<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STORAGE DIMENSIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3572 77-0324887
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1656 MCCARTHY BOULEVARD
MILPITAS, CA 95035
(408) 945-0710
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID A. EEG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STORAGE DIMENSIONS, INC.
1656 MCCARTHY BOULEVARD
MILPITAS, CA 95035
(408) 945-0710
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
KENNETH M. SIEGEL, ESQ. THOMAS A. COLL, ESQ.
CHRISTOPHER K. SADEGHIAN, ESQ. CARL R. SANCHEZ, ESQ.
VICTOR H. SIM, ESQ. JANE K. ADAMS, ESQ.
WILSON SONSINI GOODRICH & ROSATI COOLEY GODWARD LLP
PROFESSIONAL CORPORATION 4365 EXECUTIVE DRIVE, SUITE 1100
650 PAGE MILL ROAD SAN DIEGO, CA 92121
PALO ALTO, CA 94304 (619) 550-6000
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effectiveness of this Registration
Statement and the effective time of the proposed merger of Storage Acquisition
Corp. with and into Artecon, Inc., as described in the Agreement and Plan of
Merger and Reorganization, dated as of December 22, 1997, attached as Annex A to
the Joint Proxy Statement/Prospectus forming a part of this Registration
Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If the form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING
SECURITIES TO BE REGISTERED REGISTERED SHARE(2) PRICE(2)
- ------------------------------------------------------------------------------------------------------------
Common Stock, $0.005 par value... 13,982,776 shares(1) (2) (2)
- ------------------------------------------------------------------------------------------------------------
Preferred Stock, $0.005 par
value.......................... 2,494,159 shares (2) (2)
- ------------------------------------------------------------------------------------------------------------
Total
============================================================================================================
<CAPTION>
<S> <C>
- -----------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
- -----------------------------------------------------------------------------------
Common Stock, $0.005 par value... (2)
- -----------------------------------------------------------------------------------------------------------
Preferred Stock, $0.005 par
value.......................... (2)
- ------------------------------------------------------------------------------------------------------------
$1,882(3)
============================================================================================================
</TABLE>
(1) Represents an estimate of the maximum number of shares of the Common Stock
of the Registrant which may be issued to former holders of shares of Common
Stock and Preferred Stock of Artecon, Inc. ("Artecon") pursuant to the
Merger described herein and a maximum of 831,386 shares of Common Stock of
the Registrant which may become issuable upon conversion of Registrant's
Preferred Stock being registered hereby.
(2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended, the
registration fee has been calculated on the basis of the book value of the
securities of Artecon, Inc. ("Artecon"), calculated to be $6,376,594 in the
aggregate as of January 16, 1998, being transferred to the Registrant in the
merger of Storage Acquisition Corp. with and into Artecon pursuant to the
Agreement and Plan of Merger and Reorganization dated as of December 22,
1997 among the Registrant, Storage Acquisition Corp. and Artecon.
(3) Pursuant to Rule 457(b) under the Securities Act, the registration fee was
paid on January 23, 1998 by the Registrant in connection with the filing of
preliminary proxy materials of the Registrant and Artecon included herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
STORAGE DIMENSIONS, INC.
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the Stockholders
of Storage Dimensions, Inc. ("Storage Dimensions"), which will be held at 9:00
a.m. on March 31, 1998 (the "Storage Dimensions Special Meeting"), at the
corporate offices of Storage Dimensions at 1656 McCarthy Boulevard, Milpitas, CA
95035.
At the Storage Dimensions Special Meeting, you will be asked to consider
and vote upon proposals to (i) combine the business and operations of Storage
Dimensions with those of Artecon, Inc. (the "Business Combination"); (ii) amend
Storage Dimensions' Certificate of Incorporation to provide for a classified
Board of Directors; (iii) amend Storage Dimensions' Certificate of Incorporation
to provide that a director may not be removed from office without cause except,
until the third annual meeting of Storage Dimensions following the Merger, by
the affirmative vote of at least 80% of the outstanding voting stock of Storage
Dimensions and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock of Storage Dimensions thereafter; (iv) increase the number of
shares authorized for issuance pursuant to Storage Dimensions' 1996 Stock Option
Plan by 2,000,000 shares; and (v) increase the number of shares authorized for
issuance pursuant to Storage Dimensions' 1996 Employee Stock Purchase Plan by
200,000 shares (the amendments referred to in clauses (ii) and (iii) above are
hereinafter collectively referred to as the "Certificate of Incorporation
Amendments" and the amendments referred to in clauses (iv) and (v) above are
hereinafter collectively referred to as the "Stock Plan Amendments"). Each of
these proposals is described more fully in the accompanying Notice of Special
Meeting of Stockholders and Joint Proxy Statement/Prospectus. In the Business
Combination, Storage Dimensions will issue an aggregate of approximately
13,120,000 shares of Storage Dimensions Common Stock to the holders of Artecon
Common Stock. Such shares would have a value of approximately $52,480,000, based
upon the closing price of Storage Dimensions Common Stock as reported on the
Nasdaq National Market on February 23, 1998. In addition, Storage Dimensions
will issue an aggregate of 2,494,159 shares of Storage Dimensions Series A
Preferred Stock (convertible into a maximum of approximately 831,000 shares of
Storage Dimensions Common Stock) to certain Artecon shareholders, which shares
will not be publicly traded. Immediately following the Business Combination, the
former holders of Artecon capital stock will hold approximately 62.5% of the
outstanding capital stock of Storage Dimensions and current holders of Storage
Dimensions Common Stock will hold approximately 37.5% of the outstanding capital
stock of Storage Dimensions.
While the percentage of outstanding capital stock of Storage Dimensions to
be held by former holders of Artecon Common Stock and current holders of Storage
Dimensions Common Stock following the Business Combination is fixed, the exact
number of shares of Storage Dimensions Common Stock issuable to the former
Artecon shareholders (but not shares of Storage Dimensions Preferred Stock) is
subject to modest change based upon changes in the number of outstanding shares
of Storage Dimensions Common Stock and Artecon Common Stock prior to the
Business Combination. Based upon the number of shares of each company
outstanding on February 23, 1998, approximately 2.16 shares of Storage
Dimensions Common Stock would be issued for each share of Artecon Common Stock
in the Business Combination (the "Exchange Ratio"). While dollar fluctuations in
the market price of Storage Dimensions Common Stock will not affect the Exchange
Ratio, they would change the aggregate value of shares of Storage Dimensions
Common Stock issued in the Business Combination.
In addition, in connection with the Business Combination, Storage
Dimensions will change its name to "Artecon, Inc." and the Storage Dimensions
Common Stock will be traded on the Nasdaq National Market under the symbol
"ARTE."
If the requisite approvals of the stockholders of Storage Dimensions and
the shareholders of Artecon, Inc. are received and all other conditions to
closing are satisfied or waived, the Merger is anticipated to close by March 31,
1998. Storage Dimensions stockholders do not have dissenters' or appraisal
rights under Delaware law as a result of the Merger.
<PAGE> 3
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND
CONDITIONS OF THE BUSINESS COMBINATION AND THE CERTIFICATE OF INCORPORATION
AMENDMENTS HAS DETERMINED THAT THE BUSINESS COMBINATION AND THE CERTIFICATE OF
INCORPORATION AMENDMENTS ARE FAIR TO STORAGE DIMENSIONS AND IN THE BEST
INTERESTS OF STORAGE DIMENSIONS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS OF STORAGE DIMENSIONS HAS UNANIMOUSLY APPROVED THE BUSINESS
COMBINATION AND THE CERTIFICATE OF INCORPORATION AMENDMENTS AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE BUSINESS COMBINATION AND THE
CERTIFICATE OF INCORPORATION AMENDMENTS.
YOUR BOARD OF DIRECTORS HAS ALSO CAREFULLY CONSIDERED THE STOCK PLAN
AMENDMENTS AND BELIEVES THAT SUCH AMENDMENTS WILL BE NECESSARY TO ENABLE THE
COMBINED BUSINESS TO ATTRACT AND RETAIN THE HIGHLY QUALIFIED PERSONNEL THAT WILL
BE NECESSARY IN ORDER FOR THE COMBINED BUSINESS TO SUCCEED IN THE FUTURE.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE STOCK PLAN AMENDMENTS AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF SUCH AMENDMENTS.
Your vote is important regardless of how many shares you own. Please take a
few minutes now to review the Joint Proxy Statement/Prospectus and to sign and
date your proxy and return it in the envelope provided. You may attend the
meeting and vote in person even if you have previously returned your proxy.
Sincerely,
LOGO
David A. Eeg
President, Chief Executive Officer and
Director
March 9, 1998
<PAGE> 4
STORAGE DIMENSIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Storage
Dimensions, Inc., a Delaware corporation ("Storage Dimensions"), will be held at
9:00 a.m. on March 31, 1998 (the "Storage Dimensions Special Meeting"), at the
corporate offices of Storage Dimensions at 1656 McCarthy Boulevard, Milpitas, CA
95035.
The meeting is called for the purpose of considering and voting upon:
Proposal 1. A proposal (the "Business Combination Proposal") to
approve (i) the Agreement and Plan of Merger and Reorganization dated as of
December 22, 1997 (the "Reorganization Agreement"), among Storage
Dimensions, Storage Acquisition Corp., a newly formed, a wholly-owned
subsidiary of Storage Dimensions ("Merger Sub"), and Artecon, Inc., a
California corporation ("Artecon"), and the Merger of Merger Sub with and
into Artecon, whereby Merger Sub will cease to exist and Artecon will
become a wholly-owned subsidiary of Storage Dimensions (the "Merger") and
(ii) proposed amendments to Storage Dimensions' Certificate of
Incorporation to change its name to "Artecon, Inc." following the Merger
and to designate a new class of Series A Preferred Stock.
As a result of the Merger, each outstanding share of Artecon Common
Stock (other than Dissenting Shares, as defined herein) will be converted
into the right to receive approximately 2.16 shares of Storage Dimensions
Common Stock (the "Exchange Ratio") and each outstanding share of Artecon
Preferred and Preferred B Stock (collectively, the "Artecon Preferred
Stock")(other than Dissenting Shares) will be converted into the right to
receive one share of newly designated Storage Dimensions Series A Preferred
Stock. The Storage Dimensions Common Stock to be issued to the holders of
Artecon Common Stock and the Storage Dimensions Series A Preferred Stock to
be issued to the holders of Artecon Preferred Stock in the Merger are
collectively referred to herein as the "Merger Consideration." Following
the Merger, the former holders of Artecon Common Stock will hold in the
aggregate approximately 13,120,000 shares of Storage Dimensions Common
Stock, based upon the number of shares of Storage Dimensions Common Stock
outstanding on February 23, 1998. Such shares would have a value of
approximately $52,480,000, based upon the closing price of Storage
Dimensions Common Stock as reported on the Nasdaq National Market on
February 23, 1998. In addition, Storage Dimensions will issue an aggregate
of 2,494,159 shares of Storage Dimensions Series A Preferred Stock
(convertible into a maximum of approximately 831,000 shares of Storage
Dimensions Common Stock) to certain Artecon shareholders. Immediately
following the Business Combination, the former holders of Artecon capital
stock will hold approximately 62.5% of the outstanding capital stock of
Storage Dimensions and current holders of Storage Dimensions Common Stock
will hold approximately 37.5% of the outstanding capital stock of Storage
Dimensions.
While the percentage of outstanding capital stock of Storage
Dimensions to be held by former holders of Artecon Common Stock and current
holders of Storage Dimensions Common Stock following the Business
Combination is fixed, the exact number of shares of Storage Dimensions
Common Stock issuable to the former Artecon shareholders (but not shares of
Storage Dimensions Preferred Stock) is subject to modest change based upon
changes in the number of outstanding shares of Storage Dimensions Common
Stock and Artecon Common Stock prior to the Business Combination. Based
upon the number of shares of each company outstanding on February 23, 1998,
approximately 2.16 shares of Storage Dimensions Common Stock would be
issued for each share of Artecon Common Stock in the Business Combination
(the "Exchange Ratio"). While dollar fluctuations in the market price of
Storage Dimensions Common Stock will not affect the Exchange Ratio, they
would change the aggregate value of shares of Storage Dimensions Common
Stock issued in the Business Combination. A copy of the Reorganization
Agreement is attached as Annex A to the Joint Proxy Statement/Prospectus. A
copy of the proposed amendment to the Storage Dimensions Certificate of
Incorporation (the "Certificate of Amendment") is attached as Annex B to
this Joint Proxy Statement/Prospectus.
If the requisite approval of the stockholders of Storage Dimensions
and Artecon is received and all other conditions to the Merger are
satisfied or waived, the Merger is anticipated to close by March 31, 1998.
