UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

APPLIED SIGNAL TECHNOLOGY, INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required.

 

 

 

 

 

 

 

 

Solely for purposes of calculating the registration fee, the maximum aggregate value of the transaction was calculated as the sum of (A) 14,729,124 shares of common stock (representing the number of shares, including shares of common stock outstanding and options) multiplied by $38.00.

 

 

 

 

 

 

o  Fee paid previously with preliminary materials:

 

 

 

 

 

 

 

 

 

 

PRELIMINARY PROXY MATERIAL SUBJECT TO COMPLETION

APPLIED SIGNAL TECHNOLOGY, INC.
460 WEST CALIFORNIA AVENUE
SUNNYVALE, CALIFORNIA 94086

 

[ • ], 2011

 

Dear Shareholder:

 

On behalf of the board of directors of Applied Signal Technology, Inc. (the “Company”), I cordially invite you to attend a special meeting of shareholders of the Company, to be held on [ • ], 2011 at 8 a.m. Pacific Time, at [ • ].

 

On December 18, 2010, the Company entered into an Agreement and Plan of Merger (the ‘‘Merger Agreement”) with Raytheon Company, a Delaware corporation (“Parent”), and RN Acquisition Company, a California corporation and a wholly owned subsidiary of Parent (“Merger Sub”). At the special meeting, you will be asked to consider and vote upon a proposal to adopt the Merger Agreement and approve the Merger.

 

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Parent has caused Merger Sub to commence a tender offer (the “Offer”) to purchase all of the outstanding shares of common stock, without par value, of the Company, for $38.00 per share (the “Offer Price”), net to the seller in cash, without interest, and less any applicable withholding taxes. The Merger Agreement also provides that a one-step merger of Merger Sub with and into the Company (the “Merger”) may be consummated regardless of whether the Offer is completed, but if the Offer is not completed, the Merger will only be able to be consummated after the shareholders of the Company have adopted the Merger Agreement at a special meeting of shareholders. In the Merger, each outstanding share of the Company, other than shares owned by Parent or Merger Sub or by the Company’s shareholders who have validly exercised their dissenters’ rights under California law, would be converted into the right to receive a per share amount equal to the Offer Price, net to the shareholder in cash, without interest and less any withholding taxes.

 

After careful consideration, the Company’s board of directors has unanimously adopted the Merger Agreement and approved the Merger and determined that the Merger Agreement and the transactions contemplated thereby (including the Merger) are fair to and in the best interests of the Company and its shareholders. Accordingly, the Company’s board of directors unanimously recommends that you vote “FOR” approval of the proposal to adopt the Merger Agreement and approve the Merger and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Approval of the proposal to adopt the Merger Agreement and approve the Merger requires the affirmative vote of holders of a majority of the outstanding shares of our common stock. Your vote is very important. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The failure to vote your shares of our common stock will have the same effect as a vote “AGAINST” approval of the proposal to adopt the Merger Agreement and approve the Merger.

 

If your shares are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares in accordance with the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares “FOR” approval of the proposal to adopt the Merger Agreement and approve the Merger will have the same effect as voting “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger.

 

The accompanying proxy statement provides you with detailed information about the special meeting, the Merger Agreement and the Merger. A copy of the Merger Agreement is attached as Annex A to the proxy statement. In arriving at its recommendations, the Company’s board of directors gave careful consideration to a number of factors that are described in the enclosed proxy statement. We encourage you to read the entire proxy statement and its annexes, including the Merger Agreement, carefully. You may also obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission.

 

On behalf of the board of directors and management of the Company, we thank you for your support.

 

Very truly yours,

 

William B. Van Vleet III

President and Chief Executive Officer

Applied Signal Technology, Inc.

 

The proxy statement is dated [ • ], 2011, and is first being mailed to our shareholders on or about [ • ], 2011.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PROPOSED MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

PRELIMINARY PROXY MATERIAL SUBJECT TO COMPLETION

APPLIED SIGNAL TECHNOLOGY, INC.
460 WEST CALIFORNIA AVENUE
SUNNYVALE, CALIFORNIA 94086

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To Be Held • , 2011

 

A special meeting of shareholders of Applied Signal Technology, Inc., a California corporation (the “Company”), will be held on [ • ], 2011 at 8 a.m. Pacific Time, at [ • ].

 

The meeting will be held for the following purposes:

 

1. To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of December 18, 2010, as it may be amended from time to time (the “Merger Agreement”), by and among the Company, Raytheon Company, a Delaware corporation (“Parent”), and RN Acquisition Company, a California corporation and a wholly-owned subsidiary of Parent ( “Merger Sub”), and approve the merger of Merger Sub with and into the Company (the “Merger”). A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement.

 

2. To consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the Merger Agreement and approve the Merger.

 

3. To transact any other business that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company.

 

The board of directors has fixed the close of business on [ • ] , 2011 as the record date for determining shareholders entitled to notice of and to vote at the special meeting.

 

Your vote is very important, regardless of the number of shares of common stock you own. The Merger cannot be completed unless the Merger Agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of the Company’s common stock, without par value (the “Company Common Stock”). Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope or submit your proxy by telephone or the Internet prior to the special meeting to ensure that your shares of Company Common Stock will be represented at the special meeting if you are unable to attend. If you fail to return your proxy card or fail to submit your proxy by phone or the Internet, your shares of Company Common Stock will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger.

 

After careful consideration, the Company’s board of directors has unanimously adopted the Merger Agreement and approved the Merger and determined that the Merger Agreement and the transactions contemplated thereby (including the Merger) are fair to and in the best interests of the Company and its shareholders. Accordingly, the Company’s board of directors unanimously recommends that you vote “FOR” approval of the proposal to adopt the Merger Agreement and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED.

 

By Order of the board of directors,

 

William B. Van Vleet III

President and Chief Executive Officer

Applied Signal Technology, Inc.

 

Sunnyvale, California

[ • ], 2011

 

TABLE OF CONTENTS

 

This proxy statement and a proxy card are first being mailed on or about [ • ], 2011 to shareholders who owned shares of Company common stock as of the close of business on [ • ], 2011.

 

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 73.

 

•  Parties to the Merger (Page 17)

 

Applied Signal Technology, Inc.  (the “Company,” “we,” “our,” or ‘‘us”), is a California corporation formed in 1984, and is headquartered in Sunnyvale, California. The Company is a leading provider of advanced intelligence, surveillance and reconnaissance (ISR) products, systems, and services that enhance global security.

 

Raytheon Company (“Parent”) is a Delaware corporation formed in 1922 and is headquartered in Waltham, Massachusetts. Parent is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. Parent provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing, effects, and command, control, communications and intelligence systems (C3I), as well as a wide range of mission support services. Parent serves both domestic and international customers, principally as a prime contractor on a broad portfolio of defense and related programs for government customers.

 

RN Acquisition Company ( “Merger Sub”) is a California corporation and a wholly-owned subsidiary of Parent that was formed by Parent solely for the purpose of facilitating the acquisition of the Company. To date, Merger Sub has not carried on any activities other than those related to its formation and completing the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Sub will cease to exist.

 

In this proxy statement, we refer to the Agreement and Plan of Merger, dated December 18, 2010, as it may be amended from time to time, among the Company, Parent and Merger Sub, as the ‘‘Merger Agreement,” and the merger of Merger Sub with and into the Company, as the ‘‘Merger.”

 

•  Tender Offer (Page 48)

 

On December 30, 2010, Merger Sub commenced a tender offer (the “Offer”), for all of the outstanding shares of the Company’s common stock, without par value (the “Company Common Stock”), at a price of $38.00 per share (the “Offer Price”), net to the seller in cash without interest. The Offer contemplated that, after completion of the Offer and the satisfaction or waiver of all conditions, we will merge with Merger Sub and all outstanding shares of Company Common Stock, other than shares held by Parent, Merger Sub or the Company or shares held by the Company’s shareholders who have validly exercised their dissenters’ rights under California law and for whom dissenters’ rights are available under California law, will be canceled and converted into the right to receive cash equal to the Offer Price. The Offer was commenced pursuant to the Merger Agreement.

 

Under the terms of the Merger Agreement, the parties agreed to complete the Merger whether or not the Offer is completed. If the Offer is not completed, California law provides that the Merger can only be completed after the receipt of shareholder approval of the adoption of the Merger Agreement and approval of the Merger that will be considered at the special meeting. We are soliciting proxies for the special meeting to obtain shareholder approval of the adoption of the Merger Agreement and approval of the Merger to be able to consummate the Merger, regardless of the outcome of the Offer.

 

We refer in this proxy statement to the Offer and to terms of the Merger Agreement applicable to the Offer; however, the Offer is being made separately to the holders of shares of Company Common Stock and is not applicable to the special meeting.

•  The Special Meeting (Page 17)

 

Time, Place and Purpose of the Special Meeting (Page 17)

 

The special meeting will be held on [ • ], 2011 at 8 a.m. PST, at [ • ].

 

At the special meeting, holders of Company Common Stock will be asked to approve the proposal to adopt the Merger Agreement and approve the Merger and to approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the Merger Agreement and approve the Merger.

 

Record Date and Quorum (Page 18)

 

You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of Company Common Stock at the close of business on [ • ], 2011, which the Company has set as the record date for the special meeting and which we refer to as the “record date.” You will have one vote for each share of Company Common Stock that you owned on the record date. As of the record date, there were [ • ] shares of Company Common Stock outstanding and entitled to vote at the special meeting. A majority of the shares of Company Common Stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting.

 

Vote Required (Page 18)

 

Approval of the proposal to adopt the Merger Agreement and approve the Merger requires the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote thereon.

 

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of holders of a majority of the shares of Company Common Stock present in person or represented by proxy and entitled to vote on the matter at the special meeting.

 

As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [415,229] shares of Company Common Stock (excluding (1) shares issuable upon the exercise of options to purchase Company Common Stock (the ‘‘Options”), and (2) shares issuable upon vesting of Company restricted stock awards, which we refer to as restricted stock awards) (collectively representing [     ]% of the outstanding shares of Company Common Stock on the record date). Concurrently with the execution of the Merger Agreement, Parent and the Company entered into tender and voting agreements with certain shareholders of the Company who are also members of the board of directors of the Company (the ‘‘Board”) and certain of their affiliates. Pursuant to the terms of such tender and voting agreements, such shareholders will each vote all of their shares of Company Common Stock (other than shares of Company Common Stock as to which such holder does not have discretionary authority) “FOR” the proposal to adopt the Merger Agreement and approve the Merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Proxies and Revocation (Page 20)

 

Any shareholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of Company Common Stock are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of Company Common Stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, your shares of Company Common Stock will not be voted on the proposal to adopt the Merger Agreement and approve the Merger, which will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger, and your shares of Company Common Stock will not have an effect on approval of the proposal to adjourn the special meeting.

 

You may change your vote or revoke your proxy at any time before it is voted at the special meeting by:

 

 

 

If you hold your shares of Company Common Stock in street name, you may submit new voting instructions by contacting your bank, brokerage firm or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy from your bank, brokerage firm or other nominee. Simply attending the special meeting without voting, however, will not revoke your proxy.

 

•  The Merger (Page 22)

 

The Merger Agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the Merger and will continue to do business following the Merger. As a result of the Merger, the Company will cease to be a publicly traded company. If the Merger is completed, you will not own any shares of the capital stock of the surviving corporation.

 

Merger Consideration (Page 22)

 

In the Merger, each outstanding share of Company Common Stock (except for certain shares owned by Parent or Merger Sub, and shares held by shareholders who have perfected their statutory dissenters’ rights under California law and for whom dissenters’ rights are available under California law, which we refer to collectively as the “Excluded Shares”) will be converted into the right to receive $38.00 in cash, without interest, which amount we refer to as the per share Merger consideration, less any applicable withholding taxes.

 

•  Reasons for Recommendation (Page 27)

 

After careful consideration of various factors described in the section entitled “The Merger — Reasons for Recommendation,” the Board unanimously (i) approved and declared advisable the Merger Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement (the ‘‘Contemplated Transactions”), (ii) declared that it is in the best interests of the Company and the Company’s shareholders (other than Parent and its subsidiaries) that the Company enter into the Merger Agreement and consummate the Merger and the other transactions contemplated by the Merger Agreement on the terms and subject to the conditions set forth in the Merger Agreement, (iii) declared that the terms of the Merger are fair to the Company and the Company’s shareholders (other than Parent and its subsidiaries) and (iv) recommended that the Company’s shareholders adopt the Merger Agreement and approve the Merger.

 

In considering the recommendation of the Board with respect to the proposal to adopt the Merger Agreement and approve the Merger, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, yours. The Board was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the Merger, and in recommending that the Merger Agreement be adopted by the shareholders of the Company. See the section entitled “The Merger — Interests of Certain Persons in the Merger” beginning on page 37.

 

The Board recommends that you vote “FOR” the proposal to adopt the Merger Agreement and approve the Merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

•  Opinion of the Company’s Financial Advisor (Page 50)

 

In connection with the Offer and the Merger, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BofA Merrill Lynch”), the Company’s financial advisor, delivered to the Company’s board of directors a written opinion, dated December 18, 2010, as to the fairness, from a financial point of view and as of the date of the opinion, of the consideration of $38.00 per share to be received by holders of Company Common Stock in the Offer and the Merger. The full text of the written opinion, dated December 18, 2010, of BofA Merrill Lynch, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is

attached as Annex B to this document and is incorporated by reference herein in its entirety. BofA Merrill Lynch provided its opinion to the Company’s board of directors for the benefit and use of the Company’s board of directors in connection with and for purposes of its evaluation of the consideration of $38.00 per share to be received by holders of Company Common Stock in the Offer and the Merger from a financial point of view. BofA Merrill Lynch’s opinion does not address any other aspect of the Merger and does not constitute a recommendation to any stockholder as to how to vote or act in connection with the proposed Merger.

 

•  Financing of the Merger

 

We anticipate that the total funds needed by Parent and Merger Sub to complete the Merger, based upon the shares of Company Common Stock (which estimate includes payment in respect of outstanding Options and unvested Restricted Shares) outstanding as of [ • ], 2011, and to pay estimated related transaction fees and expenses, would be approximately $550 million. There is no financing condition to complete the Merger. We understand that Merger Sub intends to obtain such funds by means of a capital contribution from Parent.

 

•  Interests of Certain Persons in the Merger (Page 37)

 

When considering the recommendation of the Board that you vote to approve the proposal to adopt the Merger Agreement and approve the Merger, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, your interests as a shareholder. The Board was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the Merger, and in recommending that the Merger Agreement be adopted and the Merger be approved by the shareholders of the Company. These interests include the following:

 

 

In addition, if the proposal to adopt the Merger Agreement and approve the Merger is approved by our shareholders, the vested shares of previously restricted Company Common Stock held by our directors and executive officers will be treated in the same manner as outstanding shares of Company Common Stock held by other shareholders of the Company.

 

•  Material U.S. Federal Income Tax Consequences of the Merger (Page 45)

 

The exchange of shares of Company Common Stock for cash in the Merger will generally be a taxable transaction to United States securities holders for United States federal income tax purposes. In general, a United States holder whose shares of Company Common Stock are converted into the right to receive cash in the Merger will recognize gain or loss for United States federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes) and its adjusted tax basis in such shares. Backup withholding may also apply to the cash payments made pursuant to the Merger unless the United States holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. Payments made to a non-United States holder with respect to shares of Company Common Stock exchanged for cash pursuant to the Merger will generally be exempt from United States federal income tax. A non-United States holder may, however, be subject to backup withholding with respect to the cash payments made pursuant to the Merger, unless the holder certifies that it is not a United States person or otherwise establishes a valid exemption from backup withholding tax. You should read “The Merger — Material United States Federal Income Tax Consequences of the Merger” beginning on page 45 for definitions of “United States Holder” and “Non-United States Holder,” and for a more detailed discussion of the United States federal income tax consequences of the Merger. You should also consult your tax advisor with respect to the specific tax consequences to you

in connection with the Merger in light of your own particular circumstances, including federal estate, gift and other non-income tax consequences, and tax consequences under state, local or foreign tax laws.

 

•  Regulatory Approvals and Notices (Page 46)

 

Under the terms of the Merger Agreement, the Merger cannot be completed until the waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), has expired or been terminated.

 

Under the HSR Act and the rules promulgated thereunder by the Federal Trade Commission (the ‘‘FTC”), the Merger cannot be completed until each of the Company and Parent files a notification and report form with the FTC and the Antitrust Division of the Department of Justice (the “DOJ”), and the applicable waiting period has expired or been terminated. Parent filed such a notification and report form on January 3, 2011 and requested early termination of the waiting period. The Company filed such a notification and report form on January 7, 2011. The applicable waiting period will expire at 11:59 p.m., New York City time, on January 18, 2011, unless earlier terminated or unless the FTC or the DOJ issues a request for additional information and documentary material prior to that time.

 

•  Litigation Relating to the Merger (Page 48)

 

On January 11, 2011, the Company received a copy of an unfiled complaint and was informed that a putative shareholder class action lawsuit has been, or will be, filed in the Superior Court of the State of California, County of Santa Clara, captioned Jarackas v. Applied Signal Technology, Inc., et al. (Case No. 111CV191643) against the Company, the members of the Board, Parent and Merger Sub (the “Complaint”). The Complaint alleges that the members of the Board breached their fiduciary duties in connection with the Board’s recommendation to the Company’s shareholders to accept the Offer, authorizing the Company to enter into the Merger Agreement and the disclosures regarding the Offer and the Merger. The Complaint seeks injunctive relief and does not seek an award of money damages. The Company believes the allegations are without merit and intends to defend vigorously the action.

 

•  The Merger Agreement (Page 48)

 

Conversion of Capital Stock (Page 50)

 

At the effective time of the Merger, each share of Company Common Stock issued and outstanding (except for the Excluded Shares) will convert into the right to receive the per share Merger consideration of $38.00 in cash, without interest, less any applicable withholding taxes.

 

Treatment of Options (Page 51)

 

At the effective time of the Merger, each outstanding and unexercised Option, vested or unvested, issued under the Company’s equity plans or otherwise, will be cancelled and will entitle the holder to receive an amount in cash equal to the excess of $38.00 over the exercise price per share of Company Common Stock subject to such Option, multiplied by the number of shares of Company Common Stock subject to such Option, less any applicable withholding taxes.

 

Treatment of Restricted Shares (Page 51)

 

Upon effective time of the Merger, each outstanding restricted share of Company Common Stock that is subject to vesting (each, a “Restricted Share”) granted pursuant to the Company’s equity incentive plans will be converted, without any action on the part of the holder of such Restricted Share, into the right to receive, as soon as practicable (and in any event within two business days) following the vesting of such Restricted Share in accordance with its terms, a per share cash payment equal to the Offer Price, less any applicable withholding of taxes.

