a Company Material
Adverse Effect.
(e) Except as set forth in SCHEDULE 3.11(E) to the Company Disclosure
Schedule, the total amounts set up as liabilities for current and deferred Taxes
in the financial statements referred to in SECTION 3.07 of this Agreement are
sufficient, in accordance with GAAP, to cover in all material respects the
payment of all Taxes, whether or not assessed or disputed, which are, or are
hereafter found to be, or to have been, due by or with respect to the Company
and any of its subsidiaries up to and through the periods covered thereby.
(f) The Company has previously delivered or made available to Parent true
and complete copies of each written Tax allocation or sharing agreement and a
true and complete description of each unwritten Tax allocation or sharing
arrangement affecting the Company or any of its subsidiaries.
(g) Except for statutory liens for current Taxes not yet due, no material
liens for Taxes exist upon the assets of any of the Company or its subsidiaries.
(h) Neither the Company nor any of its subsidiaries will be required to
include any amount in income for any taxable period beginning after July 1, 1997
as a result of a change in accounting method for any taxable period ending on or
before June 30, 1997 or pursuant to any agreement with any Tax authority with
respect to any such taxable period.
(i) Except as set forth on SCHEDULE 3.11(I) to the Company Disclosure
Schedule, none of the property of the Company or any of its subsidiaries is held
in an arrangement for which partnership Tax Returns are being filed, and neither
the Company nor any of its subsidiaries owns any interest in any controlled
foreign corporation (as defined in section 957 of the Code), passive foreign
investment company (as defined in
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section 1296 of the Code) or other entity the income of which is required to be
included in the income of the Company or such subsidiary.
(j) Except as set forth on SCHEDULE 3.11(J) to the Company Disclosure
Schedule, none of the property of the Company or any of its subsidiaries is
subject to a safe-harbor lease (pursuant to Section 168(f) (8) of the Internal
Revenue Code of 1954 as in effect after the Economic Recovery Tax Act of 1981
and before the Tax Reform Act of 1986) or is "tax-exempt use property" (within
the meaning of Section 168(h) of the Code) or "tax-exempt bond financed
property" (within the meaning of Section 168(g)(5) of the Code).
(k) Except as set forth on SCHEDULE 3.11(K) to the Company Disclosure
Schedule, none of the transactions contemplated by this Agreement will result in
any Tax liability or the recognition of any item of income or gain to the
Company or any of its subsidiaries.
(l) Neither the Company nor any of its subsidiaries has made an election
under Section 341(f) of the Code.
(m) Except as set forth in SCHEDULE 3.11 of the Company Disclosure Schedule,
neither the Company nor any subsidiary has ever been a member of an affiliated
group of corporations (as defined in Section 1504(a) of the Internal Revenue
Code) other than the group of which the Company is currently the common parent.
(n) Except as set forth in SCHEDULE 3.11 of the Company Disclosure Schedule,
neither the Company nor any subsidiary is or has ever been subject to Taxes in
any jurisdiction outside the United States.
SECTION 3.12. TAX MATTERS; POOLING.
(a) Neither the Company nor, to the knowledge of the Company, any of its
affiliates has taken or agreed to take any action that would prevent the Merger
from (a) constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code or (b) being treated for financial accounting
purposes as a "pooling of interests" in accordance with GAAP and the rules,
regulations and interpretations of the SEC (a "Pooling Transaction").
(b) To the knowledge of the Company, there is no plan or intention by any
stockholder of the Company who owns five percent or more of the Company Common
Stock, and there is no plan or intention on the part of any of the remaining
stockholders of the Company Common Stock, to sell, exchange or otherwise dispose
of a number of shares of Parent Common Stock to be received in the Merger that
would reduce the Company stockholders' ownership of Parent Common Stock to a
number of shares having a value, as of the Effective Time, of less than 45
percent of the value of all of the Company Common Stock (including shares of the
Company Common Stock exchanged for cash in lieu of fractional shares of Parent
Common Stock) outstanding immediately prior to the Effective Time.
(c) Immediately following the Merger, the Company will hold at least 90
percent of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets held immediately prior to the Merger.
For purposes of this representation, amounts used by the Company to pay Merger
expenses and all redemptions and distributions made by the Company will be
included as assets of the Company immediately prior to the Merger.
(d) The Company and the holders of the Company Common Stock will each pay
their respective expenses, if any, incurred in connection with the Merger.
(e) There is no intercorporate indebtedness existing between the Company and
Parent or between the Company and Merger Sub that was issued, acquired, or will
be settled at a discount.
(f) The Company is not an investment company as defined in Section 368(a)
(2) (F) (iii) and (iv) of the Code.
(g) The Company is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
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SECTION 3.13. AFFILIATES. SCHEDULE 3.13 to the Company Disclosure Schedule
identifies all persons who the Company considers to be affiliates of the Company
under Rule 145 of the Securities Act. Concurrently with the execution and
delivery of this Agreement, the Company has delivered to Parent an executed
letter agreement, substantially in the form of EXHIBIT A hereto, from certain of
such persons identified on SCHEDULE 3.13 to the Company Disclosure Schedule and
will deliver to Parent within ten days after the date of this Agreement an
executed letter agreement, substantially in the form of EXHIBIT A hereto, from
each of the other persons identified on SCHEDULE 3.13 to the Company Disclosure
Schedule.
SECTION 3.14. CERTAIN BUSINESS PRACTICES. None of the Company, any of its
subsidiaries or any directors or officers, or to the knowledge of the Company
any agents or employees, of the Company or any of its subsidiaries has
individually or in the aggregate in any material respect (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
SECTION 3.15. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SCHEDULE 3.15 of the Company Disclosure Schedule and except for matters that
could not reasonably be expected to result, individually or in the aggregate
with all other such matters, in liability to the Company or any of its
subsidiaries in excess of $750,000, (i) the properties, operations and
activities of the Company and its subsidiaries are in compliance with all
applicable Environmental Laws; (ii) the Company and its subsidiaries and the
properties and operations of the Company and its subsidiaries are not subject to
any existing, pending or, to the knowledge of the Company, threatened action,
suit, claim, investigation, inquiry or proceeding by or before any governmental
authority under any Environmental Laws; (iii) all notices, permits, licenses, or
similar authorizations, if any, required to be obtained or filed by the Company
or any of its subsidiaries under any Environmental Laws in connection with any
aspect of the business of the Company or its subsidiaries, including without
limitation those relating to the treatment, storage, disposal or release of a
hazardous or otherwise regulated substance, have been duly obtained or filed and
will remain valid and in effect after the Merger, and the Company and its
subsidiaries are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations; (iv) the Company and its
subsidiaries have satisfied and are currently in compliance with all financial
responsibility requirements applicable to their operations and imposed by any
governmental authority under any Environmental Laws, and the Company and its
subsidiaries have not received any notice of noncompliance with any such
financial responsibility requirements; (v) to the Company's knowledge, there are
no physical or environmental conditions existing on any property of the Company
or its subsidiaries or resulting from the Company's or such subsidiaries'
operations or activities, past or present, at any location, that would give rise
to any on-site or off-site remedial obligations imposed on the Company or any of
its subsidiaries under any Environmental Laws or that would impact the soil,
groundwater or surface water or human health (to the extent of exposure to
hazardous substances); (vi) to the Company's knowledge, since the effective date
of the relevant requirements of applicable Environmental Laws and to the extent
required by such applicable Environmental Laws, all hazardous or otherwise
regulated substances generated by the Company and its subsidiaries have been
transported only by carriers authorized under Environmental Laws to transport
such substances and wastes, and disposed of only at treatment, storage, and
disposal facilities authorized under Environmental Laws to treat, store or
dispose of such substances and wastes; (vii) there has been no exposure of any
person or property to hazardous substances or any pollutant or contaminant, nor
has there been any release of hazardous substances, or any pollutant or
contaminant into the environment by the Company or its subsidiaries or in
connection with their properties or operations that could reasonably be expected
to give rise to any claim against the Company or any of its subsidiaries for
damages or compensation; and (viii) subject to restrictions necessary to
preserve any attorney client privilege, the Company and its subsidiaries have
made available to Parent all internal and external environmental audits and
studies and all correspondence on substantial environmental matters in the
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possession of the Company or its subsidiaries relating to any of the current or
former properties or operations of the Company and its subsidiaries.
For purposes of this Agreement, the term "Environmental Laws" shall mean any
and all laws, statutes, ordinances, rules, regulations, or orders of any
Governmental Entity pertaining to health (to the extent of exposure to hazardous
substances) the environment currently in effect in any and all jurisdictions in
which the Company and its subsidiaries own property or conduct business,
including without limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Hazardous & Solid
Waste Amendments Act of 1984, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended, the Oil Pollution Act of 1990 ("OPA"), any state laws
implementing the foregoing federal laws, and all other environmental
conservation or protection laws. For purposes of this Agreement, the terms
"hazardous substance" and "release" have the meanings specified in CERCLA and
RCRA and shall include petroleum and petroleum products, radon and PCB's, and
the term "disposal" has the meaning specified in RCRA; provided, however, that
to the extent the laws of the state in which the property is located establish a
meaning for "hazardous substance," "release," or "disposal" that is broader than
that specified in either CERCLA or RCRA, such broader meaning shall apply.
SECTION 3.16. VOTE REQUIRED. The only vote of the holders of any class or
series of the Company capital stock necessary to approve the Merger is the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of the Company Common Stock.
SECTION 3.17. BROKERS. Except as set forth in SCHEDULE 3.17 to the Company
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
SECTION 3.18. INSURANCE. Except as set forth in SCHEDULE 3.18 to the
Company Disclosure Schedule, the Company and each of its subsidiaries are
currently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business and similarly situated would, in accordance with good business
practice, customarily be insured.
SECTION 3.19. PROPERTIES. Except as set forth on SCHEDULE 3.19 to the
Company Disclosure Schedule and except for liens arising in the ordinary course
of business after the date hereof and properties and assets disposed of in the
ordinary course of business after June 30, 1997, the Company and its
subsidiaries have good and marketable title, free and clear of all liens (other
than liens that could not reasonably be expected to have a Company Material
Adverse Effect), to all their material properties and assets, whether tangible
or intangible, real, personal or mixed, reflected in the June 30, 1997
consolidated balance sheet (as previously provided to Parent) as being owned by
the Company and its subsidiaries as of the date thereof or purported to be owned
on the date hereof. All buildings, and all fixtures, equipment and other
property and assets which are material to its business on a consolidated basis,
held under leases by any of the Company or its subsidiaries are held under valid
instruments enforceable by the Company or its subsidiaries in accordance with
their respective terms. Substantially all of the Company's and its subsidiaries'
equipment in regular use has been well maintained and is in good and serviceable
condition, except for failures to be in good and serviceable condition that
could not reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.20. CERTAIN MATERIAL CONTRACTS.
(a) SCHEDULE 3.20(A) to the Company Disclosure Schedule lists each of the
following agreements and arrangements (whether written or oral and including all
amendments thereto) to which the Company or
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any of its subsidiaries is a party or a beneficiary or by which the Company or
any of its subsidiaries is bound that are material, directly or indirectly, to
the business of the Company and any of its subsidiaries, taken as a whole
(collectively, the "Material Contracts") (i) any supply, distribution or other
agreements or arrangements pursuant to which the Company or its subsidiaries
sell or distribute any products or services and which is not cancelable within
30 days notice without penalty that reasonably could be expected to result in
fiscal year 1997 or 1998 revenues in excess of $5,000,000; (ii) any warranty
agreements or arrangements under which the Company or any of its subsidiaries
has any liability with a value in excess of $250,000; (iii) any capital or
operating leases or conditional sales agreements relating to vehicles or
equipment with a value in excess of $250,000; (iv) any agreements or
arrangements pursuant to which the Company or any of its subsidiaries is
entitled or obligated to acquire any assets from a third party in excess of
$250,000; (v) material insurance policies currently in effect; (vi) any
agreement evidencing, securing or otherwise relating to any indebtedness for
which the Company or any of its subsidiaries has any liability in excess of
$250,000, (vii) any agreement with or for the benefit of any stockholder,
director, officer or employee of the Company or any of its subsidiaries, or any
affiliate or family member thereof (other than employee benefit plans, benefit
arrangements and other compensatory arrangements referred to in SECTION 3.10);
and (viii) any other agreement or arrangement (other than contracts for the
purchase or sale of goods or services in the ordinary course of business in
connection with the performance of the Company's contracts) pursuant to which
the Company or any of its subsidiaries could be required to make or be entitled
to receive aggregate payments in excess of $250,000 and which is not cancelable
within 30 days notice without penalty.
(b) The Company and its subsidiaries have performed all of their obligations
under each Material Contract and there exists no breach or default (or event
that with notice or lapse of time would constitute a breach or default) under
any Material Contract, except as could not reasonably be expected to have a
Company Material Adverse Effect.
(c) Except as set forth in SCHEDULE 3.20 of the Company Disclosure Schedule,
on the date hereof and on the Closing Date, each Material Contract is valid,
binding and in full force and effect and enforceable in all material respects in
accordance with its respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance or other
similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity. Except as set forth in SCHEDULE 3.20 of
the Company Disclosure Schedule, there has been no termination or, to the
Company's knowledge, threatened termination or notice of default under any
Material Contract. The Company has delivered or made available to Parent a copy
of each written Material Contract.
(d) Except as set forth in SCHEDULE 3.20(D) to the Company Disclosure
Schedule, no consent of any person is required in connection with the
transactions contemplated by this Agreement in order to preserve the rights of
the Company or any of its subsidiaries under or to prevent any disadvantage to
the Company or any of its subsidiaries in respect of any Material Contract after
the Effective Time.
SECTION 3.21. PRINCIPAL CUSTOMERS; COMPETING INTERESTS. The Company has
made available to Parent a list of the ten largest customers by dollar volume of
sales for fiscal year 1997 of the Company and its subsidiaries (the "Largest
Customers"), with the amount of revenues attributable to each such customer, for
the Company's 1996 and 1997 fiscal years. Except as described in such SCHEDULE
3.21, none of the Largest Customers has terminated or materially altered its
relationship with the Company since the beginning of the Company's 1996 fiscal
year, or, to the Company's knowledge, threatened to do so or otherwise notified
the Company of any intention to do so, and there has been no material dispute
with any of the Largest Customers since the beginning of the Company's 1996
fiscal year. Except as described in such SCHEDULE 3.21, none of the Company, any
of its subsidiaries, any director, officer or stockholder of any of the
foregoing owns, directly or indirectly, an interest in any entity that is a
competitor, customer or supplier of the Company or any of its subsidiaries or
that otherwise has business dealings with the Company or any of its subsidiaries
that are material to the Company and its subsidiaries taken as a whole,
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other than the beneficial ownership of not more than 1% of the voting securities
of any such entity that are publicly traded.
SECTION 3.22. INTELLECTUAL PROPERTY RIGHTS. There are no registered
patents, trademarks, service marks, trade names or copyrights, or applications
for or licenses (to or from the Company or any of its subsidiaries) with respect
to any of the foregoing that are material to the Company and its subsidiaries
taken as a whole, that (a) are owned by the Company or any of its subsidiaries,
or with respect to which the Company or any of its subsidiaries has any rights,
or (b) are used, whether directly or indirectly, by the Company or any of its
subsidiaries, other than as set forth on SCHEDULE 3.22 to the Company Disclosure
Schedule. Except as set forth in SCHEDULE 3.22 of the Company Disclosure
Schedule, the Company and its subsidiaries have the right to use the trademarks
and trade names set forth on such SCHEDULE 3.22 and any other computer software
and software licenses, intellectual property, proprietary information, trade
secrets, trademarks, trade names, copyrights, material and manufacturing
specifications, drawings and designs used by the Company or any of its
subsidiaries and material to the operation of the business of the Company or any
of its subsidiaries (collectively, "Intellectual Property"), without infringing
on or otherwise acting adversely to the rights or claimed rights of any person,
except to the extent such infringement or actions adverse to another's rights or
claimed rights could not reasonably be expected to have a Company Material
Adverse Effect. Except as set forth on SCHEDULE 3.22 to the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries is obligated to pay
any royalty or other consideration material to the Company and its subsidiaries
taken as a whole to any person in connection with the use of any Intellectual
Property. Except as set forth in SCHEDULE 3.22 of the Company Disclosure
Schedule and as could not reasonably be expected to have a Company Material
Adverse Effect, to the Company's knowledge, no other person is infringing on the
rights of the Company and its subsidiaries in any of their Intellectual
Property.
SECTION 3.23. INFORMATION SUPPLIED. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of the Company and no statement by the Company or other information contained in
the Company Disclosure Schedule, any side letters delivered or entered into by
the Company pursuant to this Agreement or any document incorporated therein by
reference as of the date of such representation, warranty, statement or
document, contains any untrue statement of material fact, or omits to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which such statements were made (but after
taking into account (i) all such representations, warranties, statements or
documents and (ii) the information included in the Company's reports filed with
the SEC on or after July 1, 1996), not misleading.