Proposal 2. A proposal to approve an amendment to Storage Dimensions'
Certificate of Incorporation to provide for a classified Board of Directors
whereby the directors will be separated into three classes with members of
each class serving for a three year term;
<PAGE> 5
Proposal 3. A proposal to approve an amendment to Storage Dimensions'
Certificate of Incorporation to provide that a director may not be removed
from office without cause except, until the third annual meeting of Storage
Dimensions following the Merger, by the affirmative vote of at least 80% of
the outstanding voting stock of Storage Dimensions and by the affirmative
vote of at least 66 2/3% of the outstanding voting stock of Storage
Dimensions thereafter;
Proposal 4. A proposal to approve an amendment to Storage Dimensions'
1996 Stock Option Plan to increase the number of shares that may be issued
thereunder from 1,000,000 to 3,000,000 (the "1996 Option Plan Amendment");
Proposal 5. A proposal to approve an amendment to Storage Dimensions'
1996 Employee Stock Purchase Plan to increase the number of shares that may
be issued thereunder from 200,000 to 400,000 (the "Purchase Plan
Amendment"); and
Such other business as may properly come before the Storage Dimensions
Special Meeting or any adjournments or postponements thereof.
Proposals 2 and 3 above are collectively referred to herein as the
"Certificate of Incorporation Amendments." Proposals 4 and 5 are collectively
referred to herein as the "Stock Plan Amendments."
The effectiveness of the Certificate of Incorporation Amendments is subject
to the approval of the Business Combination Proposal. Notwithstanding any
indication to the contrary on a proxy card, a vote against the Business
Combination Proposal will constitute a vote against the Certificate of
Incorporation Amendments. In addition, Proposals 2 and 3 are mutually dependent.
That is, a vote against Proposal 2 will constitute a vote against Proposal 3,
and a vote against Proposal 3 will constitute a vote against Proposal 2.
The Business Combination Proposal, Certificate of Incorporation Amendments,
Stock Plan Amendments and other related matters are more fully described in the
attached Joint Proxy Statement/Prospectus and the Annexes thereto.
The Board of Directors has fixed the close of business on February 23, 1998
as the record date for the determination of the stockholders entitled to notice
of and to vote at the Storage Dimensions Special Meeting and any adjournments or
postponements thereof. Only holders of record of Storage Dimensions Common Stock
on the record date are entitled to vote at the Storage Dimensions Special
Meeting.
If you would like to attend the Storage Dimensions Special Meeting and your
shares are held by a broker, bank or other nominee, you must bring to the
meeting a recent brokerage statement or a letter from the nominee confirming
your beneficial ownership of the shares. You must also bring a form of personal
identification. In order to vote your shares at the Storage Dimensions Special
Meeting, you must obtain from the nominee a proxy issued in your name.
You can ensure that your shares are voted at the Storage Dimensions Special
Meeting by signing and dating the enclosed proxy and returning it in the
envelope provided. Sending in a signed proxy will not affect your right to
attend the meeting and vote in person. You may revoke your proxy at any time
before it is voted by giving written notice to the Secretary of Storage
Dimensions at Storage Dimensions' headquarters, 1656 McCarthy Boulevard,
Milpitas, CA 95035, by signing and returning a later dated proxy or by voting in
person at the Storage Dimensions Special Meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Board of Directors,
LOGO
Robert E. Bylin, Secretary
Milpitas, California
March 9, 1998
<PAGE> 6
ARTECON, INC.
MARCH 9, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders
of Artecon, Inc., a California corporation ("Artecon"), which will be held at
9:00 a.m. on March 31, 1998 (the "Artecon Special Meeting"), at the corporate
offices of Artecon at 6305 El Camino Real, Carlsbad, California 92009.
At the Artecon Special Meeting, you will be asked to consider and vote upon
a proposal (the "Merger Proposal") to approve the Agreement and Plan of Merger
and Reorganization dated as of December 22, 1997 (the "Reorganization
Agreement"), among Artecon, Storage Dimensions, Inc., a Delaware corporation
("Storage Dimensions"), and Storage Acquisition Corp., a newly formed California
corporation and wholly-owned subsidiary of Storage Dimensions ("Merger Sub"),
and the merger of Merger Sub with and into Artecon, whereby Merger Sub will
cease to exist and Artecon will become a wholly-owned subsidiary of Storage
Dimensions (the "Merger"). As a result of the Merger, each outstanding share of
Artecon Common Stock (other than Dissenting Shares, as defined herein) will be
converted into the right to receive approximately 2.16 shares of Storage
Dimensions Common Stock (the "Exchange Ratio") and each outstanding share of
Artecon Preferred Stock and Artecon Preferred B stock (other than Dissenting
Shares) will be converted into the right to receive one share of newly
designated Storage Dimensions Series A Preferred Stock. Following the Merger,
the former holders of Artecon Common Stock will hold in the aggregate
approximately 13,120,000 shares of Storage Dimensions Common Stock, based upon
the number of shares of Storage Dimensions Common Stock outstanding on February
23, 1998. Such shares would have a value of approximately $52,480,000, based
upon the closing price of Storage Dimensions Common Stock as reported on the
Nasdaq National Market on February 23, 1998. In addition, Storage Dimensions
will issue an aggregate of 2,494,159 shares of Storage Dimensions Series A
Preferred Stock (convertible into a maximum of approximately 831,000 shares of
Storage Dimensions Common Stock) to the holders of Artecon Preferred Stock and
Artecon Preferred B Stock. Immediately following the Merger, the former holders
of Artecon capital stock will hold approximately 62.5% of the outstanding
capital stock of Storage Dimensions and current holders of Storage Dimensions
Common Stock will hold approximately 37.5% of the outstanding capital stock of
Storage Dimensions.
While the percentage of outstanding capital stock of Storage Dimensions to
be held by former holders of Artecon Common Stock and current holders of Storage
Dimensions Common Stock following the Merger is fixed, the exact number of
shares of Storage Dimensions Common Stock issuable to the former Artecon
shareholders (but not shares of Storage Dimensions Preferred Stock) is subject
to modest change based upon changes in the number of outstanding shares of
Storage Dimensions Common Stock and Artecon Common Stock prior to the Merger.
Based upon the number of shares of each company outstanding on February 23,
1998, approximately 2.16 shares of Storage Dimensions Common Stock would be
issued for each share of Artecon Common Stock in the Merger. While dollar
fluctuations in the market price of Storage Dimensions Common Stock will not
affect the Exchange Ratio, they would change the aggregate value of shares of
Storage Dimensions Common Stock issued in the Merger.
In connection with the Merger, Storage Dimensions will amend its
Certificate of Incorporation to (i) change its name to "Artecon, Inc."; and (ii)
designate a new Series A Preferred Stock, consisting of 2,494,159 shares. In
addition, the Storage Dimensions stockholders will also vote on proposals to
provide for a classified Board of Directors whereby the directors will be
separated into three classes with members of each class serving for a three year
term, and to provide that a director may not be removed from office without
cause except, until the third annual meeting of Storage Dimensions following the
Merger, by the affirmative vote of at least 80% of the outstanding voting stock
of Storage Dimensions and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock of Storage Dimensions thereafter.
Upon consummation of the Merger, the name of Storage Dimensions will be
changed to "Artecon, Inc." and the Storage Dimensions Common Stock will be
traded on the Nasdaq National Market under the symbol "ARTE." The Artecon
shareholders will hold shares of a publicly-traded Delaware corporation that is
subject
<PAGE> 7
to on-going disclosure obligations under the Securities Exchange Act of 1934, as
amended, including the filing of quarterly and annual reports, current reports
and proxy statements. As stockholders of a Delaware corporation following the
Merger, the rights of the Artecon shareholders will differ from their current
rights as holders of shares of a California corporation.
The Merger Proposal is described more fully in the accompanying Notice of
Special Meeting of Shareholders and Joint Proxy Statement/Prospectus.
If the requisite approvals of the stockholders of Storage Dimensions and
the shareholders of Artecon are received and all other conditions to closing are
satisfied or waived, the Merger is anticipated to close by March 31, 1998.
Holders of Artecon Common Stock and/or Artecon Preferred Stock may, by
complying with Chapter 13 of the California General Corporation Law, be entitled
to dissenters' rights and the receipt of a cash payment for their shares as set
forth therein.
THE BOARD OF DIRECTORS OF ARTECON HAS DETERMINED THAT THE MERGER IS FAIR TO
ARTECON AND IN THE BEST INTERESTS OF ARTECON SHAREHOLDERS. ACCORDINGLY, THE
BOARD OF DIRECTORS OF ARTECON HAS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
THESE ITEMS.
Your vote is important regardless of how many shares you own. Please take a
few minutes now to review the Joint Proxy Statement/Prospectus and to sign and
date your proxy and return it in the envelope provided. You may attend the
meeting and vote in person even if you have previously returned your proxy.
Sincerely,
/s/ JAMES L. LAMBERT
James L. Lambert
President and Chief Executive Officer
<PAGE> 8
ARTECON, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Artecon,
Inc., a California corporation ("Artecon"), will be held at 9:00 a.m. on March
31, 1998 (the "Artecon Special Meeting"), at the corporate offices of Artecon at
6305 El Camino Real, Carlsbad, California 92009.
The meeting is called for the purpose of considering and voting upon a
proposal (the "Merger Proposal") to approve (i) the Agreement and Plan of Merger
and Reorganization dated as of December 22, 1997 (the "Reorganization
Agreement"), among Artecon, Storage Dimensions, Inc., a Delaware corporation
("Storage Dimensions"), and Storage Acquisition Corp., a newly formed California
corporation and wholly-owned subsidiary of Storage Dimensions ("Merger Sub"),
and the merger of Merger Sub with and into Artecon, whereby Merger Sub will
cease to exist and Artecon will become a wholly-owned subsidiary of Storage
Dimensions (the "Merger").
As a result of the Merger, each outstanding share of Artecon Common Stock
(other than Dissenting Shares, as defined herein) will be converted into the
right to receive approximately 2.16 shares of Storage Dimensions Common Stock
(the "Exchange Ratio"), and each outstanding share of Artecon Preferred and
Preferred B stock (collectively, the "Artecon Preferred Stock") (other than
Dissenting Shares) will be converted into the right to receive one share of
newly designated Storage Dimensions Series A Preferred Stock. The Storage
Dimensions Common Stock to be issued to the holders of Artecon Common Stock and
the Storage Dimensions Series A Preferred Stock to be issued to the holders of
Artecon Preferred Stock in the Merger are collectively referred to herein as the
"Merger Consideration." Following the Merger, the former holders of Artecon
Common Stock will hold in the aggregate approximately 13,120,000 shares of
Storage Dimensions Common Stock, based upon the number of shares of Storage
Dimensions Common Stock outstanding on February 23, 1998. Such shares would have
a value of approximately $52,480,000, based upon the closing price of Storage
Dimensions Common Stock as reported on the Nasdaq National Market on February
23, 1998. In addition, Storage Dimensions will issue an aggregate of 2,494,159
shares of Storage Dimensions Series A Preferred Stock (convertible into a
maximum of approximately 831,000 shares of Storage Dimensions Common Stock) to
certain Artecon shareholders. Immediately following the Merger, the former
holders of Artecon capital stock will hold approximately 62.5% of the
outstanding capital stock of Storage Dimensions, and current holders of Storage
Dimensions Common Stock will hold approximately 37.5% of the outstanding capital
stock of Storage Dimensions, in each case, giving effect to the conversion of
the Storage Dimensions Series A Preferred Stock being issued in the Merger and
the exercise of outstanding Storage Dimensions stock options with an exercise
price of less than $3.96875 per share.
In connection with the Merger, Storage Dimensions will amend its
Certificate of Incorporation to (i) change its name to "Artecon, Inc.", and (ii)
designate a new Series A Preferred Stock consisting of 2,494,159 shares. In
addition, Storage Dimensions stockholders will vote upon proposals to provide
(i) for a classified Board of Directors whereby the directors will be separated
into three classes with members of each class serving for a three year term, and
(ii) that a director may not be removed from office without cause except, until
the third annual meeting of Storage Dimensions following the Merger, by the
affirmative vote of at least 80% of the outstanding voting stock of Storage
Dimensions and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock of Storage Dimensions thereafter.
Upon consummation of the Merger, the name of Storage Dimensions will be
changed to "Artecon, Inc." and the Storage Dimensions Common Stock will be
traded on the Nasdaq National Market under the symbol "ARTE." The Storage
Dimensions Series A Preferred Stock will not be publicly traded. The Artecon
shareholders will hold shares of a publicly-traded Delaware corporation that is
subject to on-going disclosure obligations under the Securities Exchange Act of
1934, as amended, including the filing of quarterly and
<PAGE> 9
annual reports, current reports and proxy statements. As stockholders of a
Delaware corporation following the Merger, the rights of the Artecon
shareholders will differ from their current rights as shareholders of a
California corporation. A copy of the Reorganization Agreement is attached as
Annex A to the Joint Proxy Statement/Prospectus. A copy of the proposed
amendment to the Storage Dimensions Certificate of Incorporation is attached as
Annex B to this Joint Proxy Statement/Prospectus.