No Solicitation of a Takeover Proposal (Page 56)

 

The Company agreed that it shall not, and shall not permit its controlled affiliates or permit its or any of its controlled affiliates’ directors, officers, employees, investment bankers, attorneys, accountants or other advisors or representatives, whom we refer to collectively as “representatives,” to, directly or indirectly:

 

 

The Company also agreed that it shall, and shall cause its subsidiaries and direct its representatives to, immediately cease and cause to be terminated all existing communications and negotiations with any person or entity conducted prior to the date of the Merger Agreement with respect to any Takeover Proposal and shall request, and exercise all rights under all confidentiality or nondisclosure agreements with regard to, the prompt return or destruction of all confidential information previously furnished in connection therewith.

 

Notwithstanding the restrictions described above, at any time before the first to occur of the Company shareholders meeting to approve the Merger and the acceptance of shares of Company Common Stock for payment in the Offer, the Company may, and may permit and authorize its affiliates and its and their respective representatives to, (i) furnish information with respect to the Company and its subsidiaries to a person or entity making a bona fide written Takeover Proposal (and its representatives) pursuant to a confidentiality agreement with provisions identical in all substantive respects to, and which otherwise contains terms that are no less favorable to the Company than, those contained in its confidentiality agreement with Parent and (ii) participate in discussions or negotiations with the person making such Takeover Proposal (and its representatives) regarding such Takeover Proposal, so long as the Company complies with certain terms of the Merger Agreement. See “No Solicitation of a Takeover Proposal” beginning on page 56.

 

Conditions to the Merger (Page 49)

 

The respective obligations of the Company, Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver of certain customary conditions, including receipt of required antitrust approvals and the accuracy of the parties’ respective representations and warranties in the Merger Agreement. The obligation of Parent and Merger Sub to consummate the Merger is also subject to the absence of any state of facts, condition, change, development or event, from the date of the Merger Agreement until the effective time of the Merger, that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect, as described under “The Merger Agreement–Representations and Warranties” beginning on page 51.

 

Termination (Page 62)

 

We and Parent may, by mutual written consent, terminate the Merger Agreement and abandon the Merger at any time prior to the effective time of the Merger, whether before or after the adoption of the Merger Agreement by our shareholders.

 

The Merger Agreement may be terminated and the Merger abandoned at any time prior to the effective time of the Merger, whether before or after the adoption of the Merger Agreement by our shareholders:

 

 

 

 

 

 

 

 

 

Termination Fee and Expense Reimbursement (Page 64)

 

 

•  Market Price of Company Common Stock (Page 66)

 

The per share Merger consideration of $38.00 per share of Company Common Stock:

 

 

•  Dissenters’ Rights (Page 69)

 

If the Merger is consummated pursuant to the Merger Agreement, each holder of shares of Company Common Stock who fully complies with and meets all the requirements of the provisions of Chapter 13 of the California General Corporation Law (the “CGCL”), whom we refer to as a “qualifying shareholder,” may have the right to require the Company to purchase the holder’s shares for cash at “fair market value.” A qualifying shareholder will be entitled to exercise these dissenters’ rights under the CGCL only if (i) the holders of 5% or more of the outstanding shares properly file demands for payment of the fair market value or (ii) the shares held by such holder are subject to any restriction on transfer imposed by the Company or by any law or regulation (“Restricted Securities”). Accordingly, if the holders of 5% or more of the shares properly file demands for payment in compliance with Chapter 13 of the CGCL, all other qualifying shareholders will be entitled to require the Company to purchase their shares for cash at their fair market value if the Merger is consummated. If the holders of less than 5% of the shares properly file demands for payment in compliance with Chapter 13 of the CGCL but any holder of Restricted Securities properly files such a demand, only such holder or holders of Restricted Securities shall be entitled to require the Company to purchase their shares as described in the preceding sentence. In addition, if immediately prior to the effective time of the Merger, the shares are not listed on a national securities exchange certified by the California Commissioner of Corporations, holders of shares may exercise dissenters’ rights as to any or all of their shares entitled to such rights. If the Merger is not consummated, no qualifying shareholder will be entitled to have the Company or Merger Sub purchase such holder’s shares under Chapter 13 of the CGCL.

 

Under the CGCL, the “fair market value” of the shares may be one agreed to by the Company and the qualifying shareholders or judicially determined, depending on the circumstances. The “fair market value” is determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation as a result of the Merger and subject to adjustments. The value so determined could be more or less than the Offer Price.

 

If the Company denies that a shareholder is a qualifying shareholder, or if a qualifying shareholder and the Company fail to agree on the fair market value of shares, then such shareholder demanding purchase of shares as dissenting shares or the Company may, within six months after the Company mails the notice of a short-form Merger pursuant to Section 1110 of the CGCL or, if applicable, the required notice that shareholders have approved the Merger, file a complaint or intervene in a pending action to determine whether the shares are dissenting shares or the fair market value of the shares, as applicable.

 

The foregoing discussion of the rights of qualifying shareholders does not purport to be a complete statement of the procedures to be followed by shareholders desiring to exercise any available dissenters’ rights and is qualified in its entirety by reference to Chapter 13 of the CGCL, a copy of which is reproduced in its entirety as Annex C to this proxy statement.

 

•  Delisting and Deregistration of Company Common Stock (Page 72)

 

If the Merger is completed, the Company Common Stock will be delisted from the Nasdaq Global Select Market (“Nasdaq”), and deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As such, we would no longer file periodic reports with the Securities and Exchange Commission (the “SEC”) on account of the Company Common Stock.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger, the Merger Agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a shareholder of the Company. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 73.

 

 

Under the terms of the Merger Agreement, the parties agreed to pursue the Merger whether or not the Offer is completed. If the Offer is not completed, the parties agreed that the Merger could only be completed after the receipt of shareholder approval of the adoption of the Merger Agreement and the approval of the Merger that will be considered at the special meeting.

 

We are soliciting proxies for the special meeting to obtain shareholder approval of the adoption of the Merger Agreement and the approval of the Merger to be able to consummate the Merger regardless of the outcome of the Offer. Regardless of whether you tendered your shares of Company Common Stock in the Offer, you may nevertheless vote your shares at the special meeting because you were a shareholder as of the record date of the meeting.

 

 

Payments made to a non-United States holder with respect to shares of Company Common Stock exchanged for cash pursuant to the Merger will generally be exempt from United States federal income tax. A non-United States holder may, however, be subject to backup withholding with respect to the cash payments made pursuant to the Merger, unless the holder certifies that it is not a United States person or otherwise establishes a valid exemption from backup withholding tax.

 

You should read “The Merger — Material United States Federal Income Tax Consequences of the Merger” beginning on page 45 for definitions of “United States Holder” and “Non-United States Holder,” and for a more detailed discussion of the United States federal income tax consequences of the Merger. You should also consult your tax advisor with respect to the specific tax consequences to you in connection with the Merger in light of your own particular circumstances, including federal estate, gift and other non-income tax consequences, and tax consequences under state, local or foreign tax laws.

 

 

If you hold shares of Company Common Stock in “street name” (that is, in a brokerage account or through a bank or other nominee) and you plan to vote in person at the special meeting, you will need to bring a valid photo identification and a copy of a statement reflecting your share ownership as of the record date, or a legal proxy from your broker or nominee.

 

Shareholders of record will be verified against an official list available in the registration area at the meeting. We reserve the right to deny admittance to anyone who cannot adequately show proof of share ownership as of the record date.

 

 

 

 

Telephone Voting:  You may vote by calling the toll-free telephone number indicated on your proxy card. Please follow the voice prompts that allow you to vote your shares of Company Common Stock and confirm that your instructions have been properly recorded.

 

Internet Voting:  You may vote by logging on to the website indicated on your proxy card. Please follow the website prompts that allow you to vote your shares of Company Common Stock and confirm that your instructions have been properly recorded.

 

Return Your Proxy Card By Mail:  You may vote by completing, signing and returning the proxy card in the postage-paid envelope provided with this proxy statement. The proxy holders will vote your shares of Company Common Stock according to your directions. If you sign and return your proxy card without specifying choices, your shares of Company Common Stock will be voted by the persons named in the proxy in accordance with the recommendations of the Board as set forth in this proxy statement.

 

Vote at the Meeting:  You may cast your vote in person at the special meeting. Written ballots will be passed out to shareholders or legal proxies who want to vote in person at the meeting.

 

Telephone and Internet voting for shareholders of record will be available 24 hours a day and will close at 11:59 p.m. Pacific Time on [ • ], 2011. Telephone and Internet voting is convenient, provides postage and

mailing cost savings and is recorded immediately, minimizing the risk that postal delays may cause votes to arrive late and therefore not be counted.

 

Even if you plan to attend the special meeting, you are encouraged to vote your shares of Company Common Stock by proxy. You may still vote your shares of Company Common Stock in person at the meeting even if you have previously voted by proxy. If you are present at the meeting and vote in person, your previous vote by proxy will not be counted. Simply attending the special meeting without voting, however, will not revoke your proxy.

 

 

If you do not instruct your bank, brokerage firm or other nominee to vote your shares of Company Common Stock, your shares will not be voted and the effect will be the same as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger, and your shares of Company Common Stock will not have an effect on the proposal to adjourn the special meeting.

 

 

 

If you hold your shares of Company Common Stock in street name, you may submit new voting instructions by contacting your bank, brokerage firm or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy from your bank, brokerage firm or other nominee.

 

 

If your shares of Company Common Stock are held in street name, they may not be voted if you do not provide the bank, brokerage firm or other nominee with voting instructions. Currently, banks, brokerage firms or other nominees have the authority under the rules of the New York Stock Exchange (the “NYSE”) rules to vote shares of Company Common Stock for which their customers do not provide voting instructions on certain “routine” matters.

However, banks, brokerage firms or other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the proposal to adopt the Merger Agreement and approve the Merger and the proposal to approve the adjournment of the special meeting, if necessary or appropriate, and, as a result, absent specific instructions from the beneficial owner of such shares of Company Common Stock, banks, brokerage firms or other nominees are not empowered to vote those shares of Company Common Stock on non-routine matters, which we refer to generally as broker non-votes.

 

 

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of Company Common Stock present in person or represented by proxy and entitled to vote on the matter at the special meeting even if less than a quorum. Abstaining will have the same effect as a vote “AGAINST” the proposal to adjourn the special meeting, if necessary or appropriate. If you fail to submit a proxy or to vote in person at the special meeting or if your shares of Company Common Stock are held through a bank, brokerage firm or other nominee and you do not instruct your bank, brokerage firm or other nominee on how to vote your shares of Company Common Stock, your shares of Company Common Stock will not be voted, but this will not have an effect on the proposal to adjourn the special meeting.

 

 

For the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, you may vote “FOR,” “AGAINST” or “ABSTAIN.” Abstentions will have the same effect as if you voted “AGAINST” the proposal, but broker non-votes will not have an effect on the proposal.

 

 

This information is also available free of charge at www.sec.gov, an Internet site maintained by the SEC that contains reports, proxy and information statements, and other information regarding issuers that is filed electronically with the SEC. Shareholders may also read and copy any reports, statements and other information filed by us with the SEC at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or visit the SEC’s website for further information on its public reference room. In addition, shareholders may obtain free copies of the documents filed with the SEC by contacting the Company at 460 West California Avenue, Sunnyvale, California 94086, (408) 749-1888.

 

The references to our website address and the SEC’s website address do not constitute incorporation by reference of the information contained in these websites and should not be considered part of this document.

 

Our SEC filings are available in print to any shareholder who requests a copy at the phone number or address listed above.

 

 

This proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us, contain statements that, in our opinion, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,” “estimate,” “will,” “may,” “should,” “future,” “predicts,” “potential,” “continue” and similar expressions identify these forward-looking statements, which appear in a number of places in this proxy statement (and the documents to which we refer you in this proxy statement) and include, but are not limited to, all statements relating directly or indirectly to the timing or likelihood of completing the Merger to which this proxy statement relates, plans for future growth and other business development activities as well as capital expenditures, financing sources and the effects of regulation and competition and all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers. You are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks detailed in our filings with the SEC, including our most recent filings on Forms 10-K and 10-Q, factors and matters contained or incorporated by reference in this document, and the following factors:

 

 

Consequently, all of the forward-looking statements we make in this document are qualified by the information contained or incorporated by reference herein, including, but not limited to, (a) the information contained under this heading and (b) the information contained under the headings “Business” and “Risk Factors” and information in our consolidated financial statements and notes thereto included in our most recent filings on Forms 10-K and 10-Q (see “Where You Can Find More Information” beginning on page 73). We are under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences.

 

You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.

 

The Company

 

Applied Signal Technology, Inc.

460 West California Avenue

Sunnyvale, California 94086

(408) 749-1888

 

The Company is a California corporation formed in 1984, and is headquartered in Sunnyvale, California. The Company is a leading provider of advanced intelligence, surveillance and reconnaissance (ISR) products, systems, and services that enhance global security. For more information about the Company, please visit our website www.appsig.com. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC. See also “Where You Can Find More Information” beginning on page 73. Company Common Stock is publicly traded on Nasdaq under the symbol “APSG”.

 

Parent

 

Raytheon Company

870 Winter Street

Waltham, MA 02451

(781) 522-3000

 

Parent is a Delaware corporation formed in 1922 and is headquartered in Waltham, Massachusetts. Parent is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world. Parent provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing, effects, and command, control, communications and intelligence systems (C3I), as well as a wide range of mission support services. Parent serves both domestic and international customers, principally as a prime contractor on a broad portfolio of defense and related programs for government customers. For more information about Parent, please visit Parent’s website www.raytheon.com. Parent’s common stock is publicly traded on the NYSE under the symbol “RTN”.

 

Merger Sub

 

RN Acquisition Company

c/o Raytheon Company

870 Winter Street

Waltham, MA 02451

(781) 522-3000

 

Merger Sub is a California corporation and a wholly-owned subsidiary of Parent that was formed by Parent solely for the purpose of facilitating the acquisition of the Company. To date, Merger Sub has not carried on any activities other than those related to its formation and completing the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Sub will cease to exist.

 

Time, Place and Purpose of the Special Meeting

 

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by the Board for use at the special meeting to be held on [ • ], 2011, starting at 8 a.m., Pacific Time, at [ • ], or at any postponement or adjournment thereof. At the special meeting, holders of shares of Company Common Stock will be asked to approve the proposal to adopt the Merger Agreement and approve the Merger and to approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there

are insufficient votes at the time of the special meeting to approve the proposal to adopt the Merger Agreement and approve the Merger.

 

Our shareholders must approve the proposal to adopt the Merger Agreement and approve the Merger in order for the Merger to occur. If our shareholders fail to approve the proposal to adopt the Merger Agreement and approve the Merger, the Merger will not occur. A copy of the Merger Agreement is attached as Annex A to this proxy statement, which we encourage you to read carefully in its entirety.

 

Record Date and Quorum

 

We have fixed the close of business on [ • ], 2011 as the record date for the special meeting, and only holders of record of shares of Company Common Stock on the record date are entitled to vote at the special meeting. You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of Company Common Stock at the close of business on the record date. On the record date, there were [ • ] shares of Company Common Stock outstanding and entitled to vote. Each share of Company Common Stock entitles its holder to one vote on all matters properly coming before the special meeting.

 

A majority of the shares of Company Common Stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Shares of Company Common Stock represented at the special meeting but not voted, including shares of Company Common Stock for which a shareholder directs an “abstention” from voting, will be counted for purposes of establishing a quorum. Broker non-votes will not be counted for determining whether a quorum is present. A quorum is necessary to transact business at the special meeting. Once a share of Company Common Stock is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established. In the event that a quorum is not present at the special meeting, it is expected that the special meeting will be adjourned or postponed.

 

Attendance

 

Only shareholders of record or their duly authorized proxies have the right to attend the special meeting. To gain admittance, you must present a valid photo identification, such as a driver’s license or passport. If your shares of Company Common Stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of Company Common Stock and a valid photo identification. If you are the representative of a corporate or institutional shareholder, you must present valid photo identification along with proof that you are the representative of such shareholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

 

Vote Required

 

Approval of the proposal to adopt the Merger Agreement and approve the Merger requires the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock. For the proposal to adopt the Merger Agreement and approve the Merger, you may vote FOR, AGAINST or ABSTAIN. Abstentions will not be counted as votes cast in favor of the proposal to adopt the Merger Agreement but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or abstain, it will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger.

 

If your shares of Company Common Stock are registered directly in your name with our transfer agent, BNY Mellon Shareowner Services, you are considered, with respect to those shares of Company Common Stock, the “shareholder of record.” This proxy statement and proxy card have been sent directly to you by the Company.

 

If your shares of Company Common Stock are held through a bank, brokerage firm or other nominee, you are considered the “beneficial owner” of shares of Company Common Stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of Company Common Stock, the shareholder of record. As the beneficial owner, you have the right

to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting.

 

Under the rules of the NYSE, banks, brokerage firms or other nominees who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms or other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the proposal to adopt the Merger Agreement and approve the Merger and, as a result, absent specific instructions from the beneficial owner of such shares of Company Common Stock, banks, brokerage firms or other nominees are not empowered to vote those shares of Company Common Stock on non-routine matters, which we refer to generally as broker non-votes. These broker non-votes will be counted for purposes of determining a quorum, but will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger.

 

The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of Company Common Stock present in person or represented by proxy and entitled to vote on the matter at the special meeting. For the proposal to adjourn the special meeting, if necessary or appropriate, you may vote FOR, AGAINST or ABSTAIN. For purposes of this proposal, if your shares of Company Common Stock are present at the special meeting but are not voted on this proposal, or if you have given a proxy and abstained on this proposal, this will have the same effect as if you voted “AGAINST” the proposal. If you fail to submit a proxy or vote in person at the special meeting, or there are broker non-votes on the issue, as applicable, the shares of Company Common Stock not voted, will not be counted in respect of, and will not have an effect on, the proposal to adjourn the special meeting.

 

If you are a shareholder of record, you may have your shares of Company Common Stock voted on matters presented at the special meeting in any of the following ways:

 

Telephone Voting:  You may vote by calling the toll-free telephone number indicated on your proxy card. Please follow the voice prompts that allow you to vote your shares of Company Common Stock and confirm that your instructions have been properly recorded.

 

Internet Voting:  You may vote by logging on to the website indicated on your proxy card. Please follow the website prompts that allow you to vote your shares of Company Common Stock and confirm that your instructions have been properly recorded.

 

Return Your Proxy Card By Mail:  You may vote by completing, signing and returning the proxy card in the postage-paid envelope provided with this proxy statement. The proxy holders will vote your shares of Company Common Stock according to your directions. If you sign and return your proxy card without specifying choices, your shares of Company Common Stock will be voted by the persons named in the proxy in accordance with the recommendations of the Board as set forth in this proxy statement.

 

Vote at the Meeting:  You may cast your vote in person at the special meeting. Written ballots will be passed out to shareholders or legal proxies who want to vote in person at the meeting.

 

If you are a beneficial owner, you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of Company Common Stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee.

 

Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for voting over the Internet or by telephone. If you choose to vote by mailing a proxy card, your proxy card must be filed with our Secretary by the time the special meeting begins. Please do not send in your stock certificates with your proxy card. When the Merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the per share Merger consideration in exchange for your stock certificates.