SECTION 3.24. OPINION OF FINANCIAL ADVISOR. The Company has received the
opinion of Legg Mason Wood, Incorporated to the effect that, as of the date of
delivery of such opinion, the Merger Consideration to be received by the holders
of the Company Common Stock in the Merger is fair, from a financial point of
view, to such holders.
SECTION 3.25. [RESERVED]
SECTION 3.26. FEDERAL GOVERNMENT CONTRACTS.
(a) Except as set forth in SCHEDULE 3.26 to the Company Disclosure Schedule,
(i) none of the federal government contracts of the Company or its subsidiaries
have been terminated for default or convenience; (ii) no show cause or cure
notices, as defined by each contract or applicable federal regulation, have been
issued; and (iii) neither the Company nor its subsidiaries have received any
notices to cure any defaults of the contracts. In addition, to the Company's
knowledge, there are no material delivery or performance problems or issues on
the part of the Company or its subsidiaries.
(b) Except as set forth in SCHEDULE 3.26 to the Company Disclosure Schedule,
none of the Company's federal government contracts, to the Company's knowledge,
are anticipated to be terminated for convenience or discontinued for any reason
including for lack of funding or federal budget constraints.
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(c) All information, data, representations, statements and certificates as
submitted or provided to the government (the "Information") relative to federal
government contracts of the Company or any of its subsidiaries were current,
complete and accurate in all material respects as of the date made (including
particularly invoices, claims or other requests for payments and any certificate
regarding procurement integrity "or certificates of current cost and pricing
data"), in each case to the extent of any open statute of limitations.
SECTION 3.27. PARENT STOCK OWNERSHIP. Neither the Company nor any of its
subsidiaries beneficially owns any shares of Parent Common Stock of other
securities convertible into or exchangeable for Parent Common Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
The Parent Companies hereby represent and warrant to the Company that:
SECTION 4.01. ORGANIZATION AND QUALIFICATION. Each of the Parent Companies
is a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of the business conducted by
it or the ownership or leasing of its properties makes such qualification
necessary, other than where the failure to be so duly qualified and in good
standing could not be reasonably expected to have a Parent Material Adverse
Effect. The term "Parent Material Adverse Effect" as used in this Agreement
shall mean any change or effect that, individually or when taken together with
all other such changes or effects (but after giving effect to application of
insurance proceeds or other rights of indemnification in respect of such change
or effect), could reasonably be expected to be materially adverse to the
business, operations, assets, financial condition, or results of operations of
Parent and its subsidiaries, taken as a whole.
SECTION 4.02. CHARTER AND BYLAWS. Parent has heretofore furnished or made
available to the Company a complete and correct copy of the charter and bylaws,
as amended or restated, of each of the Parent Companies. Except as set forth in
SCHEDULE 4.02 of the disclosure schedule delivered to the Company by Parent on
the date hereof (the "Parent Disclosure Schedule"), none of the Parent Companies
is in violation of any of the provisions of its charter or bylaws.
SECTION 4.03. CAPITALIZATION.
(a) The authorized capital stock of Parent consists of (i) 75,000,000 shares
of Parent Common Stock, of which as of June 30, 1997, (x) 29,495,497 shares were
issued and outstanding, (y) no shares were held in treasury and (z) 2,752,710
shares were reserved for future issuance pursuant to outstanding stock options
and 6,405,686 shares were reserved for future issuance upon conversion of shares
of Class B common stock, par value $0.01 per share, of Parent (the "Class B
Common Stock"); (ii) 6,405,686 shares of Class B Common Stock of which all such
shares were issued and outstanding; and (iii) 3,000,000 shares of preferred
stock, par value $0.01 per share ("Parent Preferred Stock"), of which no shares
are issued and outstanding. Except as described in this SECTION 4.03 or in
SCHEDULE 4.03(A) of the Parent Disclosure Schedule, as of the date of this
Agreement, no shares of capital stock of Parent are reserved for any purpose.
The outstanding shares of capital stock of Parent are duly authorized, validly
issued, fully paid and nonassessable, and have not been issued in violation of
(nor are any of the authorized shares of capital stock of Parent subject to) any
preemptive or similar rights created by statute, the charter or bylaws of
Parent, or any agreement to which Parent is a party or bound.
(b) Except as set forth in SECTION 4.03(A) above or in SCHEDULE 4.03(B)(I)
to the Parent Disclosure Schedule, there are no options, warrants or other
rights, agreements, arrangements or commitments of any character to which the
Parent or any of its subsidiaries is a party relating to the issued or unissued
capital
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stock of the Parent or any of its subsidiaries or obligating the Parent or any
of its subsidiaries to grant, issue or sell any shares of the capital stock of
the Parent or any of its subsidiaries, by sale, lease, license or otherwise.
Except as set forth in SCHEDULE 4.03(B)(II) to the Parent Disclosure Schedule,
there are no obligations, contingent or otherwise, of the Parent or any of its
subsidiaries to (A) repurchase, redeem or otherwise acquire any shares of the
Parent Common Stock or other capital stock of the Parent, or the capital stock
or other equity interests of any subsidiary of the Parent; or (B) (other than
advances to subsidiaries in the ordinary course of business) provide material
funds to, or make any material investment in (in the form of a loan, capital
contribution or otherwise), or provide any guarantee with respect to the
obligations of, any subsidiary of the Parent or any other person. Except as
described in SCHEDULE 4.03(B)(III) to the Parent Disclosure Schedule, neither
the Parent nor any of its subsidiaries (x) directly or indirectly owns, (y) has
agreed to purchase or otherwise acquire or (z) holds any interest convertible
into or exchangeable or exercisable for 5% or more of the capital stock of any
corporation, partnership, joint venture or other business association or entity.
Except as set forth in SCHEDULE 4.03(B)(IV) of the Parent Disclosure Schedule
and except for any agreements, arrangements or commitments between the Parent
and its subsidiaries or between such subsidiaries, there are no agreements,
arrangements or commitments of any character (contingent or otherwise) pursuant
to which any person is or may be entitled to receive any payment based on the
revenues or earnings, or calculated in accordance therewith, of the Parent or
any of its subsidiaries. There are no voting trusts, proxies or other agreements
or understandings to which the Parent or any of its subsidiaries is a party or
by which the Parent or any of its subsidiaries is bound with respect to the
voting of any shares of capital stock of the Parent or any of its subsidiaries.
(c) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, par value $0.01 per share ("Merger Sub Common Stock"). As of the
date of this Agreement, 100 shares of Merger Sub Common Stock were issued and
outstanding and held by Parent, all of which are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, Merger Sub's charter or bylaws or any agreement to which
Merger Sub is a party or is bound.
(d) The shares of Parent Common Stock to be issued pursuant to the Merger
(i) will be duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights created by statute, Parent's charter or bylaws
or any agreement to which Parent is a party or is bound and (ii) will, when
issued, be listed on the NYSE.
SECTION 4.04. AUTHORITY. Each of the Parent Companies has all requisite
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated hereby
(subject to, with respect to the issuance of the Parent Common Stock in the
Merger, the approval thereof by the holders of the Parent Common Stock as
described in SECTION 4.12). The execution and delivery of this Agreement by each
of the Parent Companies and the consummation by each of the Parent Companies of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of any of the
Parent Companies are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby (subject to, with respect to the issuance of
the Parent Common Stock in the Merger, the approval thereof by the holders of
the Parent Common Stock as described in SECTION 4.12). This Agreement has been
duly executed and delivered by each of the Parent Companies and, assuming the
due authorization, execution and delivery thereof by the Company, constitutes
the legal, valid and binding obligation of each of the Parent Companies.
SECTION 4.05. NO CONFLICT; REQUIRED FILINGS AND CONSENT.
(a) Except as set forth in SCHEDULE 4.05 of the Parent Disclosure Schedule,
the execution and delivery of this Agreement by each of the Parent Companies
does not, and the consummation of the transactions contemplated hereby will not
(i) conflict with or violate the charter or bylaws, or the equivalent
organizational documents, in each case as amended or restated, of Parent or any
of Parent's subsidiaries, (ii) conflict with or violate any Laws applicable to
Parent or any of Parent's subsidiaries or by which any of
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their properties is bound or subject, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any of the properties or assets of Parent or any of Parent's
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or any of Parent's subsidiaries is a party or by or to which
Parent or any of Parent's subsidiaries or any of their respective properties is
bound or subject, except in the case of clauses (ii) and (iii) where such
conflict, violation, breach, default, right, requirement, lien or encumbrance
could not reasonably be expected to have a Parent Material Adverse Effect. The
Board of Directors of the Parent has taken all actions necessary under Delaware
Law, including approving the transactions contemplated by this Agreement and
taking appropriate actions under any stockholder protection laws applicable to
the Parent or any of its subsidiaries, to ensure that restrictions on business
combinations or the owning or voting of the capital stock of the Parent or any
of its subsidiaries do not, and will not apply in respect or as a result of the
transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by each of the Parent
Companies does not, and the consummation of the transactions contemplated hereby
will not, require any of the Parent Companies to obtain any consent, license,
permit, approval, waiver, authorization or order of, or to make any filing with
or notification to, any Governmental Entities, except for applicable
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws,
the HSR Act and those matters referenced in SCHEDULE 4.05(B) of the Parent
Disclosure Schedule and the filing and recordation of appropriate merger
documents as required by Maryland Law.
SECTION 4.06. PERMITS; COMPLIANCE. Except as set forth in SCHEDULE 4.06 of
the Parent Disclosure Schedule, each of Parent and its subsidiaries is in
possession of all material franchises, grants, authorizations, licenses,
permits, easements, variances, exemptions, consents, certificates, approvals and
orders necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted (collectively, the "Parent Permits"), and
there is no action, proceeding or investigation pending or, to the knowledge of
Parent, threatened regarding suspension or cancellation of any of the Parent
Permits. Except as set forth in SCHEDULE 4.06 of the Parent Disclosure Schedule,
neither Parent nor any of its subsidiaries is in material conflict with, or in
material default or violation of (a) any Law applicable to Parent or any of its
subsidiaries or by or to which any of their respective properties is bound or
subject or (b) any of the Parent Permits. Except as set forth in SCHEDULE 4.06
of the Parent Disclosure Schedule, since June 30, 1995, neither Parent nor any
of its subsidiaries has received from any Governmental Entity any written
notification with respect to possible material conflicts, defaults or violations
of Laws.
SECTION 4.07. SEC REPORTS; FINANCIAL STATEMENTS.
(a) Since June 30, 1995, Parent and its subsidiaries have filed all forms,
reports, statements and other documents required to be filed with the SEC,
including, without limitation, (1) all Annual Reports on Form l0-K, (2) all
Quarterly Reports on Form 10-Q, (3) all proxy statements relating to meetings of
stockholders (whether annual or special), (4) all Current Reports on Form 8-K
and (5) all other reports, schedules, registration statements or other documents
(collectively, the "Parent SEC Reports"). The Parent SEC Reports, including all
Parent SEC Reports filed after the date of this Agreement and prior to the
Effective Time (x) were or will be prepared in all material respects in
accordance with the requirements of applicable Law and (y) did not at the time
they were filed, or will not at the time they are filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Parent SEC Reports filed prior to
the Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
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principles applied on a consistent basis throughout the periods involved (except
(A) to the extent required by changes in generally accepted accounting
principles and (B) with respect to Parent SEC Reports filed prior to the date of
this Agreement, as may be indicated in the notes thereto) and (ii) fairly
present or will fairly present the consolidated financial position of Parent and
its subsidiaries as of the respective dates thereof and the consolidated results
of operations and cash flows for the periods indicated (including reasonable
estimates of normal and recurring year-end adjustments), except that (x) any
unaudited interim financial statements were or will be subject to normal and
recurring year-end adjustments and (y) any pro forma financial information
contained in such consolidated financial statements is not necessarily
indicative of the consolidated financial position of Parent and its subsidiaries
as of the respective dates thereof and the consolidated results of operations
and cash flows for the periods indicated.
SECTION 4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Parent SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in SCHEDULE 4.08 to the Parent
Disclosure Schedule, since June 30, 1997, each of Parent and its subsidiaries
have conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice, and there has not been: (i) any material
damage, destruction or loss (whether or not covered by insurance) with respect
to any material assets of Parent or any of its subsidiaries; (ii) any material
change by Parent or its subsidiaries in their accounting methods, principles or
practices; (iii) except for dividends by a subsidiary of Parent to Parent or
another subsidiary of Parent, any declaration, setting aside or payment of any
dividends or distributions in respect of shares of Parent Common Stock or the
shares of stock of, or other equity interests in, any majority-owned subsidiary
of Parent, or any redemption, purchase or other acquisition by Parent or any of
Parent's subsidiaries of any of Parent's securities or any of the securities of
any subsidiary of Parent; or (iv) any Parent Material Adverse Effect.
SECTION 4.09. ABSENCE OF LITIGATION. Except as set forth in SCHEDULE 4.09
to the Parent Disclosure Schedule, there is no claim, action, suit, litigation,
proceeding, arbitration or, to the knowledge of Parent, investigation of any
kind, at law or in equity (including actions or proceedings seeking injunctive
relief), pending or, to the knowledge or Parent, threatened against Parent or
any of its subsidiaries or any properties or rights of Parent or any of its
subsidiaries (except for claims, actions, suits, litigation, proceedings,
arbitrations or investigations which could not reasonably be expected to have a
Parent Material Adverse Effect) and neither Parent nor any of its subsidiaries
is subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement with, or, to the knowledge of Parent, continuing
investigation by, any Governmental Entity, or any judgment, order, writ,
injunction, decree or award of any Governmental Entity or arbitrator, including,
without limitation, cease-and-desist or other orders.
SECTION 4.10. TAX MATTERS; POOLING.
(a) None of the Parent Companies nor, to the knowledge of Parent, any of
their affiliates has taken or agreed to take any action that would prevent the
Merger (i) from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code or (ii) from being treated as a Pooling Transaction
for financial accounting purposes.
(b) There is no intercorporate indebtedness existing between Parent and the
Company or between Merger Sub and the Company that was issued, acquired, or will
be settled at a discount.
(c) Parent has no present plan or intention to sell or dispose of any of the
assets of the Company or any of its subsidiaries after the Effective Time,
except for (i) sales, transfers or other distributions made in the ordinary
course of business and (ii) transfers described in Section 368(a)(2)(C) of the
Code.
(d) Parent has no present plan or intention to reacquire any of the shares
of Parent Common Stock it will issue to stockholders of the Company in the
Merger.
(e) Following the Effective Time, Parent currently intends to continue the
historic businesses of the Company and its subsidiaries that are presently
conducted.
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SECTION 4.11. VOTE REQUIRED. The only vote of the holders of any class or
series of Parent capital stock necessary to approve the issuance of the Parent
Common Stock in the Merger is, pursuant to the requirements of the NYSE, the
affirmative vote of the holders of a majority of the outstanding shares of the
common stock of Parent voted on the proposal to so issue the Parent Common
Stock; provided that the total vote cast on such proposal represents over 50% in
interest of the outstanding common stock of Parent. No vote of the holders or
any class or series of Parent capital stock is required to approve the Merger
and adopt this Agreement. Parent, as the sole stockholder of Merger Sub, will
promptly vote to approve the Merger and adopt this Agreement.
SECTION 4.12. BROKERS. Except as set forth on SCHEDULE 4.12 to the Parent
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of any of the Parent Companies.
SECTION 4.13. INFORMATION SUPPLIED. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of Parent and no statement by the Parent or other information contained in the
Parent Disclosure Schedule, any side letters delivered or entered into by the
Parent pursuant to this Agreement or any document incorporated therein by
reference as of the date of such representation, warranty, statement or
document, contains any untrue statement of material fact, or omits to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which such statements were made (but after
taking into account (i) all such representations, warranties, statements or
documents and (ii) the information included in Parent's reports filed with the
SEC on or after July 1, 1996), not misleading.
SECTION 4.14. OPINION OF FINANCIAL ADVISOR. Parent has received the
opinion of Smith Barney Inc. to the effect that, as of the date of the
Agreement, the Exchange Ratio is fair, from a financial point of view, to
Parent.
SECTION 4.15. [RESERVED]
SECTION 4.16. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) The Affiliated Computer Services, Inc. Savings Plan (a) is the only
employee pension benefit plan maintained by the Parent or any ERISA Affiliate
that is intended to qualify under Code Section 401; and (b) meets the
qualification requirements of the Code in form and operation, and such plan, and
each trust (if any) forming a part thereof, has received a favorable
determination letter from the Internal Revenue Service as to the qualification
under the Code of such plan and the tax-exempt status of such related trust, and
nothing has occurred since the date of such determination letter that may
adversely affect the qualification of such plan or the tax-exempt status of such
related trust. Except as set forth in SCHEDULE 4.16 of the Parent Disclosure
Schedule, all Employee Plans purporting to qualify for special tax treatment
under any provision of the Code, including, without limitation, Code Sections
79, 105, 106, 125, 127, 129, 132, 421 or 501(c)(9) meet the requirement of such
sections in form and in operation. All reports, returns or filings required by
any government agency have been filed in accordance with all applicable
requirements.