If the requisite approvals of the stockholders of Storage Dimensions and
the shareholders of Artecon are received and all other conditions to the Merger
are satisfied or waived, the Merger is anticipated to close by March 31, 1998.
The Merger Proposal and other related matters are more fully described in
the attached Joint Proxy Statement/Prospectus and the Annexes thereto.
The Board of Directors has fixed the close of business on February 23, 1998
as the record date for the determination of the shareholders entitled to notice
of and to vote at the Artecon Special Meeting and any adjournments or
postponements thereof. Only holders of record of Artecon Common Stock and
Artecon Preferred Stock on the record date are entitled to vote at the Artecon
Special Meeting.
Holders of Artecon Common Stock and/or Artecon Preferred Stock may, by
complying with Chapter 13 of the California General Corporation Law (the
"CGCL"), be entitled to dissenters' rights and the receipt of a cash payment for
their shares as set forth therein, and the shares of Artecon Common Stock and/or
Artecon Preferred Stock held by such persons will be deemed to be "Dissenting
Shares." A copy of Chapter 13 of the CGCL is attached as Annex D to this Joint
Proxy Statement/Prospectus.
If you would like to attend the Artecon Special Meeting and your shares are
held by a broker, bank or other nominee, you must bring to the meeting a recent
brokerage statement or a letter from the nominee confirming your beneficial
ownership of the shares. You must also bring a form of personal identification.
In order to vote your shares at the Artecon Special Meeting, you must obtain
from the nominee a proxy issued in your name.
You can ensure that your shares are voted at the meeting by signing and
dating the enclosed proxy and returning it in the envelope provided. Sending in
a signed proxy will not affect your right to attend the meeting and vote in
person. You may revoke your proxy at any time before it is voted by giving
written notice to the Secretary of Artecon at Artecon's headquarters, at 6305 El
Camino Real, Carlsbad, California 92009, by signing and returning a later dated
proxy or by voting in person at the Artecon Special Meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Board of Directors,
/s/ PAMELA LAMBERT
Pamela Lambert, Secretary
Carlsbad, California
March 9, 1998
<PAGE> 10
PROSPECTUS
STORAGE DIMENSIONS, INC.
AND
ARTECON, INC.
JOINT PROXY STATEMENT
FOR THE SPECIAL MEETING OF STORAGE DIMENSIONS STOCKHOLDERS TO BE HELD
ON MARCH 31, 1998 AND FOR THE SPECIAL MEETING OF ARTECON
SHAREHOLDERS TO BE HELD ON MARCH 31, 1998
------------------------
STORAGE DIMENSIONS, INC.
PROSPECTUS
------------------------
This Joint Proxy Statement and Prospectus (the "Joint Proxy
Statement/Prospectus") is being furnished to the stockholders of Storage
Dimensions in connection with the solicitation of proxies by the Board of
Directors of Storage Dimensions (the "Storage Dimensions Board") for use at a
Special Meeting of Stockholders of Storage Dimensions to be held at the
corporate offices of Storage Dimensions at 1656 McCarthy Blvd., Milpitas,
California 95035 on March 31, 1998 at 9:00 a.m., local time, and at any and all
adjournments or postponements thereof (the "Storage Dimensions Special
Meeting"). This Joint Proxy Statement/Prospectus also constitutes the Prospectus
of Storage Dimensions with respect to the issuance of shares of Storage
Dimensions Common Stock and shares of Storage Dimensions Series A Preferred
Stock to be issued to shareholders of Artecon. Storage Dimensions Common Stock
is traded on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "STDM." Upon consummation of the Merger, the name of
Storage Dimensions will be changed to "Artecon, Inc." and the Storage Dimensions
Common Stock will be traded on the Nasdaq National Market under the symbol
"ARTE." On March 6, 1998, the last reported sale price per share of Storage
Dimensions Common Stock on the Nasdaq National Market was $3.75.
This Joint Proxy Statement/Prospectus is also being furnished to the
holders of shares of Artecon Common Stock, no par value (the "Artecon Common
Stock"), holders of shares of Artecon Preferred Stock, no par value, and holders
of shares of Artecon Preferred B Stock, no par value (the Artecon Preferred
Stock and Artecon Preferred B Stock are collectively referred to herein as the
"Artecon Preferred Stock"), in connection with the solicitation of proxies by
the Board of Directors of Artecon (the "Artecon Board") for use at a Special
Meeting of Shareholders of Artecon to be held at the corporate offices of
Artecon at 6305 El Camino Real, Carlsbad, California 92009 on March 31, 1998 at
9:00 a.m., local time, and at any and all adjournments or postponements thereof
(the "Artecon Special Meeting").
Upon consummation of the Merger (i) each issued and outstanding share of
Artecon Common Stock (other than Dissenting Shares, as defined herein) will be
converted into the right to receive approximately 2.16 shares (the "Exchange
Ratio") of Storage Dimensions Common Stock, $.005 par value (the "Storage
Dimensions Common Stock"), (ii) each issued and outstanding share of Artecon
Preferred Stock (other than Dissenting Shares) will be converted into the right
to receive one share of Storage Dimensions Series A Preferred Stock, $.005 par
value (the "Storage Dimensions Preferred Stock"), (iii) each outstanding option,
warrant or other right to purchase Artecon Common Stock, if any, will become an
equivalent right with respect to Storage Dimensions Common Stock, on the same
terms as the original option, warrant or other right, as adjusted by the
Exchange Ratio, (iv) all shares of Artecon Common Stock and Artecon Preferred
Stock will cease to be outstanding and will be canceled and retired and will
cease to exist, and each holder of a certificate formerly representing shares of
Artecon Common Stock and Artecon Preferred Stock will thereafter cease to have
any rights with respect thereto, except the right to receive certificates
representing the shares of Storage Dimensions Common Stock and Storage
Dimensions Preferred Stock, respectively, and (v) Artecon will become a
wholly-owned subsidiary of Storage Dimensions. In connection with the Merger,
Storage Dimensions will amend its Certificate of Incorporation to: (i) change
its name to "Artecon, Inc."; (ii) subject to approval of Proposal 2 below,
provide for a classified Board of Directors whereby the directors
<PAGE> 11
will be separated into three classes with members of each class serving for a
three year term; (iii) subject to approval of Proposal 3 below, provide that a
director may not be removed from office without cause except, until the third
annual meeting of the stockholders of Storage Dimensions following the Merger,
by the affirmative vote of at least 80% of the outstanding voting stock of
Storage Dimensions and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock of Storage Dimensions thereafter; and (iv) designate a
new Series A Preferred Stock, consisting of 2,494,159 shares. In the Business
Combination, Storage Dimensions will issue an aggregate of approximately
13,120,000 shares of Storage Dimensions Common Stock to the Artecon
shareholders, based upon the number of shares of Storage Dimensions Common Stock
outstanding on February 23, 1998. Such shares would have a value of
approximately $52,480,000, based upon the closing price of Storage Dimensions
Common Stock as reported on the Nasdaq National Market on February 23, 1998. In
addition, Storage Dimensions will issue an aggregate of 2,494,159 shares of
Storage Dimensions Preferred Stock (convertible into a maximum of approximately
831,000 shares of Storage Dimensions Common Stock) to certain Artecon
shareholders, which shares of Storage Dimensions Preferred Stock will not be
publicly traded. Immediately following the Merger, the former holders of Artecon
capital stock will hold approximately 62.5% of the outstanding capital stock of
Storage Dimensions and current holders of Storage Dimensions Common Stock will
hold approximately 37.5% of the outstanding capital stock of Storage Dimensions,
in each case giving effect to the conversion of the Storage Dimensions Series A
Preferred Stock being issued in the Merger and the exercise of outstanding
Storage Dimensions stock options with an exercise price of less than $3.96875
per share.
While the percentage of outstanding capital stock of Storage Dimensions to
be held by former holders of Artecon Common Stock and the current holders of
Storage Dimensions Common Stock following the Business Combination is fixed, the
exact number of shares of Storage Dimensions Common Stock issuable to the former
Artecon shareholders (but not shares of Storage Dimensions Preferred Stock) is
subject to modest change based upon changes in the number of outstanding shares
of Storage Dimensions Common Stock and Artecon Common Stock prior to the
Business Combination. Based upon the number of shares of each company
outstanding on February 23, 1998, approximately 2.16 shares of Storage
Dimensions Common Stock would be issued for each share of Artecon Common Stock
in the Business Combination. While dollar fluctuations in the market price of
Storage Dimensions Common Stock will not affect the Exchange Ratio, they would
change the aggregate value of shares of Storage Dimensions Common Stock issued
in the Business Combination.
Consummation of the Merger is subject to various conditions, including the
approval and adoption of the Reorganization Agreement and approval of the Merger
by holders of a majority of the outstanding shares of Artecon Common Stock and
Artecon Preferred Stock, each voting as a separate class, at the Artecon Special
Meeting and the approval of the Business Combination Proposal and the
Certificate of Incorporation Amendments at the Storage Dimensions Special
Meeting by the affirmative vote of a majority of the outstanding shares of
Storage Dimensions Common Stock. Certain holders of Artecon capital stock, who
together hold approximately 66.6% and 99.2% of the outstanding Artecon Common
Stock and Artecon Preferred Stock, respectively, have agreed to vote such shares
in favor of the Reorganization Agreement and the Merger and have granted Storage
Dimensions an irrevocable proxy to vote their shares of Artecon Common Stock and
Artecon Preferred Stock in favor of the Reorganization Agreement and the Merger.
In addition, certain holders of Storage Dimensions Common Stock, who together
hold approximately 56.7% of the outstanding Storage Dimensions Common Stock,
have agreed to vote such shares of Storage Dimension Common Stock in favor of
the Business Combination Proposal and have granted Artecon an irrevocable proxy
to vote their shares of Storage Dimensions Common Stock in favor of the Business
Combination Proposal. See "OTHER AGREEMENTS -- Artecon Voting Agreements" and
"-- Storage Dimensions Voting Agreements."
Holders of Artecon Common Stock and/or Artecon Preferred Stock may, by
complying with Chapter 13 of the CGCL, be entitled to dissenters' rights and the
receipt of a cash payment for their shares as set forth therein, and the shares
of Artecon Common Stock and Artecon Preferred Stock held by such persons will be
deemed to be "Dissenting Shares." Storage Dimensions stockholders do not have
dissenters' or appraisal rights under Delaware law as a result of the Merger.
------------------------
<PAGE> 12
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. SEE "RISK
FACTORS" COMMENCING ON PAGE 23 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD
BE CONSIDERED BY HOLDERS OF STORAGE DIMENSIONS COMMON STOCK AND ARTECON CAPITAL
STOCK IN CONNECTION WITH THEIR CONSIDERATION OF THE MATTERS CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECT.
THE SHARES OF STORAGE DIMENSIONS COMMON STOCK AND STORAGE DIMENSIONS SERIES
A PREFERRED STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
All information contained in this Joint Proxy Statement/Prospectus
regarding Storage Dimensions and Merger Sub has been provided by Storage
Dimensions. All information contained in this Joint Proxy Statement/Prospectus
regarding Artecon has been provided by Artecon.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise. See "STORAGE DIMENSIONS SPECIAL MEETING -- Record Date," "-- Voting
Rights; Proxies," "ARTECON SPECIAL MEETING -- Record Date," and "-- Voting
Rights; Proxies."
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY STORAGE DIMENSIONS OR ARTECON. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES OFFERED BY THIS
JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR THE ISSUANCE
OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE HEREOF.
THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORMS OF PROXY
ARE FIRST BEING MAILED TO HOLDERS OF STORAGE DIMENSIONS COMMON STOCK AND ARTECON
CAPITAL STOCK ON OR ABOUT MARCH 11, 1998.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS MARCH 9, 1998.