 

If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, or your proxies, will vote your shares of Company Common Stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may

specify whether your shares of Company Common Stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

 

If you properly sign your proxy card but do not mark the boxes showing how your shares of Company Common Stock should be voted on a matter, the shares of Company Common Stock represented by your properly signed proxy will be voted “FOR” the proposal to adopt the Merger Agreement and approve the Merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

If you have any questions or need assistance voting your shares, please call [ • ] toll-free at [ • ].

 

IT IS IMPORTANT THAT YOU VOTE YOUR SHARES OF COMPANY COMMON STOCK PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. SHAREHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

 

As of [ • ], 2011, the record date for the special meeting, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, [ • ] shares of Company Common Stock (excluding any shares of Company Common Stock deliverable upon exercise or conversion of any Options or Restricted Shares), representing [ • ]% of the outstanding shares of Company Common Stock on the record date. The directors and executive officers have informed the Company that they currently intend to vote all of their shares of Company Common Stock “FOR” the proposal to adopt the Merger Agreement and approve the Merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

On December 18, 2010, certain shareholders, who are also members of the Board and certain of their affiliates, entered into separate tender and voting agreements with Parent and Merger Sub (the “Tender and Voting Agreements”). Pursuant to the Tender and Voting Agreements, among other things, each such shareholder has agreed to tender in the Offer, and not withdraw, all of the shares beneficially owned by the shareholder, as well as any other shares of Company Common Stock acquired by the tendering shareholder after the date of the Tender and Voting Agreements. In addition, each shareholder appointed Parent and Merger Sub as proxy for such shareholder with the power to vote all shares of Company Common Stock covered by the Tender and Voting Agreement and beneficially owned at the time of the vote, whether at an annual, special, postponed or adjourned meeting of the Company’s shareholders, or to grant consent or approval in any written consent in lieu of such a meeting to, among other things, vote in favor of approval of the Merger and adoption of the Merger Agreement and vote in favor of any adjournment of any shareholder meeting with respect to the Merger or the Merger Agreement.

 

Proxies and Revocation

 

Any shareholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person at the special meeting. If your shares of Company Common Stock are held in “street name” by your bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of Company Common Stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or vote in person at the special meeting, or abstain, or do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, your shares of Company Common Stock will not be voted on the proposal to adopt the Merger Agreement and approve the Merger, which will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement and approve the Merger.

 

If you are a shareholder of record, you have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is voted at the special meeting by:

 

 

If you hold your shares in street name, you may submit new voting instructions by contacting your bank, brokerage firm or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy from your bank, brokerage firm or other nominee.

 

Adjournments and Postponements

 

Although it is not currently expected, the special meeting may be adjourned or postponed, including for the purpose of soliciting additional proxies, if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the Merger Agreement and approve the Merger or if a quorum is not present at the special meeting. Other than an announcement to be made at the special meeting of the time, date and place of an adjourned meeting, an adjournment generally may be made without notice. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow the Company’s shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

Anticipated Date of Completion of the Merger

 

We are working towards completing the Merger as soon as possible. If the Merger is approved at the shareholders meeting, then, assuming timely satisfaction of the other necessary closing conditions, we anticipate that the Merger will be completed promptly thereafter.

 

Rights of Dissenting Shareholders

 

If the Merger is consummated pursuant to the Merger Agreement, each holder of shares of Company Common Stock who fully complies with and meets all the requirements of the provisions of Chapter 13 of the CGCL, whom we may refer to as “qualifying shareholders”, may have the right to require the Company to purchase the holder’s shares for cash at “fair market value.” A qualifying shareholder will be entitled to exercise these dissenters’ rights under the CGCL only if (i) the holders of 5% or more of the outstanding shares of Company Common Stock properly file demands for payment of the fair market value or (ii) the shares held by such holder are subject to any restriction on transfer imposed by the Company or by any law or regulation (“Restricted Securities”). Accordingly, if the holders of 5% or more of the shares properly file demands for payment in compliance with Chapter 13 of the CGCL, all other qualifying shareholders will be entitled to require the Company to purchase their shares for cash at their fair market value if the Merger is consummated. If the holders of less than 5% of the shares properly file demands for payment in compliance with Chapter 13 of the CGCL but any holder of restricted securities properly files such a demand, only such holder or holders of restricted securities shall be entitled to require the Company to purchase their shares as described in the preceding sentence. In addition, if immediately prior to the effective time of the Merger, the shares are not listed on a national securities exchange certified by the California Commissioner of Corporations, holders of shares may exercise dissenters’ rights as to any or all of their shares entitled to such rights. If the Merger is not consummated, no qualifying shareholder will be entitled to have the Company or Merger Sub purchase such holder’s shares under Chapter 13 of the CGCL.

 

Under the CGCL, the “fair market value” of the shares may be one agreed to by the Company and the qualifying shareholders or judicially determined, depending on the circumstances. The “fair market value” is determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation as a result of the Merger and subject to adjustments. The value so determined could be more or less than the Offer price.

 

If the Company denies that a shareholder is a qualifying shareholder, or if a qualifying shareholder and the Company fail to agree on the fair market value of shares, then such shareholder demanding purchase of shares as dissenting shares or the Company may, within six months after the Company mails the notice of a short-form merger pursuant to Section 1110 of the CGCL or, if applicable, the required notice that shareholders have approved the Merger, file a complaint or intervene in a pending action to determine whether the shares are dissenting shares or the fair market value of the shares, as applicable.

 

The foregoing discussion of the rights of qualifying shareholders does not purport to be a complete statement of the procedures to be followed by shareholders desiring to exercise any available dissenters’ rights and is qualified

in its entirety by reference to Chapter 13 of the CGCL, a copy of which is reproduced in its entirety as Annex D to this proxy statement.

 

Payment of Solicitation Expenses

 

The Company may reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of Company Common Stock for their expenses in forwarding soliciting materials to beneficial owners of Company Common Stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

Questions and Additional Information

 

If you have more questions about the Merger or how to submit your proxy or vote, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call [ • ] toll-free at [ • ].

 

This discussion of the Merger and the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, which is attached to this proxy statement as Annex A. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. You should carefully read the entire Merger Agreement in its entirety as it is the legal document that governs the Merger.

 

The Merger Agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the Merger and will continue to do business following the Merger. As a result of the Merger, the Company will cease to be a publicly traded company. You will not own any shares of the capital stock of the surviving corporation.

 

Merger Consideration

 

In the Merger, each outstanding share of Company Common Stock (except for the Excluded Shares) will be converted into the right to receive the per share Merger consideration of $38.00 in cash, without interest, less any applicable withholding taxes.

 

Background of the Contemplated Transactions

 

The Company continually reviews its position in the intelligence, surveillance and reconnaissance (ISR) and cyber solutions industries to examine potential strategic business transactions that might be in the interests of its shareholders. The Company’s management regularly spends time identifying potential business acquisitions of interest and regularly engages in discussions with companies that appear to be appropriate candidates for business combinations. As part of its ongoing evaluation of the Company’s business and its strategic planning, the Board periodically discusses and reviews the Company’s strategic goals and alternatives, performance and prospects. The Board has in the past received updates from time to time from various investment bankers on the state of the Company’s industry and potential for acquisition activity.

 

Over the years, the Company has been approached multiple times by different parties to inquire whether the Board was interested in pursuing a potential transaction. After review, the Board determined each time that pursuing the inquiry was not in the best interests of the shareholders.

 

In addition, the defense electronics industry has a relatively limited number of significant participants. Over the years, the Company has worked with Parent and most of the other significant participants in the industry on certain programs and, in connection with such programs, their employees have interacted frequently. Prior to their discussions with respect to the Offer and the Merger described below, Parent and the Company have had an ongoing business relationship relating to teaming and subcontractor arrangements that are common in the industries in which Parent and the Company operate.

In early 2008, the Company retained BofA Merrill Lynch to advise the Company with respect to takeover preparedness and evaluating its strategic alternatives. In June 2009, the Board formed an ad hoc Mergers and Acquisitions Committee comprised of David D. Elliman, Milton E. Cooper and Robert J. Richardson to review any strategic opportunities presented to the Company, including acquisitions, and to make a recommendation to the full Board as to any such opportunities. Each member of the M&A Committee is an independent director of the Company. The M&A Committee was established as an administrative convenience in order to permit the efficient review of potential transactions and to facilitate the involvement of members of the Board in any acquisition process, and not because of any actual or perceived conflict of interest involving any director.

 

In May 2010, the Company initiated its annual strategic business planning process to assess future growth opportunities for the Company. The Company received input from an independent strategic advisory board consisting of recognized former government officials to provide insight and perspectives into the U.S. federal government budgeting process. The information was used to create a corporate growth strategy consisting of detailed implementation plans for each of the Company’s lines of business. The strategic plan contemplated expansion through a combination of organic growth and strategic acquisitions.

 

In June 2010, following public speculation as to a potential sale of a similar company in the Company’s market space, the Board determined that it would be advisable to review potential strategic alternatives and compare the resulting options to the Company’s strategic plan. William B. Van Vleet III, the Company’s President and Chief Executive Officer and a director, updated the Board on strategic alternatives available to the Company, and reported to the Board on his meetings with a number of investment bankers. At the end of June 2010, the sale of the similar company was announced publicly at a price that implied the possibility of obtaining a compelling value for the Company in any sale process.

 

In September 2010, the Company’s management presented its strategic plan to the Board. Although the plan identified areas for reasonable growth as an independent company, the Board determined that a pursuit of strategic alternatives, up to and including a sale of the Company, had the potential to generate greater shareholder value. The Board requested independent validation of the potential value of the Company in a sale process. Mr. Van Vleet contacted BofA Merrill Lynch to discuss re-engaging BofA Merrill Lynch to assist the Company in evaluating strategic alternatives available to the Company. BofA Merrill Lynch commenced a preparatory review of the Company’s business and operations and the Company’s potential strategic alternatives.

 

On September 22 and 23, 2010, in connection with a regularly scheduled board meeting, the independent members of the Board held a meeting to consider strategic alternatives for the Company, which was followed by a meeting of the M&A Committee and the full Board. At the meetings, representatives of BofA Merrill Lynch discussed the Company’s financial performance and presented a preliminary review of the strategic alternatives available to the Company. BofA Merrill Lynch also described the process that it would recommend if the Board determined to engage in a further exploration of strategic alternatives. At the Board meeting, a representative from DLA Piper LLP (US) (“DLA Piper”), counsel to the Company, reviewed with the Board their fiduciary duties with respect to any potential sale transaction, and management provided input on the strategic alternatives available to the Company. Following the presentations and further questions and discussion, the Board determined to engage in a further exploration of strategic alternatives and authorized the re-engagement of BofA Merrill Lynch to assist the Company in exploring strategic alternatives and any potential sale transaction. The Board selected BofA Merrill Lynch on the basis of BofA Merrill Lynch’s experience, its reputation and its familiarity with the Company and its business. The Company executed an amended and restated engagement agreement with BofA Merrill Lynch pursuant to which it engaged BofA Merrill Lynch to serve as its exclusive financial advisor in connection with the Company’s evaluation of strategic alternatives and any potential sale transaction.

 

At the end of September 2010, the Company, BofA Merrill Lynch and DLA Piper began preparing for the commencement of a process to contact potentially interested parties in connection with an exploration of strategic alternatives, including the preparation of a confidential description of the Company. The Company’s management and its financial and legal advisors also prepared a management brief, due diligence materials and draft transaction documents in preparation for contacting potentially interested parties.

 

On October 11, 2010, the M&A Committee authorized BofA Merrill Lynch to begin contacting potentially interested parties on behalf of the Company in connection with an exploration of strategic alternatives. Beginning

on October 12, 2010, BofA Merrill Lynch began contacting a targeted list of 14 likely bidders from the defense industry that had been identified by the Company and BofA Merrill Lynch. Due to market speculation as to the Company’s potential sale process, another strategic bidder that was not on the targeted list approached the Company about participating in the potential sale process and was invited to participate. Commencing on October 14, 2010, DLA Piper, on behalf of the Company, negotiated mutual nondisclosure agreements with the interested parties. The Company and Parent executed a mutual nondisclosure agreement on October 19, 2010. The Company also entered into mutual nondisclosure agreements with nine other interested parties.

 

On October 18, 2010, BofA Merrill Lynch began distributing a confidential information package, including projections, to each of the 10 interested parties that had entered into mutual nondisclosure agreements with the Company. BofA Merrill Lynch also sent, on behalf of the Company, a bid process letter to each of the 10 parties, indicating to the parties that they should submit an indication of interest letter to BofA Merrill Lynch no later than November 9, 2010.

 

In mid-to-late October 2010, occasional press reports speculated as to the Company’s potential sales process and the Company’s retention of investment bankers. Consistent with its long-standing policy, the Company declined to comment on market rumors. During the week of October 18, 2010, the Company noted an increase in its share price and trading volume. As a result, on October 22, 2010, the Company issued a press release stating that the Company was considering strategic alternatives, and that the Company had retained BofA Merrill Lynch, but that no assurance could be given that any transaction would be completed.

 

On November 9, 2010, BofA Merrill Lynch, on behalf of the Company, received five preliminary indications of interest at prices ranging from $31.38 to $37.00 per share. The five bidders submitting indications of interest included (a) Parent, (b) two other large U.S. defense contractors (“Bidder A” and “Bidder B,” respectively), (c) a large foreign-owned defense contractor (“Bidder C”) and (d) a strategic bidder in the commercial aerospace and defense businesses (“Bidder D”). Parent’s indication of interest was at a price of $32.00 to $34.00 per share. The other five previously interested parties that executed mutual nondisclosure agreements declined to submit indications of interest.

 

On November 11, 2010, the M&A Committee met with representatives of BofA Merrill Lynch and DLA Piper to discuss the status of the potential sale process. Following the M&A Committee meeting, the full Board convened to discuss the status of the Company’s exploration of strategic alternatives. At that Board meeting, a representative from DLA Piper advised the Board as to their fiduciary duties in considering strategic alternatives. Representatives of BofA Merrill Lynch reviewed with the Board its analysis of the proposals received. Mr. Van Vleet provided the Board with an overview of management’s activities in support of the review of strategic alternatives. He also noted that the public announcement of a potential transaction had created a great deal of uncertainty for the Company’s employees and described the risks to the Company if the conclusion of the process was delayed. During the presentations, the Board asked numerous questions and an extensive discussion ensued.

 

In the second half of November 2010, members of the Company’s management, with assistance from BofA Merrill Lynch, conducted management presentations with the five interested parties and simultaneously facilitated a due diligence process with the five interested parties. The due diligence process included conducting in-person management presentations, responding to various due diligence questions about the Company’s assets and operations, conducting telephonic due diligence discussions between the Company’s and the interested parties’ outside financial, legal and accounting advisors, and conducting in-person due diligence review sessions and on-site due diligence visits to the Company’s facilities. Each interested party was given an extensive, in-person presentation by Company representatives, and was provided access to the Company’s on-line data room containing financial, operational, regulatory, intellectual property, human resource, legal and other information concerning the Company.

 

As part of these due diligence activities, on November 17, 2010, members of Parent’s senior management, including Richard R. Yuse, President of Parent’s Space and Airborne Systems business, and Michael J. Cody, Parent’s Vice President, Corporate Development, met informally with members of the Company’s senior management and representatives of BofA Merrill Lynch to discuss Parent’s due diligence review and the Company’s operations. On November 18, 2010, members of Parent’s management and outside financial advisors attended an in-person management and due diligence presentation by the Company’s management and BofA Merrill Lynch.

During the week of November 22, 2010, BofA Merrill Lynch asked the five interested parties to update their views on price and to provide a detailed agenda and timeline for conducting any remaining due diligence. During the week of November 29, 2010, BofA Merrill Lynch received feedback from three interested parties, including Parent. Bidder A indicated a price in the mid-$30’s. Bidder B declined to provide feedback because it determined that it could no longer support the value in its original indication of interest. Bidder C declined to provide feedback, and indicated that it would be unable to complete a transaction in the near future. Bidder D indicated a price in the mid-$30’s, which was at the low end of its previously indicated range, and also indicated that it would be unable to complete a transaction in the near future. Parent declined to provide a specific price, but indicated that it was prepared to make, at the appropriate time, a best and final offer at a price in the mid-to-high $30’s. Parent and Bidder A both indicated that they would be able to complete any remaining due diligence promptly and be ready to submit a final bid soon thereafter.

 

On December 1, 2010 and December 2, 2010, members of Parent’s management and its accounting advisors met with the Company’s outside accounting advisors in connection with Parent’s due diligence review of the Company’s financial statements.

 

On December 3, 2010, the M&A Committee met to discuss the status of discussions with the various bidders. BofA Merrill Lynch reviewed with the M&A Committee its analysis of the current proposals. After deliberations, the M&A Committee determined that Parent and Bidder A were the bidders most likely to provide the highest value for the Company’s shareholders, and the most likely to be able to submit a final bid promptly. The M&A Committee noted that Bidder C’s foreign ownership would necessitate a regulatory approval process that would not apply to any of the other bidders, and that Bidder C itself had stated that it would be unable to complete a transaction in the near future. The M&A Committee also discussed the fact that Bidder C’s foreign ownership could be a concern for the Company’s customers and would increase the risk of damage to the Company in the event that discussions with Bidder C became known in the marketplace but no transaction was completed. The M&A Committee noted that Bidder D might have difficulty completing a transaction because, among other things, it had a limited ability to review classified information, and 90% of the Company’s business involved classified contracts, and that Bidder D itself had stated that it would be unable to complete a transaction in the near future. The M&A Committee also noted the continued risk of employee departures if the conclusion of the process was delayed. For all of the foregoing reasons, the M&A Committee instructed BofA Merrill Lynch to focus its efforts on Parent and Bidder A and to request final offers from those parties, but to keep in contact with Bidder C and Bidder D in case Parent or Bidder A were not able to complete a transaction.

 

On December 6, 2010, BofA Merrill Lynch asked Parent and Bidder A to submit best and final offers no later than December 15, 2010. BofA Merrill Lynch also sent to Parent and Bidder A the form of merger agreement that had been prepared by DLA Piper, with input from the Company and the M&A Committee. The draft merger agreement contemplated a transaction structured as an all-cash tender Offer. Parent and Bidder A were asked to submit any proposed revisions to the form of merger agreement no later than December 15, 2010. On December 10, 2010, BofA Merrill Lynch distributed to Parent and Bidder A draft disclosure schedules to the Company’s draft of the merger agreement.

 

Between December 6, 2010 and December 15, 2010, representatives from DLA Piper had discussions with representatives from Parent and Bidder A to respond to questions regarding the draft merger agreement and disclosure schedules. During this time, Parent and Bidder A continued their due diligence investigation of the Company. BofA Merrill Lynch and representatives of the Company had ongoing discussions with Parent and Bidder A in connection with outstanding due diligence inquiries.