(b) Except as set forth in SCHEDULE 4.16 of the Company Disclosure Schedule,
no condition exists that would subject the Parent, any ERISA Affiliate or Parent
to any excise tax, penalty tax or fine related to any Employee Plan, except as
could not reasonably be expected to have a Parent Material Adverse Effect.
(c) There is no Employee Plan that is subject to Part 3 of Title I of ERISA
or Title IV of ERISA; each Employee Plan has been operated in all material
respects in compliance with ERISA, the Code and all other applicable laws; none
of the Employee Plans is a "multiple employer plan" or "multiemployer plan" (as
described or defined in ERISA or the Code), nor has the Parent or any ERISA
Affiliate ever contributed or been required to contribute to any such plan;
there are no material unfunded liabilities existing under any Employee Plans,
and each Employee Plan could be terminated as of the Closing Date without any
material liability to the Parent, the Parent or any ERISA Affiliate.
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(d) Except as set forth in SCHEDULE 4.16 of the Parent Disclosure Schedule,
there are no material actions, suits, claims, audits, or investigations pending
or, to the knowledge of the Parent, threatened against, or with respect to, any
of the Employee Plans or their assets, other than benefit claims in the normal
course of plan operations, and except as set forth in SCHEDULE 4.16 of the
Parent Disclosure Schedule and except as could not reasonably be expected to
have a Parent Material Adverse Effect, all contributions required to be made to
the Employee Plans have been made.
SECTION 4.17. CERTAIN BUSINESS PRACTICES. None of the Parent, any of its
subsidiaries or any directors or officers, or to the knowledge of Parent, any
agents or employees, of the Parent or any of its subsidiaries has individually
or in the aggregate in any material respect (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
SECTION 4.18. ENVIRONMENTAL MATTERS. Except for matters disclosed in
SCHEDULE 4.18 of the Parent Disclosure Schedule and except for matters that
could not reasonably be expected to result, individually or in the aggregate
with all other such matters, in liability to the Parent or any of its
subsidiaries in excess of $750,000, (i) the properties, operations and
activities of the Parent and its subsidiaries are in compliance with all
applicable Environmental Laws; (ii) the Parent and its subsidiaries and the
properties and operations of the Parent and its subsidiaries are not subject to
any existing, pending or, to the knowledge of the Parent, threatened action,
suit, claim, investigation, inquiry or proceeding by or before any governmental
authority under any Environmental Laws; (iii) all notices, permits, licenses, or
similar authorizations, if any, required to be obtained or filed by the Parent
or any of its subsidiaries under any Environmental Laws in connection with any
aspect of the business of the Parent or its subsidiaries, including without
limitation those relating to the treatment, storage, disposal or release of a
hazardous or otherwise regulated substance, have been duly obtained or filed and
will remain valid and in effect after the Merger, and the Parent and its
subsidiaries are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations; (iv) the Parent and its
subsidiaries have satisfied and are currently in compliance with all financial
responsibility requirements applicable to their operations and imposed by any
governmental authority under any Environmental Laws, and the Parent and its
subsidiaries have not received any notice of noncompliance with any such
financial responsibility requirements; (v) to the Parent's knowledge, there are
no physical or environmental conditions existing on any property of the Parent
or its subsidiaries or resulting from the Parent's or such subsidiaries'
operations or activities, past or present, at any location, that would give rise
to any on-site or off-site remedial obligations imposed on the Parent or any of
its subsidiaries under any Environmental Laws or that would impact the soil,
groundwater, or surface water or human health (to the extent of exposure to
hazardous substances); (vi) to the Parent's knowledge, since the effective date
of the relevant requirements of applicable Environmental Laws and to the extent
required by such applicable Environmental Laws, all hazardous or otherwise
regulated substances generated by the Parent and its subsidiaries have been
transported only by carriers authorized under Environmental Laws to transport
such substances and wastes, and disposed of only at treatment, storage, and
disposal facilities authorized under Environmental Laws to treat, store or
dispose of such substances and wastes; (vii) there has been no exposure of any
person or property to hazardous substances or any pollutant or contaminant, nor
has there been any release of hazardous substances, or any pollutant or
contaminant into the environment by the Parent or its subsidiaries or in
connection with their properties or operations that could reasonably be expected
to give rise to any claim against the Parent or any of its subsidiaries for
damages or compensation; and (viii) subject to restrictions necessary to
preserve any attorney client privilege, the Parent and its subsidiaries have
made available to Parent all internal and external environmental audits and
studies and all correspondence on substantial environmental matters in the
possession of the Parent or its subsidiaries relating to any of the current or
former properties or operations of the Parent and its subsidiaries.
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For purposes of this Agreement, the term "Environmental Laws" shall mean any
and all laws, statutes, ordinances, rules, regulations, or orders of any
Governmental Entity pertaining to health (to the extent of exposure to hazardous
substances) or the environment currently in effect in any and all jurisdictions
in which the Parent and its subsidiaries own property or conduct business,
including without limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Hazardous & Solid
Waste Amendments Act of 1984, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended, the Oil Pollution Act of 1990 ("OPA"), any state laws
implementing the foregoing federal laws, and all other environmental
conservation or protection laws. For purposes of this Agreement, the terms
"hazardous substance" and "release" have the meanings specified in CERCLA and
RCRA and shall include petroleum and petroleum products, radon and PCB's, and
the term "disposal" has the meaning specified in RCRA; PROVIDED, HOWEVER, that
to the extent the laws of the state in which the property is located establish a
meaning for "hazardous substance," "release," or "disposal" that is broader than
that specified in either CERCLA or RCRA, such broader meaning shall apply.
SECTION 4.19. INSURANCE. Except as set forth on SCHEDULE 4.19 to the
Parent Disclosure Schedule, the Parent and each of its subsidiaries are
currently insured, and during each of the past five calendar years have been
insured, for reasonable amounts against such risks as companies engaged in a
similar business and similarly situated would, in accordance with good business
practice, customarily be insured.
SECTION 4.20. INTELLECTUAL PROPERTY RIGHTS. There are no registered
patents, trademarks, service marks, trade names or copyrights, or applications
for or licenses (to or from the Parent or any of its subsidiaries) with respect
to any of the foregoing that are material to the Parent and its subsidiaries
taken as a whole, that (a) are owned by the Parent or any of its subsidiaries,
or with respect to which the Parent or any of its subsidiaries has any rights,
or (b) are used, whether directly or indirectly, by the Parent or any of its
subsidiaries, other than as set forth on SCHEDULE 4.20 to the Parent Disclosure
Schedule. Except as set forth in SCHEDULE 4.20 of the Parent Disclosure
Schedule, the Parent and its subsidiaries have the right to use the trademarks
and trade names set forth on such SCHEDULE 4.20 and any other computer software
and software licenses, intellectual property, proprietary information, trade
secrets, trademarks, trade names, copyrights, material and manufacturing
specifications, drawings and designs used by the Parent or any of its
subsidiaries and material to the operation of the business of the Parent or any
of its subsidiaries (collectively, "Intellectual Property"), without infringing
on or otherwise acting adversely to the rights or claimed rights of any person,
except to the extent such infringement or actions adverse to another's rights or
claimed rights could not reasonably be expected to have a Parent Material
Adverse Effect. Except as set forth on SCHEDULE 4.20 to the Parent Disclosure
Schedule, neither the Parent nor any of its subsidiaries is obligated to pay any
royalty or other consideration material to the Parent and its subsidiaries taken
as a whole to any person in connection with the use of any Intellectual
Property. Except as set forth in SCHEDULE 4.20 of the Parent Disclosure Schedule
and as could not reasonably be expected to have a Parent Material Adverse
Effect, to the Parent's knowledge, no other person is infringing on the rights
of the Parent and its subsidiaries in any of their Intellectual Property.
SECTION 4.21. CREDIT FACILITIES. As of the date of this Agreement, Parent
has, and as of the Closing Date Parent will have, sufficient cash and available
sources of credit to repay any and all amounts outstanding under the Company's
principal credit facility with NationsBank, N.A.
SECTION 4.22. COMPANY COMMON STOCK. Neither Parent nor any of its
subsidiaries beneficially owns any shares of Company Common Stock of other
securities convertible into or exchangeable for Company Common Stock.
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ARTICLE V
COVENANTS
SECTION 5.01. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby
covenants and agrees that, prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by Parent,
the Company will and will cause its subsidiaries to:
(a) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
(c) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice; and
(d) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
SECTION 5.02. NEGATIVE COVENANTS OF THE COMPANY. Except as expressly
contemplated by this Agreement, otherwise consented to in writing by Parent or
set forth in Schedule 5.02 of the Company Disclosure Schedule, from the date of
this Agreement until the Effective Time, the Company will not do, and will not
permit any of its subsidiaries to do, any of the foregoing:
(a) (i) increase the compensation payable to or to become payable to any
director or executive officer, unless such increase results from the
operation of compensation arrangements in effect prior to the date hereof;
(ii) grant any severance or termination pay (other than pursuant to the
normal severance policy of the Company or its subsidiaries as in effect on
the date of this Agreement or any of the agreements or arrangements
disclosed in the Company Disclosure Schedule) to, or enter into or amend any
employment or severance agreement with, any director, officer or employee;
(iii) establish, adopt or enter into any employee benefit plan or
arrangement; or (iv) except as may be required by applicable law and actions
that are not inconsistent with the provisions of Section 6.08 of this
Agreement, amend in any material respect, or take any other actions with
respect to, any of the Benefit Plans or any of the plans, programs,
agreements, policies or other arrangements described in Section 3.10(d) of
this Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of the Company to the Company or another wholly
owned subsidiary of the Company and except for regular semi-annual dividends
with respect to the Company Common Stock in an amount not to exceed $0.11
per share;
(c) (i) except as described in Schedule 3.03(b)(ii) of the Company
Disclosure Schedule, redeem, purchase or otherwise acquire any shares of its
or any of its subsidiaries' capital stock or any securities or obligations
convertible into or exchangeable for any shares of its or its subsidiaries'
capital stock (other than any such acquisition directly from any wholly
owned subsidiary of the Company in exchange for capital contributions or
loans to such subsidiary), or any options, warrants or conversion or other
rights to acquire any shares of its or its subsidiaries' capital stock or
any such securities or obligations (except in connection with the exercise
of outstanding Stock Options in accordance with their terms); (ii) effect
any reorganization or recapitalization; or (iii) split, combine or
reclassify any of its or its subsidiaries' capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for, shares of its or its subsidiaries' capital
stock;
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(d) (i) except as described in Schedule 3.03(b)(i) of the Company
Disclosure Schedule, issue, deliver, award, grant or sell, or authorize or
propose the issuance, delivery, award, grant or sale (including the grant of
any security interests, liens, claims, pledges, limitations in voting
rights, charges or other encumbrances) of, any shares of any class of its or
its subsidiaries' capital stock (including shares held in treasury), any
securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire any such shares
(except as permitted pursuant to Section 6.08 of this Agreement or for the
issuance of shares upon the exercise of outstanding Stock Options); (ii)
amend or otherwise modify the terms of any such rights or options the effect
of which shall be to make such terms more favorable to the holders thereof;
or (iii) except as contemplated by the terms of existing Stock Options, take
any action to accelerate the exercisability of Stock Options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than the purchase of
assets from suppliers or vendors in the ordinary course of business and
consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any of its material assets or any material assets of
any of its subsidiaries, except for dispositions of inventories and of
assets in the ordinary course of business and consistent with past practice;
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, any Competing Transaction (as defined below), or
enter into discussions or negotiate with any person or entity in furtherance
of such inquiries or to obtain a Competing Transaction, or agree to or
endorse any Competing Transaction, or authorize or permit any of the
officers, directors or employees of the Company or any of its subsidiaries
or any investment banker, financial advisor, attorney, accountant or other
representative retained by the Company or any of the Company's subsidiaries
to take any such action, and the Company shall promptly notify Parent of all
relevant terms of any such inquiries and proposals received by the Company
or any of its subsidiaries or by any such officer, director, investment
banker, financial advisor, attorney, accountant or other representative
relating to any of such matters and if such inquiry or proposal is in
writing, the Company shall promptly deliver or cause to be delivered to
Parent a copy of such inquiry or proposal; provided, however, that nothing
contained in this subsection (g) shall prohibit the Board of Directors of
the Company from (i) furnishing information to, or entering into discussions
or negotiations with, or following termination of this Agreement in
accordance with Section 8.01, entering into an agreement with, any person or
entity in connection with an unsolicited bona fide written proposal, by such
person or entity to acquire the Company pursuant to a merger, consolidation,
share exchange, business combination or other similar transaction or to
acquire a substantial portion of the assets of the Company or any of its
subsidiaries, if, and only to the extent that (A) the Board of Directors of
the Company, after consultation with and based upon the advice of
independent legal counsel, determines in good faith that such action is
necessary for such Board of Directors to comply with its fiduciary duties to
stockholders under applicable law and (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such
person or entity the Company (x) provides one day's prior written notice to
Parent to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity and (y) enters into
with such person or entity a confidentiality agreement in reasonably
customary form on terms not more favorable to such person or entity than the
terms contained in that certain Confidentiality Agreement dated as of July
20, 1997 between Parent and the Company (the "Confidentiality Agreement");
(ii) complying with Rule 14e-2 or Rule 14d-9 promulgated under the Exchange
Act with regard to a Competing Transaction; or (iii) failing to make or
withdrawing or modifying its recommendation referred to in Section 6.02(a)
if
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there exists a Competing Transaction and the Board of Directors of the
Company, after consultation with and based upon the advice of independent
legal counsel, determines in good faith that such action is necessary for
such Board of Directors to comply with its fiduciary duties to stockholders
under applicable law. For purposes of this Agreement, "Competing
Transaction" shall mean any of the following (other than the transactions
contemplated by this Agreement) involving the Company or any of its
subsidiaries: (i) any merger, consolidation, share exchange, business
combination or similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 20% or more of the assets
of the Company and its subsidiaries, taken as a whole, (iii) any tender
offer or exchange offer for 20% or more of the outstanding shares of capital
stock of the Company or the filing of a registration statement under the
Securities Act in connection therewith; (iv) any person having acquired
beneficial ownership of, or any group (as such term is used in Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder)
having been formed which beneficially owns or has the right to acquire
beneficial ownership of, 20% or more of the outstanding shares of capital
stock of the Company; or (v) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of
the foregoing;
(h) release any third party from its obligations, or grant any consent,
under any existing standstill provision relating to a Competing Transaction
or otherwise under any confidentiality or other agreement relating thereto,
or fail to fully enforce any such agreement;
(i) adopt or propose to adopt any amendments to its charter or bylaws,
which would have an adverse impact on the consummation of the transactions
contemplated by this Agreement, except to the extent necessary to implement
the Advisory Board contemplated by Section 1.05;
(j) (A) change any of its methods of accounting in effect at June 30,
1997, or (B) make or rescind any express or deemed election relating to
Taxes, settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ending June 30, 1997, except, in
each case, as may be required by Law or GAAP;
(k) incur any obligation for borrowed money or purchase money
indebtedness, whether or not evidenced by a note, bond, debenture or similar
instrument, except in the ordinary course of business consistent with past
practice and in no event in excess of $250,000 in the aggregate (unless such
borrowings are incurred under the Company's principal credit facility with
NationsBank, N.A. and relate to working capital or capital expenditures in
the ordinary course of business);
(l) enter into any arrangement, agreement or contract material to the
Company and its subsidiaries taken as a whole with any third party (other
than customers in the ordinary course of business) which provides for an
exclusive arrangement with that third party or is substantially more
restrictive on the Company or substantially less advantageous to the Company
than arrangements, agreements or contracts existing on the date hereof;
(m) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. AFFIRMATIVE AND NEGATIVE COVENANTS OF PARENT.
(a) Parent hereby covenants and agrees that, prior to the Effective Time,
unless otherwise expressly contemplated by this Agreement or consented to in
writing by the Company, Parent will and will cause its material subsidiaries to:
(i) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
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(ii) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
(iii) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice;
(iv) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained; and
(v) take all actions necessary to cause Merger Sub to approve the
Merger, this Agreement and the transactions contemplated thereby and hereby.
(b) Except as expressly contemplated by this Agreement, otherwise consented
to in writing by the Company or set forth in Schedule 5.03 of the Parent
Disclosure Schedule, from the date of this Agreement until the Effective Time,
Parent will not do, and will not permit any of its subsidiaries to do, any of
the following:
(i) knowingly take any action which would result in a failure to
maintain the trading of the Parent Common Stock on the NYSE;
(ii) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Parent to Parent or another wholly owned
subsidiary of Parent;
(iii) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than the purchase of
assets from suppliers or vendors in the ordinary course of business and
consistent with past practice), which, in each case, would prevent the
consummation of the transactions contemplated by this Agreement;
(iv) adopt or propose to adopt any amendments to its charter or bylaws,
which would have an adverse impact on the consummation of the transactions
contemplated by this Agreement; or
(v) agree in writing or otherwise to do any of the foregoing.