<PAGE> 13
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD LOOKING STATEMENTS.................................. 1
AVAILABLE INFORMATION....................................... 1
SUMMARY..................................................... 3
The Parties............................................... 3
Storage Dimensions, Inc................................ 3
Artecon, Inc........................................... 3
Storage Acquisition Corp............................... 4
The Meetings.............................................. 4
Time, Place and Date................................... 4
Purpose of the Meetings................................ 4
Votes Required; Record Date............................ 5
Recommendations of the Boards of Directors................ 6
The Merger................................................ 6
General................................................ 6
Merger Consideration................................... 6
Amendment to Storage Dimensions Certificate of
Incorporation......................................... 7
Effect on Artecon Stock Options, Warrants or Rights.... 7
Effect on Storage Dimensions Stock Options............. 8
Conditions to the Merger; Termination; Fees............ 8
Exchange of Artecon Stock Certificates................. 8
No Solicitation........................................ 8
Dissenters' and Appraisal Rights....................... 9
Accounting Treatment................................... 9
Stock Ownership Following the Merger................... 9
Risk Factors........................................... 9
Opinion of Financial Advisor........................... 9
Interests of Certain Persons in the Merger............. 10
Governmental Approvals................................. 10
Certain Federal Income Tax Consequences................ 10
Additional Matters for Consideration by Storage
Dimensions Stockholders............................... 11
Comparative Rights of Stockholders..................... 11
MARKET PRICE INFORMATION.................................... 12
SELECTED HISTORICAL FINANCIAL INFORMATION................... 13
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 16
COMPARATIVE PER SHARE DATA.................................. 22
RISK FACTORS................................................ 23
Risks Relating to the Merger.............................. 23
Risks Related to the Businesses of Storage Dimensions and
Artecon................................................ 26
INTRODUCTION................................................ 33
</TABLE>
i
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
STORAGE DIMENSIONS SPECIAL MEETING.......................... 33
Record Date............................................... 33
Quorum.................................................... 33
Required Votes............................................ 33
Voting Rights; Proxies.................................... 34
Solicitation of Proxies................................... 34
ARTECON SPECIAL MEETING..................................... 36
Record Date............................................... 36
Quorum.................................................... 36
Required Votes............................................ 36
Voting Rights; Proxies.................................... 36
Solicitation of Proxies................................... 37
THE MERGER.................................................. 38
General................................................... 38
Effective Time............................................ 39
Conversion of Shares; Procedures for Exchange of Artecon
Certificates........................................... 39
Background of the Merger.................................. 40
Recommendation of the Storage Dimensions Board; Storage
Dimensions
Reasons for the Merger................................. 42
Recommendation of the Artecon Board; Artecon Reasons for
the Merger............................................. 44
Opinion of Financial Advisor to Storage Dimensions........ 45
Interests of Certain Persons in the Merger................ 50
Certain Federal Income Tax Consequences................... 51
Accounting Treatment...................................... 53
Effect on Artecon Options, Warrants and Rights............ 53
Effect on Storage Dimensions Options...................... 53
Regulatory Matters........................................ 53
Federal Securities Law Consequences....................... 53
Stock Listing............................................. 54
Appraisal and Dissenters' Rights.......................... 54
Merger Expenses and Fees and Other Costs.................. 56
THE REORGANIZATION AGREEMENT................................ 56
Terms of the Merger....................................... 56
Exchange of Certificates.................................. 58
Representations and Warranties............................ 59
Conduct of Business Pending the Merger.................... 59
Additional Covenants...................................... 62
Indemnification of Officers and Directors................. 62
No Solicitation........................................... 62
Conditions to the Merger.................................. 63
Termination of the Reorganization Agreement............... 64
Termination Fees.......................................... 66
Other Fees and Expenses................................... 66
Amendment; Waiver......................................... 66
</TABLE>
ii
<PAGE> 15
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OTHER AGREEMENTS............................................ 66
Artecon Voting Agreements................................. 66
Storage Dimensions Voting Agreements...................... 67
Affiliate Agreements...................................... 67
Standstill Agreement...................................... 68
Amendment to Storage Dimensions Certificate of
Incorporation.......................................... 68
STORAGE DIMENSIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 70
STORAGE DIMENSIONS BUSINESS................................. 76
STORAGE DIMENSIONS EXECUTIVE COMPENSATION................... 88
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF STORAGE
DIMENSIONS................................................ 90
ARTECON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 92
CHANGE IN ACCOUNTANTS OF ARTECON............................ 96
ARTECON BUSINESS............................................ 98
ARTECON EXECUTIVE COMPENSATION.............................. 110
BENEFICIAL SECURITY OWNERSHIP OF CERTAIN OWNERS AND
MANAGEMENT OF STORAGE DIMENSIONS.......................... 113
BENEFICIAL SECURITY OWNERSHIP OF CERTAIN OWNERS AND
MANAGEMENT OF ARTECON..................................... 115
MANAGEMENT OF STORAGE DIMENSIONS AFTER THE MERGER........... 117
STOCK OWNERSHIP OF STORAGE DIMENSIONS FOLLOWING THE
MERGER.................................................... 120
DESCRIPTION OF CAPITAL STOCK................................ 122
Description of Storage Dimensions Capital Stock........... 122
Description of Artecon Capital Stock...................... 123
COMPARISON OF RIGHTS OF STORAGE DIMENSIONS STOCKHOLDERS AND
ARTECON SHAREHOLDERS...................................... 125
ADDITIONAL MATTERS FOR CONSIDERATION BY STORAGE DIMENSIONS
STOCKHOLDERS.............................................. 133
LEGAL MATTERS............................................... 140
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS.................. 140
STOCKHOLDER PROPOSALS....................................... 140
EXPERTS..................................................... 140
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
Annex A -- Agreement and Plan of Merger and Reorganization
Annex B -- Certificate of Amendment of Storage Dimensions Certificate of
Incorporation
Annex C -- Opinion of Salomon Smith Barney
Annex D -- California General Corporation Law Sections 1300-1312
Annex E -- Form of Storage Dimensions Voting Agreement
Annex F -- Form of Artecon Voting Agreement
iii
<PAGE> 16
FORWARD LOOKING STATEMENTS
Certain statements in this Joint Proxy Statement/Prospectus constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21B of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The reasons
for the Merger discussed under the caption "THE MERGER," statements about the
expected impact of the Merger on Storage Dimensions' and Artecon's businesses,
financial performance and condition, accounting and tax treatment and the extent
of the charges to be incurred by Storage Dimensions related to the Merger are
forward-looking statements. Further, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "projects," "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the results of the combined company to differ
materially from those indicated by such forward-looking statements, including,
but not limited to, (i) factors related to the Merger, including the risk that
anticipated synergies will not be realized, the significant transaction charges
and the potential dilutive effect to holders of Storage Dimensions Common Stock
and Artecon capital stock which will result from the Merger, the effect of the
Merger on customers and partners of Storage Dimensions and Artecon and (ii)
factors related to Storage Dimensions' and Artecon's businesses including
history of operating losses and uncertain profitability, significant
fluctuations in operating results, the dependence on the server market in
general and storage systems in particular, the ability to develop and ship
planned products incorporating technological advancements, the ability to
recruit, train and retain qualified sales and other personnel, product liability
and insurance, as well as those additional factors set forth in this Joint Proxy
Statement/Prospectus under the caption "RISK FACTORS." Neither Storage
Dimensions nor Artecon undertakes any obligation to update any forward-looking
statements.
AVAILABLE INFORMATION
Storage Dimensions is subject to the informational requirements of the
Exchange Act, and file reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). This
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and may be available at the following Regional
Offices of the Commission: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Storage Dimensions makes filings pursuant to the
Exchange Act with the Commission electronically, and such materials may be
inspected and copied at the Commission's Web site (http://www.sec.gov). Material
filed by Storage Dimensions can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC
20006.
Artecon is not subject to the informational requirements of the Exchange
Act and, as a result, does not file reports, proxy or information statements or
other information with the Commission.
Under the rules and regulations of the Commission, the solicitation of
proxies from the shareholders of Artecon to approve the Merger Proposal
constitutes an offering of the Storage Dimensions Common Stock and the Storage
Dimensions Preferred Stock to be issued in connection with the Merger.
Accordingly, Storage Dimensions will file with the Commission a Registration
Statement on Form S-4 under the Securities Act with respect to such offering (as
amended from time to time, the "Registration Statement"). This Joint Proxy
Statement/Prospectus constitutes the prospectus of Storage Dimensions that will
be filed as part of the Registration Statement. Other parts of the Registration
Statement are excluded from this Joint Proxy Statement/Prospectus pursuant to
the rules and regulations of the Commission. Reference is made to the
Registration Statement for further information with respect to Storage
Dimensions, Artecon and the Storage Dimensions Common Stock and the Storage
Dimensions Preferred Stock offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and
1
<PAGE> 17
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission or attached as an Annex hereto.
This Joint Proxy Statement/Prospectus contains trademarks of Storage
Dimensions, Artecon and other companies.
2
<PAGE> 18
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus and the Annexes hereto. This summary
does not contain a complete statement of all material information relating to
the Reorganization Agreement or the Merger and is subject to, and is qualified
in its entirety by, the more detailed information and financial statements
contained in this Joint Proxy Statement/Prospectus. Holders of Storage
Dimensions and Artecon capital stock should read this Joint Proxy
Statement/Prospectus carefully in its entirety. Certain capitalized terms used
in this summary are defined elsewhere in this Joint Proxy Statement/Prospectus.
THE PARTIES
Storage Dimensions, Inc.
Storage Dimensions designs, manufactures, markets and supports
high-performance data storage systems for open systems network applications.
Storage Dimensions focuses on the Intel-based local area network market (the
"PC-LAN market") by developing and marketing a broad family of disk and tape
storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability (minimum downtime) requirements of its
customers while at the same time reducing life-cycle cost of ownership. In line
with its open systems strategy, Storage Dimensions also develops and supports
selected products for the UNIX market. Storage Dimensions products are sold
through its own field sales force in combination with multi-tiered distribution
channels. Storage Dimensions currently expects its revenues for the fiscal
quarter ending March 31, 1998 to be significantly less than its results of
operations for the fourth quarter of 1997 and for the first quarter of 1997.
Storage Dimensions attributes the decline to a combination of uncertainty in the
marketplace resulting from Storage Dimensions' announcement of the Merger in
late 1997 and continued sales force productivity issues.
Storage Dimensions was incorporated in the State of Delaware in November
1992. In an acquisition effected on December 26, 1992 (the "Storage
Acquisition"), Storage Dimensions acquired the assets and assumed the
liabilities of the "Storage Dimensions" subsidiary of Maxtor Corporation
("Maxtor") for an aggregate purchase price of $21.4 million. The Storage
Acquisition was financed through equity investments in Storage Dimensions made
by Capital Partners, Inc. ("Capital Partners") and certain of its affiliates
(collectively, the "Capital Partners Group"), by certain members of Storage
Dimensions' management and by Maxtor. In March 1997, Storage Dimensions
completed its initial public offering. Storage Dimensions' address is 1656
McCarthy Boulevard, Milpitas, California 95035 and its telephone number is (408)
954-0710.
Artecon, Inc.
Artecon designs, manufactures, markets and supports a broad range of
scalable, fully integrated data storage products for the open-systems computing
environment. Artecon has established itself as a leader in the design,
manufacture and sale of third-party mass storage and enhancement products in the
Sun Microsystems ("Sun") and UNIX markets, offering both host-attached and
network-attached storage solutions for a broad range of customers. Artecon's
enterprise storage product line includes scalable RAID systems which allow users
to grow modularly from a single mass storage device to over ten terabytes (10TB)
of rack-mounted, fault-tolerant mass storage, thereby meeting the capacity and
performance needs of a wide range of customers while protecting and maintaining
customer investment. Artecon's telecommunications infrastructure storage
products represent what Artecon believes is the industry's only fully
NEBS-certified, multi-terabyte solution for high-end, application-specific needs
of telecommunications and government customers using commercial off-the-shelf
("COTS") workstation technology. Artecon also markets rackmount solutions for
COTS workstations and servers and provides systems integration and a variety of
other service and support programs. Artecon currently expects its revenues for
the fiscal quarter ending March 31, 1998 to be significantly less than its
results of operations for the quarter ended December 31, 1997. Artecon
attributes the decline primarily to post-holiday seasonal sales declines and
uncertainty in the marketplace resulting from the announcement of the Merger in
late 1997.
3
<PAGE> 19
In August 1997, Artecon acquired substantially all of the assets and
liabilities of Falcon Systems, Inc. ("Falcon"), a network-attached storage
server integrator and storage peripherals reseller, in a transaction accounted
for as a purchase. The Falcon acquisition enabled Artecon to achieve several
important strategic objectives, including the acquisition of Artecon's
AerREAL(TM) real-time specialized file server software and other complementary
products to better serve Artecon's existing customers, the expansion of
Artecon's customer base in the UNIX, Windows NT and Windows 95 markets and a
significant expansion of Artecon's revenue base.
The principal executive offices of Artecon are located at 6305 El Camino
Real, Carlsbad, California 92009 and its telephone number is (760) 931-5500.
Storage Acquisition Corp.
Merger Sub is a California corporation recently organized for the sole
purpose of effecting the Merger. Merger Sub is a wholly-owned subsidiary of
Storage Dimensions, has no material assets and has not engaged in any activities
except in connection with the Merger.
The principal executive offices of Merger Sub are located at 1656 McCarthy
Boulevard, Milpitas, California 95035 and its telephone number is (408)
954-0710.