 

On December 13, 2010, members of Parent’s senior management, including Mr. Yuse, met with Mr. Van Vleet to discuss Parent’s potential acquisition of the Company.

 

On December 14, 2010, Hunton & Williams LLP, counsel to Parent (“H&W”), discussed with DLA Piper certain issues with respect to the draft merger agreement. Among other things, they discussed structuring the transaction as a tender offer with a minimum tender condition that was equal to the minimum number of shares that, taken together with the Company’s authorized but unissued shares that would be subject to the Top-Up Option, would permit Merger Sub to effect a short-form merger without the need to hold a meeting of the Company’s shareholders (the ‘‘Minimum Threshold”). They also discussed providing that the merger agreement would require

the Company to proceed on a parallel track by filing a proxy statement for a special meeting of the Company’s shareholders to approve a one-step merger if a majority, but less than the number of shares necessary to obtain the Minimum Threshold, were tendered in the Offer.

 

Also on December 14, 2010, members of Parent’s senior management, including David C. Wajsgras, Parent’s Senior Vice President and Chief Financial Officer, and Mr. Cody, discussed the Company’s financial performance for the quarter ended October 31, 2010, with members of the Company’s senior management, including Mr. Van Vleet.

 

On December 15, 2010, Parent submitted a best and final offer of $38.00 per share, together with Parent’s proposed revisions to the form of merger agreement. Parent’s draft merger agreement contemplated an all-cash tender offer structure and the ability to complete the transaction as a one-step merger in certain circumstances. Parent’s draft merger agreement also requested that the Company’s directors, in their capacity as shareholders, enter into tender and voting agreements pursuant to which, among other things, they would agree to tender their shares in the Offer. Parent also advised that its due diligence was substantially complete.

 

Also on December 15, 2010, Bidder A advised BofA Merrill Lynch that it required approval by its board of directors before submitting its best and final offer and that its board was scheduled to meet in the morning on December 17, 2010.

 

On December 16, 2010 and December 17, 2010, representatives of DLA Piper and BofA Merrill Lynch had discussions with Parent and its representatives as to certain issues raised by Parent’s final bid and Parent’s comments to the draft merger agreement.

 

On December 17, 2010, the M&A Committee started meeting at 11:00 a.m. Eastern time to consider the terms of Parent’s best and final offer and to review the revisions to the draft merger agreement proposed by Parent. Following the M&A Committee meeting, the Board convened to review the status of the potential sale process. Representatives of DLA Piper discussed with the Board their fiduciary duties in the context of a potential sale transaction. During the course of the Board meeting, Bidder A contacted BofA Merrill Lynch and explained that it would not be submitting a final offer, which information was shared with the Board. Representatives of BofA Merrill Lynch then reviewed with the Board the financial aspects of Parent’s proposal. Following this discussion, BofA Merrill Lynch confirmed to the Board that, if requested, and subject to its receipt and review of the final merger agreement, it was prepared to render its opinion to the effect that the consideration to be received by the holders of shares in the Contemplated Transactions was fair, from a financial point of view, to such holders. Representatives from DLA Piper described for the Board the key provisions of the draft merger agreement from Parent and the key issues raised. Discussion then ensued among the members of the Board regarding Parent’s revised merger agreement, during which time representatives of DLA Piper responded to questions from members of the Board. The Board also discussed the implications of Bidder A’s decision not to submit any final bid and further considered alternatives other than a sale, including remaining an independent company. BofA Merrill Lynch advised the Board that they had asked Parent to submit a best and final offer, and that they believed Parent had complied with that request. Given that Parent had indicated that it had submitted its best and final offer, and that Parent’s bid was the only final offer submitted and represented a compelling value, the Board determined after a lengthy discussion that it would not be advisable to ask Parent to increase its offer price or to have further discussions with any other potential bidders. Further discussions would also give the Parent an opportunity to reconsider the price it was offering and the terms it proposed in its draft merger agreement. The Board concluded after a lengthy discussion that the benefits to the Company’s shareholders of proceeding to a merger agreement with Parent as quickly as possible at the price it was currently offering outweighed the benefits of any further negotiations concerning price. Accordingly, the Board instructed DLA Piper to continue negotiations on the merger agreement submitted by Parent and attempt to resolve any open issues. The Board decided to defer any decision on approving Parent’s offer to allow the negotiations to proceed and the Board more time to consider and reflect on the information presented. Following the meeting, BofA Merrill Lynch advised Parent that the Board desired to proceed with negotiations with Parent with a view toward finalizing the merger agreement, the disclosure schedules and the tender and voting agreements.

 

During the remainder of December 17, 2010 and December 18, 2010, DLA Piper and H&W had multiple discussions with respect to the draft merger agreement. DLA Piper sent to H&W a proposed form of tender and voting agreement. In the evening of December 17, 2010, H&W submitted its comments to the Company’s draft

disclosure schedules and form of tender and voting agreement. DLA Piper and H&W proceeded to negotiate and finalize drafts of the merger agreement, disclosure schedules and tender and voting agreements.

 

At the end of the day on December 18, 2010, the M&A Committee convened to consider the terms of Parent’s revised merger agreement. Following the M&A Committee meeting, the full Board convened. Representatives of DLA Piper reviewed the status of the negotiations and the revised terms of the merger agreement and reviewed with the Board their fiduciary duties in the context of the transaction being considered. BofA Merrill Lynch reiterated its overview of financial matters. BofA Merrill Lynch then reviewed its financial analysis of the proposed transaction and delivered to the Board its opinion to the effect that, as of that date and based on and subject to various assumptions and limitations described in its opinion, the consideration of $38.00 per share in cash to be received by holders of shares in the Contemplated Transactions was fair, from a financial point of view, to such holders. Following questions by the members of the Board to representatives of BofA Merrill Lynch and DLA Piper, and further discussion among the members of the Board, the M&A Committee recommended that the Board accept the Offer from Parent. Then the Board, by unanimous action of all members, determined that acceptance of Parent’s Offer was in the best interests of the Company’s shareholders. The Board approved and authorized the execution, delivery and performance of, and declared advisable, the Merger Agreement, the Offer, the Merger and the Contemplated Transactions, and further resolved to recommend to the Company’s shareholders that they tender their shares pursuant to the Offer, and, if required, adopt the Merger Agreement and approve the Merger.

 

After the adjournment of the Board meeting, representatives of BofA Merrill Lynch telephoned representatives of Parent to inform Parent that the Board had accepted Parent’s offer. The Merger Agreement and the tender and voting agreements were executed later in the evening on December 18, 2010.

 

The parties announced the transaction in separately issued press releases before the opening of the U.S. stock markets on December 20, 2010.

 

On December 30, 2010, Parent and Merger Sub commenced the Offer, which has an initial expiration date of January 28, 2011.

 

Reasons for Recommendation

 

The Board consulted with the Company’s senior management, the M&A Committee, the Company’s outside legal advisor, DLA Piper, and the Company’s financial advisor, BofA Merrill Lynch, in evaluating the Merger Agreement and the Contemplated Transactions and in the course of reaching its determination to adopt the Merger Agreement and approve the Offer, the Merger and the Contemplated Transactions and to recommend unanimously that the Company’s shareholders accept the Offer and tender their shares pursuant to the Offer and, if required by applicable law, adopt the Merger Agreement and approve the Merger. The Board considered a number of factors, including the following material factors and benefits of the Offer and Merger, each of which the Board believed supported its recommendation:

 

 

 

 

 

The Board also considered a variety of uncertainties and risks in its deliberations concerning the Merger Agreement and the Contemplated Transactions, including the Offer and the Merger, including the following:

 

 

 

The foregoing discussion of information and factors considered by the Board is not intended to be exhaustive. In light of the variety of factors considered in connection with its evaluation of Merger Agreement and the Contemplated Transactions, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. Rather, the Board viewed its determinations and recommendations as being based on the totality of information and factors presented to and considered by the Board. Moreover, each member of the Board applied his or her own personal business judgment to the process and may have given different weight to different factors.

 

The Board unanimously recommends that you vote “FOR” the proposal to adopt the Merger Agreement and approve the Merger and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

In considering the recommendation of the Board with respect to the proposal to adopt the Merger Agreement and approve the Merger, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, yours. The Board was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the Merger, and in recommending that the Merger Agreement be adopted and the Merger be approved by the shareholders of the Company. See the section entitled “The Merger” beginning on page 22.

 

Opinion of the Company’s Financial Advisor

 

The Company has retained BofA Merrill Lynch to act as the financial advisor to its Board in connection with the Contemplated Transactions. BofA Merrill Lynch is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The Company selected BofA Merrill Lynch to act as the financial advisor in connection with the Contemplated Transactions on the basis of BofA Merrill Lynch’s experience in transactions similar to the Contemplated Transactions, its reputation in the investment community and its familiarity with the Company and its business.

 

The full text of BofA Merrill Lynch’s written opinion to the Board, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex B to this proxy statement and is incorporated by reference herein in its entirety. The following summary of BofA Merrill Lynch’s opinion is qualified by reference to the full text of the opinion. BofA Merrill Lynch delivered its opinion to the Board for the benefit and use of the Board (in its capacity as such) in connection with and for purposes of its evaluation of the consideration of $38.00 per share from a financial point of view. BofA Merrill Lynch’s opinion does not address any other aspect of the Contemplated Transactions and does not constitute a recommendation as to whether any shareholder of the Company should tender any shares of Company Common Stock pursuant to the Offer or how any shareholder of the Company should vote or act in connection with the Merger or any related matter.

In connection with rendering its opinion, BofA Merrill Lynch, among other things:

 

 

In arriving at its opinion, BofA Merrill Lynch assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it and relied upon the assurances of the management of the Company that they were not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the Company’s forecasts, BofA Merrill Lynch was advised by the Company, and assumed, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of the Company as to the future financial performance of the Company. BofA Merrill Lynch did not make or was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Company, nor did it make any physical inspection of the properties or assets of the Company. BofA Merrill Lynch did not evaluate the solvency or fair value of the Company or Parent under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. BofA Merrill Lynch assumed, at the direction of the Company, that the Contemplated Transactions would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Contemplated Transactions, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, would be imposed that would have an adverse effect on the Company or the contemplated benefits of the Contemplated Transactions.

 

BofA Merrill Lynch expressed no view or opinion as to any terms or other aspects of the Contemplated Transactions (other than the consideration of $38.00 per share to the extent expressly specified in its opinion), including, without limitation, the form or structure of the Contemplated Transactions. BofA Merrill Lynch’s opinion was limited to the fairness, from a financial point of view, of the consideration of $38.00 per share in cash to be received by holders of shares and no opinion or view was expressed with respect to any consideration received in connection with the Contemplated Transactions by the holders of any other class of securities, creditors or other constituencies of any party. In addition, no opinion or view was expressed with respect to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to any of the officers, directors or employees of any party to the Contemplated Transactions, or class of such persons, relative to the consideration of

$38.00 per share. Furthermore, no opinion or view was expressed as to the relative merits of the Contemplated Transactions in comparison to other strategies or transactions that might be available to the Company or in which the Company might engage or as to the underlying business decision of the Company to proceed with or effect the Contemplated Transactions. In addition, BofA Merrill Lynch expressed no opinion or recommendation as to whether any shareholder of the Company should tender shares pursuant to the Offer or how any shareholder of the Company should vote in connection with the Merger or any related matter. Except as described above, neither the Company nor the Board imposed other limitations on the investigations made or procedures followed by BofA Merrill Lynch in rendering its opinion.

 

BofA Merrill Lynch’s opinion was necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to BofA Merrill Lynch as of, the date of its opinion. It should be understood that subsequent developments may affect its opinion, and BofA Merrill Lynch does not have any obligation to update, revise or reaffirm its opinion. The issuance of BofA Merrill Lynch’s opinion was approved by BofA Merrill Lynch’s Americas Fairness Opinion Review Committee.

 

The following represents a brief summary of the material financial analyses presented by BofA Merrill Lynch to the Board in connection with its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by BofA Merrill Lynch, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by BofA Merrill Lynch. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by BofA Merrill Lynch.

 

Summary of Analyses

 

Selected Publicly Traded Companies Analysis.  BofA Merrill Lynch reviewed publicly available financial and stock market information for the Company and the following nine publicly traded companies in the defense electronics and “pure play” defense industries:

 

 

BofA Merrill Lynch reviewed enterprise values of the selected publicly traded companies, calculated as equity values based on closing share prices on December 14, 2010, plus debt, preferred equity and minority interest, less cash and marketable securities, as a multiple of fiscal years 2010 and 2011 estimated earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA. BofA Merrill Lynch then applied a multiple range of 8.0x — 10.0x of fiscal year 2011 estimated EBITDA, adjusted to exclude transactions fees, litigation, inventory write-downs and Defense Contract Audit Agency expenses, derived from the selected publicly traded companies to corresponding estimated adjusted EBITDA of the Company based on management projections. Estimated financial data of the selected publicly traded companies were based on publicly available consensus estimates of research analysts’ reports and calendarized to December 31. This analysis indicated the following

implied per share equity value reference range for the Company (rounded to the nearest $0.25), as compared to the consideration of $38.00 per share:

 

 

No company used in this analysis is identical or directly comparable to the Company. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which the Company was compared.

 

Selected Precedent Transactions Analysis.  BofA Merrill Lynch reviewed, to the extent publicly available, financial information relating to the following ten selected transactions involving companies in the defense and intelligence industries:

 

 

BofA Merrill Lynch reviewed transaction values, calculated as the enterprise value implied for the target company based on the consideration payable in the selected transaction, as a multiple of the target company’s adjusted EBITDA for the last twelve months, or LTM. BofA Merrill Lynch then applied a multiple range of 13.0x – 16.0x of adjusted LTM EBITDA derived from the selected transactions to the Company’s adjusted LTM EBITDA. This analysis indicated the following implied per share equity value reference range for the Company (rounded to the nearest $0.25), as compared to the consideration of $38.00 per share:

 

 

No company, business or transaction used in this analysis is identical or directly comparable to the Company or the Contemplated Transactions. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which the Company and the Contemplated Transactions were compared.

 

Discounted Cash Flow Analysis.  BofA Merrill Lynch performed a discounted cash flow analysis of the Company to calculate the estimated present value of the unlevered, after-tax free cash flows that the Company could generate during the Company’s fiscal years 2011 through 2015 based on forecasts relating to the Company prepared by the management of the Company. BofA Merrill Lynch performed a discounted cash flow analysis using two methods of valuing the Company at the end of the projection period, the terminal exit multiple method and the perpetuity growth rate method. For the discounted cash flow analysis using the terminal exit multiple method, for the purpose of calculating the terminal value for the Company at the end of the forecast period, BofA Merrill Lynch applied terminal multiples ranging from 8.0x – 10.0x to the Company’s 2015 estimated EBITDA. For the

discounted cash flow analysis using the perpetuity growth rate method, for the purpose of calculating the terminal value for the Company at the end of the forecast period, BofA Merrill Lynch applied varying growth rates in the near term and perpetuity to the Company’s normalized 2015 estimated unlevered free cash flow. Normalized 2015 estimated unlevered free cash flow was derived from the Company’s 2015 estimated EBITDA by utilizing varying assumptions, including with respect to depreciation and amortization, working capital and investments in growth opportunities. For both the discounted cash flow analysis using the terminal exit multiple method and the discounted cash flow analysis using the perpetuity growth rate method, the cash flows and terminal values were then discounted to present value using discount rates ranging from 9.5% – 11.5%. These analyses indicated the following implied per share equity value reference ranges for the Company (rounded to the nearest $0.25), as compared to the consideration of $38.00 per share:

 

Implied per Share Equity Value Reference Range for the Company

 

 

Other Factors

 

In rendering its opinion, BofA Merrill Lynch also reviewed and considered other factors, including:

 

 

 

 

Miscellaneous

 

As noted above, the discussion set forth above is a summary of the material financial analyses presented by BofA Merrill Lynch to the Board in connection with its opinion and is not a comprehensive description of all analyses undertaken by BofA Merrill Lynch in connection with its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to partial analysis or summary description. BofA Merrill Lynch believes that its

analyses summarized above must be considered as a whole. BofA Merrill Lynch further believes that selecting portions of its analyses and the factors considered or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying BofA Merrill Lynch’s analyses and opinion. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary.

 

In performing its analyses, BofA Merrill Lynch considered industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company and BofA Merrill Lynch. The estimates of the future performance of the Company in or underlying BofA Merrill Lynch’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by BofA Merrill Lynch’s analyses. These analyses were prepared solely as part of BofA Merrill Lynch’s analysis of the fairness, from a financial point of view, of the consideration of $38.00 per share and were provided to the Board in connection with the delivery of BofA Merrill Lynch’s opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the estimates used in, and the ranges of valuations resulting from, any particular analysis described above are inherently subject to substantial uncertainty and should not be taken to be BofA Merrill Lynch’s view of the actual values of the Company.

 

The type and amount of consideration payable in the Contemplated Transactions was determined through negotiations between the Company and Parent, rather than by any financial advisor, and were approved by the Board. The decision to enter into the Merger Agreement was solely that of the Board. As described above, BofA Merrill Lynch’s opinion and analyses were only one of many factors considered by the Board in its evaluation of the Contemplated Transactions and should not be viewed as determinative of the views of the Board or management with respect to the Contemplated Transactions or the consideration.

 

The Company has agreed to pay BofA Merrill Lynch for its services in connection with the Contemplated Transactions a customary fee, a portion of which was payable in connection with its opinion and a significant portion of which is contingent upon the completion of the Offer. Pursuant to the engagement letter between BofA Merrill Lynch and the Company, dated as of October 7, 2010, the Company has agreed to pay BofA Merrill Lynch a fee totaling approximately $8.8 million, of which $1 million was earned upon delivery of its opinion and the remaining portion of which will be payable upon the consummation of the Offer and the Merger. The Company also has agreed to reimburse BofA Merrill Lynch for its expenses incurred in connection with BofA Merrill Lynch’s engagement and to indemnify BofA Merrill Lynch, any controlling person of BofA Merrill Lynch and each of their respective directors, officers, employees, agents and affiliates against specified liabilities, including liabilities under the federal securities laws.

 

BofA Merrill Lynch and its affiliates comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of companies, governments and individuals. In the ordinary course of their businesses, BofA Merrill Lynch and its affiliates may invest on a principal basis or on behalf of customers or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions in the equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, Parent and certain of their respective affiliates.

 

In addition, BofA Merrill Lynch and its affiliates in the past have provided, currently are providing, and in the future may provide, investment banking, commercial banking and other financial services to Parent and have received and in the future may receive compensation for the rendering of these services, including (i) having acted as a joint book-running manager and as one of the underwriters for Parent’s offerings of notes in 2009 and 2010, (ii) having acted or acting as lead arranger, bookrunner and syndication agent for, and a lender under, certain credit facilities of Parent, including Parent’s primary revolving credit facility and (iii) having provided or providing certain foreign exchange and treasury management and trade services and products to Parent.

Certain Company Projections

 

The Company does not as a matter of course make public projections as to future performance, earnings or other results beyond the current fiscal year, and is especially wary of making projections for extended periods due to the unpredictability of the underlying assumptions and estimates.