With respect to SUBSECTIONS 5.03(B)(IV) and (V) above, the parties hereto
acknowledge that, in connection with the Parent's upcoming Annual Meeting of
Stockholders, a proposed increase in the amount of the Parent's authorized Class
A Common Stock to 500,000,000 shares and a proposed increase in the amount of
the Parent's authorized Class B Common Stock to 14,000,000 shares and charter
and bylaw amendments to implement for Parent a staggered Board of Directors
consistent with the resolutions of the Parent's Board of Directors passed on
August 5, 1997 do not violate or breach such subsections.
(c) Parent hereby expressly consents to the terms and conditions of, and
assumes the obligations of the Company under, the split-dollar life insurance
agreements between the Company and each of Clifford Kendall, Ted Tinsley and
Mary Ann Mayhew as are disclosed on Schedule 3.10 to the Company Disclosure
Schedule.
SECTION 5.04. ACCESS AND INFORMATION.
(a) Except as may be deemed necessary or appropriate to comply with
applicable laws (including, without limitation, any requirements with respect to
security clearances) and subject to any applicable privileges (including,
without limitation, the attorney-client privilege), the Company shall, and shall
cause its subsidiaries to (i) afford to Parent and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, the "Parent Representatives") reasonable access
at
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reasonable times, upon reasonable prior notice, to the officers, employees,
agents, properties, offices and other facilities of the Company and its
subsidiaries and to the books and records thereof and (ii) furnish promptly to
Parent and the Parent Representatives such information concerning the business,
properties, contracts, records and personnel of the Company and its subsidiaries
(including, without limitation, financial, operating and other data and
information) as may be reasonably requested, from time to time, by Parent.
(b) Parent shall, and shall cause its subsidiaries to (i) afford to the
Company and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the " Company
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, accountants, agents, properties, offices and
other facilities of Parent and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to the Company and the Company Representatives
such information concerning the business, properties, contracts, records and
personnel of Parent and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by the Company.
(c) Notwithstanding the foregoing provisions of this SECTION 5.04, neither
party shall be required to grant access or furnish information to the other
party to the extent that such access or the furnishing of such information is
prohibited by law. No investigation by the parties hereto made heretofore or
hereafter shall affect the representations and warranties of the parties which
are herein contained and each such representation and warranty shall survive
such investigation.
(d) The information received pursuant to SECTION 5.04(A) and (B) shall be
deemed to be "Confidential Information" for purposes of the Confidentiality
Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. MEETINGS OF STOCKHOLDERS.
(a) The Company shall, promptly after the date of this Agreement, take all
actions necessary in accordance with Maryland Law and its charter and bylaws to
convene a meeting of the Company's stockholders to act on this Agreement (the
"Company Stockholders Meeting"), and the Company shall consult with Parent in
connection therewith. The Company shall use its best efforts to solicit from
stockholders of the Company proxies in favor of the approval and adoption of
this Agreement and to secure the vote of stockholders required by Maryland Law
and its charter and bylaws to approve and adopt this Agreement, unless otherwise
necessary due to the applicable fiduciary duties of the directors of the
Company, as determined by such directors in good faith after consultation with
and based upon the advice of independent legal counsel.
(b) Parent shall, promptly after the date of this Agreement, take all
actions necessary in accordance with the Delaware General Corporation Law and
its charter and bylaws to convene a meeting of Parent's stockholders to approve
the issuance of the Parent Common Stock in connection with the Merger pursuant
to the requirements of the NYSE (the "Parent Stockholders Meeting"). Parent
shall use its best efforts to solicit from stockholders of Parent proxies in
favor of the approval of such issuance of Parent Common Stock and to secure the
vote of stockholders required by the NYSE.
SECTION 6.02. REGISTRATION STATEMENT; PROXY STATEMENTS.
(a) As promptly as practicable after the execution of this Agreement, Parent
shall prepare and file with the SEC a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Registration Statement"), containing a proxy
statement/prospectus for stockholders of the Company (the "Company Proxy
Statement/Prospectus") and a proxy statement and form of proxy for stockholders
of Parent (together with any amendments thereof or
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supplements thereto, in each case in the form or forms mailed to Parent's
stockholders, the "Parent Proxy Statement"), in connection with the registration
under the Securities Act of the offer and sale of Parent Common Stock to be
issued in the Merger and the other transactions contemplated by this Agreement.
As promptly as practicable after the execution of this Agreement, the Company
shall prepare and file with the SEC a proxy statement that will be the same as
the Company Proxy Statement/Prospectus, and a form of proxy, in connection with
the vote of the Company's stockholders with respect to the Merger (such proxy
statement and form of proxy, together with any amendments thereof or supplements
thereto, in each case in the form or forms mailed to the Company's stockholders,
being the "Company Proxy Statement"). Each of Parent and the Company will use
its best efforts to cause the Registration Statement to be declared effective as
promptly as practicable, and shall take any action required to be taken under
any applicable federal or state securities laws in connection with the issuance
of shares of Parent Common Stock in the Merger. Each of Parent and the Company
shall furnish to the other all information concerning it and the holders of its
capital stock as the other may reasonably request in connection with such
actions. As promptly as practicable after the Registration Statement shall have
been declared effective, the Company shall mail the Company Proxy Statement to
its stockholders entitled to notice of and to vote at the Company Stockholders
Meeting and Parent shall mail the Parent Proxy Statement to its stockholders
entitled to notice of and to vote at the Parent Stockholders Meeting. The
Company Proxy Statement shall include the recommendation of the Company's Board
of Directors in favor of the Merger and adoption of this Agreement, unless
otherwise necessary due to the applicable fiduciary duties of the directors of
the Company, as determined by such directors in good faith after consultation
with and based upon the advice of independent legal counsel. The Parent Proxy
Statement shall include the recommendation of Parent's Board of Directors in
favor of approval of the issuance of the Parent Common Stock in the Merger.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by the
Company for inclusion in (i) the Company Proxy Statement to be sent to the
stockholders of the Company in connection with the Company Stockholders Meeting
shall not, at the date the Company Proxy Statement (or any supplement thereto)
is first mailed to stockholders, at the time of the Company Stockholders Meeting
or at the Effective Time and (ii) the Parent Proxy Statement to be sent to the
stockholders of Parent in connection with the Parent Stockholders Meeting shall
not, at the date the Parent Proxy Statement (or any supplement thereto) is first
mailed to stockholders, at the time of the Parent Stockholders Meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any of its affiliates, or its or their
respective officers or directors, should be discovered by the Company that
should be set forth in an amendment to the Registration Statement or a
supplement to the Company Proxy Statement or the Parent Proxy Statement, the
Company shall promptly inform Parent thereof in writing. All documents that the
Company is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form in all material respects
with the applicable requirements of the Securities Act and the rules and
regulations thereunder and the Exchange Act and the rules and regulations
thereunder.
(c) The information supplied by Parent for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by Parent for
inclusion in (i) the Company Proxy Statement to be sent to the stockholders of
the Company in connection with the Company Stockholders Meeting shall not, at
the date the Company Proxy Statement (or any supplement thereto) is first mailed
to stockholders, at the time of the Company Stockholders Meeting or at the
Effective Time and (ii) the
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Parent Proxy Statement to be sent to the stockholders of Parent in connection
with the Parent Stockholders Meeting shall not, at the date the Parent Proxy
Statement (or any supplement thereto) is first mailed to stockholders, at the
time of the Parent Stockholders Meeting or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to
Parent or any of its affiliates, or to their respective officers or directors,
should be discovered by Parent that should be set forth in an amendment to the
Registration Statement or a supplement to the Company Proxy Statement or the
Parent Proxy Statement, Parent shall promptly inform the Company thereof in
writing. All documents that Parent is responsible for filing with the SEC in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the applicable requirements of the Securities Act and
the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) The Company and Parent shall each use, and shall cause each of their
respective subsidiaries to use, all reasonable efforts to (i) take, or cause to
be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Agreement, (ii) obtain
from any Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by Parent or
the Company or any of their subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, the Merger,
(iii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Merger required under (A)
the Securities Act (in the case of Parent) and the Exchange Act and the rules
and regulations thereunder, and any other applicable federal or state securities
laws, (B) the HSR Act and (C) any other applicable Law; provided that Parent and
the Company shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the nonfiling
party and its advisors prior to filings and, if requested, shall accept all
reasonable additions, deletions or changes suggested in connection therewith.
The Company and Parent shall furnish all information required for any
application or other filing to be made pursuant to the rules and regulations of
any applicable Law (including all information required to be included in the
Company Proxy Statement, the Parent Proxy Statement or the Registration
Statement) in connection with the transactions contemplated by this Agreement.
Parent and the Company shall request early termination of the waiting period
with respect to the Merger under the HSR Act.
(b) Parent and the Company agree to cooperate with respect to, and shall
cause each of their respective subsidiaries to cooperate with respect to, and
agree to use all reasonable efforts vigorously to contest and resist, any
action, including legislative, administrative or judicial action, and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order (whether temporary, preliminary or permanent) (an "Order") of any
Governmental Entity that is in effect and that restricts, prevents or prohibits
the consummation of the Merger or any other transactions contemplated by this
Agreement, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal and all available legislative
action.
(c) (i) Each of the Company and Parent shall give (or shall cause their
respective subsidiaries to give) any notices to third parties, and use, and
cause their respective subsidiaries to use all reasonable efforts to obtain any
third party consents (A) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (B) otherwise required under any
contracts, licenses, leases or other agreements in connection with the
consummation of the transactions contemplated hereby or (C) required to prevent
a Company Material Adverse Effect or a Parent Material Adverse Effect from
occurring prior to the Effective Time.
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(ii) In the event that any party shall fall to obtain any third party
consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by
the other parties, to limit the adverse effect upon the Company and Parent,
their respective subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time, from
the failure to obtain such consent.
(d) Subject to any restrictions imposed by applicable law, each of Parent
and the Company shall promptly notify the other of (w) any material change in
its business, financial condition or results of operations, (x) any complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) of any Governmental Entities with respect to its business or the
transactions contemplated hereby, (y) the institution or the threat of material
litigation involving it or any of its subsidiaries or (z) any event or condition
that might reasonably be expected to cause any of its representations,
warranties, covenants or agreements set forth herein not to be true and correct
at the Effective Time. As used in the preceding sentence, "material litigation"
means any case, arbitration or adversary proceeding or other matter which would
have been required to be disclosed on the Company Disclosure Schedule pursuant
to Section 3.09 or the Parent Disclosure Schedule pursuant to Section 4.09, as
the case may be, if in existence on the date hereof.
SECTION 6.04. AFFILIATES; POOLING; TAX TREATMENT.
(a) The Company shall use all reasonable efforts to obtain from any person
who may be deemed to have become an affiliate of the Company after the date of
this Agreement and on or prior to the Effective Time, a written agreement
substantially in the form of EXHIBIT A hereto as soon as practicable after
attaining such status.
(b) Parent shall not be required to maintain the effectiveness of the
Registration Statement for the purpose of resale by stockholders of the Company
who may be affiliates of the Company or Parent pursuant to Rule 145 under the
Securities Act.
(c) Each party hereto shall use all reasonable efforts to cause the Merger
to be treated for financial accounting purposes as a Pooling Transaction, and
shall not take, and shall use all reasonable efforts to prevent any affiliate of
such party from taking, any actions which could prevent the Merger from being
treated for financial accounting purposes as a Pooling Transaction,
(d) Each party hereto shall use all reasonable efforts to cause the Merger
to qualify, and shall not take, and shall use all reasonable efforts to prevent
any affiliate of such party from taking, any actions which could prevent the
Merger from qualifying as a reorganization under the provisions of Section
368(a) of the Code.
SECTION 6.05. PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any such press release
or make any such public statement prior to such consultation. The press release
announcing the execution and delivery of this Agreement may be a joint press
release of Parent and the Company.
SECTION 6.06. NYSE LISTING. Parent shall use all reasonable efforts to
cause the shares of Parent Common Stock to be issued in the Merger to be
approved for listing (subject to official notice of issuance) on the NYSE prior
to the Effective Time.
SECTION 6.07. COMFORT LETTERS.
(a) The Company shall use all reasonable efforts to cause Ernst & Young LLP
to deliver a letter dated as of the date of the Company Proxy Statement, and
addressed to itself and Parent and their respective Boards of Directors, in form
and substance reasonably satisfactory to Parent, and customary in scope and
substance for agreed-upon procedures letters delivered by independent public
accountants in
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connection with registration statements and proxy statements similar to the
Registration Statement and the Company Proxy Statement.
(b) Parent shall use all reasonable efforts to cause Price Waterhouse LLP to
deliver a letter dated as of the date of the Parent Proxy Statement, and
addressed to itself and the Company and their respective Boards of Directors, in
form and substance reasonably satisfactory to the Company, and customary in
scope and substance for agreed-upon procedures letters delivered by independent
public accounts in connection with registration statements and proxy statements
similar to the Registration Statement and the Parent Proxy Statement.
SECTION 6.08. STOCK OPTION PLANS.
(a) OPTION PLANS. Parent and the Company shall take such actions not
inconsistent with the Merger being accounted for financial accounting purposes
as a Pooling Transaction, including (with respect to the Company) the amendment
of the Option Plans and Stock Options, to permit Parent to assume, and Parent
shall assume, effective at the Effective Time, each Stock Option that remains
unexercised in whole or in part as of the Effective Time and substitute shares
of Parent Common Stock for the shares of the Company Common Stock purchasable
under each such assumed option ("Assumed Option"), which assumption and
substitution shall be effected as follows:
(i) the Assumed Option shall not give the optionee additional benefits
which such optionee did not have under the Stock Option before such
assumption and shall be assumed on the same terms and conditions as the
Stock Option being assumed (including any terms and conditions arising as a
result of the transactions contemplated by this Agreement), subject to
SECTION 6.08(A)(II) and (III) below;
(ii) the number of shares of Parent Common Stock purchasable under the
Assumed Option shall be equal to the number of shares of Parent Common Stock
that the holder of the Stock Option being assumed would have received
(without regard to any vesting schedule) upon consummation of the Merger had
such Stock Option been exercised in full immediately prior to consummation
of the Merger; and
(iii) the per share exercise price of such Assumed Option shall be an
amount equal to the per share exercise price of the Stock Option being
assumed divided by the Exchange Ratio.
(b) REGISTRATION. Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Common Stock for
delivery upon exercise of the Assumed Options, and, as soon as practicable after
the Effective Time, Parent shall file a registration statement on Form S-8 (or
other appropriate form) with respect to the shares of Parent Common Stock
subject to the Assumed Options, and shall use its best efforts to maintain the
effectiveness of such registration statement for so long as any of the Assumed
Options remain outstanding.
SECTION 6.09. MERGER SUB. Prior to the Effective Time, Merger Sub shall
not conduct any business or make any investments other than as specifically
contemplated by this Agreement and will not have any assets (other than a de
minimis amount of cash paid to Merger Sub for the issuance of its stock to
Parent) or liabilities.
SECTION 6.10. INDEMNIFICATION; INSURANCE. For a period of six years after
the Effective Time, Parent shall not amend or otherwise modify, or cause the
Company to amend or otherwise modify, Article NINTH of the charter of the
Company or Article VII of the bylaws of the Company (in each case as in effect
on the date hereof), or similar provisions of the charter or bylaws of any
subsidiaries of the Company, in a manner that would adversely affect the rights
thereunder of any individuals who at any time prior to the Effective Time were
directors or officers of the Company or any of its subsidiaries in respect of
acts or omissions occurring at or prior to the Effective Time (including,
without limitation, the transactions contemplated by this Agreement), unless
such amendment or modification is required by law. For a period of six years
after the Effective Time, Parent shall cause the Surviving Corporation to
maintain officers' and
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directors' liability insurance for all persons currently covered under the
Company's officers' and directors' liability insurance policies, in their
capacities as officers and directors, on terms no less favorable to the covered
persons than such existing insurance; provided, however, that Parent shall not
be required in order to maintain or procure such coverage to pay an annual
premium in excess of 150% of the current annual premium paid by the Company for
its existing coverage (the "Cap"); and provided, further, that if equivalent
coverage cannot be obtained, or can be obtained only by paying an annual premium
in excess of the Cap, Parent shall only be required to obtain as much coverage
as can be obtained by paying an annual premium equal to the Cap. This SECTION
6.10 is intended to be for the benefit of, and shall be enforceable by, the
persons referred to above, their heirs and personal representatives, and shall
be binding on Parent and its successors and assigns.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Closing Date of the following conditions, any or all of which
may be waived in writing by the parties hereto, in whole or in part, to the
extent permitted by applicable law:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT; BLUE SKY.The
Registration Statement shall have been declared effective by the SEC under
the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated by the SEC. Parent shall have
received all Blue Sky permits and other authorizations necessary to
consummate the transactions contemplated by this Agreement.