THE MEETINGS
Time, Place and Date
The Storage Dimensions Special Meeting will be held at the corporate
offices of Storage Dimensions located at 1656 McCarthy Boulevard, Milpitas, CA
95035 on March 31, 1998, at 9:00 a.m., local time.
The Artecon Special Meeting will be held at the corporate offices of
Artecon located at 6305 El Camino Real, Carlsbad, California 92009 on March 31,
1998, at 9:00 a.m., local time.
Purpose of the Meetings
Storage Dimensions Special Meeting. At the Storage Dimensions Special
Meeting, holders of Storage Dimensions Common Stock will consider and vote upon:
(a) the Business Combination Proposal; (b) the Certificate of Incorporation
Amendments; (c) the Stock Plan Amendments; and (d) such other matters as may
properly come before the Storage Dimensions Special Meeting or any postponements
or adjournments thereof.
THE STORAGE DIMENSIONS BOARD HAS UNANIMOUSLY APPROVED THE BUSINESS
COMBINATION PROPOSAL, THE CERTIFICATE OF INCORPORATION AMENDMENTS AND THE STOCK
PLAN AMENDMENTS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF STORAGE
DIMENSIONS VOTE FOR THE APPROVAL OF SUCH PROPOSALS. SEE "THE
MERGER -- RECOMMENDATION OF THE STORAGE DIMENSIONS BOARD; STORAGE DIMENSIONS
REASONS FOR THE MERGER" AND "-- INTERESTS OF CERTAIN PERSONS IN THE MERGER" AND
"ADDITIONAL MATTERS FOR CONSIDERATION BY STORAGE DIMENSIONS STOCKHOLDERS."
Artecon Special Meeting. At the Artecon Special Meeting, holders of Artecon
Common Stock and Artecon Preferred Stock, each voting as a separate class, will
consider and vote upon the Merger Proposal.
THE ARTECON BOARD HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL AND
UNANIMOUSLY RECOMMENDS THAT THE ARTECON SHAREHOLDERS VOTE FOR THE MERGER
PROPOSAL. SEE "THE MERGER -- RECOMMENDATION OF THE ARTECON BOARD; ARTECON
REASONS FOR THE MERGER" AND "-- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
4
<PAGE> 20
Votes Required; Record Date
Storage Dimensions.
Approval of the Business Combination Proposal and the Certificate of
Incorporation Amendments will require the affirmative vote of the holders of a
majority of the outstanding shares of Storage Dimensions Common Stock. The
effectiveness of the Certificate of Incorporation Amendments is subject to the
approval of the Business Combination Proposal. Notwithstanding any indication to
the contrary, a vote against the Business Combination Proposal will constitute a
vote against the Certificate of Incorporation Amendments. In addition, Proposals
2 and 3 are mutually dependent. That is, a vote against Proposal 2 will
constitute a vote against Proposal 3, and a vote against Proposal 3 will
constitute a vote against Proposal 2. Approval of the Stock Plan Amendments will
require the affirmative vote of the holders of a majority of the shares of
Storage Dimensions Common Stock present in person or represented by proxy at the
Storage Dimensions Special Meeting and voting on the Stock Plan Amendments.
Holders of Storage Dimensions Common Stock are entitled to one vote per share.
Only holders of Storage Dimensions Common Stock at the close of business on
February 23, 1998 (the "Storage Dimensions Record Date") will be entitled to
notice of and to vote at the Storage Dimensions Special Meeting. See "STORAGE
DIMENSIONS SPECIAL MEETING." On the Storage Dimensions Record Date, there were
8,022,430 shares of Storage Dimensions Common Stock outstanding.
Certain holders of Storage Dimensions Common Stock, who together hold
approximately 56.1% of the Storage Dimensions Common Stock outstanding as of the
Storage Dimensions Record Date, have entered into voting agreements with Artecon
(the "Storage Dimensions Voting Agreements") pursuant to which such holders have
agreed to vote in favor of the Business Combination Proposal and the Certificate
of Incorporation Amendments and have granted Artecon an irrevocable proxy to
vote their shares of Storage Dimensions Common Stock in favor of the Business
Combination Proposal and the Certificate of Incorporation Amendments. See "OTHER
AGREEMENTS -- Storage Dimensions Voting Agreements." A copy of the form of the
Storage Dimensions Voting Agreement is attached hereto as Annex E.
Other than the Storage Dimensions stockholders who have signed the Storage
Dimensions Voting Agreements, Storage Dimensions stockholders who have executed
a proxy may revoke the proxy at any time prior to its exercise at the Storage
Dimensions Special Meeting by giving written notice to the Secretary of Storage
Dimensions at Storage Dimensions' corporate offices, 1656 McCarthy Boulevard,
Milpitas, CA 95035, by signing and returning a later dated proxy or by voting in
person at the Storage Dimensions Special Meeting. ACCORDINGLY, STORAGE
DIMENSIONS STOCKHOLDERS WHO HAVE EXECUTED AND RETURNED PROXY CARDS IN ADVANCE OF
THE STORAGE DIMENSIONS SPECIAL MEETING MAY CHANGE THEIR VOTE AT ANY TIME PRIOR
TO OR AT THE STORAGE DIMENSIONS SPECIAL MEETING.
Artecon.
Approval of the Merger Proposal will require the affirmative vote of the
holders of a majority of the outstanding shares of Artecon Common Stock and
Artecon Preferred Stock, each voting as a separate class. Holders of Artecon
Common Stock and Artecon Preferred Stock are entitled to one vote per share.
Only holders of Artecon Common Stock and Artecon Preferred Stock at the close of
business on February 23, 1998 (the "Artecon Record Date") will be entitled to
notice of and to vote at the Artecon Special Meeting. On the Artecon Record
Date, there were 6,043,990 shares of Artecon Common Stock and 2,517,159 shares
of Artecon Preferred Stock outstanding. See "ARTECON SPECIAL MEETING."
Certain holders of Artecon capital stock, who, as of the Artecon Record
Date, together own approximately 66.6% of the outstanding Artecon Common Stock
and approximately 99.2% of the outstanding Artecon Preferred Stock, have entered
into voting agreements with Storage Dimensions (the "Artecon Voting Agreements")
pursuant to which such holders have agreed to vote in favor of the Merger and
have granted Storage Dimensions an irrevocable proxy to vote their shares of
Artecon capital stock in favor of the Merger Proposal. See "OTHER
AGREEMENTS -- Artecon Voting Agreements." A copy of the form of the Artecon
Voting Agreement is attached hereto as Annex F.
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<PAGE> 21
Other than the Artecon shareholders who have signed the Artecon Voting
Agreements, Artecon shareholders who have executed a proxy may revoke the proxy
at any time prior to its exercise at the Artecon Special Meeting by giving
written notice to the Secretary of Artecon at Artecon's corporate offices, 6305
El Camino Real, Carlsbad, California 92009, by signing and returning a later
dated proxy or by voting in person at the Artecon Special Meeting. ACCORDINGLY,
ARTECON SHAREHOLDERS WHO HAVE EXECUTED AND RETURNED PROXY CARDS IN ADVANCE OF
THE ARTECON SPECIAL MEETING MAY CHANGE THEIR VOTE AT ANY TIME PRIOR TO OR AT THE
ARTECON SPECIAL MEETING.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Storage Dimensions Board. The Storage Dimensions Board has unanimously
approved the Business Combination Proposal and the Certificate of Incorporation
Amendments and has determined that the Merger is in the best interests of
Storage Dimensions and its stockholders and recommends approval of the Business
Combination Proposal and the Certificate of Incorporation Amendments by the
stockholders of Storage Dimensions. The primary factors considered and relied
upon by the Storage Dimensions Board in reaching its recommendation are
described below under "THE MERGER -- Recommendation of the Storage Dimensions
Board; Storage Dimensions Reasons for the Merger." The Storage Dimensions Board
has also unanimously approved the Stock Plan Amendments and recommends approval
thereof.
The Artecon Board. The Artecon Board has unanimously approved the Merger
Proposal and has determined that the Merger is in the best interests of Artecon
and its shareholders and recommends approval of the Merger Proposal by the
shareholders of Artecon. The primary factors considered and relied upon by the
Artecon Board in reaching its recommendation are described below under "THE
MERGER -- Recommendation of the Artecon Board; Artecon Reasons for the Merger."
THE MERGER
General
Pursuant to the Reorganization Agreement, Merger Sub will be merged with
and into Artecon, whereby Merger Sub will cease to exist and Artecon will become
a wholly owned subsidiary of Storage Dimensions. The Merger will occur on the
date of filing and acceptance of a certificate of merger with the Secretary of
State of the State of California (the "Effective Date"), which is anticipated to
occur on or about March 31, 1998. See "THE MERGER -- Effective Time."
Merger Consideration
In the Merger, Storage Dimensions will issue an aggregate of approximately
13,120,000 million shares of Storage Dimensions Common Stock to the Artecon
shareholders. Such shares would have a value of approximately $52,480,000, based
upon the closing price of Storage Dimensions Common Stock as reported on the
Nasdaq National Market on February 23, 1998. In addition, Storage Dimensions
will issue an aggregate of 2,494,159 shares of Storage Dimensions Series A
Preferred Stock to certain Artecon shareholders, which shares will not be
publicly traded. Immediately following the Business Combination, the former
holders of Artecon capital stock will hold approximately 62.5% of the
outstanding capital stock of Storage Dimensions and the current holders of
Storage Dimensions Common Stock will hold approximately 37.5% of the outstanding
capital stock of Storage Dimensions, in each case, giving effect to the
conversion of the Storage Dimensions Series A Preferred Stock being issued in
the Merger and the exercise of outstanding Storage Dimensions stock options with
an exercise price of less than $3.96875 per share. While the percentage of
outstanding capital stock of Storage Dimensions to be held by former holders of
Artecon Common Stock and current holders of Storage Dimensions Common Stock
following the Merger is fixed, the exact number of shares of Storage Dimensions
Common Stock issuable to the former Artecon shareholders (but not shares of
Storage Dimensions Preferred Stock) is subject to modest change based upon
changes in the number of outstanding shares of Storage Dimensions Common Stock
and Artecon Common Stock prior to the Merger. Based upon the number of shares of
each company outstanding on February 23, 1998, approximately
6
<PAGE> 22
2.16 shares of Storage Dimensions Common Stock would be issued for each share of
Artecon Common Stock in the Merger. While dollar fluctuations in the market
price of Storage Dimensions Common Stock will not affect the Exchange Ratio,
they would change the aggregate value of shares of Storage Dimensions Common
Stock issued in the Merger.
More specifically, the exact number of shares of Storage Dimensions Common
Stock into which each share of Artecon Common Stock will be converted will be
determined as of the Effective Time as follows: the Exchange Ratio will be a
fraction the numerator of which is the number of Merger Shares (as defined
below) and the denominator of which is the number of Artecon Shares (as defined
below). "Merger Shares" shall mean the shares of Storage Dimensions Common Stock
to be issued to holders of Artecon Common Stock in the Merger and shall be equal
to the product of (A) 1.5641 (the "Applicable Multiple") times (B) the sum of
(x) the number of shares of Storage Dimensions Common Stock outstanding
immediately prior to the Effective Time plus (y) the maximum number of shares of
Storage Dimensions Common Stock issuable upon exercise of any options to
purchase Storage Dimensions Common Stock (without regard to vesting) with option
exercise prices of less than $3.96875. "Artecon Shares" shall mean the sum of
(A) the number of shares of Artecon Common Stock outstanding immediately prior
to the Effective Time plus (B) the maximum number of shares of Artecon Common
Stock underlying any instruments convertible into or exchangeable for Artecon
Common Stock (without regard to vesting) outstanding immediately prior to the
Effective Time, including shares of Artecon Preferred Stock other than the
2,494,159 shares of Artecon Preferred Stock held by W.R. Sauey and certain
affiliates of W.R. Sauey. Such shares of Artecon Preferred Stock held by W.R.
Sauey and such affiliates (the "Sauey Preferred") will be converted into
2,494,159 shares of Storage Dimensions Preferred Stock pursuant to the Merger,
as described below. Although the Applicable Multiple is fixed, the Exchange
Ratio is subject to modest change based upon changes in the number of shares of
Storage Dimensions Common Stock and Artecon Common Stock outstanding immediately
prior to the Effective Time.
The Sauey Preferred will constitute all of the shares of Artecon Preferred
Stock outstanding as of the Effective Time. Each share of Sauey Preferred
outstanding as of the Effective Time shall be converted into the right to
receive one share of Storage Dimensions Preferred Stock. All current holders of
Artecon Preferred Stock, other than the Sauey Preferred, have agreed to convert
such Artecon Preferred Stock into shares of Artecon Common Stock prior to the
Effective Time pursuant to their rights under Artecon's Articles of
Incorporation, which shares will then be converted into Storage Dimensions
Common Stock pursuant to the Merger. Former Artecon shareholders will receive
cash in lieu of any fractional shares of Storage Dimensions Common Stock to
which such Artecon shareholders would otherwise have been entitled. See "THE
REORGANIZATION AGREEMENT -- Terms of the Merger."