 

However, in connection with the due diligence review of the Company, in mid-October, 2010, the Company provided an information package to each of the ten interested parties that had previously executed confidentiality agreements as part of the Company’s sale process. The information packages included non-public internal financial forecasts regarding the Company’s anticipated future operations for the balance of the fiscal year ended October 31, 2010 and the five fiscal years ended October 31, 2011, 2012, 2013, 2014 and 2015, respectively, copies of which were also provided to BofA Merrill Lynch. The forecasts identified above are referred to collectively as the ‘‘Internal Financial Forecasts.” Summaries of the Internal Financial Forecasts are set forth below.

 

The Internal Financial Forecasts were not prepared with a view toward public disclosure. Rather, the Internal Financial Forecasts were prepared by the Company’s management solely for internal management purposes, the bidders’ review in connection with their due diligence investigations and BofA Merrill Lynch’s use in connection with its opinion regarding the Offer and the Merger. The Internal Financial Forecasts were not prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or generally accepted accounting principles, nor were they examined or reviewed by the Company’s independent public accounting firm or any other accounting firm, nor has any such firm expressed any opinion or other assurance with respect thereto. There is no guarantee that the Internal Financial Forecasts will be realized, or that the assumptions upon which they are based will prove to be correct. In addition, the Internal Financial Forecasts did not include certain potential downward revisions that may occur due to ongoing customer contract matters that were disclosed to each of the bidders. Further, the Internal Financial Forecasts do not take into account the effect of any failure to occur of the Offer or the Merger and should not be viewed as accurate or continuing in that context. The Company’s shareholders are cautioned not to place undue reliance on the Internal Financial Forecasts included in this proxy statement. The Internal Financial Forecasts are being included in this proxy statement not to influence your decision whether to tender your shares in the Offer or vote in favor of the adoption of the Merger Agreement and approval of the Merger, but rather because they were made available by the Company to the bidders and BofA Merrill Lynch.

 

The Internal Financial Forecasts were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of the Company’s management. Important factors that may affect actual results and result in the forecast results not being achieved include, but are not limited to, the risks and uncertainties identified in the reports filed by the Company with the SEC (including the Company’s Form 10-K for the fiscal year ended October 31, 2010). Some of these specific risks, although not all, are: the Company’s ability to achieve the anticipated benefits of its recent acquisitions, the Company’s ability to capture organic growth opportunities and to utilize the strategic advantages of a strong capital position; the Company’s ability to obtain new orders from procurers, including the U.S. Government when anticipated and to successfully perform and achieve profitability on such contracts; the Company’s ability to hire qualified staff as needed; and other factors affecting the Company’s business that are beyond its control. The Internal Financial Forecasts also reflect assumptions as to certain business decisions that are subject to change. Because the Internal Financial Forecasts cover multiple years, such information by its nature becomes less reliable with each successive year. The Internal Financial Forecasts should be read together with the historical financial statements of the Company included in its Form 10-K for the fiscal year ended October 31, 2010.

 

Accordingly, there can be no assurance that the projections contained in the Internal Financial Forecasts will be realized, and actual results may vary materially from those shown. The inclusion of the Internal Financial Forecasts in this proxy statement should not be regarded as an indication that Parent or Merger Sub or their affiliates, advisors or representatives considered or consider the Internal Financial Forecasts to be a reliable prediction of future events, and the Internal Financial Forecasts should not be relied upon as such. None of the Company, Parent or Merger Sub or their respective affiliates, advisors or representatives can give you any assurance that actual results will not differ from the Internal Financial Forecasts, and none of them undertakes any obligation to update or otherwise revise or reconcile the Internal Financial Forecasts to reflect circumstances existing after the date the Internal Financial

Forecasts were prepared or to reflect events, even in the event that any or all of the assumptions underlying the projections contained in the Internal Financial Forecasts are shown to be in error. The Company has made no representation to Parent or Merger Sub, in the Merger Agreement or otherwise, concerning the Internal Financial Forecasts.

 

The Internal Financial Forecasts include non-GAAP financial measures, including EBITDA. The Company believes that EBITDA provides important information about the operating trends of the Company. The Company uses EBITDA to evaluate performance of its business operations. These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP and may be different from similarly titled measures used by other companies. EBITDA is not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP. These measures should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures.

 

These projections include the following:

 

 

Closing and Effective Time of Merger

 

If the Merger is approved at the special meeting then, assuming timely satisfaction of the other necessary closing conditions, we anticipate that the Merger will be completed promptly thereafter. The effective time of the Merger will occur as soon as practicable following the closing of the Merger upon the filing of a certificate of merger with the Secretary of State of the State of California (or at such later date as we and Parent may agree and specify in the certificate of merger).

 

Payment of Merger Consideration and Surrender of Stock Certificates

 

Each record holder of shares of Company Common Stock (other than holders of solely the Excluded Shares) will be sent a letter of transmittal describing how such holder may exchange its shares of Company Common Stock for the per share Merger consideration as soon as reasonably practicable after the effective time of the Merger.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

You will not be entitled to receive the per share Merger consideration until you deliver a duly completed and executed letter of transmittal to the paying agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the applicable letter of transmittal is accompanied by all documents reasonably required by the paying agent to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

 

Interests of Certain Persons in the Merger

 

Overview

 

The Company’s executive officers and the members of the Board may be deemed to have certain interests in the Contemplated Transactions, including the Offer and the Merger, that may be different from or in addition to those of the Company’s shareholders generally. These interests may create potential conflicts of interest. The Board

was aware of those interests and considered them, among other matters, in reaching its decision to adopt the Merger Agreement and approve the Contemplated Transactions.

 

Company Stock Options

 

Under the Merger Agreement, upon the earlier of the effective time of the Offer or the effective time of the Merger, each unexercised Option, whether vested or unvested, that is outstanding immediately prior to the effective time of the Offer or the effective time of the Merger, as the case may be, shall be canceled. The holders of each such Option will become entitled to receive an amount in cash equal to the product of (a) the excess of the Offer Price over the exercise price per share subject to such Option multiplied by (b) the number of shares subject to such Option immediately prior to the effective time of the Offer or the effective time of the Merger, as the case may be, without interest and less any required withholding taxes (such amount, the “Option Spread Value”). The Option Spread Value will be paid to each holder of an Option as soon as practicable after the effective time of the Offer or the effective time of the Merger, as the case may be.

 

The table below sets forth information regarding the Options held by the Company’s directors and executive officers as of December 28, 2010 that would be canceled and exchanged immediately prior to the effective time of the Offer or the effective time of the Merger, as the case may be, into the right to receive the Option Spread Value. All of the Options are vested.

 

The table below sets forth the Option Spread Value of the Options held by the Company’s directors and executive officers, as of December 28, 2010, that will be paid following the effective time of the Offer or the effective time of the Merger, as the case may be. All of such Options are vested.

 

 

Simultaneous with the first to occur of the effective time of the Offer and the effective time of the Merger, Parent and Merger Sub shall pay the Company an amount in cash equal to the aggregate amount of consideration to be paid to holders of Options and the Company shall cause such consideration to be paid to such holders pursuant to the terms of the Merger Agreement.

 

Restricted Shares

 

At the earlier of the effective time of the Offer or the effective time of the Merger, each unvested Company Restricted Share (as defined in the Merger Agreement and referred to herein as ‘‘Restricted Shares”) outstanding immediately prior to the effective time of the Offer or the effective time of the Merger, as the case may be, will be converted, with the holder of such Restricted Share becoming entitled to receive upon vesting an amount in cash equal to the product of (a) the amount of the Offer price and (b) the number of Restricted Shares held by such holder, without interest and less any required withholding taxes (such amount, the “Restricted Share Value”), and Parent shall cause the Surviving Corporation to pay the Restricted Share Value to such holder as soon as practicable

following the vesting of such Restricted Share in accordance with its terms. The table below sets forth the gross Restricted Share Value of Restricted Shares held by the Company’s directors and executive officers, as of December 28, 2010.

 

 

 

 

Employee Stock Purchase Plan

 

Under the Company’s 1993 Employee Stock Purchase Plan, as amended (the “ESPP”), participants are permitted to purchase shares at a discount on certain dates through payroll deductions within a pre-determined purchase period. Employee directors and executive officers of the Company are eligible to participate in the ESPP. Certain executive officers of the Company currently participate in the ESPP. Pursuant to the Merger Agreement, the Company has agreed that, among other things, (i) participation in the ESPP is limited to those employees who were participants as of the date of the Merger Agreement, (ii) no purchase period will be commenced after the date of the Merger Agreement, (iii) each purchase right under the ESPP outstanding immediately prior to the effective time of the Offer or the effective time of the Merger, as the case may be, shall be used to purchase from the Company whole shares of Common Stock (subject to the provisions of the ESPP regarding the maximum number and value of shares purchasable per participant) at the applicable price determined under the terms of the ESPP for the then outstanding purchase period, using such date as the final purchase date for such purchase period, and any remaining accumulated but unused payroll deductions shall be distributed to the relevant participants without interest as promptly as practicable following the effective time of the Offer or the effective time of the Merger, as the case may be, and (iv) the ESPP will terminate, effective upon the earlier of the purchase date for the purchase period in effect on the date of the Merger Agreement and the effective time of the Offer or the effective time of the Merger, as the case may be.

 

Section 16 Matters

 

Pursuant to the Merger Agreement, the Company has agreed to take all reasonable steps as may be required to cause the treatment of the Options and Restricted Shares in connection with the Merger Agreement by each individual who is a director or executive officer of the Company subject to Section 16 of the Exchange Act to be exempt under Rule 16b-3 under the Exchange Act.

 

Severance and Change-in-Control Arrangements

 

On August 18, 2004, the Compensation Committee of the Board (the “Compensation Committee”) adopted, and has subsequently amended from time to time, most recently on December 13, 2010, the Company’s Executive

Retention and Severance Plan (the “Executive Severance Plan”). The Executive Severance Plan provides certain benefits to the Company’s executive officers and key employees upon involuntary termination of employment and in connection with a Change in Control of the Company, as defined in the Executive Severance Plan and described below.

 

A participant in the Executive Severance Plan whose employment is terminated without cause or resigns following certain adverse changes in employment circumstances, including any such termination or resignation that occurs during a period from the first public announcement of a change in control and ending 12 months after a change in control, will be entitled to specified severance benefits. In addition to accrued compensation, including any earned but unpaid prior year bonus, and benefits earned under the Company’s employee benefit and equity compensation plans, the terminated participant will receive cash severance payments equal to the aggregate of the participant’s base salary for a period of 24 months in the case of the chief executive officer, and 12 months in the case of other executive officers, plus an amount equal to the participant’s annual bonus for one year. In addition, participants will be entitled to receive for the same respective periods employer-paid health benefits substantially similar to those provided immediately prior to the termination. Participants will also be entitled to acceleration in full of the vesting of equity awards they hold upon any such termination occurring within 24 months following a change in control. Provision of all such benefits is conditioned upon the participant’s execution of a release of claims against us and entry into a covenant not to compete with us set forth in a restrictive covenants agreement. The participant may elect to terminate the restrictive covenants agreement, including the termination of the non-competition agreement, in exchange for forfeiting any additional severance payments payable after such termination. The treatment of any stock based awards held by Executive Severance Plan participants upon a change in control of the Company will be determined under the plans or agreements providing for such options or awards.

 

Following a participant’s termination of employment, the participant will be indemnified by us to the fullest extent permitted under applicable law and will be provided with directors’ and officers’ liability insurance (if applicable) for a period of six years, each as set forth in the Executive Severance Plan. If any payment or benefit received or to be received by the participant pursuant to the Executive Severance Plan or otherwise would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then the Company will pay the executive officer only such amounts as will not exceed the amount that produces the greatest after-tax benefit to the participant.

 

For purposes of the Executive Severance Plan, a Change in Control means the occurrence of any of the following:

 

 

For purposes of the Executive Severance Plan, “Cause” means the occurrence of any of the following, as determined in good faith by a vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held in whole or in part for such purpose:

 

 

 

For purposes of the Executive Severance Plan, “Good Reason” means the occurrence during the two-year period following a change in control of the Company (as described above) of any of the following conditions without the participant’s consent:

 

 

Summary of Certain Benefits Payable in Connection with the Contemplated Transactions

 

The table below contains an estimate of the value of certain material payments and benefits payable, in connection with the Contemplated Transactions, to the Company’s executive officers, directors and affiliates. The table excludes, among other things, payments that may be made for (i) outstanding shares of Company Common Stock that are tendered for purchase pursuant to the Offer and (ii) the Option Spread Value for Options that are estimated to be vested on March 15, 2011, an illustrative date of the effective time of the Merger. Amounts shown in the table are estimates and assume, among other things, that each executive officer or director of the Company will have a qualifying termination of his or her employment on March 15, 2011. These estimates will not be used to

determine actual benefits paid, which will be calculated in accordance with terms of the Merger Agreement or the related agreement, plan or arrangement, as applicable, and may materially differ from these estimates.

 

 

Directors’ Compensation

 

Under the Company’s director compensation policy, only directors who are not employees of the Company receive compensation for their services as directors. Directors are compensated entirely by annual cash payments, payable quarterly. Non-employee directors receive an annual retainer of $76,000, plus a fee of $1,000 per meeting for in-person attendance at each of the four regularly scheduled meetings of the Board per annum. The Chairman of the Audit Committee receives an additional $14,000 annual retainer, the Chairman of the Compensation Committee receives an additional $7,500 annual retainer, the Chairman of the Governance and Nominating Committee receives an additional $5,000 annual retainer and the Chairman of the Board receives an additional $10,000 annual retainer. In addition, in connection with the sale process, the Board determined that each individual member of the M&A Committee would receive $10,000 per month, which total amount shall not exceed $50,000, and the Chairman of the M&A Committee would receive $15,000 per month, which total amount shall not exceed $75,000. The Company also reimburses its non-employee directors for their out-of-pocket expenses incurred in connection with attendance at Board, committee and shareholder meetings and other Company business.

 

Employee Benefit Matters

 

The Merger Agreement provides that Parent and its subsidiaries, until December 31, 2011, shall provide each person employed by the Company or its subsidiaries immediately prior to the effective time of the Merger and who remains employed by the Company or its subsidiaries on or after the effective time of the Merger (“Continuing Employees”) with compensation (including base salary and bonus opportunities, but not equity-based compensation) and benefits (including paid time off, 401(k), health and severance benefits) that are materially no less favorable in the aggregate than those provided to the Continuing Employees immediately prior to the effective time of the Merger. The Merger Agreement also provides that Parent shall, solely to the extent Parent makes its employee benefits plans available to Continuing Employees after the effective time of the Merger, give credit to Continuing Employees for prior service to the Company or its subsidiaries for purposes of eligibility to participate, vesting, benefits levels or accruals for such employees in respect of Parent’s employee benefits plans (other than benefit levels and accruals under any retirement, pension or savings plan, except for credit for prior service for the purposes of determining eligibility for a matching contribution under Parent’s savings and investment plan), except in cases where credit would result in duplication of benefits.

 

Director and Officer Exculpation, Indemnification and Insurance

 

The Company’s articles of incorporation and bylaws provide that the Company shall indemnify its directors and officers, and may indemnify its employees and agents, to the fullest extent permitted by California law.

Based on such indemnification provisions, pursuant to Section 204 of the CGCL, the Company’s directors will not be personally liable to the Company or to its shareholders for monetary damages for breach or alleged breach of the directors’ duty of care or for conduct constituting negligence (or gross negligence) in the exercise of their fiduciary duties. The Company’s directors will continue to be subject to personal liability to the Company and its shareholders, however, for, among other things:

 

 

These provisions have no effect on claims against any of the Company’s directors in his or her capacity as an officer.

 

Section 317 of the CGCL has been interpreted to provide for the indemnification of directors, officers, employees and agents against liability and the entitlement to reimbursement of expenses incurred, under certain circumstances, for claims arising under the Securities Act of 1933, as amended (the “Securities Act”). The SEC has adopted the position, however, that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Under the Merger Agreement, Parent and Merger Sub have agreed that all rights to indemnification, advancement of expenses and exculpation from liabilities for acts or omissions occurring at or prior to the effective time of the Merger existing as of the date of the Merger Agreement in favor of the current or former directors or officers of the Company and its subsidiaries (each, an “Indemnified Party”) as provided in their respective certificates of incorporation or bylaws (or comparable organizational documents) and any indemnification or other agreements of the Company (as in effect at the time of the Merger Agreement) shall be assumed by the Surviving Corporation in the Merger, without further action, upon the effective time of the Merger, and shall survive the Merger and shall continue in full force and effect in accordance with their terms. From and after the effective time of the Merger, Parent and the Surviving Corporation shall be jointly and severally liable to pay and perform in a timely manner such indemnification obligations.

 

Under the Merger Agreement, from the effective time of the Offer through the sixth anniversary of the effective time of the Merger, Parent shall, or shall cause the Surviving Corporation to, cause the Company’s directors and officers that are insured under the Company’s current directors’ and officers’ liability insurance policy in effect as of the date of the Merger Agreement (the ‘‘Existing D&O Policy”) to be covered by a directors’ and officers’ liability insurance policy for acts or omissions occurring prior to the effective time of the Merger on terms with respect to such coverage and amounts no less favorable than those of the Existing D&O Policy. However, in no event shall Parent be obligated to pay an annual premium for such insurance in excess of 300% of the annual premium currently paid by the Company for the Existing D&O Policy.

 

Accounting Treatment

 

The Merger will be accounted for as a “purchase transaction” for financial accounting purposes.

Material U.S. Federal Income Tax Consequences of the Merger

 

The following is a summary of the material United States federal income tax consequences of the Merger to shareholders of the Company whose shares are converted into the right to receive cash in the Merger. This discussion is for general information only and does not purport to consider all aspects of United States federal income taxation that might be relevant to shareholders of the Company. The discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary regulations thereunder and administrative and judicial interpretations thereof, all of which are subject to change, possibly with a retroactive effect. The discussion applies only to shareholders of the Company in whose hands shares are capital assets within the meaning of Section 1221 of the Code. No ruling has been or will be sought from the IRS, and no opinion of counsel has been or will be rendered as to the tax consequences of the Merger. This discussion does not apply to shares received pursuant to the exercise of employee stock options or otherwise as compensation, or to certain types of shareholders (including, without limitation, insurance companies, tax-exempt organizations, financial institutions, regulated investment companies, partnerships, S-corporations, and other pass-through entities and broker-dealers) which may be subject to special rules under the Code. This discussion does not discuss the United States federal income tax consequences to any shareholder of the Company who, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust, or a U.S. holder having a functional currency other than the U.S. dollar, nor does it consider the effect of any federal estate or gift tax laws or foreign, state or local tax laws. This discussion also does not address tax considerations that may be relevant to shareholders of the Company in light of their particular circumstances, such as holding shares as part of a straddle, hedge, conversion, or constructive sale transaction, an integrated investment or other risk-reduction transaction or shareholders of the Company that are subject to the alternative minimum tax. This discussion does not address the United States federal income tax consequences to a shareholder who receives Merger consideration as the result of the vesting and/or the deemed exercise of stock options or warrants or as the result of the vesting of restricted stock. If a partnership holds the shares, the tax treatment of a partner generally will depend on the status of the partner and on the activities of the partnership. Partners of partnerships holding shares should consult their tax advisors regarding the tax consequences of the Merger.