(b) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of the
Company, and the issuance of the Parent Common Stock in the Merger shall
have been approved by the requisite vote of the stockholders of Parent.
(c) NO ORDER. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger; and no such Governmental Entity
shall have initiated or threatened to initiate any proceeding seeking any of
the foregoing that reasonably could be expected to prevent the Merger or
otherwise result in a Company Material Adverse Effect or a Parent Material
Adverse Effect.
(d) HSR ACT. The applicable waiting period under the HSR Act with
respect to the transactions contemplated by this Agreement shall have
expired or been terminated.
(e) POOLING OF INTERESTS. Parent and the Company shall have been advised
in writing by each of Price Waterhouse LLP and Ernst & Young LLP,
respectively, on the Closing Date that the Merger should be treated for
financial accounting purposes as a Pooling Transaction.
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE PARENT
COMPANIES. The obligations of the Parent Companies to effect the Merger and the
other transactions contemplated hereby are also subject to the satisfaction at
or prior to the Closing Date of the following conditions, any or all of which
may be waived in writing by Parent, in whole or in part:
(a) REPRESENTATIONS AND WARRANTIES.Each of the representations and
warranties of the Company contained in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent such representations and warranties specifically
relate to
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an earlier date, in which case such representations and warranties shall be
true and correct as of such earlier date) except as, individually or in the
aggregate, could not reasonably be expected to have a Company Material
Adverse Effect. The Parent Companies shall have received a certificate of
the President and the Chief Financial Officer of the Company, dated the
Closing Date, to such effect.
(b) AGREEMENTS AND COVENANTS.The Company shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by it on or prior to the
Closing Date. The Parent Companies shall have received a certificate of the
President and the Chief Financial Officer of the Company, dated the Closing
Date, to that effect.
(c) MATERIAL ADVERSE CHANGE.Since June 30, 1997, there shall have been
no change, occurrence or circumstance in the financial condition, results of
operations, business, operations or prospects of the Company or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations, business, operations or prospects of the Company and its
subsidiaries, taken as a whole. The Parent Companies shall have received a
certificate of the President and the Chief Financial Officer of the Company,
dated the Closing Date, to such effect.
(d) ABSENCE OF REGULATORY CONDITIONS.There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in connection
with the grant of a regulatory approval necessary, in the reasonable
business judgment of Parent, to the continuing operation of the current or
future business of the Company, which imposes any condition or restriction
upon the Parent Companies or the business or operations of the Company
which, in the reasonable business judgment of Parent, would be materially
burdensome in the context of the transactions contemplated by this
Agreement.
(e) EARNINGS PER SHARE.The earnings per share of the Company for the
quarter ending September 30, 1997 shall be no less than as disclosed
elsewhere by the Company to the Parent, as determined in accordance with
GAAP applied on a consistent basis with the financial statements referred to
in SECTION 3.07.
(f) TAX OPINION.Hughes & Luce, L.L.P. shall have delivered to Parent its
written opinion as of the date that the Parent Proxy Statement is first
mailed to Parent stockholders substantially to the effect that (x) the
Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code, (y) Parent, Merger Sub and the Company will each be a party to
that reorganization within the meaning of Section 368(b) of the Code, and
(z) Parent, Merger Sub and the Company will not recognize any gain or loss
for U.S. federal income tax purposes as a result of the Merger, and such
opinion shall not have been withdrawn or modified in any material respect.
(h) VCR SUBMISSION.The Company shall have filed a VCR submission with
the Internal Revenue Service in respect of each of the 401(k) Savings Plan
for Employees of Computer Data Systems, Inc., the Retirement Plan for
Employees of Computer Data Systems, Inc. and the Company's Supplemental
Deferred Compensation Plan, as set forth in Schedule 3.10 to the Company
Disclosure Schedule.
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by the Company, in whole or in part:
(a) REPRESENTATIONS AND WARRANTIES.Each of the representations and
warranties of the Parent Companies contained in this Agreement shall be true
and correct as of the Closing Date as though made on and as of the Closing
Date (except to the extent such representations and warranties specifically
relate to an earlier date, in which case such representations and warranties
shall be true and correct as of such earlier date) except as, individually
or in the aggregate, could not reasonably be
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expected to have a Parent Material Adverse Effect. The Company shall have
received a certificate of the President and the Chief Financial Officer of
the Parent, dated the Closing Date, to such effect.
(b) AGREEMENTS AND COVENANTS.The Parent Companies shall have performed
or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Closing Date. The Company shall have received a certificate of
the President and the Chief Financial Officer of the Parent, dated the
Closing Date, to that effect.
(c) MATERIAL ADVERSE CHANGE.Since June 30, 1997, there shall have been
no change, occurrence or circumstance in the financial condition, results of
operations, business, operations or prospects of Parent or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations, business, operations or prospects of Parent and its
subsidiaries, taken as a whole. The Company shall have received a
certificate of the President and the Chief Financial Officer of each of the
Parent Companies, dated the Closing Date, to such effect.
(d) ABSENCE OF REGULATORY CONDITIONS.There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in connection
with the grant of a regulatory approval necessary, in the reasonable
business judgment of the Company, to the continuing operation of the current
or future business of Parent, which imposes any condition or restriction
upon Parent or the business or operations of Parent which, in the reasonable
business judgment of the Company, would be materially burdensome in the
context of the transactions contemplated by this Agreement.
(e) NEW YORK STOCK EXCHANGE LISTING.The shares of Parent Common Stock to
be issued in the Merger shall have been approved for listing (subject to
official notice of issuance) on the NYSE.
(f) TAX OPINION.Miles & Stockbridge, a Professional Corporation, shall
have delivered to the Company its written opinion as of the date that the
Company Proxy Statement is first mailed to the Company stockholders
substantially to the effect that (x) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, (y) Parent,
Merger Sub and the Company will each be a party to that reorganization
within the meaning of Section 368(b) of the Code, and (z) no gain or loss
for U.S. federal income tax purposes will be recognized by the holders of
the Company Common Stock upon receipt of shares of Parent Common Stock in
the Merger, except with respect to any cash received in lieu of a fractional
share interest in Parent Common Stock, and such opinion shall not have been
withdrawn or modified in any material respect.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement
and the Merger by the stockholders of the Company:
(a) by mutual consent of Parent and the Company;
(b) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if
any representation or warranty of the Company shall have become untrue, in
either case such that the conditions set forth in SECTION 7.02(A) or SECTION
7.02(B) of this Agreement, as the ease may be, would be incapable of being
satisfied by February 15, 1998; provided, that in any case, a willful breach
shall be deemed to cause such conditions to be incapable of being satisfied
for purposes of this SECTION 8.01(B);
(c) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of the Parent Companies set forth in this
Agreement, or if any representation or warranty of the Parent Companies
shall have become untrue, in either case such that the conditions set forth
in SECTION 7.03(A) or SECTION 7.03(B) of this Agreement, as the case may be,
would be incapable of being satisfied by February 15, 1998; provided, that
in any case, a willful breach shall be deemed to cause such conditions to be
incapable of being satisfied for purposes of this SECTION 8.01(C);
(d) by either Parent or the Company, if there shall be any Order which
is final and nonappealable preventing the consummation of the Merger, except
if the party relying on such Order to terminate this Agreement has not
complied with its obligations under SECTION 6.03(B) of this Agreement;
(e) by either Parent or the Company, if the Merger shall not have been
consummated before February 15, 1998, except if the party relying on this
SECTION 8.01(E) shall have failed to comply with its covenants and
agreements hereunder and such failure to consummate the Merger shall be a
result of the breach or violation of such covenants and agreements;
(f) by either Parent or the Company, if this Agreement and the Merger
shall fail to receive the requisite vote for approval and adoption by the
stockholders of the Company at the Company Stockholders Meeting or if the
issuance of the Parent Common Stock in connection with the Merger shall fail
to receive the requisite vote for approval by the stockholders of Parent at
the Parent Stockholders Meeting;
(g) by Parent, if (i) the Board of Directors of the Company withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Parent or shall have resolved to do any of the foregoing;
(ii) the Board of Directors of the Company shall have recommended to the
stockholders of the Company any Competing Transaction or shall have resolved
to do so; (iii) a tender offer or exchange offer for 20% or more of the
outstanding shares of capital stock of the Company is commenced, and the
Board of Directors of the Company recommends that stockholders tender their
shares into such tender or exchange offer; or (iv) any person (other than
Parent or an affiliate thereof) shall have acquired beneficial ownership or
the right to acquire beneficial ownership of, or any "group" (as such term
is used in Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns or
has the right to acquire beneficial ownership of, 20% or more of the then
outstanding shares of capital stock of the Company; or
(h) by the Company, if the Board of Directors of the Company (x) fails
to make or withdraws its recommendation referred to in SECTION 6.02(A) if
there exists at such time a Competing Transaction, or (y) recommends to the
Company's stockholders approval or acceptance of a Competing Transaction,
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in each case only if the Board of Directors of the Company, after
consultation with and based upon the advice of independent legal counsel,
determines in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under
applicable law.
The right of any party hereto to terminate this Agreement pursuant to this
SECTION 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 8.02. EFFECT OF TERMINATION. Except as provided in SECTION 8.05 or
SECTION 9.01 of this Agreement, in the event of the termination of this
Agreement pursuant to SECTION 8.01, this Agreement shall forthwith become void,
there shall be no liability on the part of the Parent Companies or the Company
to the other and all rights and obligations of any party hereto shall cease,
except that nothing herein shall relieve any party of any liability for (i) any
breach of such party's covenants or agreements contained in this Agreement, or
(ii) any willful breach of such party's representations or warranties contained
in this Agreement.
SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; PROVIDED, HOWEVER, that, after approval
of the Merger by the stockholders of the Company, (i) no amendment, which under
applicable law may not be made without the approval of the stockholders of the
Company, may be made without such approval, and (ii) no amendment, which under
the applicable rules of the NYSE, may not be made without the approval of the
stockholders of Parent, may be made without such approval. This Agreement may
not be amended except by an instrument in writing signed by the parties hereto.
SECTION 8.04. WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension or
waiver shall be valid only if set forth in an instrument in writing signed by
the party or parties to be bound thereby. For purposes of this SECTION 8.04, the
Parent Companies as a group shall be deemed to be one party.
SECTION 8.05. FEES, EXPENSES AND OTHER PAYMENTS.
(a) Except as provided in SECTION 8.05(C) of this Agreement, all Expenses
(as defined in paragraph (b) of this SECTION 8.05) incurred by the parties
hereto shall be borne solely and entirely by the party which has incurred such
Expenses; PROVIDED, HOWEVER, that (i) the allocable share of the Parent
Companies as a group and the Company for all Expenses related to printing,
filing and mailing the Registration Statement, the Company Proxy Statement and
the Parent Proxy Statement and all SEC and other regulatory filing fees incurred
in connection with the Registration Statement, the Company Proxy Statement and
the Parent Proxy Statement shall be one-half each (ii) any and all filing fees
under the HSR Act shall be borne one-half each by Parent and the Company and
(iii) in the event that the Company Stockholders Meeting is held and this
Agreement and the transactions contemplated hereby are not approved by the
requisite vote of the stockholders of the Company (and at the time of such
meeting, there shall not exist a Competing Transaction), then the Company shall
pay all of Parent's Expenses up to $1 million if, but only if (x) the conditions
set forth in SECTIONS 7.01(A), (B), (C) and (D) and SECTIONS 7.03(A), (B), (C),
(D), and (e) have been satisfied, (y) with respect to SECTION 7.01(E), Price
Waterhouse LLP advises Parent that but for the failure of the Company's
stockholders to approve the Merger or other actions or inactions by the Company
or an affiliate of the Company or within the control of either, the Merger would
be treated for financial accounting purposes as a Pooling Transaction, and (z)
with respect to SECTION 7.03(F), but for the failure of the Company's
stockholders to approve the Merger or other actions or inactions by the Company
or an
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affiliate of the Company or within the control of either, the Merger would
constitute a reorganization with the meaning of Section 368(a) of the Code.
(b) "Expenses" as used in this Agreement shall include all out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to a party hereto and
its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the preparation, printing, filing and mailing of
the Registration Statement, the Company Proxy Statement and the Parent Proxy
Statement, the solicitation of stockholder approvals and all other matters
related to the consummation of the transactions contemplated hereby.
(c) The Company agrees that if this Agreement is terminated pursuant to:
(i) SECTION 8.01(B) and (X) such termination is the result of a willful
breach of any representation, warranty, covenant or agreement of the Company
contained herein and (y) the Company shall have entered into negotiations
relating to a Competing Transaction, in any such case at any time within the
period commencing on the date of this Agreement through the date of
termination of this Agreement; or
(ii) SECTION 8.01(F) because this Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the stockholders of
the Company at the Company Stockholders Meeting and, at the time of such
meeting there shall exist a Competing Transaction, the conditions to the
Company's obligations to close set forth in ARTICLE VIII of this Agreement
have been otherwise satisfied and, within nine months of the Company
Stockholders Meeting, the Company or its Board of Directors enters into an
agreement with the same party, or an affiliate of that party, as is involved
in the Competing Transaction, which agreement relates to (x) any merger,
consolidation, share exchange, business consolidation or similar
transaction, or (y) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of 20% or more of the assets of the Company and its
subsidiaries, taken as a whole (provided, however, that in addition to the
foregoing provisions of this SECTION 8.05(C)(II), (X) the conditions set
forth in SECTIONS 7.01(A), (B), (C) and (D) and SECTIONS 7.03(A), (B), (C),
(D), and (E) have been satisfied, (y) with respect to SECTION 7.01(E), Price
Waterhouse LLP advises Parent that but for the failure of the Company's
stockholders to approve the Merger or other actions or inactions by the
Company or an affiliate of the Company or within the control of either, the
Merger would be treated for financial accounting purposes as a Pooling
Transaction, and (z) with respect to SECTION 7.03(F), but for the failure of
the Company's stockholders to approve the Merger or other actions or
inactions by the Company or an affiliate of the Company or within the
control of either, the Merger would constitute a reorganization with the
meaning of Section 368(a) of the Code); or
(iii) SECTION 8.01(G)(I) and at the time of the withdrawal, modification
or change (or resolution to do so) of its recommendation by the Board of
Directors of the Company, there exists a Competing Transaction; or
(iv) SECTIONS 8.01(G)(II) or (III); or
(v) SECTION 8.01(H);
then the Company shall pay to Parent an amount equal to $15,000,000, which
amount is inclusive of all of Parent's Expenses.
(d) Any payment required to be made pursuant to SECTION 8.05(C) of this
Agreement shall be made as promptly as practicable but not later than three
business days after termination of this Agreement, and shall be made by wire
transfer of immediately available funds to an account designated by Parent.
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ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) Except as set forth in SECTION 9.01(B) of this Agreement, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers, directors, representatives or agents, whether prior to or
after the execution of this Agreement.
(b) The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to ARTICLE VIII, except that the agreements set forth in ARTICLES I and
II and IX and SECTIONS 6.08 and 6.10 shall survive the Effective Time and those
set forth in SECTIONS 5.04(D), 8.02 and 8.05 and ARTICLE IX hereof shall survive
termination. Nothing herein shall be construed to cause the Confidentiality
Agreement to terminate upon the termination of this Agreement pursuant to
ARTICLE VIII.
SECTION 9.02. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally, mailed by registered or certified mail
(postage prepaid, return receipt requested) or mailed by an overnight delivery
service to the parties at the following addresses (or at such other address for
a party as shall be specified by like changes of address) or sent by electronic
transmission to the telecopier number specified below:
(a) If to any of the Parent Companies, to:
Affiliated Computer Services, Inc.
2828 North Haskell
Dallas, Texas 75204
Attention: David Black, Esq.
Facsimile No.: (214)823-5746
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street
Suite 2800
Dallas, Texas 75201
Attention: David G. Luther, Jr.
Facsimile No.: (214) 939-6100
(b) If to the Company, to:
Computer Data Systems, Inc.
One Curie Court
Rockville, Maryland 20850-4389
Attention: Peter A. Bracken
Facsimile No: (301)921-7140
with a copy to:
Miles & Stockbridge, a Professional Corporation
10 Light Street
Baltimore, Maryland 21202-1487
Attention: Glenn C. Campbell
Facsimile No.: (410) 385-3700
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SECTION 9.03. CERTAIN DEFINITIONS. For the purposes of this Agreement, the
term:
(a) "affiliate" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) a person shall be deemed a "beneficial owner" of or to have
"beneficial ownership" of the Company Common Stock or Parent Common Stock,
as the case may be, in accordance with the interpretation of the term
"beneficial ownership" as defined in Rule 13d-3 under the Exchange Act, as
in effect on the date hereof; provided that a person shall be deemed to be
the beneficial owner of, and to have beneficial ownership of, the Company
Common Stock or Parent Common Stock, as the case may be, that such person or
any affiliate of such person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
(c) "business day" means any day other than a day on which banks in the
State of New York are authorized or obligated to be closed;
(d) "control" (including the terms "controlled," "controlled by," and
"under common control with") means the possession, directly or indirectly,
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(e) "ERISA Affiliate" means the Company and each corporation,
partnership, or other trade or business, whether or not incorporated, which
is or has been treated as a single employer or controlled group member with
the Company pursuant to Code Section 414 or ERISA Section 4001.