Amendments to Storage Dimensions Certificate of Incorporation
Approval of the Business Combination Proposal by Storage Dimensions
stockholders will also constitute approval of an amendment to the Storage
Dimensions Certificate of Incorporation to (i) change its name to "Artecon,
Inc."; and (ii) designate a new Series A Preferred Stock, consisting of
2,494,159 shares. In addition, subject to the approval of the Certificate of
Incorporation Amendments by Storage Dimensions stockholders, Storage Dimensions
will amend its Certificate of Incorporation to provide for a classified Board of
Directors whereby the directors will be separated into three classes with
members of each class serving for a three year term and to provide that a
director may not be removed from office without cause except, until the third
annual meeting of stockholders of Storage Dimensions following the Merger, by
the affirmative vote of at least 80% of the outstanding voting stock of Storage
Dimensions and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock of Storage Dimensions thereafter.
Effect on Artecon Stock Options, Warrants or Rights
At the Effective Time, each outstanding option, warrant and right to
purchase Artecon Common Stock, if any, will be assumed by Storage Dimensions and
each such option, warrant or right will be deemed to constitute an option,
warrant or other right to acquire, on the same terms and conditions as were
applicable to
7
<PAGE> 23
such Artecon option, warrant or right as of the Effective Time, the number
(rounded down to the nearest whole number) of shares of Storage Dimensions
Common Stock that the holder of such option, warrant or right would have been
entitled to receive pursuant to the Merger had such holder exercised the Artecon
option, warrant or right in full immediately prior to the Effective Time (not
taking into account whether or not such option was in fact exercisable), at a
price per share equal to the exercise price under such Artecon option, warrant
or right divided by the Exchange Ratio (rounded up to the nearest whole cent).
See "THE MERGER -- Effect on Artecon Options, Warrants and Rights" and "THE
REORGANIZATION AGREEMENT -- Terms of the Merger -- Artecon Options, Warrants and
Rights."
Effect on Storage Dimensions Stock Options
At the Effective Time, all Storage Dimensions stock options, other than
those granted after December 22, 1997, will become fully vested and exercisable
as a result of the Merger. Such options will remain outstanding for the
remainder of their original term (subject to earlier termination in the event
that an optionee's service relationship with Storage Dimensions is terminated).
The number of shares subject to outstanding Storage Dimensions options and the
exercise price thereof will remain unchanged.
Conditions to the Merger; Termination; Fees
The consummation of the Merger is subject to various conditions, including:
(i) approval by the stockholders of Storage Dimensions and the shareholders of
Artecon; (ii) the absence of any legal restraints or prohibitions preventing the
consummation of the Merger, including compliance with the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended; (iii) receipt of opinions of
legal counsel as to the tax treatment of the Merger; (iv) the listing on the
Nasdaq National Market of the Storage Dimensions Common Stock to be issued in
the Merger; and (v) the filing of the Certificate of Amendment in the form
attached to the Reorganization Agreement, which includes the Certification of
Incorporation Amendments. See "THE MERGER -- Stock Listing" and "THE
REORGANIZATION AGREEMENT -- Conditions to the Merger."
The Reorganization Agreement may be terminated under certain circumstances
but may not be terminated by either Storage Dimensions or Artecon as a result of
fluctuations in the market price per share of Storage Dimensions Common Stock.
In addition, Storage Dimensions and Artecon have agreed that, if the
Reorganization Agreement is terminated under certain circumstances, the
terminating party will be obligated to pay the other party a sum of $1.5
million, together with out-of-pocket costs. See "THE REORGANIZATION
AGREEMENT -- Termination of the Reorganization Agreement" and "-- Termination
Fees."
Exchange of Artecon Stock Certificates
At or as soon as practicable after the Effective Time, holders of Artecon
Common Stock and Artecon Preferred Stock will surrender their certificates
representing such Artecon capital stock in exchange for certificates
representing Storage Dimensions Common Stock or Storage Dimensions Preferred
Stock, as the case may be. Holders of Artecon capital stock will receive a cash
payment in lieu of fractional shares, if any. See "THE REORGANIZATION
AGREEMENT -- Exchange of Certificates."
No Solicitation
Pursuant to the Reorganization Agreement, except under certain limited
circumstances, each of Storage Dimensions and Artecon has agreed not to (i)
solicit, initiate, encourage or induce the making, submission or announcement of
any alternate acquisition proposal, (ii) furnish any information regarding
itself or any of its subsidiaries to any other party in connection with any
alternate acquisition proposal, (iii) participate in any discussions or
negotiations with any other parties with respect to an alternate acquisition
proposal, or (iv) enter into any letter of intent or similar document or any
other contract relating to an alternate acquisition proposal. See "THE
REORGANIZATION AGREEMENT -- No Solicitation."
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<PAGE> 24
Dissenters' and Appraisal Rights
If the Merger is approved by the required vote of Artecon shareholders and
Storage Dimensions stockholders and is not abandoned or terminated, holders of
Artecon capital stock who did not vote in favor of the Merger Proposal may, by
complying with Sections 1300 through 1312 of the CGCL, be entitled to
dissenters' rights and to cash payments for their shares as described therein. A
copy of Chapter 13 of the CGCL is attached hereto as Annex D. Under the Delaware
General Corporation Law (the "DGCL"), Storage Dimensions stockholders are not
entitled to dissenters' rights or appraisal rights with respect to the proposed
Merger.
Under Delaware law, Storage Dimensions stockholders are not entitled to
appraisal rights. After the Merger, such stockholders would continue to hold the
same number of shares of Storage Dimensions Common Stock as they held before the
Merger. See "THE MERGER -- Appraisal and Dissenters' Rights."
Accounting Treatment
For accounting purposes, the Merger will be treated as a purchase of
Storage Dimensions by Artecon since the holders of Artecon capital stock would
hold and have voting power with respect to approximately 62.5% of the total
issued and outstanding voting capital stock of Storage Dimensions immediately
following the Merger. See "THE MERGER -- Accounting Treatment."
Stock Ownership Following the Merger
Based upon the capitalization of Storage Dimensions as of the close of
business on the Storage Dimensions Record Date, an aggregate of approximately
13,120,000 shares of Storage Dimensions Common Stock will be issued to holders
of Artecon Common Stock in the Merger. In addition, in the Merger, Storage
Dimensions will issue an aggregate of 2,494,159 shares of Storage Dimensions
Preferred Stock to certain holders of Artecon Preferred Stock. Such Storage
Dimensions Preferred Stock will be convertible into a maximum of approximately
831,000 shares of Storage Dimensions Common Stock at any time after January 1,
1999. Based upon (i) the number of shares of Storage Dimensions Common Stock
issued and outstanding as of the Storage Dimensions Record Date, (ii) the
issuance of Storage Dimensions Common Stock in the Merger, (iii) the conversion
of the Storage Dimensions Preferred Stock issued in the Merger into Storage
Dimensions Common Stock, and (iv) the exercise of Storage Dimensions stock
options with an exercise price of less than $3.96875 per share, the former
holders of Artecon capital stock and the current holders of Storage Dimensions
Common Stock would hold, and would have voting power with respect to,
approximately 62.5% and 37.5%, respectively, of Storage Dimensions' outstanding
capital stock. The foregoing number of shares of Storage Dimensions capital
stock to be issued in the Merger is subject to adjustment to reflect any changes
in the capitalization of Storage Dimensions subsequent to the Storage Dimensions
Record Date. See "STOCK OWNERSHIP OF STORAGE DIMENSIONS FOLLOWING THE MERGER."
Risk Factors
See "RISK FACTORS" for a discussion of certain risk factors pertaining to
the Merger and the businesses of Storage Dimensions and Artecon.
Opinion of Financial Advisor
Smith Barney Inc. (now associated with Salomon Brothers Inc and
collectively with Salomon Brothers Inc, doing business as, and referred to
herein as, "Salomon Smith Barney") has acted as financial advisor to Storage
Dimensions in connection with the Merger and has delivered to the Storage
Dimensions Board a written opinion dated December 22, 1997 to the effect that,
as of the date of such opinion and based upon and subject to certain matters
stated therein, the Merger Consideration was fair, from a financial point of
view, to Storage Dimensions. The full text of the written opinion of Salomon
Smith Barney dated December 22, 1997, which sets forth the assumptions made,
matters considered and limitations on the review undertaken, is attached as
Annex C to this Joint Proxy Statement/Prospectus and should be read carefully in
its entirety. THE OPINION OF SALOMON SMITH BARNEY IS DIRECTED TO THE STORAGE
DIMENSIONS BOARD AND RELATES ONLY TO THE
9
<PAGE> 25
FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO STORAGE
DIMENSIONS, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE STORAGE DIMENSIONS SPECIAL MEETING. See
"THE MERGER -- Opinion of Financial Advisor." Salomon Smith Barney's opinion
does not address the fairness of the Merger Consideration from a financial point
of view to the stockholders of Storage Dimensions since the stockholders of
Storage Dimensions will not be asked to convert their shares of Storage
Dimensions Common Stock in the Merger.
Artecon elected not to retain a financial advisor or obtain a fairness
opinion in connection with the Merger. The Artecon Board believed that it had
considered all material factors which were relevant to its approval of the
Merger and did not believe that the economic cost of retaining a financial
advisor and obtaining a fairness opinion was justified under the circumstances.
Interests of Certain Persons in the Merger
In considering the respective recommendations of the Artecon Board and
Storage Dimensions Board with respect to the Merger, the Artecon shareholders
and Storage Dimensions stockholders should be aware that certain members of the
Artecon Board and the Storage Dimensions Board and the executive officers of
each company have certain interests in the Merger that are in addition to the
interests of the shareholders generally.
In particular, pursuant to the Reorganization Agreement, James Lambert,
Jason Sauey and W.R. Sauey, current directors of Artecon, will become members of
the Storage Dimensions Board at the Effective Time. Current Storage Dimensions
directors Chong Sup Park and Brian Fitzgerald will remain on the Board. In
addition, James Lambert, Tesfaye Hailemichael and Dana Kammersgard, currently
President and Chief Executive Officer, Chief Financial Officer and a director,
respectively, of Artecon, will serve as President and Chief Executive Officer,
Chief Financial Officer and Secretary, respectively, of Storage Dimensions
following the Merger.
In addition, in connection with the Merger, Storage Dimensions and each of
David Eeg and Robert Bylin, the President and Chief Executive Officer and the
Chief Financial Officer of Storage Dimensions, respectively, amended the
employment agreements of such persons to provide certain severance benefits upon
termination of their relationship with Storage Dimensions. Moreover, as a result
of the Merger, stock options held by all Storage Dimensions employees, including
executive officers (but excluding options granted after December 22, 1997), will
become fully vested and exercisable. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF STORAGE DIMENSIONS" and "THE MERGER -- Effect on Storage
Dimensions Options."
W.R. Sauey, a director of Artecon, and certain entities affiliated with Mr.
Sauey, are the owners of 2,494,159 shares of Artecon Preferred Stock and will
receive all of the Storage Dimensions Preferred Stock being issued in the
Merger.
Governmental Approvals
The consummation of the Merger is subject to the expiration or termination
of the relevant waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Storage Dimensions and Mr.
W.R. Sauey, a principal shareholder of Artecon, have filed notification and
report forms under the HSR Act. Effective February 13, 1998, the waiting period
under the HSR Act was terminated. See "OTHER MATTERS -- Regulatory Approvals
Required."
Certain Federal Income Tax Consequences
It is expected that the Merger will constitute a tax-free reorganization
for federal income tax purposes and, accordingly, that no gain or loss will be
recognized for federal income tax purposes by the Artecon shareholders upon the
conversion of Artecon Common Stock into Storage Dimensions Common Stock or upon
the conversion of Artecon Preferred Stock into Storage Dimensions Preferred
Stock in the Merger (except with respect to any cash received in lieu of any
fractional share interest of Storage Dimensions
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<PAGE> 26
Common Stock or for Dissenting Shares). The obligations of Storage Dimensions
and Artecon to consummate the Merger are conditioned on the receipt by Storage
Dimensions of an opinion from Wilson Sonsini Goodrich & Rosati, P.C. and the
receipt by Artecon of an opinion from Cooley Godward LLP, that the Merger
constitutes a reorganization under Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"). See "THE MERGER -- Certain Federal Income Tax
Consequences." ARTECON SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE MERGER.