 

Because individual circumstances may differ, each shareholder should consult its, his or her own tax advisor to determine the applicability of the rules discussed below and the particular tax effects of the Merger on a beneficial holder of shares, including the application and effect of the alternative minimum tax and any state, local and foreign tax laws and of changes in such laws.

 

The exchange of shares for cash pursuant to the Merger will be a taxable transaction for United States federal income tax purposes. In general, a shareholder who receives cash in exchange for shares pursuant to the Merger will recognize gain or loss for United States federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received for the shares and the shareholder’s adjusted tax basis in the shares exchanged for cash pursuant to the Merger. Gain or loss will be determined separately for each block of shares (that is, shares acquired at the same price per share in a single transaction) exchanged for cash pursuant to the Merger. Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder’s holding period for such shares is more than one year at the time of consummation the Merger, as the case may be. Long-term capital gains recognized by a non-corporate shareholder upon a disposition of a share generally will be eligible for reduced United States federal income tax rates. In the case of a share that has been held for one year or less, such capital gains generally will be subject to tax at ordinary income tax rates. Certain limitations apply to the use of a shareholder’s capital losses.

 

In general, the Company’s shareholders who exercise statutory dissenters’ rights in connection with the Merger will also recognize gain or loss. Any holder considering exercising statutory dissenters’ rights should consult his, her or its own tax advisor.

 

A shareholder whose shares exchanged for cash pursuant to the Merger is subject to information reporting and may be subject to backup withholding unless certain information is provided to the paying agent or an exemption applies. See Section 3.2 of the Merger Agreement — “Exchange of Certificates.”

Regulatory Approvals and Notices

 

Antitrust Compliance.  Under the HSR Act and the related rules and regulations that have been issued by the FTC, certain transactions may not be consummated until specified information and documentary material (“Premerger Notification and Report Forms”) have been furnished to the FTC and the Antitrust Division of the Department of Justice (the “Antitrust Division”) and certain waiting period requirements have been satisfied. These requirements of the HSR Act apply to the Merger.

 

Under the HSR Act, the Merger may not be completed until the expiration of a 15 calendar day waiting period following the filing by Parent, as the ultimate parent entity of Merger Sub, of a Premerger Notification and Report Form concerning the Offer and the Merger with the FTC and the Antitrust Division, unless the waiting period is earlier terminated by the FTC and the Antitrust Division. Parent filed a Premerger Notification and Report Forms with the FTC and the Antitrust Division in connection with the purchase of shares in the Offer and the Merger on January 3, 2011. The Company filed a Premerger Notification and Report Form with the same offices on January 7, 2011. Accordingly, the required waiting period with respect to the Offer and the Merger will expire at 11:59 p.m., New York City time, on January 18, 2011, unless earlier terminated by the FTC and the Antitrust Division or unless the FTC or the Antitrust Division issues a request for additional information and documentary material (a “Second Request”) prior to that time. If within the 15 calendar day waiting period either the FTC or the Antitrust Division issues a Second Request, the waiting period with respect to the Offer and the Merger would be extended until 10 calendar days following the date of substantial compliance by Parent with that request, unless the FTC or the Antitrust Division terminates the additional waiting period before its expiration. After the expiration of the 10 calendar day waiting period, the waiting period could be extended only by court order or with Parent’s consent. In practice, complying with a Second Request can take a significant period of time. Although the Company is required to file certain information and documentary material with the FTC and the Antitrust Division in connection with the Offer and the Merger, neither the Company’s failure to make those filings nor a request for additional documents and information issued to the Company by the FTC or the Antitrust Division will extend the waiting period with respect to the purchase of shares in the Offer and the Merger. The Merger will not require an additional filing under the HSR Act if Merger Sub owns more than 50% of the outstanding shares at the time of the Merger or if the Merger occurs within one year after the HSR Act waiting period applicable to the offer expires or is terminated.

 

The FTC and the Antitrust Division will scrutinize the legality under the antitrust laws of Merger Sub’s proposed acquisition of the Company. At any time before or after Merger Sub’s acceptance for payment of shares pursuant to the Merger, if the Antitrust Division or the FTC believes that the Merger would violate the U.S. federal antitrust laws by substantially lessening competition in any line of commerce affecting U.S. consumers, the FTC and the Antitrust Division have the authority to challenge the transaction by seeking a federal court order enjoining the transaction or, if shares have already been acquired, requiring disposition of such shares or the divestiture of substantial assets of Merger Sub, the Company or any of their respective subsidiaries or affiliates or requiring other conduct relief. U.S. state attorneys general and private persons may also bring legal action under the antitrust laws seeking similar relief or seeking conditions to Merger Sub’s obligation to accept for payment shares tendered in the Offer or consummate the Merger. While Parent believes that consummation of the Merger would not violate any antitrust laws, there can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if a challenge is made, what the result will be. If any such action is threatened or commenced by the FTC, the Antitrust Division or any state or any other person, Merger Sub may not be obligated to consummate the Merger.

 

State Takeover Statutes.  The Company is incorporated under the laws of the State of California. Section 1203 of the CGCL provides that if a tender offer is made to some or all of a corporation’s shareholders by an “interested party,” an affirmative opinion in writing as to the fairness of the consideration to the shareholders of such corporation is required to be delivered to the shareholders at the time that the tender offer is first made in writing to the shareholders. However, if the tender offer is commenced by publication and tender offer materials are subsequently mailed or otherwise distributed to the shareholders, the opinion may be omitted in the publication if the opinion is included in the materials distributed to the shareholders. If a tender of shares is being sought by an “interested party” and a third party proposal (a ‘‘Proposal”) to acquire the same corporation is made to the corporation or its shareholders, at least ten days prior to the date for the acceptance of the shares tendered to the “interested party,” the shareholders of the corporation shall be informed of such Proposal, forwarded copies of any written materials provided by the person making the Proposal and given a reasonable period of time (ten days from

the date of notice or publication of the Proposal) to withdraw any tender in favor of the “interested party” tender offer. For purposes of Section 1203, the term “interested party” includes, among other things, a person who is a party to the transaction and (a) directly or indirectly controls the corporation that is the subject of the tender offer or proposal, (b) is, or is directly or indirectly controlled by, an officer or director of the subject corporation or (c) is an entity in which a material financial interest is held by any director or executive officer of the subject corporation. The Company believes that no state takeover or similar statute is applicable to the Merger Agreement, the Offer, the Merger, the other transactions contemplated by the Merger Agreement or compliance with the terms of the Merger Agreement, and that the resolutions adopted by its Board are sufficient to render inapplicable to Parent, Merger Sub, the Merger Agreement, the Merger, the Tender and Voting Agreements and the other transactions contemplated by the Merger Agreement the restrictions on business combinations set forth in the CGCL.

 

A number of other states have adopted laws and regulations which purport, to varying degrees, to be applicable to attempts to acquire securities of corporations which are incorporated, or have substantial assets, shareholders, principal executive offices or principal places of business therein or whose business operations otherwise have substantial economic effects in such states. If any government official or third party seeks to apply any state takeover law to the Offer or the Merger, we will take such action as then appears desirable, which action may include challenging the applicability or validity of such statute in appropriate court proceedings. If it is asserted that one or more state takeover statutes apply to the Offer, the Merger, the Merger Agreement or the Tender Agreements and it is not determined that such statute or statutes do not apply or are invalid as applied to the Offer, the Merger, the Merger Agreement or the Tender Agreements, as applicable, we might be required to file certain information with, or to receive approvals from, the relevant state authorities or holders of shares, and we may be unable to accept for payment or pay for the shares tendered pursuant to the Offer, or be delayed in continuing or consummating the Offer or the Merger. In such case, we may not be obligated to accept for payment or pay for any tendered shares.

 

Litigation Relating to the Merger

 

On January 11, 2011, the Company received a copy of an unfiled complaint and was informed that a putative shareholder class action lawsuit has been, or will be, filed in the Superior Court of the State of California, County of Santa Clara, captioned Jarackas v. Applied Signal Technology, Inc., et al. (Case No. 111CV191643) against the Company, the members of the Board, Parent and Merger Sub (the “Complaint”). The Complaint alleges that the members of the Board breached their fiduciary duties in connection with the Board’s recommendation to the Company’s shareholders to accept the Offer, authorizing the Company to enter into the Merger Agreement and the disclosures regarding the Offer and the Merger. The Complaint seeks injunctive relief and does not seek an award of money damages. The Company believes the allegations are without merit and intends to defend vigorously the action.

 

This section describes the material terms of the Merger Agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. Capitalized terms used herein and not otherwise defined have the meanings set forth in the Merger Agreement. We encourage you to read the Merger Agreement carefully and in its entirety. This section is not intended to provide you with any factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in the section entitled, “Where You Can Find More Information”, beginning on page [ • ].

 

Explanatory Note Regarding the Merger Agreement

 

The Merger Agreement is included to provide you with information regarding its terms. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the Merger Agreement. The representations, warranties and covenants made in the Merger Agreement by the Company, Parent and Merger Sub

were qualified and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to consummate the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to shareholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure schedule that the Company delivered in connection with the Merger Agreement, which disclosures were not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Merger Agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

 

Merger Agreement

 

The Offer.  On December 30, 2010, Merger Sub commenced the Offer at a price of $38.00 per share, net to the seller in cash, without interest, and less any applicable withholding of taxes. The Offer contemplated that, after completion of the Offer and the satisfaction or waiver of all the conditions to the Offer, Merger Sub would merger with and into the Company and all outstanding shares of Company Common Stock, other than Excluded Shares, would be canceled and converted into the right to receive cash equal to $38.00 per share, without interest and less any applicable withholding of taxes. The offer was commenced pursuant to the merger agreement.

 

Under the terms of the Merger Agreement, the parties agreed to complete the Merger whether or not the Offer is completed. If the Offer is not completed, the parties agreed and California law provides that the Merger could only be completed after the receipt of the Shareholder Approval (as defined below) at the special meeting. We are soliciting proxies for the special meeting to obtain the Shareholder Approval to be able to consummate the Merger regardless of the outcome of the Offer.

 

The Merger Agreement also provides that the obligation of Merger Sub to purchase shares of Company Common Stock tendered in the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including the expiration or termination of applicable waiting periods (any extensions thereof) under the HSR Act and other customary closing conditions. In addition, it is a condition to Merger Sub’s obligation to purchase the shares tendered in the Offer that the number of the outstanding shares of Company Common Stock that have been validly tendered and not validly withdrawn, together with any shares of Company Common Stock then owned by Parent and its subsidiaries, equals at least 76.3% of the Company Common Stock outstanding as of the expiration of the Offer.

 

Pursuant to the Merger Agreement, the Company granted to Merger Sub an irrevocable right (the ‘‘Top-Up Option”) to purchase a number of newly issued shares of Company Common Stock (“Top-Up Shares”) that, when added to the number of shares owned by Parent, Merger Sub and any of their wholly-owned subsidiaries immediately prior to the time of such exercise, Merger Sub owns at least one share more than 90% of the shares of Company Common Stock outstanding immediately after the exercise of the Top-Up Option at a price per share equal to the Offer Price. Merger Sub may exercise this right at any time after shares of Company Common Stock are accepted for purchase in the Offer and prior to the earlier to occur of (i) the effective time of the Merger and (ii) the termination of the Merger Agreement.

 

We refer in this proxy statement to the Offer and to terms of the Merger Agreement applicable to the Offer; however, the Offer is being made separately to the holders of shares of Company Common Stock and is not applicable to the special meeting.

The Merger.  The Merger Agreement provides that, upon and subject to the conditions of the Merger Agreement, and in accordance with the CGCL, at the effective time of the Merger:

 

 

At the effective time of the Merger, (i) the articles of incorporation of the Company shall be amended and restated in its entirety to be identical to the articles of incorporation of Merger Sub in effect immediately prior to the Merger and (ii) the by-laws of Merger Sub in effect immediately before the effective time of the Merger shall become the by-laws of the Surviving Corporation, in each case with references to Merger Sub therein automatically amended to become references to the Surviving Corporation.

 

Conditions to the Merger

 

Conditions of the Company, Parent and Merger Sub.  The obligations of each party to effect the Merger are subject to the fulfillment or waiver, to the extent permitted by law, at or before the effective time of the Merger of the following conditions:

 

 

Conditions of the Company.  The obligations of the Company to effect the Merger are subject to the fulfillment or waiver, to the extent permitted by law, at or before the effective time of the Merger of the following conditions:

 

 

Conditions of Parent and Merger Sub.  The obligations of Parent and Merger Sub to effect the Merger are subject to the fulfillment or waiver, to the extent permitted by law, at or before the effective time of the Merger of the following conditions:

 

 

 

Conversion of Capital Stock.  At the effective time of the Merger:

 

 

After the effective time of the Merger, the shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate, or evidence of shares held in book-entry form, that immediately prior to the effective time of the Merger represented any such shares shall cease to have any rights with respect thereto, except the right to receive an amount in cash equal to the Offer Price (the “Merger Consideration”) in accordance with the terms of the Merger Agreement. At the effective time of the Merger, Parent shall, or shall cause the Surviving Corporation to, deposit with the paying agent funds in amounts and at the times necessary for the payment of the Merger Consideration to be paid to holders of shares in the Merger.

 

Treatment of Options.  At the earlier of the time that Merger Sub accepts for payment shares tendered in the Offer or the effective time of the Merger, each outstanding option to purchase shares granted pursuant to the Company’s equity compensation plans that is outstanding and unexercised at such time (in each case, whether vested or unvested) will be canceled without any action on the part of the holder of any option in consideration for the right to receive, as soon as practicable (and in any event within two business days) following the acceptance of shares in the Offer or the effective time of the Merger, as the case may be, an amount in cash equal to the excess, if any, of the Offer Price over the exercise price per share subject to such option.

 

Treatment of Restricted Shares.  At the earlier of the time that Merger Sub accepts for payment shares tendered in the Offer or the effective time of the Merger, each outstanding restricted share granted pursuant to the Company’s equity incentive plans will be converted without any action on the part of the holder of such restricted share into the right to receive an amount in cash equal to the Offer Price less any applicable withholding of taxes, as soon as practicable (and in any event within two business days) following the vesting of such restricted share in accordance with its terms.

 

Treatment of Purchase Plan.  Under the ESPP, participants are permitted to purchase shares at a discount on certain dates through payroll deductions within a pre-determined purchase period. Employee directors and executive officers of the Company are eligible to participate in the ESPP. Certain executive officers of the

Company currently participate in the ESPP. Pursuant to the Merger Agreement, the Company has agreed that, among other things, (i) participation in the ESPP is limited to those employees who were participants as of the date of the Merger Agreement, (ii) no purchase period will be commenced after the date of the Merger Agreement, (iii) each purchase right under the ESPP outstanding immediately prior to the time that Merger Sub accepts for payment shares tendered in the Offer (or the effective time of the Merger, as the case may be) shall be used to purchase from the Company whole shares (subject to the provisions of the ESPP regarding the maximum number and value of shares purchasable per participant) at the applicable price determined under the terms of the ESPP for the then-outstanding purchase period, using such date as the final purchase date for such purchase period, and any remaining accumulated but unused payroll deductions shall be distributed to the relevant participants without interest as promptly as practicable following the time that Merger Sub accepts for payment shares tendered in the Offer (or the effective time of the Merger, as the case may be) and (iv) the ESPP will terminate, effective upon the earlier of the purchase date for the purchase period in effect on the date of the Merger Agreement and the time that Merger Sub accepts for payment shares tendered in the Offer (or, if the Offer has been terminated, the effective time of the Merger).

 

Merger Without a Meeting of Shareholders; Shareholders’ Meeting.  If, following the Offer and any subsequent offering period and the exercise, if any, of the Top-Up Option, Parent and its subsidiaries shall own at least 90% of the shares, the parties to the Merger Agreement shall take all necessary and appropriate action, including with respect to the transfer to Merger Sub of any shares held by Parent or any subsidiary of Parent, to cause the Merger to become effective, as soon as practicable after Merger Sub accepts for payment the shares tendered in the Offer, without holding the Company shareholders meeting in accordance with the CGCL. If the Minimum Tender Condition is met and Merger Sub accepts and purchases shares in the Offer, Merger Sub will own at least 90% of the outstanding shares (including shares issued pursuant to the Top-Up Option) and expects to consummate the Merger without a meeting of the shareholders of the Company and the special meeting would be canceled.

 

At the Company shareholders meeting, if any, Parent agrees to cause all shares acquired pursuant to the Offer and all other shares, if any, owned by Parent or any subsidiary of Parent to be voted in favor of the Merger.

 

Representations and Warranties.  The Merger Agreement contains representations and warranties made by the Company to Parent and Merger Sub and representations and warranties made by Parent and Merger Sub to the Company. The representations and warranties in the Merger Agreement were made for solely for purposes of the Merger Agreement, were the product of negotiations among the Company, Parent and Merger Sub, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Merger Agreement. Some of those representations and warranties may not be accurate or complete as of any particular date because they are subject to a contractual standard of materiality or Material Adverse Effect different from that generally applicable to public disclosures to shareholders or used for the purpose of allocating risk between the parties to the Merger Agreement rather than establishing matters of fact. Moreover, inaccuracies in the representations and warranties are subject to waiver by the parties to the Merger Agreement without notice to you. Accordingly, you should not rely on the representations and warranties contained in the Merger Agreement as statements of actual facts.

 

In the Merger Agreement, the Company has made customary representations and warranties to Parent and Merger Sub with respect to, among other things:

 

 

 

Some of the representations and warranties in the Merger Agreement made by the Company are qualified as to “materiality” or “Material Adverse Effect.” For purposes of the Merger Agreement, a “Material Adverse Effect” means any state of facts, condition, change, development or event with respect to the Company that, individually or in the aggregate (i) results in or is reasonably likely to result in a Material Adverse Effect on the business, assets, liabilities, properties, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole, or (ii) prevents, materially impedes or materially delays the consummation of the Offer or the Merger to a date following the Termination Date. The definition of “Material Adverse Effect” excludes from clause (i):

 

 

 

In the Merger Agreement, Parent and Merger Sub have made customary representations and warranties to the Company with respect to, among other things:

 

 

Some of the representations and warranties in the Merger Agreement made by Parent and Merger Sub are qualified as to “materiality.”

 

None of the representations and warranties contained in the Merger Agreement or in any instrument delivered pursuant to the Merger Agreement survive the effective time of the Merger. This limit does not apply to any covenant or agreement of the parties which by its terms contemplates performance after the effective time of the Merger.