(f) "knowledge" or "known" means with respect to any matter in question,
if an executive officer of the Company or Parent, as the case may be, has
actual knowledge of such matter;
(g) "federal government contract" is to be given its customary use
within the industry. It is further defined to include any contractual
arrangement (implied or express) with any agency, department, or branch of
the United States Government that is subject to the laws and regulations of
the United States of America, regardless of whether the Company is in
privity of contract with the United States or is operating through a
subcontract, partnership, teaming arrangement, affiliate, or other indirect
arrangement.
(g) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as used in
Section l3(d) of the Exchange Act);
(h) "subsidiary" or "subsidiaries" of the Company, Parent, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which the Company, Parent, the Surviving
Corporation or any such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, more than 50% of the stock or other equity interests the holders
of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity;
and
(i) "Tax" or "Taxes" means any and all taxes, charges, fees, levies,
assessments, duties or other amounts payable to any federal, state, local or
foreign taxing authority or agency, including, without limitation, (x)
income, franchise, profits, gross receipts, minimum, alternative minimum,
estimated, ad valorem, value added, sales, use, service, real or personal
property, capital stock, license, payroll, withholding, disability,
employment, social security, workers compensation, unemployment
compensation, utility, severance, excise, stamp, windfall profits, transfer
and gains taxes, (y) customs, duties, imposts, charges, levies or other
similar assessments of any kind, and (z) interest, penalties and additions
to tax imposed with respect thereto.
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SECTION 9.04. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
SECTION 9.05. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 9.06. ENTIRE AGREEMENT. This Agreement (together with the
Exhibits, the Company Disclosure Schedule, the Parent Disclosure Schedule), the
Confidentiality Agreement and any side letter entered into pursuant to this
Agreement constitute the entire agreement of the parties, and supersede all
prior agreements and undertakings, both written and oral, among the parties or
between any of them, with respect to the subject matter hereof. The Company
agrees that nothing contained in this Agreement, the proxies granted by certain
officers and directors of the Company to Parent on or about the date hereof or
the transactions contemplated hereby or thereby shall be deemed to violate the
Confidentiality Agreement and that such agreements and proxies have been entered
into or granted with the prior written consent of the Company.
SECTION 9.07. ASSIGNMENT. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 9.08. PARTIES IN INTEREST. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied (other than as contemplated by SECTION 6.08 and
SECTION 6.11), is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 9.09. SPECIFIC PERFORMANCE. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
SECTION 9.10. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive to, and not exclusive
of, any rights or remedies otherwise available.
SECTION 9.11. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law. Notwithstanding the foregoing, the effect of the Merger shall be governed
by, and construed in accordance with, Maryland Law.
SECTION 9.12. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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SECTION 9.13. DISCLOSURE. Certain information set forth in the Company
Disclosure Schedule has been included and disclosed solely for informational
purposes and may not be required to be disclosed pursuant to the terms and
conditions of this Agreement. The disclosure of any such information shall not
be deemed to constitute an acknowledgment or agreement that the information is
required to be disclosed in connection with the representations and warranties
made in this Agreement or that the information is material, nor shall any
information so included and disclosed be deemed to establish a standard of
materiality or otherwise used to determine whether any other information is
material.
SECTION 9.14. VOTING. The directors and executive officers of each of
Parent and the Company, solely in their capacity as stockholders, have entered
into side letters agreeing (a) to not sell their shares of capital stock of
Parent and the Company, respectively, prior to the earliest to occur of (i) the
closing of the Merger or (ii) the termination of the Agreement pursuant to its
terms and (b) to vote their shares of capital stock in Parent and the Company,
respectively, in favor of the Merger and the transactions contemplated by this
Agreement at the Parent Stockholders Meeting and the Company Stockholders
Meeting, respectively.
* * * *
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
AFFILIATED COMPUTER SERVICES, INC.,
a Delaware corporation
By: /s/ DARWIN DEASON
--------------------------------------
Darwin Deason
Chief Executive Officer
ACS ACQUISITION CORP.,
a Maryland corporation
By: /s/ JEFFREY A. RICH
--------------------------------------
Jeffrey A. Rich
President
COMPUTER DATA SYSTEMS, INC.,
a Maryland corporation
By: /s/ PETER A. BRACKEN
--------------------------------------
Peter A. Bracken
President
A-42
SCHEDULES
COMPUTER DATA SYSTEMS, INC.
Schedule -- Organization and Qualification; Subsidiaries
3.01
Schedule -- Capitalization
3.03
Schedule -- No Conflict; Required Filings and Consent
3.05
Schedule -- Permits; Compliance
3.06
Schedule -- Absence of Certain Changes or Events
3.08
Schedule -- Litigation
3.09
Schedule -- Employee Benefit Plans; Labor Matters
3.10
Schedule -- Taxes
3.11
Schedule -- Affiliates
3.13
Schedule -- Environmental Matters
3.15
Schedule -- Brokers
3.17
Schedule -- Insurance
3.18
Schedule -- Properties
3.19
Schedule -- Certain Material Contracts
3.20
Schedule -- Principal Customers; Competing Interests
3.21
Schedule -- Intellectual Property Rights
3.22
Schedule -- Federal Government Contracts
3.26
Schedule -- Negative Covenants of Company
5.02
AFFILIATED COMPUTER SERVICES, INC.
Schedule -- Charter and Bylaws
4.02
Schedule -- Capitalization
4.03
Schedule -- No Conflict; Required Filings and Consent
4.05
Schedule -- Permits; Compliance
4.06
Schedule -- Absence of Certain Changes or Events
4.08
Schedule -- Litigation
4.09
Schedule -- Brokers
4.12
Schedule -- Conditions Related to Employee Benefit Plans; Labor Matters
4.16
Schedule -- Environmental Matters
4.18
Schedule -- Insurance
4.19
Schedule -- Intellectual Property Rights
4.20
Schedule -- Affirmative and Negative Covenants of Parent
5.03
Affiliated Computer Services, Inc. and Computer Data Systems, Inc. agree to
furnish supplementary a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
A-43
EXHIBIT A
COMPANY AFFILIATE'S AGREEMENT
Affiliated Computer Services, Inc.
2828 N. Haskell
Dallas, Texas 75204
Ladies and Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be an
"affiliate" of Computer Data Systems, Inc., a Maryland corporation (the
"Company"), as that term is defined for purposes of paragraphs (c) and (d) of
Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act").
Pursuant to the terms and subject to the conditions of that certain
Agreement and Plan of Merger by and among Affiliated Computer Services, Inc., a
Delaware corporation ("Parent"), ACS Acquisition Corp., a Maryland corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and the Company dated as
of September , 1997 (the "Merger Agreement"), providing for, among other
things, the merger of Merger Sub with and into the Company (the "Merger"), I
will be entitled to receive shares of Class A common stock, par value $0.01 per
share, of Parent ("Parent Common Stock"), in exchange for shares of common
stock, $0.10 par value, of the Company ("the Company Common Stock") owned by me
at the Effective Time (as defined in the Merger Agreement) of the Merger as
determined pursuant to the Merger Agreement.
I further understand that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the staff of the SEC has issued certain
guidelines that should be followed to ensure the pooling of the entities.
In consideration of the agreements contained herein, Parent's reliance on
this letter in connection with the consummation of the Merger and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, I hereby represent, warrant and agree that (i) I will not make any
sale, transfer or other disposition of the Company Common Stock owned by me
during the period commencing 30 days before the Effective Time and ending at the
earlier of the Effective Time and the termination of the Merger Agreement, and
(ii) I will not make any sale, transfer or other disposition of Parent Common
Stock owned by me after the Effective Time until such time as financial
statements that include at least 30 days of combined operations of the Company
and Parent after the Merger shall have been publicly reported, unless I shall
have delivered to Parent prior to any such sale, transfer or other disposition,
a written opinion from Price Waterhouse LLP, independent public accountants for
Parent, or a written no-action letter from the accounting staff of the SEC, in
either case in form and substance reasonably satisfactory to Parent, to the
effect that such sale, transfer or other disposition will not cause the Merger
not to be treated as a "pooling of interests" for financial accounting purposes
in accordance with generally accepted accounting principles and the rules,
regulations and interpretations of the SEC and (iii) I will not make any sale,
transfer or other disposition of any shares of Parent Common Stock received by
me pursuant to the Merger in violation of the Securities Act or the Rules and
Regulations. I have been advised that the issuance of the shares of Parent
Common Stock pursuant to the Merger will have been registered with the SEC under
the Securities Act on a Registration Statement on Form S-4. However, I have also
been advised, and I agree, that since I may be deemed to be an affiliate of the
Company at the time the Merger is submitted for a vote of the stockholders of
the Company, the Parent Common Stock received by me pursuant to the Merger can
be sold by me only (i) pursuant to an effective registration statement under the
Securities Act, (ii) in conformity with the volume and other limitations of Rule
145
A-44
promulgated by the SEC under the Securities Act, or (iii) in reliance upon an
exemption from registration that is available under the Securities Act.
I also understand and agree that stop transfer instructions will be given to
Parent's transfer agent with respect to the Parent Common Stock to be received
by me pursuant to the Merger and that there will be placed on the certificates
representing such shares of Parent Common Stock, or any substitutions therefor,
a legend stating in substance as follows:
"These shares were issued in a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. These shares may only be transferred
in accordance with the terms of such Rule and an Affiliate's Agreement between
the original holder of such shares and [*], a copy of which agreement is on file
at the principal offices of such company."
It is understood and agreed that the legend set forth above shall be removed
upon surrender of certificates bearing such legend by delivery of substitute
certificates without such legend if I shall have delivered to Parent an opinion
of counsel, in form and substance reasonably satisfactory to Parent, to the
effect that the sale or disposition of the shares represented by the surrendered
certificates may be effected without registration of the offering, sale and
delivery of such shares under the Securities Act.
By its execution hereof, Parent agrees that it will, as long as I own any
Parent Common Stock to be received by me pursuant to the Merger, the resale of
which remains subject to Rule 145 under the Securities Act, take all reasonable
efforts to make timely filings with the SEC of all reports required to be filed
by it pursuant to the Securities Exchange Act of 1934, as amended, and will
promptly furnish upon written request of the undersigned a written statement
confirming that such reports have been so timely filed.
If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.
Very truly yours,
By:
--------------------------------------
Name:
Title:
Date:
Address:
ACCEPTED this day
of September , 1997
AFFILIATED COMPUTER SERVICES, INC.
By:
- ---------------------------------
Name:
Title:
A-45
APPENDIX B
[LOGO]
September 20, 1997
The Board of Directors
Affiliated Computer Services, Inc.
2828 North Haskell Avenue
Dallas, Texas 75204
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Affiliated Computer Services, Inc. ("ACS") of the consideration to be
paid by ACS pursuant to the terms and subject to the conditions set forth in the
Agreement and Plan of Merger, dated as of September 20, 1997 (the "Merger
Agreement"), by and among ACS, ACS Acquisition Corp., a wholly owned subsidiary
of ACS ("Merger Sub"), and Computer Data Systems, Inc. (CDS"). As more fully
described in the Merger Agreement, (i) Merger Sub will be merged with and into
CDS (the "Merger") and (ii) each outstanding share of the Common Stock, par
value $0.10 per share, of CDS (the "CDS Common Stock") will be converted into
the right to receive 1.759 (the "Exchange Ratio") shares of the Class A Common
Stock, par value $0.01 per share, of ACS (the "ACS Common Stock").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of ACS and certain senior officers and other representatives and
advisors of CDS concerning the businesses, operations and prospects of ACS and
CDS. We examined certain publicly available business and financial information
relating to ACS and CDS as well as certain financial forecasts and other
information and data for ACS and CDS which were provided to or otherwise
discussed with us by the respective managements of ACS and CDS, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Merger. We reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other things:
current and historical market prices and trading volumes of ACS Common Stock and
CDS Common Stock; the historical and projected earnings and other operating data
of ACS and CDS; and the capitalization and financial condition of ACS and CDS.
We considered, to the extent publicly available, the financial terms of certain
other similar transactions recently effected which we considered relevant in
evaluating the Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations we considered relevant in evaluation those of ACS and CDS. We
also evaluated the potential pro forma financial impact of the Merger on ACS. In
addition to the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the management of ACS and CDS that such forecasts and other
information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective
B-1
The Board of Directors
Affiliated Computer Services, Inc.
September 20, 1997
Page 2
managements of ACS and CDS as to the future financial performance of ACS and CDS
and the strategic implications and operational benefits (including the amount,
timing and achievability thereof) anticipated to result from the Merger. We have
assumed, with your consent, that the Merger will be treated as a pooling of
interests in accordance with generally accepted accounting principles and as a
tax-free reorganization for federal income tax purposes. Our opinion, as set
forth herein relates to the relative values of ACS and CDS. We are not
expressing any opinion as to what the value of the ACS Common Stock actually
will be when issued to CDS stockholders pursuant to the Merger or the price at
which the ACS Common Stock will trade subsequent to the Merger. We have not made
or been provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of ACS or CDS nor have we made any
physical inspection of the properties or assets of ACS or CDS. We were not
requested to consider, and our opinion does not address, the relative merits of
the Merger as compared to any alternative business strategies that might exist
for ACS or the effect of any other transaction in which ACS might engage. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to ACS with
respect to this opinion and will receive a fee upon the delivery of this
opinion. In the ordinary course of our business, we and our affiliates may
actively trade or hold the securities of ACS and CDS for our own account or for
the account of our customers and, accordingly, may at any time hold a long or
short position in such securities. In addition, we and our affiliates (including
Travelers Group Inc. and its Affiliates) may maintain relationships with ACS and
CDS.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of ACS in its evaluation of the proposed
Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on any
matter relating to the proposed Merger. Our opinion may not be published or
otherwise used or referred to, nor shall any public reference to Smith Barney be
made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of the
opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to ACS.
Very truly yours,
/s/ SMITH BARNEY INC.
B-2
APPENDIX C
LEGG MASON WOOD WALKER, INCORPORATED
111 SOUTH CALVERT STREET
BALTIMORE, MARYLAND 21202
October 1, 1997
Board of Directors
Computer Data Systems, Inc.
One Curie Court
Rockville, Maryland 20650-4389
Members of the Board:
We understand that Affiliated Computer Services, Inc. ("ACS") proposes to
acquire all of the outstanding capital stock of Computer Data Systems, Inc.
("CDSI" or the "Company") by means of a merger through a wholly-owned subsidiary
of ACS (the "Sub") and the issuance of shares of ACS Class A common stock in
exchange for all of the issued and outstanding shares of CDSI common stock (the
"Merger Transaction"). Pursuant to the Merger Transaction, each of the
outstanding shares of CDSI will be converted into the right to receive 1.759
shares of ACS Class A common stock (the "Merger Consideration"). The terms and
conditions of the Merger Transaction are set forth in more detail in the
Agreement and Plan of Merger dated as of September 20, 1997 between ACS, the Sub
and CDSI (the "Agreement").
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, of the Merger Consideration to CDSI's
stockholders. This opinion is directed only to the consideration to be received
by CDSI's stockholders pursuant to the Merger Transaction.
In connection with this opinion, we reviewed, among other things: (a) the
Merger Agreement; (b) the Annual Reports to Stockholders and the Annual Reports
on Form 10-K of CDSI for the five fiscal years ended June 30, 1996; (c) the
Annual Reports to Stockholders and the Annual Reports on Form 10-K of ACS for
the five years ended June 30, 1996; (d) draft copies of the Annual Reports on
Form 10-K for CDSI and ACS for the fiscal years ended June 30, 1997; (e) certain
interim reports to stockholders and Quarterly Reports on Form 10-Q of CDSI and
ACS; and (f) certain other communications from CDSI and ACS to their respective
stockholders. We also had discussions with members of the senior managements of
CDSI and ACS regarding the past and current business operations, financial
condition and future prospects of their respective companies. In addition, we
reviewed the reported price and trading activity for the shares of CDSI common
stock and the shares of ACS Class A common stock, compared certain financial and
stock market information for CDSI and ACS with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the information
technology services industry specifically, and in other industries generally,
and performed such other studies and analyses as we considered appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for the independent verification of such information and have
further relied upon the assurances of the managements of ACS and the Company
that they are not aware of any facts that would make such information inaccurate
or misleading. With respect to the financial projections of ACS, upon advice of
the Company we have assumed that such projections have been reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the management of ACS as to the future financial performance of ACS and that ACS
will perform substantially in accordance with such projections. With respect to
the financial projections for the Company, upon advice of the Company we have
assumed that such projections
C-1
Board of Directors
October 1, 1997
have been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company and that the Company will perform
substantially in accordance with such projections. In arriving at our opinion,
we have not conducted a physical inspection of the properties or facilities of
ACS or the Company and have not made or obtained any evaluations or appraisals
of the assets or liabilities of ACS or the Company. Upon the advice of the
Company and its legal and accounting advisors, we have assumed that the Merger
Transaction will qualify (i) for pooling-of-interests accounting treatment and
(ii) as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, and therefore as a tax-free transaction to the
stockholders of CDSI. Our opinion necessarily is based upon market, economic and
other conditions as they exist on, and can be evaluated as of, the date of this
letter.