Additional Matters for Consideration by Storage Dimensions Stockholders
At the Storage Dimensions Special Meeting, Storage Dimensions stockholders
will also be asked to consider and vote upon (i) the Certificate of
Incorporation Amnendments, (ii) an amendment to the Storage Dimensions 1996
Stock Option Plan to increase the number of shares issuable thereunder from
1,000,000 to 3,000,000 and (iii) an amendment to the Storage Dimensions 1996
Employee Stock Purchase Plan to increase the number of shares issuable
thereunder from 200,000 to 400,000.
Comparative Rights of Stockholders
For a discussion of various differences between the rights of the Artecon
shareholders and the rights of the Storage Dimensions stockholders, see
"DESCRIPTION OF CAPITAL STOCK -- Description of Storage Dimensions Capital
Stock" and "-- Description of Artecon Capital Stock" and "COMPARISON OF RIGHTS
OF HOLDERS OF STORAGE DIMENSIONS CAPITAL STOCK AND ARTECON CAPITAL STOCK."
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MARKET PRICE INFORMATION
Storage Dimensions Common Stock is listed on the Nasdaq National Market
under the symbol "STDM." There are currently no outstanding shares of Storage
Dimensions Preferred Stock. Upon consummation of the Merger, the name of Storage
Dimensions will be changed to "Artecon, Inc." and the Storage Dimensions Common
Stock will be traded on the Nasdaq National Market under the symbol "ARTE."
Following the Merger, the Storage Dimensions Preferred Stock will not be
publicly traded.
The table below sets forth, for the fiscal quarters indicated, the reported
high and low closing sales prices of Storage Dimensions Common Stock on the
Nasdaq National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK HIGH LOW
--------------------------- ------ -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter (from March 11, 1997)......................... $ 7.25 $6.50
Second Quarter.............................................. $14.50 $5.38
Third Quarter............................................... $ 8.38 $4.50
Fourth Quarter.............................................. $ 6.38 $3.50
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter (to March 6, 1998)............................ $ 3.97 $3.75
</TABLE>
There is no public market for Artecon's capital stock. On December 31,
1997, the last reported sale price reported on the Nasdaq National Market for
the Storage Dimensions Common Stock was $3.75 per share. See "RISK
FACTORS -- Volatility of Stock Prices, Absence of Public Market for Preferred
Stock."
On December 19, 1997, the last full trading day prior to the execution and
delivery of the Reorganization Agreement and the public announcement thereof,
the last reported sales price of Storage Dimensions Common Stock was $4.00 per
share. On March 6, 1998, the last reported sales price of Storage Dimensions
Common Stock the Nasdaq National Market was $3.75 per share. Based on an
Exchange Ratio of approximately 2.16 shares of Storage Dimensions Common Stock
for each share of Artecon Common Stock, the pro forma equivalent market value of
Artecon Common Stock on March 6, 1998 was $8.10 per share.
Because the market price of Storage Dimensions Common Stock is subject to
fluctuation, the market value of the shares of Storage Dimensions Common Stock
that holders of Artecon Common Stock will receive in the Merger may increase or
decrease prior to the Merger (provided, however, that the number of shares of
Storage Dimensions Common Stock issuable in the Merger will not be affected by
any changes in the market price of Storage Dimensions Common Stock).
HOLDERS OF ARTECON CAPITAL STOCK ARE URGED TO OBTAIN A CURRENT MARKET
QUOTATION FOR STORAGE DIMENSIONS COMMON STOCK.
Neither Storage Dimensions nor Artecon has paid any cash dividends in the
past, and each currently intends to retain future earnings, if any, to fund the
development and growth of its business and not to pay any cash dividends in the
foreseeable future.
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<PAGE> 28
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical consolidated financial information of
Storage Dimensions and Artecon has been derived from their respective historical
consolidated financial statements, and should be read in conjunction with such
consolidated financial statements and the notes thereto, which are included in
this Joint Proxy Statement/Prospectus.
STORAGE DIMENSIONS SELECTED HISTORICAL FINANCIAL INFORMATION. The selected
historical financial information of Storage Dimensions as of and for the years
ended December 31, 1995, 1996 and 1997 has been derived from the consolidated
financial statements audited by Price Waterhouse LLP, independent accountants,
included elsewhere in this Joint Proxy Statement/Prospectus. The selected
historical financial information of Storage Dimensions as of and for the years
ended December 31, 1993 and 1994 has been derived from the consolidated
financial statements audited by Price Waterhouse LLP, independent accountants,
not included elsewhere in this Joint Proxy Statement/Prospectus.
ARTECON SELECTED HISTORICAL FINANCIAL INFORMATION. The selected historical
financial information set forth below with respect to Artecon's statement of
operations for the nine months ended December 31, 1996, and with respect to its
balance sheet at March 31, 1996, is derived from the unaudited consolidated
financial statements of Artecon. The selected historical financial information
set forth below with respect to Artecon's statements of operations for the year
ended March 31, 1997, and the nine months ended December 31, 1997, and with
respect to Artecon's balance sheet at March 31, 1997, are derived from the
consolidated financial statements of Artecon, which have been audited by
Deloitte & Touche LLP, independent accountants, included elsewhere in this Joint
Proxy Statement/Prospectus. The selected historical financial information set
forth below with respect to Artecon's statement of income for each of the two
years ended March 31, 1996 and 1995 and with respect to Artecon's balance sheets
at March 31, 1996 and 1995 (except earnings per share data), are derived from
the consolidated financial statements of Artecon, which have been audited by
Ernst & Young LLP, independent auditors, included elsewhere in this Joint Proxy
Statement/Prospectus. The selected historical financial information set forth
below with respect to Artecon's statement of income for each of the two years
ended March 31, 1994 and 1993 and with respect to Artecon's balance sheets at
March 31, 1994 and 1993, are derived from the audited financial statements of
Artecon which are not included in this Joint Proxy Statement/Prospectus.
In the opinion of Artecon's management, the unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, that
Artecon considers necessary for a fair presentation of the results of operations
and financial position for each of the periods presented. Operating results for
Artecon for the nine months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending March 31,
1998.
The financial statement data set forth should be read in conjunction with,
and are qualified in its entirety by reference to, the financial statements and
notes related thereto included elsewhere in this Joint Proxy
Statement/Prospectus, "STORAGE DIMENSIONS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "ARTECON MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
13
<PAGE> 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
STORAGE DIMENSIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales:
Enterprise and OEM................................ $22,706 $40,088 $52,475 $69,873 $70,966
Desktop........................................... 42,662 21,136 7,683 2,437 366
------- ------- ------- ------- -------
Total net sales............................ 65,368 61,224 60,158 72,310 71,332
Cost of sales....................................... 48,240 41,998 37,170 45,327 45,723
------- ------- ------- ------- -------
Gross profit........................................ 17,128 19,226 22,988 26,983 25,609
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............................... 10,108 10,662 13,344 14,081 17,491
Research and development.......................... 3,623 4,339 5,377 5,872 6,250
General and administrative........................ 6,986 3,293 3,390 3,819 4,231
Advisory fee(1)................................... 340 362 360 729 --
------- ------- ------- ------- -------
Total operating expenses................... 21,057 18,656 22,471 24,501 27,972
------- ------- ------- ------- -------
Income (loss) from operations....................... (3,929) 570 517 2,482 (2,363)
Other expense, net.................................. (997) (983) (1,123) (1,155) (68)
------- ------- ------- ------- -------
Income (loss) before provision for income taxes..... (4,926) (413) (606) 1,327 (2,431)
Provision for income taxes.......................... 601 24 30 132 130
------- ------- ------- ------- -------
Net income (loss)................................... $(5,527) $ (437) $ (636) $ 1,195 $(2,561)
======= ======= ======= ======= =======
Basic net income (loss) per share(2)................ $ (3.45) $ (.27) $ (.40) $ 0.73 $ (0.39)
======= ======= ======= ======= =======
Weighted average shares used to calculate basic net
income (loss) per share........................... 1,600 1,600 1,604 1,641 6,651
======= ======= ======= ======= =======
Diluted net income (loss) per share(2).............. $ (3.45) $ (.27) $ (.40) $ 0.22 $ (0.39)
======= ======= ======= ======= =======
Weighted average shares used to calculate diluted
net income (loss) per share....................... 1,600 1,600 1,604 5,529 6,651
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 502 $ 470 $ 363 $ 1,682 $ 7,094
Working capital..................................... 1,952 2,680 543 2,513 17,297
Total assets........................................ 18,332 18,001 19,751 22,898 27,432
Short-term borrowings............................... 5,103 4,858 7,837 9,629 86
Long-term debt, less current portion................ 2,667 2,800 -- -- --
Total stockholders' equity.......................... 3,580 3,331 2,862 4,628 19,119
</TABLE>
- ---------------
(1) Represents an advisory fee paid to Capital Partners pursuant to an advisory
agreement. The advisory agreement was terminated in December 1996. The 1996
amount includes a one-time termination payment of $360,000. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF STORAGE DIMENSIONS."
(2) See Note 1 of Notes to Consolidated Financial Statements of Storage
Dimensions for an explanation of shares used in computing basic and diluted
net income (loss) per share.
14
<PAGE> 30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
ARTECON
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
----------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
INCOME DATA:
Net revenues................ $25,200 $39,472 $47,883 $47,172 $55,317 $42,438 $52,601
Gross margin................ 6,053 8,621 9,586 12,455 12,535 9,185 14,943
Operating expenses
Selling, general and
administrative......... 4,385 6,253 7,887 8,924 8,990 6,866 10,366
Research and
development............ 505 949 1,134 1,405 2,317 1,539 2,337
Acquired in-process
research and
development............ 3,700
Operating income (loss)..... 1,163 1,418 565 2,248 1,228 780 (1,460)
Net income (loss)........... 954 1,225 453 1,590 641 499 (1,614)
Basic net income (loss) per
share..................... $ 0.18 $ 0.23 $ 0.09 $ 0.30 $ 0.12 $ 0.10 $ (0.29)
Weighted average shares used
to calculate basic net
income (loss) per share... 5,205 5,225 5,225 5,218 5,202 5,203 5,619
Diluted net income (loss)
per share................. $ 0.11 $ 0.14 $ 0.05 $ 0.19 $ 0.08 $ 0.06 $ (0.29)
Weighted average shares used
to calculate diluted net
income (loss) per share... 8,688 8,708 8,645 8,532 8,410 8,411 5,619
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents... $ 794 $ 39 $ 299 $ 793 $ 746 $ 1,110 $ --
Working capital............. 3,771 4,393 4,935 6,772 6,810 10,113 13,315
Total assets................ 8,217 11,086 13,984 14,382 15,194 21,930 29,343
Total long-term debt........ 2,149 2,408 2,500 2,941 2,921 5,533 12,948
Total shareholders'
equity.................... 2,127 3,302 3,553 4,720 5,097 5,102 4,330
</TABLE>
15
<PAGE> 31
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated, nor is it
necessarily indicative of future operating results or financial position. The
unaudited pro forma combined financial statements have been derived from the
historical consolidated financial statements of Artecon and Storage Dimensions
and give effect to (i) the Merger as a reverse acquisition and a purchase of
Storage Dimensions by Artecon for accounting purposes, and (ii) costs associated
with the consummation of the Merger. The unaudited pro forma combined balance
sheet gives effect to the combination as if it had occurred on December 31, 1997
using Artecon's and Storage Dimensions' December 31, 1997 consolidated financial
statements. The unaudited pro forma combined statements of operations give
effect to the combination as if it had occurred (i) on April 1, 1997, the
beginning of the earliest period presented and (ii) at the beginning of the last
full fiscal year for each company. The pro forma adjustments are based on
preliminary estimates, available information and certain assumptions that
management deems appropriate. The pro forma financial information does not
purport to represent what the combined company's financial position or results
of operations would actually have been if such transactions in fact had occurred
on those dates or to project the combined company's financial position or
results of operations for any future period. The unaudited pro forma combined
financial statements should be read in conjunction with Artecon's and Storage
Dimensions' consolidated financial statements and the notes thereto included
elsewhere herein.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
STORAGE PRO FORMA
ARTECON DIMENSIONS --------------------------
DECEMBER 31, DECEMBER 31, ACQUISITION
1997 1997 ADJUSTMENTS COMBINED
------------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ $ -- $ 7,094 -- $ 7,094
Accounts receivable, net................. 12,490 12,178 -- 24,668
Inventories, net......................... 10,832 5,606 -- 16,438
Other current assets..................... 1,998 732 -- 2,730
------- ------- -------
Total current assets................... 25,320 25,610 -- 50,930
Property and equipment, net................ 2,327 1,822 -- 4,149
Other assets............................... 1,142 -- -- 1,142
Other intangible assets, net............... 433 -- 2,900(6)(7) 3,333
Goodwill, net.............................. 121 -- 303(7) 424
------- ------- ------- -------
Total assets........................... $29,343 $27,432 $ 3,203 $59,978
======= ======= ======= =======
</TABLE>
16
<PAGE> 32
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
STORAGE PRO FORMA
ARTECON DIMENSIONS ---------------------------
DECEMBER 31, DECEMBER 31, ACQUISITION
1997 1997 ADJUSTMENTS COMBINED
------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable............................ $ 7,959 $ 4,016 $ -- $11,975
Accrued liabilities......................... 3,303 4,211 5,100(1) 12,614
Short-term borrowings....................... -- 86 -- 86
Current portion of long-term debt........... 743 -- -- 743
------- ------- ------- -------
Total current liabilities................. 12,005 8,313 5,100 25,418
------- ------- ------- -------
Long-term liabilities:
Borrowings under lines of credit............ 10,170 -- -- 10,170
Long-term debt.............................. 2,778 -- -- 2,778
Minority interest........................... 60 -- -- 60
------- ------- ------- -------
Total long-term liabilities............... 13,008 -- -- 13,008
------- ------- ------- -------
Stockholders' equity:
Preferred stock............................. 4,904 -- (4,892)(2) 12
Common stock................................ 1,418 40 (1,353)(2) 105
Additional paid-in capital.................. -- 27,396 10,531(2)(3) 37,927
Deferred compensation....................... -- (351) 351(5) 0
Foreign currency translation adjustment..... (175) -- -- (175)
Accumulated deficit......................... (1,817) (7,966) (6,534)(4)(6) (16,317)
------- ------- ------- -------
Total stockholders' equity................ 4,330 19,119 (1,897) 21,552
------- ------- ------- -------
Total liabilities and stockholders'
equity.................................. $29,343 $27,432 $ 3,203 $59,978
======= ======= ======= =======
</TABLE>
- ---------------
(1) Adjustment to record the estimate of transaction costs related to the
Merger.