 

Conduct of Business Pending the Merger.  Except as disclosed in writing by the Company to Parent and Merger Sub prior to execution of the Merger Agreement, or permitted by the terms of the Merger Agreement, or unless Parent has given prior written consent, which will not be unreasonably withheld, from the date of the Merger Agreement until the effective time of the Merger or until the termination of the Merger Agreement, the Company will and will cause its subsidiaries to:

 

 

In addition, except with the prior written consent of Parent, which will not be unreasonably withheld, or as may be required by applicable law, as specifically contemplated by the terms of the Merger Agreement or as disclosed in writing by the Company to Parent and Merger Sub prior to execution of the Merger Agreement, from the date of the Merger Agreement until the effective time of the Merger, the Company will not, and will not permit its subsidiaries to, among other things:

 

 

 

 

 

Tax and Accounting Matters.  The Company agreed that, during the period from the date of the Merger Agreement until the effective time of the Merger, the Company and each of its subsidiaries will retain all books, documents and records reasonably necessary for the preparation of tax returns as well as any support related to potential tax audits. In addition, except as required by applicable law or with Parent’s prior written consent, the Company agreed that neither it nor any of its subsidiaries will, from the date of the Merger Agreement until the effective date of the Merger:

 

 

 

Termination of Certain Contracts.  The Company agreed that, prior to the effective time of the Merger, it will terminate certain foreign representative contracts.

 

No Solicitation of a Takeover Proposal.  The Company agreed that it shall not, and shall not permit its controlled affiliates or permit its or any of its controlled affiliates’ directors, officers, employees, investment bankers, attorneys, accountants or other advisors or representatives, whom we refer to collectively as “representatives,” to, directly or indirectly:

 

 

The Company also agreed that it shall, and shall cause its subsidiaries and direct its representatives to, immediately cease and cause to be terminated all existing communications and negotiations with any person or entity conducted prior to the date of the Merger Agreement with respect to any Takeover Proposal and shall request, and exercise all rights under all confidentiality or nondisclosure agreements with regard to, the prompt return or destruction of all confidential information previously furnished in connection therewith.

 

In addition to the other obligations of the Company set forth above, the Company agreed that it shall, as promptly as practicable and in any event within 24 hours after the receipt thereof, advise Parent orally and in writing of (i) any Takeover Proposal or any request for information or inquiry that expressly contemplates or could reasonably be expected to lead to a Takeover Proposal and (ii) the material terms and conditions of such Takeover Proposal, request or inquiry (including the identity of the bidder and any change to the financial terms, conditions or other material terms thereof). The Company agreed to (i) keep Parent reasonably informed of the status (including any change to the financial terms, conditions, or other material terms) of any such Takeover Proposal, request or inquiry on a reasonably current basis (and in any event at Parent’s request and otherwise no later than 24 hours after the occurrence of any material change, development, discussions or negotiations) and (ii) provide to Parent, as soon as practicable and in any event within 24 hours after receipt or delivery thereof, copies of all draft agreements (and any other written material to the extent such material contains any financial terms, conditions or other material terms relating to any Takeover Proposal), written inquiries or correspondence sent by or provided to the Company (or its representatives) in connection with any such Takeover Proposal. The Company shall not, and shall cause its subsidiaries not to, enter into any contract with any person subsequent to the date of the Merger Agreement, and neither the Company nor any of its subsidiaries is party to any contract, in each case that prohibits the Company from providing such information to Parent.

 

Notwithstanding the restrictions described above, at any time before the first to occur of the Company shareholders meeting to approve the Merger and the acceptance of shares for payment in the Offer, the Company may, and may permit and authorize its affiliates and its and their respective representatives to, subject to compliance with the provisions described in the immediately succeeding paragraph, (i) furnish information with respect to the

Company and its subsidiaries to a person or entity making a bona fide written Takeover Proposal (and its representatives) pursuant to a confidentiality agreement with standstill and nonsolicitation provisions identical in all substantive respects to, and which otherwise contains terms that are no less favorable to the Company than, those contained in its confidentiality agreement with Parent and (ii) participate in discussions or negotiations with the person making such Takeover Proposal (and its representatives) regarding such Takeover Proposal, if:

 

 

The Merger Agreement requires the Company not to disclose any commercially sensitive non-public information to any such person or its representatives except in a manner consistent with the Company’s past practice in dealing with the disclosure of such information in the context of evaluating Takeover Proposals prior to the date of the Merger Agreement.

 

The Merger Agreement provides that, except to the extent the Board determines in good faith (after consultation with outside legal counsel) that the failure to take such action would be inconsistent with the directors’ fiduciary duties to the shareholders of the Company under applicable law, the Company shall not terminate, waive, amend or modify any provision of any standstill, confidentiality or non-solicitation agreement to which it or any of its subsidiaries is a party and that relates to a Takeover Proposal, and the Company shall take all necessary actions and use its reasonable best efforts to enforce, to the fullest extent permitted by applicable law, the provisions of any such agreement, including by obtaining injunctions to prevent any breaches and to enforce specifically the terms and provisions thereof.

 

The Merger Agreement provides that nothing contained in the Merger Agreement prohibits the Company from making any disclosure to its shareholders if, in the good faith judgment of the Board (after consultation with outside legal counsel), such failure to disclose is reasonably likely to result in a breach of applicable law; provided, however, that the taking of any such position or making of any such disclosure shall be subject to and only taken in compliance with the provisions of the Merger Agreement described below and that the Company shall, to the extent practicable, provide Parent with a reasonable opportunity to comment on and review any such disclosure and, provided further, that any disclosure other than (i) a factually accurate statement by the Company that only describes the Company’s receipt of a Takeover Proposal, the identity of the person or group making such proposal, the terms and conditions thereof and the operation of the Merger Agreement with respect thereto, and contains a “stop, look and listen” communication of the type contemplated by Rule 14d-9(f) under the Exchange Act, (ii) an express rejection of any applicable Takeover Proposal or (iii) an express reaffirmation of the Company Recommendation (as defined below) shall be deemed to be an Adverse Recommendation Change (as defined below).

 

Recommendation of the Board.  Subject to the provisions described below, the Board agreed to recommend that the Company’s shareholders accept the Offer, tender their shares of Company Common Stock pursuant to the Offer and, if required by applicable law, adopt the Merger Agreement. This is referred to as the “Company Recommendation.” The Merger Agreement provides that, except as described below, neither the Board nor any committee thereof shall (i) withhold, withdraw (or not continue to make), change, qualify or modify in a manner adverse to Parent or Merger Sub, or propose publicly to withhold, withdraw (or not continue to make), change, qualify or modify in a manner adverse to Parent or Merger Sub, the Company Recommendation or any approval or recommendation by any

such committee regarding the Merger Agreement, the Offer and the Merger, or approve or recommend, or propose publicly to approve or recommend any Takeover Proposal, or resolve or agree to take any such action, (ii) fail to publicly recommend against any Takeover Proposal or fail to publicly reaffirm the Company Recommendation or any approval or recommendation by any such committee regarding the Merger Agreement, the Offer and the Merger within two business days after Parent so requests, (iii) fail to include the Company Recommendation in the documents filed with the Schedule TO and the documents included therein (together with any supplements or amendments thereto) or the proxy statement sent to the Company’s shareholders in connection with the shareholder special meeting to approve the Merger, (iv) approve or recommend, or propose publicly to approve, recommend or permit the Company or any of its affiliates to enter into, any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, Merger Agreement, option agreement, joint venture agreement, partnership agreement or other agreement constituting or related to, or which is intended to or is reasonably likely to lead to, any Takeover Proposal (other than pursuant to a confidentiality agreement with standstill provisions identical in all substantive respects to, and which otherwise contains terms that are no less favorable to the Company than, those contained in its confidentiality agreement with Parent), or (v) take any other action or make any other public statement that is inconsistent with the Company Recommendation (any such action or resolution or agreement to take such action in clauses (i) — (v) above being referred to herein as an ‘‘Adverse Recommendation Change”).

 

Before the first to occur of Merger Sub accepting for payment shares tendered in the Offer and the meeting of the Company’s shareholders to approve the Merger, the Board may effect an Adverse Recommendation Change in response to a Superior Proposal if:

 

 

The Merger Agreement provides that any material changes to the facts and circumstances giving rise to a proposed Adverse Recommendation Change or the financial terms or any material change to other material terms of such Superior Proposal occurring prior to the Company’s effecting an Adverse Recommendation Change shall require the Company to provide to Parent a new notice of an Adverse Recommendation Change and a new notice period and to comply with the requirements of the Merger Agreement (including those described above) with respect to each such new written notice.

In all circumstances in which the Board is permitted to effect an Adverse Recommendation Change, it may also terminate the Merger Agreement to enter into a definitive acquisition agreement that constitutes a Superior Proposal in accordance with the provisions applicable to an Adverse Recommendation Change, provided that the Company has paid the Termination Fee (as defined below).

 

Except to the extent the Board determines in good faith (after consultation with outside legal counsel) that the failure to take such action would be inconsistent with the directors’ fiduciary duties to the shareholders of the Company under applicable law, the Company agreed that it shall not terminate, waive, amend or modify any provision of any standstill, confidentiality or non-solicitation agreement to which it or any of its subsidiaries is a party and that relates to a Takeover Proposal, and the Company agreed to take all necessary actions and use its reasonable best efforts to enforce, to the fullest extent permitted by applicable law, the provisions of any such agreement, including by obtaining injunctions to prevent any breaches and to enforce specifically the terms and provisions thereof.

 

For purposes of this Offer to Purchase and the Merger Agreement:

 

 

 

 

Access to Information.  To the extent permitted under applicable law, the Company agreed to provide, and to cause its subsidiaries to provide, Parent and Parent’s representatives access upon reasonable advance notice and during normal business hours to their respective properties, assets, books, records, contracts, permits, documents, information, directors, officers and employees, but only to the extent that such access does not unreasonably interfere with the business or operations of the Company and its subsidiaries, and the Company agreed to furnish, and to cause its subsidiaries to furnish, to Parent any information concerning its business as Parent may reasonably request.

 

Reasonable Best Efforts.  Each of the Company, Parent and Merger Sub has agreed to use their respective reasonable best efforts to take, or cause to be taken, all actions that are necessary, proper or advisable to consummate and make effective the Offer, the Merger and the other transactions contemplated by the Merger Agreement, including (i) the satisfaction of the conditions to the Offer and the Merger, (ii) obtaining all necessary actions or nonactions, waivers, consents, approvals, clearances, orders and authorizations from, and the giving of any necessary notices to, governmental entities and third parties, (iii) taking all reasonable steps to provide any supplemental information requested by any governmental entity in the course of its review of the Offer and the Merger, (iv) defending any lawsuits or other legal proceedings that challenge the Merger Agreement, the Offer or the Merger and (v) the execution and delivery of any additional instruments necessary to consummate the Offer and the Merger. If any state takeover statute or similar statute or regulation is or becomes applicable to the Merger Agreement or any of the Offer, the Merger and the other transactions contemplated by the Merger Agreement, the Company and the Board each will use its reasonable best efforts to ensure that the Offer, the Merger and the other transactions contemplated by the Merger Agreement may be consummated as promptly as practicable on the terms contemplated thereby and otherwise to minimize the effect of such statute or regulation on the Merger Agreement, the Offer, the Merger and the other transactions contemplated by the Merger Agreement. In the event a governmental entity objects to the Offer, the Merger, or any other transaction contemplated by the Merger Agreement, the Company, Parent and Merger Sub will cooperate with each other and use reasonable best efforts to resolve such objection.

 

Filings and Notice.  The Company, Parent and Merger Sub each has agreed to file, as promptly as reasonably practicable after the date of the Merger Agreement, all materials initially required to be filed under the HSR Act and file as promptly as practicable thereafter all other filings necessary or appropriate under any applicable law designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization, restraint of trade, lessening of competition, or foreign investment. To the extent permitted by applicable law, the parties will request expedited treatment and will work together as may be necessary to make any such filing. The parties have also agreed to keep each other informed of any material communications, inquiries or requests for additional information in connection with such filings, provide each other with a meaningful opportunity to review such material communications, inquiries and requests, and to promptly comply with reasonable requests.

 

Notwithstanding anything in the Merger Agreement to the contrary, Parent and Merger Sub will not be required to, and neither the Company nor any of its subsidiaries may, without the prior written consent of Parent (which may be withheld in Parent’s sole discretion) (i) sell, divest, lease, license, transfer, dispose of or otherwise encumber or hold separate, whether before or after the effective time of the Merger, any assets, entities, licenses, operations, rights, product lines, businesses or interest therein of Parent, the Company or any of their respective subsidiaries or affiliates (or agree or consent to any of the foregoing actions), (ii) initiate, defend or maintain any litigation brought by a current or potential customer of Parent, the Company or any of their respective subsidiaries or affiliates in connection with the Merger Agreement, (iii) enter into any hold-separate or similar agreements, orders or decrees or (iv) change, restrict or impair, or agree or commit to any change or restriction on, or other impairment of, (A) the ability of Parent, the Company or any of their respective subsidiaries or affiliates to own or operate any of their respective assets, licenses, operations, rights, product lines, businesses or interests therein or (B) Parent’s ability to vote, transfer, receive dividends or otherwise exercise full ownership rights with respect to the capital stock of the Surviving Corporation except with respect to Parent and Merger Sub in the case of clause (iii) or (iv) as would not reasonably be expected to (1) have a material adverse effect on the Company and its subsidiaries, taken as a whole (without giving effect to the Offer or the Merger), or (2) materially and adversely diminish the benefits expected to be derived by Parent from the consummation of the Merger and other transactions contemplated in the Merger Agreement.

Except as prohibited by law, the Company will promptly notify Parent of (i) any written communication from any person alleging that its consent is required in connection with the Offer, the Merger or any other transaction contemplated by the Merger Agreement, (ii) any situation that would cause any of the closing conditions to the Offer to not be met when the Offer is scheduled to expire, (iii) any notice or other communication received from a governmental entity in connection with the Offer, the Merger or any other transaction contemplated by the Merger Agreement, (iv) any filing made by the Company with a governmental entity in connection with the Offer, the Merger or any other transaction contemplated by the Merger Agreement and (v) any suits, actions or proceedings commenced or threatened that relate to the consummation of the Merger Agreement, the Offer, the Merger or any of the other transactions contemplated by the Merger Agreement; provided, however, that no such notification shall affect the representations, warranties, obligations, covenants or agreements of the parties (or remedies with respect thereto) or the conditions to the obligations of the parties under the Merger Agreement. Parent will promptly notify the Company of any representation or warranty made by Parent or Merger Sub in the Merger Agreement becoming untrue in any material respect and of any failure by Parent or Merger Sub to perform any obligation, covenant or agreement under the Merger Agreement, if the matter to be disclosed would reasonably be expected to prevent, materially impede or materially delay consummation of the Offer, the Merger or the other transactions contemplated by the Merger Agreement; provided, however, that no such notification shall affect the representations, warranties, obligations, covenants or agreements of the parties (or remedies with respect thereto) or the conditions to the obligations of the parties under the Merger Agreement.

 

Shareholder Litigation.  In the event of any litigation against the Company and/or its directors or officers relating to the Offer, the Merger or the other transactions contemplated by the Merger Agreement, the Company shall give Parent the opportunity to participate in and shall keep Parent promptly informed with respect to the defense and will obtain the prior written consent of Parent prior to settling or satisfying any such claim, though the Company shall control such defense except to the extent that Parent or Merger Sub is a defendant in the litigation (and in that event solely as to the defense of Parent and Merger Sub).

 

Public Announcements.  Parent and Merger Sub, on the one hand, and the Company, on the other, have agreed not to make any press release or other public statement regarding the Offer, the Merger and the other transactions contemplated by the Merger Agreement before, to the extent reasonably practicable, consulting with each other and giving each other a reasonable opportunity to review and comment on any press release or other public statement, except as required by applicable law, court process or any listing agreement with Nasdaq or the New York Stock Exchange.

 

Employee Matters.  From the effective time of the Merger until December 31, 2011, the compensation and benefits for those employed at the Company immediately prior to the effective time of the Merger and who remain in the employment of the Surviving Corporation or its subsidiaries on or after the effective time of the Merger (“Continuing Employees”) shall be materially no less favorable in the aggregate than that provided to such employees immediately prior to the effective time of the Merger. Continuing Employees will receive credit for their service at the Company prior to the effective time of the Merger under Parent’s employee benefit plans that Parent makes available to such Continuing Employees for purposes of eligibility, vesting and benefit levels and accruals (other than benefit levels and accruals under any retirement, pension or savings plan, except that such service shall be treated as service with Parent and its subsidiaries for purposes of the 60-consecutive-month employment requirement for determining the level of matching contribution to which the person may be eligible under Parent’s Savings and Investment Plan), unless such credit would result in duplication of benefits. In addition, with respect to Continuing Employees, for purposes of each Parent benefit plan that is a welfare benefit plan, (i) any pre-existing condition, exclusion, actively-at-work requirement or waiting period shall be waived to the extent such condition, exclusion, requirement or waiting period was satisfied or waived under the comparable benefit plan or agreement with the Company as of the effective time of the Merger (or, if later, any applicable plan transition date) and (ii) full credit shall be given for any co-payments, deductibles or similar payments made or incurred prior to the effective time of the Merger for the plan year in which the Merger (or such transition date) became effective.

 

Parent shall cause the Surviving Corporation to honor all obligations of the benefits plans and agreements of the Company, including any rights or benefits arising from the transactions contemplated by the Merger Agreement.

Nothing in the Merger Agreement restricts the right of Parent or any of its affiliates (including the Surviving Corporation) to terminate or modify the terms of the employment of any employee of the Company after the effective time of the Merger, subject to any applicable severance or change of control agreements. Parent may also terminate or modify any Company or Parent employee benefit plan or agreement, provided that, from the effective time of the Merger until December 31, 2011, any such changes will not have an effect on those employed at the Company immediately prior to the effective time of the Merger, to the extent such changes are materially less favorable in the aggregate to what such employees received before.

 

Indemnification and Insurance.  The Merger Agreement provides for certain indemnification and insurance rights in favor of the Company’s current and former directors and officers, who we refer to as “indemnified persons.” Specifically, Parent and Merger Sub have agreed that all rights to indemnification, advancement of expenses and exculpation from liabilities for acts or omissions occurring at or prior to the effective time of the Merger, shall be assumed by the Surviving Corporation and continue in full force and effect in accordance with their terms, even if the Surviving Corporation is consolidated or merged into another entity or dissolved by Parent.

 

For a period of six years after the completion of the Merger, directors’ and officers’ liability insurance will be maintained for those persons currently covered by the Company’s existing insurance policy for acts or omissions occurring prior to the effective date of the Merger on terms and in amounts no less favorable than those of the insurance policy in effect on the date of the Merger Agreement. Parent may fulfill its obligation to provide liability insurance, however, by causing the Company to purchase a non-cancellable extension of the directors’ and officers’ liability coverage of the Company’s existing directors’ and officers’ liability insurance policy, which are commonly referred to as “tail” policies. Furthermore, in no event will Parent be required to pay an annual premium for such insurance in excess of 300% of the annual premium currently paid by the Company for such insurance.