We have acted as financial advisor to the Company in connection with the
Merger Transaction and will receive a fee for our services, including the
delivery of this Opinion. In addition, the Company has agreed to indemnify us
for certain liabilities that may arise out of the rendering of this opinion. We
have in the past and may in the future provide investment banking and other
related services to the Company, for which we expect to receive customary fees
or compensation. In the ordinary course of our business, we may actively trade
in the equity securities of the Company and ACS for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is directed solely to the Board of
Directors of CDSI. This letter is not to be quoted or referred to, in whole or
in part, in any registration statement, prospectus, or in any other document
used in connection with the offering or sale of securities, nor shall this
letter be used for any other purposes, without the prior written consent of Legg
Mason Wood Walker, Incorporated; provided that this opinion may be included in
its entirety in any proxy statement or in any disclosure statement of CDSI or
any filing made by CDSI with the Securities and Exchange Commission with respect
to the Merger Transaction.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Merger Consideration to be
paid to CDSI's stockholders is fair.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ SCOTT R. COUSINO
-----------------------------------------
Scott R. Cousino
MANAGING DIRECTOR
C-2
APPENDIX D
AFFILIATED COMPUTER SERVICES, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Non-Employee Directors and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be incentive stock
options (as defined under Section 422 of the Code) or non-statutory stock
options, as determined by the Administrator at the time of grant of an option.
Stock purchase rights, stock appreciation rights, deferred stock, dividend
equivalents and restricted stock may also be granted under the Plan. It is
intended that certain Performance Based Grants made to "covered employees" (as
defined in Code Section 162(m)(3)) will qualify as performance based
compensation under Code Section 162(m)(4)(C), and the pertinent provisions of
the Plan shall be interpreted accordingly.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan, acting pursuant to Section 4(a) of the
Plan at the time in question.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee or committees appointed by the Board
of Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "COMMON STOCK" means the Class A Common Stock of the Company,
provided that if the Company's certificate of incorporation is amended after
the date hereof to reclassify any shares of the Company's stock, "Common
Stock" shall include any shares reclassified as Class A Common Stock or any
other class of common stock of the Company.
(f) "COMPANY" means Affiliated Computer Services, Inc., a Delaware
corporation.
(g) "CONSULTANT" means a member of any advisory board of the Company or
any Parent or Subsidiary and any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services; provided that the term Consultant shall not
include directors who are paid only a director's fee by the Company, except
if such director is a member of any advisory board of the Company or any
Parent or Subsidiary.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of the employment relationship by the Company or
any Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Board, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or
(iv) in the case of transfers between locations of the Company or between
the Company, its Subsidiaries or its successor.
(i) "DEFERRED STOCK" means a grant of Shares to be issued at a deferred
date pursuant to Section 15(a) below.
(j) "DIVIDEND EQUIVALENT" means a grant of rights described in Section
15(b) below.
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(k) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system including, without limitation, the New York
Stock Exchange ("NYSE") its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported, as
quoted on such system or exchange for the last market trading day prior
to the time of determination) as reported in the Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not on
the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Common Stock; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator based upon the book value of the Company (or such other
valuation method as is deemed appropriate by the Administrator).
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "NON-EMPLOYEE DIRECTOR" means a director of the Company who is not
an Employee.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTIONED STOCK" means the Common Stock subject to an Option.
(s) "OPTIONEE" means an Employee or Consultant who receives an Option.
(t) "PARENT" means, for purposes of issuance of Incentive Stock Options
under the Plan, a "parent corporation," whether now or hereafter existing,
as defined in Section 425(e) of the Code.
(u) "PERFORMANCE BASED GRANT" means an Option or Stock Appreciation
Right granted to a "covered employee" (as defined in Code Section 162(m)(3))
that the Administrator designates as a "Performance Based Grant." Provided,
that nothing in the Plan shall be construed to prevent the issuance of
Options or other rights to such "covered employees" that are not Performance
Based Grants if the Administrator so elects.
(v) "PLAN" means this 1997 Stock Plan, as amended.
(w) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to
a grant of Stock Purchase Rights under Section 12 of the Plan or a
Restricted Stock Grant pursuant to Section 14 of the Plan.
(x) "SEVERANCE AGREEMENT" means a severance agreement or arrangement
between the Company and any executive officer of the Company.
(y) "SHARE" means a share of the Common Stock, as adjusted in accordance
with Section 17 of the Plan.
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(z) "STOCK APPRECIATION RIGHT" means an award of a right to benefit from
the appreciation of Common Stock granted pursuant to Section 13 of the Plan.
(aa) "SUBSIDIARY" means, for purposes of issuance of Incentive Stock
Options under the Plan, a "subsidiary corporation", whether now or hereafter
existing, as defined in Section 425(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. The maximum aggregate number of Shares which
may be optioned, sold, granted, or otherwise issued under the Plan shall
initially be 3,675,000, which amount may, at the discretion of the Board, be
increased from time to time to a number such that the sum of (a) the number of
shares of Common Stock covered by then outstanding options granted pursuant to
the Company's 1988 Stock Option Plan and held by current employees and
consultants, as defined in such plan, (b) the number of shares of Common Stock
covered by their outstanding options granted pursuant to this Plan and held by
current Employees, Consultants and Non-Employee Directors, and (c) the number of
shares of Common Stock available for issuance pursuant to options to be granted
pursuant to this Plan equals 12.8% of the total number of Shares of Common Stock
of the Company and shares of any other class of common stock of the Company
outstanding from time to time; provided however, subject to adjustment under
Section 17 of the Plan, the number of Shares which may be optioned, sold,
granted, or otherwise issued under the Plan shall never be less than 3,675,000.
The Shares may be authorized, but unissued, or reacquired Common Stock.
Notwithstanding the foregoing, subject to adjustment under Section 17 of the
Plan, no more than 3,675,000 Shares will be available for the granting of
Incentive Stock Options under the Plan.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, or other rights to Shares granted under the Plan
should lapse or be forfeited, the unpurchased, unissued or forfeited Shares
which were subject thereto shall, unless the Plan shall have been terminated,
become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With
respect to grants of Options, Stock Purchase Rights and other rights and
awards hereunder to Employees who are also officers or directors of the
Company, the Plan shall be administered by (A) the Board if the Board may
administer the Plan in compliance with Rule 16b-3 promulgated under the
Exchange Act or any successor thereto ("Rule 16b-3") with respect to a
plan intended to qualify thereunder as a discretionary plan, or (B) a
Committee designated by the Board to administer the Plan, which Committee
shall be constituted in such a manner as to permit the Plan to comply
with Rule 16b-3 with respect to a plan intended to qualify thereunder as
a discretionary plan. With respect to grants to Non-Employee Directors
under the Plan, the Plan shall be administered by the Board in accordance
with Rule 16b-3, provided that no Non-Employee Director shall vote on any
decision affecting his individual benefits under the Plan. Once
appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. Notwithstanding the
foregoing, with respect to Performance Based Grants to any "covered
employee" (as defined in Code Section 162(m)), the Plan shall be
administered by a Committee of the Board comprised solely of two or more
outside directors (as defined in Code Section 162(m)(4)(C)). From time to
time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by Rule 16b-3 with
respect to a plan intended to qualify thereunder as a discretionary plan.
(ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors
nor officers.
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(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are neither directors nor officers of the
Company, the Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which Committee shall be constituted
in such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of Delaware
corporate and securities laws and of the Code (the "Applicable Laws").
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the
Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies, however caused, and
remove all members of the Committee and thereafter directly administer
the Plan, all to the extent permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(m) of the Plan;
(ii) to select the Consultants, Employees and Non-Employee Directors
to whom Options and Stock Purchase Rights may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options, Stock Purchase
Rights and other rights, or any combination thereof, are granted
hereunder;
(iv) to determine the number of Shares of Common Stock to be covered
by each such award granted hereunder; provided, however, that no Optionee
who is a "covered employee" as defined in Code Section 162(m)(3) shall
receive in any one fiscal year of the Company grants of Options and Stock
Appreciation Rights with respect to more than the initial number of
shares subject to the Plan, as set forth in Section 3;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any
vesting acceleration or waiver of forfeiture restrictions regarding any
Option or other award and/or the Shares of Common Stock relating thereto,
based in each case on such factors as the Administrator shall determine,
in its sole discretion) which shall be set forth in a written award
document or agreement approved by the Administrator;
(vii) to determine whether and under what circumstances an Option may
be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount, if any, of any deemed earnings on any deferred amount during any
deferral period) in accordance with Section 15(a) below;
(ix) to reduce the exercise price of any Option or Stock
Appreciation Right to the then current Fair Market Value if the Fair
Market Value of the Common Stock covered by such Option or Stock
Appreciation Right shall have declined since the date the Option was
granted. Any such reduction in exercise price shall be subject to the
requirements of section 8(a) below as if a new option were granted, and
shall be treated as the granting of additional options for purposes of
the share limitation set forth in section 4(b)(iv) above; and
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(x) to determine the terms and restrictions applicable to Restricted
Stock, Deferred Stock, and Dividend Equivalents.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options, Stock Purchase Rights, Stock
Appreciation Rights, Deferred Stock, Dividend Equivalents and Restricted
Stock may be granted to Employees, Consultants and Non-Employee Directors.
Incentive Stock Options may be granted only to Employees. An Employee,
Consultant or Non-Employee Director who has been granted an Option or other
awards may, if he is otherwise eligible, be granted an additional Option or
Options or other awards.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000 (whether due to acceleration of exercisability,
miscalculation or error), such excess Options shall be treated as
Nonstatutory Stock Options. In the event that only a portion of the options
granted at the same time can be applied to the $100,000 limit, the Company
shall issue separate share certificate(s) for such number of shares as does
not exceed the $100,000 limit, and shall designate such shares as Incentive
Stock Options stock in its share transfer records.
(c) For purposes of Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company,
nor shall it interfere in any way with his right or the Company's right to
terminate his employment or consulting relationship at any time, with or
without cause.
6. TERM OF PLAN. Subject to any applicable law, the Plan shall continue in
effect until terminated pursuant to Section 19; provided, however, that no
grants of Incentive Stock Options shall be made under the Plan following the
expiration of ten years from the original effective date of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement. In the
case of an Incentive Stock Option granted to an Optionee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all
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classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the
date of grant.
(ii) In the case of a Nonstatutory Stock Option granted to any
person, the per Share exercise price shall be determined by the
Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall
be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of
Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not
acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) authorization
from the Company to retain from the total number of Shares as to which the
Option is exercised that number of Shares having a Fair Market Value on the
date of exercise equal to the exercise price for the total number of Shares
as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required
to pay the exercise price, (7) delivery of an irrevocable subscription
agreement for the Shares which irrevocably obligates the Optionee to take
and pay for the Shares not more than twelve months after the date of
delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment
for the issuance of Shares to the extent permitted under Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE: RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section
8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
D-6
(b) TERMINATION OF EMPLOYMENT. In the event of termination of an
Optionee's consulting relationship, Continuous Status as an Employee or
status as a Non-Employee Director of the Company, such Optionee may, subject
to Section 9(g) below, exercise vested Options that are not Incentive Stock
Options to the extent and subject to the provisions set out in Optionee's
Notice of Grant and Stock Option Agreement. In the case of an Incentive
Stock Option, such Option may be exercised only within sixty (60) days (or
such other period of time as is determined by the Administrator, with such
determination being made at the time of grant of the Option and not
exceeding ninety (90) days) after the date of such termination (but in no
event later than the expiration date of the term of such Option as set forth
in the Option Agreement), and only to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee
was not entitled to exercise an Incentive Stock Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled under the Option Agreement within the time specified herein, the
Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section
9(b) above, in the case of an Incentive Stock Option, in the event of
termination of an Optionee's Continuous Status as an Employee as a result of
his total and permanent disability (as defined in Section 22(e)(3) of the
Code), Optionee may, but only within twelve (12) months from the date of
such termination (but in no event later than the expiration date of the term
of such Option as set forth in the Option Agreement), exercise an Incentive
Stock Option to the extent otherwise entitled to exercise it at the date of
such termination. To the extent that Optionee was not entitled to exercise
an Incentive Stock Option at the date of termination, or if Optionee does
not exercise such Incentive Stock Option to the extent so entitled within
the time specified herein, the Incentive Stock Option shall terminate.
However, the twelve (12) month limitation set out in this paragraph shall
not apply to limit the exercise period set out in the Stock Option Agreement
in the case of any Nonstatutory Stock Option.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, according to its terms, by the Optionee's estate or
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Option was vested at the date of
death. To the extent the Option was unvested at the date of death, such
unvested portion of the Option shall terminate.
(e) RULE 16B-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(g) TERMINATION FOR CAUSE. Notwithstanding subsections (b), (c) and
(d) of this Section 9, any Optionee whose consulting relationship,
Continuous Status as an Employee or status as a Non-Employee Director is
terminated by the Company for Cause shall forfeit all Options granted under
this Plan, whether or not vested. For purposes of this Plan, an Optionee
shall be deemed to have been terminated for Cause if the Optionee commits an
act of gross negligence or willful misconduct, including, but not limited
to, a dereliction of duty or the committing of and conviction for a crime
involving breach of fiduciary duty to an employer, a felony or a crime
involving moral turpitude.
(h) RELOAD OPTIONS. In the event a person who is an employee of the
Company or a Subsidiary shall exercise an Option (the "Original Option") by
paying all or a portion of the Exercise Price of the shares of Common Stock
subject to the Original Option by tendering to the Company shares of Common
Stock owned by such person, an Option to purchase the number of shares of
Common Stock used for such purpose by the employee (the "Reload Option")
shall be granted to the employee as of
D-7
the exercise date; provided that a Reload Option has been granted to such
Optionee with respect to such Option, as evidenced in his written option
agreement. The Reload Option may be exercised at any time during the term of
the Original Option, under such terms and conditions, and subject to such
limitations, if any, as may be placed on such exercisability in the
Agreement.
10. VESTING OF OPTIONS IN CERTAIN EVENTS.
(a) If the Company undergoes a Change of Control, then all of the
outstanding Options held by any Optionee, whether or not such Options are
vested at such time, shall become vested and exercisable, effective the day
immediately prior to such Change of Control. For purposes of the preceding
sentence, a "Change of Control" shall have occurred if the Company is
merged, consolidated, or reorganized into or with another person, entity, or
group of entities under common control or if a majority of the outstanding
capital stock or all or substantially all of the assets of the Company are
sold to any other person, entity, or group of entities under common control
and as a result of such merger, consolidation, reorganization, or sale of
capital stock or assets, more than 51% of the combined voting power of the
then outstanding voting securities of the surviving person or entity
immediately after such transaction are held in the aggregate by a person,
entity or group of entities under common control who beneficially owned less
than 51% of the combined voting power of the Company prior to such
transaction.
(b) The Administrator shall, with respect to any participant under the
Plan who has a Severance Agreement with the Company, and in its discretion
may, with respect to any other participant under the Plan, include
provisions similar to (a) above in the terms of an award of Stock Purchase
Rights, Stock Appreciation Rights, Restricted Stock, Deferred Stock, or
Dividend Equivalents hereunder.
11. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
Will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
Notwithstanding the foregoing, Nonstatutory Options granted hereunder shall,
with respect to any Participant under the Plan who has a Severance Agreement
with the Company, and may in the discretion of the Administrator, with respect
to any other participant, be granted on terms that permit transfer without
consideration of such Nonstatutory Options by Optionee to:
(i) the spouse, children or grandchildren of the Optionee;
(ii) a trust or Uniform Gifts to Minors Act custodial account for the
exclusive benefit of the child(ren) or grandchild(ren) of the Optionee; or
(iii) a partnership or other entity in which the Optionee's spouse, children
and/or grandchildren are the only partners,
and permit the pledge of such Nonstatutory Stock Options by an Optionee to the
Company or a third party, as security for indebtedness, provided that (A) the
stock option agreement pursuant to which such Nonstatutory Options are granted
must be approved by the Administrator, and must, except with respect to
agreements with any Participant under the Plan who has a Severance Agreement
with the Company, expressly provide for transferability in a manner consistent
with this Section, and (B) subsequent transfers of transferred Options shall be
prohibited except by will or the laws of descent and distribution. Following
transfer, any such Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of each Agreement and Section 9 hereof the term "Optionee" shall be
deemed to refer to the transferee (however, the events of termination of
employment specified in Sections 9(b), (c) or (d) hereof shall continue to be
applied with respect to the original Optionee). Except as set forth above,
Options may not be transferred except by will or the laws of descent and
distribution.
12. STOCK PURCHASE RIGHTS.
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(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing of the terms, conditions and restrictions related to the offer,
including the number of Shares that such person shall be entitled to purchase,
the price to be paid (which price shall be determined by the Administrator), and
the time within which such person must accept such offer, which shall in no
event exceed thirty (30) days from the date upon which the Administrator made
the determination to grant the Stock Purchase Right. The offer shall be accepted
by execution of a Restricted Stock purchase agreement in the form determined by
the Administrator. Shares purchased pursuant to the grant of a Stock Purchase
Right shall be referred to herein as "Restricted Stock".
(b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the
Restricted Stock purchase agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock purchase
agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at such rate as the Committee may determine.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder when
his or her purchase is entered upon the records of the duly authorized transfer
agent of the Company. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Stock Purchase Right is
exercised, except as provided in Section 16 of the Plan.
13. STOCK APPRECIATION RIGHTS.
The grant of Stock Appreciation Rights under the Plan shall be subject to
the following terms and conditions, and shall contain such additional terms and
conditions, not inconsistent with the express terms of the Plan, as the
Committee shall deem desirable:
(a) STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an Award
entitling a Participant to receive an amount equal to (or if the Committee shall
determine at the time of grant, less than) the excess of the Fair Market Value
of a share of Common Stock on the date of exercise over the Fair Market Value of
a share of Common Stock on the date of grant of the Stock Appreciation Right,
or, in the case of a grant other than a Performance Based Grant, such other
price as may be set by the Committee, multiplied by the number of shares of
Common Stock with respect to which the Stock Appreciation Right shall have been
exercised.
(b) GRANT. A Stock Appreciation Right may be granted separately, or in
tandem with Options or other rights hereunder, whereby the exercise of one such
Award affects the right to exercise the other, subject to limitation under Code
Section 422 with respect to Incentive Stock Options.
(c) EXERCISE. A Stock Appreciation Right may be exercised by a Participant
in accordance with procedures established by the Committee, except that in no
event shall a Stock Appreciation Right be exercisable prior to the first
Anniversary Date of the date of grant. The Committee shall establish procedures
to provide that, with respect to any Participant subject to Section 16(b) of the
Exchange Act who would receive cash in whole or in part upon exercise of the
Stock Appreciation Right, such exercise may only occur during an exercise period
beginning on the third business day following the Company's public release of
quarterly or annual summary statements of sales and earnings and ending on the
last day
D-9
of the month following the month in which such public release occurred or during
such other period as the Administrator may provide. To the extent it is not
inconsistent with the preceding sentence, the Committee, in its discretion, may
provide that a Stock Appreciation Right shall be automatically exercised on one
or more specified dates, or that a Stock Appreciation Right may be exercised
during only limited time periods.
(d) FORM OF PAYMENT. Payment to the Participant upon exercise of a Stock
Appreciation Right may be made (i) in cash, by certified or cashier's check or
by money order, (ii) in shares of Common Stock, (iii) in the form of a Deferred
Compensation Stock Option, or (iv) any combination of the above, as the
Committee shall determine. The Committee may elect to make this determination
either at the time the Stock Appreciation Right is granted, or with respect to
payments contemplated in clauses (i) and (ii) above, at the time of the
exercise.
14. RESTRICTED STOCK.
Restricted Stock Grants may be made to Employees, Non-Employee Directors and
Consultants under the Plan. Restricted Stock Grants shall be subject to the
following terms and conditions, and may contain such additional terms and
conditions, not inconsistent with the express provisions of the Plan, as the
Committee shall deem desirable:
(a) RESTRICTED STOCK GRANTS. A Restricted Stock Grant is an award of
shares of Common Stock transferred to a Participant subject to such terms and
conditions as the Administrator deems appropriate, including, without
limitation, the requirement that the Participant forfeit such units upon
termination of employment for specified reasons within a specified period of
time, and restrictions on the sale, assignment, transfer or other disposition of
the units as set forth in (c) below. Further, as a condition to the grant of
Restricted Stock to any Participant who, at the date of grant has not been
employed by the Company and has not performed services for the Company, the
Administrator shall require such Participant to pay at least an amount equal to
the par value of the shares of Common Stock subject to the Restricted Stock
Grant within 30 days of the date of the grant, and failure to pay such amount
shall result in an automatic termination of the Restricted Stock Grant.
(b) GRANT OF AWARDS. Restricted Stock Grants shall be granted under the
Plan in such form and on such terms and conditions as the Administrator may from
time to time approve. Subject to the terms of the Plan, the Administrator shall
determine the number of Restricted Stock Grants to be granted to a Participant
and the Administrator may impose different terms and conditions on any
particular Restricted Award made to any Participant. Each Participant receiving
a Restricted Stock Grant shall be issued a stock certificate in respect of the
shares of Common Stock. The certificate shall be registered in the name of the
Participant, shall be accompanied by a stock power duly executed by the
Participant, and shall bear an appropriate legend referring to the terms,
conditions and restrictions applicable to the Award. The certificate evidencing
the shares shall be held in custody by the Company until the restrictions
imposed thereon shall have lapsed or been removed.
(c) RESTRICTION PERIOD. Restricted Awards shall provide that in order for
a Participant to vest in the Awards, the Participant must continuously provide
services for the Company or its Subsidiaries, subject to relief for specified
reasons established by the Administrator in the terms of the grant, such as
disability or a Change of Control, for a period commencing on the date of the
Award and ending on such later date or dates as the Administrator may designate
at the time of the Award, provided that the Administrator determines that such
period is adequate to result in a substantial risk of forfeiture under Code
Section 83(a) ("Restriction Period"). During the Restriction Period, a
Participant may not sell, assign, transfer, pledge, encumber, or otherwise
dispose of shares of Common Stock received under a Restricted Stock Grant. The
Administrator, in its sole discretion, may provide for the lapse of restrictions
in installments during the Restriction Period. Upon expiration of the applicable
Restriction Period (or lapse of restrictions during the Restriction Period where
the restrictions lapse in installments), the Participant
D-10
shall be entitled to receive his or her Restricted Award or the applicable
portion thereof, as the case may be.
(d) RIGHTS AS A SHAREHOLDER. Except as provided above, a Participant shall
have, with respect to the shares of Common Stock received under a Restricted
Stock Grant, all of the rights of a shareholder of the Company, including the
right to vote the shares, and the right to receive any cash dividends. Stock
dividends issued with respect to the shares covered by a Restricted Stock Grant
shall be treated as additional shares under the Restricted Stock Grant and shall
be subject to the same restrictions and other terms and conditions that apply to
shares under the Restricted Stock Grant with respect to which the dividends are
issued.
15. OTHER EQUITY BASED RIGHTS.
(a) DEFERRED STOCK. The Administrator is authorized to grant Deferred
Stock to Participants, subject to the following terms and conditions:
(i) AWARD AND RESTRICTIONS. Delivery of Shares will occur upon
expiration of the deferral period specified for Deferred Stock by the
Administrator (or, if permitted by the Administrator, as elected by the
Participant). Prior to delivery of the Deferred Stock, the Participant shall
not have any of the rights of a Shareholder and shall have the status of an
unsecured creditor having the Company's mere contractual obligation to
deliver Shares at a later date. In addition, Deferred Stock shall be subject
to such restrictions as the Administrator may impose, which restrictions may
lapse at the expiration of the deferral period or at earlier specified
times, separately or in combination, in installments, or otherwise, as the
Administrator shall determine.
(ii) FORFEITURE. Except as otherwise determined by the Administrator,
upon termination of employment (as determined under criteria established by
the Administrator) during the applicable deferral period or portion thereof
(as provided in the Award Agreement evidencing Deferred Stock), all Deferred
Stock that is at that time subject to deferral (other than a deferral at the
election of the Participant) shall be forfeited; provided, however, that the
Administrator may provide, by rule or regulation or in any Award Agreement,
or may determine in any individual case, that restrictions or forfeiture
conditions relating to Deferred Stock will be waived in whole or in part in
the event of terminations resulting from specified causes.
(iii) Deferred Stock awards shall be made only if the Administrator
determines that any applicable requirements of the Code (pertaining to
deferral of taxation), the Employee Retirement Income Security Act of 1974,
as amended, Rule 16b-3, and other pertinent statutes, rules and regulations
have been complied with, and such awards shall be subject to all additional
terms, conditions and restrictions necessary to comply therewith.
(b) DIVIDEND EQUIVALENTS. The Administrator is authorized to grant
Dividend Equivalents to Participants. The Administrator may provide that
Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Shares or Awards, or otherwise
reinvested.
16. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the Stock Purchase Right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
D-11
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Right as to which the election is
made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject
to such additional conditions or restrictions as may be required
thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code
because no election is filed under Section 83(b) of the Code, the
Optionee shall receive the full number of Shares with respect to which
the Option or Stock Purchase Right is exercised but such Optionee shall
be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
17. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Board shall notify the Optionee at least fifteen (15) days prior to such
proposed action. To the extent it has not been previously exercised, the Option
will terminate immediately prior to the consummation of such proposed action. In
the event of a merger of the Company with or into another corporation, the
Option shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation.
In the event that such successor corporation does not agree to assume the Option
or to substitute an equivalent option, the Board may, in lieu of such assumption
or substitution, provide for the Optionee to have the right to exercise the
Option as to all of the Optioned Stock, including Shares as to which the Option
would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of such assumption or substitution in the event of a merger,
the Board shall notify the Optionee that the Option shall be fully exercisable
for a period of fifteen (15) days from the date of such notice, and the Option
will terminate upon the expiration of such period.
18. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee, Consultant or
Non-Employee Director to whom an Option is so granted within a reasonable time
after the date of such grant.
D-12
19. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the material rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply [with Rule 16b-3
under the Exchange Act or] with Sections 162(m) or 422 of the Code (or any
other applicable law or regulation, including the requirements of the NYSE
or other established stock exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
20. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law. To the extent required under Code
Section 162(m)(4)(C), Performance Based Grants made hereunder with respect to
any "covered employee" are subject to stockholder approval of material
provisions of the Plan.
21. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
22. AGREEMENTS. Options, Stock Purchase Rights, Stock Appreciation Rights,
Deferred Stock, Restricted Stock and Dividend Equivalents shall be evidenced by
written agreements or award documents in such form as the Administrator shall
approve from time to time.
D-13
FRONT OF PROXY CARD
AFFILIATED COMPUTER SERVICES, INC.
BOARD OF DIRECTORS PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AT CITYPLACE, 2711 NORTH HASKELL AVENUE, DALLAS, TEXAS 75204, AT
10:00 A.M., ON TUESDAY, DECEMBER 16, 1997
The undersigned, a stockholder of Affiliated Computer Services, Inc. (the
"Corporation" or "ACS"), hereby appoints Darwin Deason and Jeffrey A. Rich, and
each of them, as proxies with full power of substitution, to vote all shares of
Class A Common Stock of the Corporation that the undersigned is entitled to vote
at the Annual Meeting (the "Annual Meeting") of Stockholders of the Corporation
to be held on Tuesday, December 16, 1997, at 10:00 a.m., and at any and all
adjournments or postponements thereof, on the following proposals:
(1) Approval of the Stock Issuance, constituting the issuance of up to
approximately 12,250,000 shares of ACS Class A Common Stock pursuant to the
Merger:
/ / FOR / / AGAINST / / ABSTAIN
(2) Approval of an amendment to the Corporation's Restated Certificate of
Incorporation classifying the ACS Board of Directors into three classes:
/ / FOR / / AGAINST / / ABSTAIN
(3) Election of directors of the Corporation to serve until each of their
respective successors shall have been duly elected and qualified. NOTE:
Please complete both (a) and (b) below.
(a) In the event that Proposals (1) and (2) are approved, election of the
following nine directors to serve such Class of directorship as indicated
next to the nominee's name, or, in the event that Proposal (1) is
approved, but Proposal (2) is not approved, election of the following
nine directors to serve for a term expiring at the Corporation's 1998
Annual Meeting of Stockholders:
DARWIN DEASON (Class I) FRANK A. ROSSI (Class II)
JEFFREY A. RICH (Class I) JOSEPH P. O'NEILL (Class II)
HENRY G. HORTENSTINE (Class II)
CLIFFORD M. KENDALL (Class II)
DARWIN DEASON (Class I) MARK A. KING (Class III)
JEFFREY A. RICH (Class I) DAVID W. BLACK (Class III)
PETER A. BRACKEN (Class III)
/ / FOR all listed nominees / / WITHHOLD AUTHORITY to vote for all
listed nominees (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME HERE: ___________________________)
(b) In the event that Proposal (1) is not approved and Proposal (2) is
approved, election of the following seven directors to serve such Class
of directorship as indicated next to the nominee's name, or, in the event
that neither Proposal (1) nor Proposal (2) is approved, election of the
following seven directors to serve for a term expiring at the
Corporation's 1998 Annual Meeting of Stockholders:
DARWIN DEASON (Class I) FRANK A. ROSSI (Class II)
JEFFREY A. RICH (Class I) JOSEPH P. O'NEILL (Class II)
HENRY G. HORTENSTINE (Class II)
DARWIN DEASON (Class I) MARK A. KING (Class III)
JEFFREY A. RICH (Class I) DAVID W. BLACK (Class III)
/ / FOR all listed nominees / / WITHHOLD AUTHORITY to vote for all
listed nominees
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME HERE:
________________________________________________________________________)
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
BACK OF PROXY CARD
(CONTINUED FROM REVERSE SIDE)
(4) Approval of an amendment to the Corporation's Bylaws requiring advance
notice by stockholders for proposals and nominations for director to be
included for consideration at a meeting of the Corporation's stockholders:
/ / FOR / / AGAINST / / ABSTAIN
(5) Approval of an amendment to the Corporation's Restated Certificate of
Incorporation to increase the number of authorized shares of ACS Class A
Common Stock from 75,000,000 to 500,000,000 and of ACS Class B Common Stock
from 6,405,686 to 14,000,000: / / FOR / / AGAINST / / ABSTAIN
(6) Authorization of performance-based incentive compensation for executive
officers of the Corporation: / / FOR / / AGAINST / / ABSTAIN
(7) Approval of the Corporation's 1997 Stock Incentive Plan:
/ / FOR / / AGAINST / / ABSTAIN
(8) In their discretion, the proxies are, and each of them is, authorized to
vote upon such other business or matters as may properly come before the
meeting or any postponements or adjournments thereof.
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ACS AND
WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE ON THE REVERSE SIDE. IF
A CHOICE IS NOT INDICATED, IT WILL BE VOTED "FOR" ITEMS (1) THROUGH (9). THIS
PROXY IS REVOCABLE AT ANY TIME BEFORE IT IS EXERCISED AS SET FORTH IN THE JOINT
PROXY STATEMENT/PROSPECTUS.
Receipt herewith of the Notice of Annual Meeting of Stockholders of ACS, dated
October , 1997, is hereby acknowledged.
PLEASE SIGN, DATE AND MAIL TODAY.
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Signature(s) (Date)
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
COMPUTER DATA SYSTEMS, INC.
PROXY
The undersigned hereby appoints Clifford M. Kendall, Peter A. Bracken, and
John C. Kezer, and each of them, as Proxies of the undersigned, each with the
power of substitution, and hereby authorizes them to represent and to vote, as
designated below, all the shares of Common Stock of Computer Data Systems,
Inc. ("CDSI"), held of record by the undersigned on October 22, 1997, at the
Special Meeting of Stockholders to be held December 16, 1997, or any
adjournment or adjournments thereof.
PLEASE SIGN YOUR NAME(S) ON THE REVERSE SIDE.
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FOLD AND DETACH HERE
Please mark
your votes as
indicated in /X/
this example
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE MERGER.
1. Proposal to approve the merger of ACS
Acquisition Corp. with and into CDSI pursuant
to the Agreement and Plan of Merger dated FOR AGAINST ABSTAIN
September 20, 1997, between Affiliated Computer / / / / / /
Services, Inc., ACS Acquisition Corp. and CDSI,
as described in Joint Proxy Statement/Prospectus.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IF PROPERLY
EXECUTED, IT WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE MERGER.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT OR
ADJOURNMENTS THEREOF.
Please sign your name exactly as it appears below. If shares are held
jointly, all holders must sign. When signing in a fiduciary or representative
capacity (attorney, executor, administrator, trustee, guardian, officer of
corporation, etc.), please give full title as such. The undersigned hereby
revokes all proxies heretofore given by the undersigned to vote at such
meeting or any adjournment or adjournments thereof.
Signature
--------------------------------
Signature if held jointly Dated: , 1997
-------------------------- ------------
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
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FOLD AND DETACH HERE