 

After the effective time of the Merger, the indemnified persons are third party beneficiaries of, and entitled to rely upon, these provisions of the Merger Agreement.

 

Stock Exchange Delisting.  The Merger Agreement provides that the Company will cooperate with Parent and Merger Sub and use its reasonable best efforts prior to the effective time of the Merger to cause the delisting from Nasdaq and deregistration of the shares under the Exchange Act after the effective time of the Merger.

 

Termination.  The Merger Agreement may be terminated at any time prior to the effective time of the Merger:

 

 

 

 

 

 

 

 

Effect of Termination and Termination Fees.  If the Merger Agreement is terminated, the Merger Agreement will become void and have no effect, without any liability or obligation on the part of Parent, Merger Sub or the Company or their respective subsidiaries, officers or directors, subject to the survival of certain provisions as described in Section 8.2 of the Merger Agreement (including the required payment by the Company to Parent of the Termination Fee described below in certain circumstances) and except that the termination of the Merger Agreement shall not relieve or release any party to the Merger Agreement from any liability arising out of its willful breach of the Merger Agreement or any fraud.

 

Termination Fee and Expense Reimbursement.  The Company has agreed to pay Parent a termination fee of $17,300,000 (the “Termination Fee”) by wire transfer of same-day funds if:

 

 

The Merger Agreement also provides that if the Merger Agreement is terminated in accordance with the terms of Section 8.1(d) thereof (which provides that Parent may terminate the Merger Agreement if, before Merger Sub accepts for payment shares tendered in the Offer, the Company shall have breached any of its representations or warranties or failed to perform any of its obligations, covenants or agreements contained in the Merger Agreement, which breach or failure to perform (i) would give rise to the failure of the condition to the Offer with respect to the Company’s representations, warranties or covenants and (ii) is incapable of being cured by the Company by the Termination Date or, if capable of being cured by the Company by the Termination Date, the Company does not commence to cure such breach or failure within ten business days after its receipt of written notice thereof from Parent and use its reasonable best efforts to pursue such cure thereafter), then the Company shall pay to Parent an amount equal to all out-of-pocket costs, fees and expenses (including attorneys’ fees) incurred by Parent and its subsidiaries (including Merger Sub) in connection with the Merger Agreement, the Offer and the Merger, such amount not to exceed $1,000,000, which shall be paid from time to time after such termination by wire transfer of same-day funds to an account designated by Parent and within two business days of Parent’s submission to the Company of documentation of such expenses.

 

The Company acknowledged that the agreements to pay the Termination Fee and reimburse Parent’s expenses are an integral part of the transactions contemplated by the Merger Agreement, and that, without these agreements, Parent would not have entered into the Merger Agreement. Accordingly, the Company agreed that if it fails promptly to pay the Termination Fee and reimburse Parent’s expenses when due and, in order to obtain such payment, Parent commences a suit that results in a judgment against the Company for such amounts, the Company shall pay to Parent its reasonable costs and expenses (including attorneys’ fees and expenses) in connection with such suit and any appeal relating thereto, together with interest on such amounts.

 

Enforcement.  The parties agreed that irreparable damage would occur in the event that any of the provisions of the Merger Agreement were breached and accordingly agreed that the parties are entitled to an injunction or injunctions to prevent breaches of the Merger Agreement and to enforce specifically its terms and provisions in addition to any other remedy to which they are entitled at law or in equity. Each party has agreed that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that the party seeking such injunction, specific performance or other equitable relief has an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or equity. In the event that a party seeks an injunction or injunctions to prevent breaches of the Merger Agreement or to enforce specifically the terms and provisions of the Merger Agreement, such party shall not be required to provide any bond or other security in connection with any such injunction or other judgment.

 

Expenses.  Except as set forth above under the heading “Termination Fee and Expense Reimbursement,” all costs and expenses incurred by the parties will be paid by the party incurring such costs and expenses, whether or not the Merger or the Offer is consummated.

 

Amendment.  Subject to the approval rights of a majority of the independent directors set forth above under the heading “The Company’s Board of Directors,” the Merger Agreement may be amended by the parties thereto at any time, whether before or after Merger Sub accepts for payment shares tendered in the Offer shall have occurred or the Shareholder Approval, if required by applicable law, has been obtained; provided, however, that (a) after Merger Sub accepts for payment shares tendered in the Offer, there shall be no amendment that decreases the Merger Consideration and (b) after the Shareholder Approval has been obtained, there shall be made no amendment that by law requires further approval by shareholders of the Company without obtaining such further approval. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties thereto.

 

The shares of Company Common Stock currently trade Nasdaq under the symbol “APSG.” As of the close of business on December 28, 2010, there were (i) 14,029,294 shares outstanding (including 597,580 unvested

Restricted Shares) and (ii) 1,491,983 shares authorized and reserved for issuance under equity incentive plans (including Options to purchase 699,830 shares).

 

The following table sets forth, for the periods indicated, the high and low sale prices per share for each quarterly period indicated, as reported by Nasdaq based on published financial sources.

 

 

On [          ], 2011, the reported closing sales price of the shares on Nasdaq was $[     ]. On December 17, 2010, the trading day immediately prior to the public announcement of the execution of the Merger Agreement, the reported closing sales price of the shares on Nasdaq was $35.02. On October 21, 2010, the last full trading day prior to the Company’s public announcement that it was considering strategic alternatives, the reported closing sales price of the shares on Nasdaq was $27.73. The Company has paid dividends at the rate of $0.50 per share per annum, payable quarterly, since fiscal year 2004, and continued payment of the dividend is subject to approval by the Board, and is reviewed quarterly. The continued payment of dividends and the amount thereof in the future will depend on a number of factors, including the Company’s financial condition, capital requirements, results of operations, future business prospects, and other factors that the Board may deem relevant. In addition, the Merger Agreement provides that, except with the prior written consent of Parent, as may be required by applicable law, as specifically contemplated by the terms of the Merger Agreement or as disclosed in writing by the Company to Parent and Merger Sub prior to execution of the Merger Agreement, from the date of the Merger Agreement until the effective time of the Merger, the Company will not, and will not permit its subsidiaries to, pay dividends. Shareholders are urged to obtain a current market quotation for the shares of the Company Common Stock.

 

The following table sets forth, as of the record date for the special meeting, certain information with respect to the beneficial ownership of the Company Common Stock by (i) each shareholder known by us to be the beneficial owner of more than 5% of the Company Common Stock, (ii) each of our directors and director-nominees, (iii) each executive officer named in the Summary Compensation Table found elsewhere in this document and (iv) all directors and executive officers of the Company as a group.

 

 

 

 

 

 

The following is a summary of Sections 1300 through 1313 of the CGCL, which sets forth the procedures for the Company’s shareholders to dissent from the Merger and to demand statutory appraisal rights under the CGCL. This summary does not purport to be a complete statement of the provisions of California law relating to the rights of the Company’s shareholders to an appraisal of the value of their shares and is qualified in its entirety by reference to Sections 1300 through 1313 of the CGCL, the full text of which is attached as Annex C hereto. Failure to follow the procedures required by the CGCL could result in the loss of dissenters’ rights.

 

Under Sections 181 and 1201 of the CGCL, the Merger constitutes a “reorganization” Chapter 13 of the CGCL provides appraisal rights for shareholders dissenting from reorganizations in certain circumstances. The Company Common Stock is listed on the Nasdaq. Generally, there are no appraisal rights in connection with securities listed on the Nasdaq or other national securities exchanges. The Company’s shareholders will be entitled to dissent and seek appraisal for their shares of Company Common Stock only if either of the following criteria are satisfied:

 

 

The Company is not aware of any transfer restrictions on its shares of Company Common Stock, except for those restrictions that apply to shares held by shareholders who are deemed to be affiliates of the Company as that term is defined in Rule 144 adopted by the SEC under the Securities Act. Any shareholder who believes there is another type of restriction on its shares and who wishes to exercise dissenters’ rights should consult with legal counsel as to the nature of the restriction and its relationship to the availability of dissenters’ rights in connection with the Merger.

 

Even though a shareholder who wishes to exercise dissenters’ rights may take certain actions in furtherance of those rights, if the Merger Agreement is later terminated and the Merger is abandoned, no shareholder of the Company will have the right to any payment from the Company by reason of having taken such actions. The following discussion is subject to the foregoing qualifications.

 

For a shareholder of the Company to exercise dissenters’ rights as to any shares of Company Common Stock in connection with the Merger, the shareholder must vote against the Merger and Merger Agreement and must make a written demand to the Company that it purchase the shares at their fair market value.

 

The written demand must:

 

 

 

In addition, within 30 days after notice of the approval of the Merger is mailed to shareholders, the shareholder must also submit to the Company or a transfer agent of the Company, for endorsement as dissenting shares, the stock certificates representing the Company’s shares as to which the shareholder is exercising dissenters’ rights.

 

Simply failing to vote for, or voting against, the Merger will not be sufficient to constitute the demand described above.

 

Shares of Company Common Stock held by shareholders who have perfected their dissenters’ rights in accordance with Chapter 13 of the CGCL and have not withdrawn their demands or otherwise lost their rights are referred to in this summary as “dissenting shares”.

 

Within ten days after approval of the Merger by the Company’s shareholders, the Company must mail a notice of the approval to each shareholder who voted against the Merger and who could potentially exercise dissenters’ rights in accordance with the CGCL. This notice must state the price determined by the Company to represent the fair market value of the dissenting shares. Chapter 13 of the CGCL states that the fair market value, for this purpose, is determined “as of the day before the first announcement” of the terms of the Merger. The day before the first announcement of the terms of the proposed Merger was December 19, 2010.

 

The Company’s notice must also include a brief description of the procedures to be followed by those holders if the holders desire to exercise their dissenters’ rights and a copy of Sections 1300 through 1304 of Chapter 13 of the CGCL. The statement of price determined by the Company to represent the fair market value of dissenting shares, as set forth in the notice of approval of the Merger, will constitute an offer by the Company to purchase any dissenting shares at the stated amount if the Merger closes.

 

If the Company and a dissenting shareholder agree that the shares are dissenting shares and agree on the price of the shares, the dissenting shareholder is entitled to receive the agreed-upon price with interest at the legal rate on judgments from the date of that agreement. Payment for the dissenting shares must be made within 30 days after the later of the date of that agreement or the date on which all statutory and contractual conditions to the Merger are satisfied. Payments are also conditioned on the surrender to the Company of the certificates representing the dissenting shares.

 

If the Company denies that shares are dissenting shares or the shareholder fails to agree with the Company as to the fair market value of the shares, then, within the time period provided by Section 1304(a) of Chapter 13 of the CGCL, any shareholder demanding purchase of such shares as dissenting shares or any interested corporation may file a complaint in the superior court in the proper California county requesting a determination as to whether the shares are dissenting shares or as to the fair market value of the holder’s shares, or both, or may intervene in any action pending on such a complaint.

 

On the trial of the action, the court will determine the status of the shares as dissenting shares if their status is in issue. If the fair market value of the dissenting shares is in issue, the court will determine, or appoint one or more impartial appraisers to determine, the fair market value of the shares.

If the court appoints an appraiser or appraisers, they will proceed to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of the appraisers, will make and file a report in the office of the clerk of the court. Thereafter, on the motion of any party, the report is submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it.

 

If the single appraiser or a majority of the appraisers fails to make and file a report within 10 days after the date of their appointment or within such further time as the court allows, or if the court does not confirm the report, the court will determine the fair market value of the dissenting shares. Subject to Section 1306 of Chapter 13 of the CGCL, judgment is rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares that any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest at the legal rate from the date on which the judgment is entered.

 

The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, is assessed or apportioned as the court considers equitable. However, if the price determined by the court is more than the price offered by the corporation, the corporation pays the costs (including, in the discretion of the court, attorneys’ fees, fees of expert witnesses and interest at the legal rate on judgments from the date the shareholder made the demand and submitted shares for endorsement if the price determined by the court is more than 125 percent of the price offered by the corporation).

 

Except as expressly limited by Chapter 13, holders of dissenting shares continue to have all the rights and privileges incident to their shares until the fair market value of their shares is agreed upon or determined.

 

A holder of dissenting shares may not withdraw a demand for payment unless the Company consents to the withdrawal. Dissenting shares lose their status as dissenting shares, and dissenting shareholders cease to be entitled to require the Company to purchase their shares, if:

 

 

To the extent that the provisions of Chapter 5 of the CGCL (which places conditions on the power of a California corporation to make distributions to its shareholders) prevent the payment to any holders of dissenting shares of the fair market value of the dissenting shares, the dissenting shareholders will become creditors of the Company for the amount that they otherwise would have received in the repurchase of their dissenting shares, plus interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors of the Company in any liquidation proceeding, with the debt to be payable when permissible under the provisions of Chapter 5 of the CGCL.

 

For U.S. federal income tax purposes, the Company’s shareholders who receive cash for their shares of Company Common Stock pursuant to the exercise of dissenters rights will generally recognize taxable gain or loss. Each holder should consult its own tax advisor as to the particular tax consequences of the exercise of dissenters rights to such holder.

 

If the Merger is completed, the Company Common Stock will be delisted from Nasdaq and deregistered under the Exchange Act and we will no longer file periodic reports with the SEC on account of Company Common Stock.

 

Other Matters for Action at the Special Meeting

 

As of the date of this proxy statement, the Board knows of no matters that will be presented for consideration at the special meeting other than as described in this proxy statement.

 

Shareholder Proposals and Nominations for 2011 Annual Meeting

 

Once the Merger is completed, there will be no public participation in any future meetings of the Company’s shareholders. If the Merger is not completed, our public shareholders will continue to be entitled to attend and participate in our shareholder meetings, and we would expect to hold our 2011 annual meeting of shareholders prior to the end of 2011.

 

Inclusion of Proposals in the Company’s Proxy Statement and Proxy Card under the SEC Rules

 

Shareholders may present proper proposals for inclusion in our proxy statement and for consideration at our next Annual Meeting of Shareholders, if such meeting is held, by submitting their proposals in writing to our Corporate Secretary in a timely manner. In the event that a shareholder desires to have a proposal considered for inclusion in our proxy statement for our 2011 Annual Meeting of Shareholders, if such meeting is held, the proposal must be forwarded in writing to our Corporate Secretary so that it is received no later than October 7, 2010. Any such proposal must comply with the requirements of Rule 14a-8 promulgated under the Exchange Act and regulations promulgated by the SEC under Rule 14a-8 regarding the inclusion of shareholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

 

Applied Signal Technology, Inc.
Attention: Corporate Secretary
460 West California Avenue
Sunnyvale, California 94086

 

Advance Notice Requirements for Shareholder Submission of Nominations and Proposals

 

Our bylaws also establish an advance notice procedure for shareholders who wish to present a proposal before an annual meeting of shareholders but do not intend for the proposal to be included in our proxy statement. Our bylaws provide that the only business that may be conducted at an annual meeting is business that is (1) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (2) properly brought before the meeting by or at the direction of the Board of Directors, or (3) if an annual meeting, properly brought before the meeting by a shareholder or (4) if a special meeting, if, and only if, the notice of a special meeting provides for business to be brought before the meeting by shareholders and such business is properly brought before the meeting by a shareholder.

 

For business to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder proposal to be presented at an annual meeting must be received at our principal executive offices not less than 120 calendar days in advance of the date the our proxy statement was released to shareholders in connection with the previous year’s annual meeting of shareholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year’s proxy statement, or in the event of a special meeting, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. To be timely for our 2011 annual meeting of shareholders, our Corporate

Secretary must receive the written notice, containing the information specified in our bylaws, at our principal executive offices not later than the close of business on October 7, 2010.

 

Our bylaws provide that no resolution shall be put before the shareholders that is not a proper subject for action by shareholders under California law; that is obstructive, frivolous, dilatory, or repugnant to good taste; that contains any false or misleading statements; that relates to the redress of a personal claim or grievance against the corporation or any other person, or if it is designed to result in a benefit or interest that is not shared by the shareholders at large; that relates to operations that account for less than five percent of the corporation’s total assets at the end of its most recent fiscal year, and for less than five percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the corporation’s business; that deals with a matter beyond the corporation’s power to effectuate; that deals with a matter relating to conduct of the ordinary business operations of the corporation; or that is counter to or substantially duplicative of a proposal to be submitted by the corporation at the meeting. If the proposal deals with substantially the same subject matter as a prior proposal submitted to shareholders in the corporation’s proxy statement and a form of proxy related to any annual or special meeting of shareholders held within the preceding five calendar years, it may be omitted from the agenda of any meeting of shareholders held within three calendar years after the latest such submission, provided that: (i) if the proposal was submitted at only one meeting during such preceding period, it received less than five percent of the total number of votes cast in regard thereto, or (ii) if the proposal was submitted at only two meeting during such preceding period, it received at the time of its second submission less than eight percent of the total number of votes cast in regard thereof, or (iii) if the prior proposal was submitted at three or more meetings during such preceding period, it received at the time of its latest submission less than ten percent of the total number of votes cast in regard thereto.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC website at www.sec.gov. You also may obtain free copies of the documents we file with the SEC, including this proxy statement, by going to the Investors page of our corporate website at www.appsig.com. Our website address is provided as an inactive textual reference only. The information provided on our website, other than copies of the documents listed below that have been filed with the SEC, is not part of this proxy statement, and therefore is not incorporated herein by reference.

 

Statements contained in this proxy statement, or in any document incorporated by reference in this proxy statement regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified in its entirety by reference to that contract or other document filed as an exhibit with the SEC. The SEC allows us to “incorporate by reference” into this proxy statement documents we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information. We incorporate by reference the documents listed below and any documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and before the date of the special meeting.

 

 

Notwithstanding the foregoing, information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K, including the related exhibits, is not incorporated by reference into this proxy statement.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to Investor Relations Department, Applied Signal Technology, Inc., 460 West California Avenue, Sunnyvale, California 94086, telephone number

(408) 749-1888 or from the SEC through the SEC website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

 

THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE YOUR SHARES OF COMPANY COMMON STOCK AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED [ • ], 2011. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

Annex A

 

 

AGREEMENT AND PLAN OF MERGER
dated as of December 18, 2010,
among
RAYTHEON COMPANY,
RN ACQUISITION COMPANY
and
APPLIED SIGNAL TECHNOLOGY, INC.

 

The Merger Agreement has been provided solely to inform investors of its terms. The representations, warranties and covenants contained in the Merger Agreement were made only for the purposes of such agreement and as of specific dates, were made solely for the benefit of the parties to the Merger Agreement and may be intended not as statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate. In addition, such representations, warranties and covenants may have been qualified by certain disclosures not reflected in the text of the Merger Agreement and may apply standards of materiality in a way that is different from what may be viewed as material by shareholders of, or other investors in, the Company. The Company’s shareholders and other investors are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or conditions of the Company, Parent, Merger Sub or any of their respective subsidiaries or affiliates.

 

TABLE OF CONTENTS

 

GLOSSARY