(2) Adjustment to reflect the issuance of Storage Dimensions Common Stock and
Storage Dimensions Preferred Stock in exchange for Artecon Common Stock and
Artecon Preferred Stock.
(3) Adjustment to properly state the combined additional paid-in capital
balance.
(4) Adjustment to eliminate the accumulated deficit account balance of Storage
Dimensions.
(5) Vesting on underlying options is automatically accelerated upon consummation
of the Merger.
(6) Adjustment to expense the acquired in-process research and development
amounting to $14,500, based on management assumptions of the product line
technology that has not yet reached technological feasibility.
(7) The fair market value of Storage Dimensions was based on the outstanding
shares of Storage Dimensions at the average bid and ask price of $3.96875 on
December 18, 1997. The unaudited estimated fair value of assets acquired and
liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair market value of stock on December 18, 1997............. $31,722
Fair value of liabilities assumed........................... 8,313
Other acquisition costs..................................... 5,100
Fair value of tangible and identifiable assets acquired..... (27,432)
Acquired in-process research and development................ (14,500)
Other intangible assets..................................... (2,400)
Acquired product line technology............................ (500)
-------
Excess of cost over identifiable assets acquired
(goodwill)................................................ $ 303
=======
</TABLE>
17
<PAGE> 33
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
STORAGE NINE MONTHS ENDED
ARTECON DIMENSIONS FALCON DECEMBER 31, 1997
NINE NINE APRIL 1, 1997 ---------------------------
MONTHS ENDED MONTHS ENDED THRU PRO FORMA
DECEMBER 31, DECEMBER 31, AUGUST 20, ---------------------------
1997 1997(1) 1997(2) ADJUSTMENTS COMBINED
-------------- ------------ -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues................. $52,601 $ 50,451 $15,218 $ -- $118,270
Cost of sales................ 37,658 32,445 11,782 -- 81,885
------- -------- ------- ------- --------
Gross profit............... 14,943 18,006 3,436 -- 36,385
Selling, general and
administrative expenses.... 10,366 16,919 4,768 -- 32,053
Research and development..... 2,337 4,759 -- -- 7,096
Acquired in-process research
and development............ 3,700 -- -- --(8) 3,700
Amortization................. -- -- -- 794(3) --
-- 32(4) 826
------- -------- ------- ------- --------
Loss from operations......... (1,460) (3,672) (1,332) (826) (7,290)
Other income (expense):
Interest income (expense),
net..................... (465) 175 (257) (57)(5) (604)
Loss on foreign currency
transactions, net (185) -- -- -- (185)
Other...................... (77) -- -- -- (77)
------- -------- ------- ------- --------
Loss before provision for
income taxes............... (2,187) (3,497) (1,589) (883) (8,156)
Benefit for income
taxes(6)................... (573) (168) -- -- (741)
------- -------- ------- ------- --------
Net loss..................... $(1,614) $ (3,329) $(1,589) $ (883) $ (7,415)
======= ======== ======= ======= ========
HISTORICAL HISTORICAL PRO FORMA
------- -------- --------
Basic and diluted net loss
per share.................. $ (0.29) $ (0.42) $ (0.37)
======= ======== ========
Weighted average shares used
to calculate basic and
diluted net loss per
share(7)................... 5,619 7,883 20,082
======= ======== ========
</TABLE>
- ---------------
(1) Storage Dimensions' results for the nine months ended December 31, 1997 are
calculated based on the audited consolidated financial information for the
year ended December 31, 1997 included elsewhere herein less the unaudited
consolidated financial information for the quarter ended March 31, 1997 not
included elsewhere herein. Storage Dimensions results for the quarter ended
March 31, 1997 are not included in the pro forma presentation.
(2) Falcon's results for the period April 1, 1997 through August 20, 1997 are
based on the audited financial information for the period January 1, 1997
through August 20, 1997 included elsewhere herein less the unaudited
financial information for the quarter ended March 31, 1997 not included
elsewhere herein. Falcon's results for the quarter ended March 31, 1997 are
not included in the pro forma presentation.
(3) Adjustment to recognize amortization of other intangible assets and
developed technology arising from the Merger over two to four years.
(4) Adjustment to recognize amortization of goodwill arising from the Merger
over seven years.
(5) Adjustment to recognize additional interest expense related to the
promissory notes issued to Falcon's previous shareholders.
(6) Prior to its acquisition by Artecon, Falcon was an S corporation. Provision
(benefit) for income taxes was not considered material for the period from
April 1-August 20, 1997.
18
<PAGE> 34
(7) Preferred shares are excluded from the computation of diluted net loss per
share due to their antidilutive nature.
(8) Excluded from the above is the adjustment to expense the $14,500 of acquired
in-process research and development associated with the Merger based on
management assumptions of the product line technology that has not yet
reached technological feasibility. This amount has been included as an
increase to accumulated deficit in the pro forma combined condensed balance
sheet at December 31, 1997.
19
<PAGE> 35
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
STORAGE
ARTECON DIMENSIONS FALCON
YEAR ENDED YEAR ENDED YEAR ENDED PRO FORMA
MARCH 31, DECEMBER 31, DECEMBER 31, ---------------------------
1997 1996 1996 ADJUSTMENTS COMBINED
---------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Net revenues................... $55,317 $72,310 $55,671 $ -- $183,298
Cost of sales.................. 42,782 45,327 45,229 133,338
------- ------- ------- ---------- --------
Gross profit................. 12,535 26,983 10,442 49,960
Selling, general and
administrative expenses...... 8,990 17,900 9,877 36,767
Research and development....... 2,317 5,872 -- -- 8,189
Amortization................... -- -- -- 1,058(3)
43(4) 1,101
Advisory fee payable to related
party(2)..................... -- 729 -- -- 729
------- ------- ------- ---------- --------
Income from operations......... 1,228 2,482 565 (1,101) 3,174
Other income (expense):
Interest expense, net........ (282) (686) (448) (137)(5) (1,553)
Gain on foreign currency
transactions, net......... 45 -- -- -- 45
Related party interest
expense................... -- (469) -- -- (469)
Other........................ (10) -- -- -- (10)
------- ------- ------- ---------- --------
Income before provision for
income taxes................. 981 1,327 117 (1,238) 1,187
Provision (benefit) for income
taxes(1)..................... 340 132 -- (220)(7) 252
------- ------- ------- ---------- --------
Net income..................... $ 641 $ 1,195 $ 117 $ (1,018)(6) $ 935
======= ======= ======= ========== ========
HISTORICAL HISTORICAL PRO FORMA
------- ------- --------
Basic net income (loss)
per share.................... $ 0.12 $ 0.73 $ 0.07
======= ======= ========
Weighted average shares used to
calculate basic net income
per share.................... 5,202 1,641 13,074
======= ======= ========
Diluted net income per share... $ 0.08 $ 0.22 $ 0.05
======= ======= ========
Weighted average shares used to
calculate diluted net income
per share.................... 8,410 5,529 17,793
======= ======= ========
</TABLE>
- ---------------
(1) Prior to its acquisition by Artecon, Falcon was an S Corporation. Provision
(benefit) for income tax was not considered material for the year ended
December 31, 1996.
(2) Represents an advisory fee paid to Capital Partners pursuant to the advisory
agreement. The advisory agreement was terminated in December 1996. The 1996
amount includes a one-time termination payment of $360,000. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS OF STORAGE DIMENSIONS."
(3) Adjustment to recognize amortization of other intangible assets and
developed technology arising from the Merger over two to four years.
(4) Adjustment to recognize amortization of goodwill arising from the Merger
over seven years.
(5) Adjustment to recognize additional interest expense related to the
promissory notes issued to Falcon's previous shareholder.
20
<PAGE> 36
(6) Excluded from the above is the adjustment to expense the $14,500 of acquired
in-process research and development associated with the Merger based on
management assumptions of the product line technology that has not yet
reached technological feasibility. This amount has been included as an
increase to accumulated deficit in the pro forma combined condensed balance
sheet at December 31, 1997.
(7) Adjustment to record the tax benefit of the pro forma adjustments at the
assumed effective tax rate.
21
<PAGE> 37
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Storage
Dimensions and Artecon and combined per share data on an unaudited pro forma
basis after giving effect to the Merger as a purchase of Storage Dimensions by
Artecon assuming the Merger had been effected during the periods presented. This
data should be read in conjunction with the selected financial data, the
unaudited pro forma combined financial information and the separate historical
financial statements of Storage Dimensions and Artecon, and notes thereto,
included elsewhere in this Joint Proxy Statement/Prospectus. The pro forma
combined financial data is not necessarily indicative of the operating results
that would have been achieved had the Merger been consummated as of the
beginning of the periods indicated nor is such data necessarily indicative of
future financial condition or results of operations. For purposes of the
comparative per share data, Storage Dimensions' financial data at December 31,
1996 has been combined with Artecon's financial data at March 31, 1997.
<TABLE>
<CAPTION>
ARTECON STORAGE DIMENSIONS
-------------------------------------- ----------------------------------------
NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997 1996
------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE DATA:
Basic net income (loss)
per share............. $(0.29) $ 0.12 $(0.42) $ 0.73
Diluted net income (loss)
per share............. $(0.29) $ 0.08 $(0.42) $ 0.22
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA COMBINED
INCOME (LOSS) PER SHARE INCOME (LOSS) PER SHARE
NINE MONTHS ENDED DECEMBER 31, 1997 YEAR ENDED MARCH 31, 1997
-------------------------------------- ----------------------------------------
PER ARTECON PER STORAGE PER ARTECON PER STORAGE
EQUIVALENT SHARE(3) DIMENSIONS SHARE EQUIVALENT SHARE(3) DIMENSIONS SHARE
------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Basic net income (loss)
per share............. $(0.80) $(0.37) $ 0.15 $ 0.07
Diluted net income (loss)
per share(4).......... $(0.80) $(0.37) $ 0.11 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
ARTECON STORAGE DIMENSIONS
------- ------------------
<S> <C> <C>
BOOK VALUE DATA:
Book value per common share(1)............................ $ 0.47 $ 2.41
Pro forma combined book value per common share(2)......... $ 2.21 $ 1.02
</TABLE>
- ---------------
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of Common Stock (and all shares of Preferred
Stock on an as-if-converted basis).
(2) The Pro Forma Combined Book Value Per Share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of Storage
Dimensions Common Stock or Artecon Common Stock (including all shares of
Preferred Stock on an as-if-converted basis) outstanding at the end of each
period.
(3) The Artecon Equivalent Pro Forma Combined Per Share amounts are calculated
by multiplying the Artecon combined pro forma per share amounts by an
assumed Exchange Ratio of 2.16 per share of Artecon Common Stock.
(4) Preferred shares are excluded from the pro forma net loss per share
computations due to their anti-dilutive nature.
22
<PAGE> 38
RISK FACTORS
Storage Dimensions Stockholders and Artecon Shareholders should carefully
consider the following matters in conjunction with the other information
included in this Joint Proxy Statement/Prospectus in determining how to vote.
The discussion in this Joint Proxy Statement/Prospectus contains
forward-looking statements that involve risks and uncertainties. Storage
Dimensions', Artecon's and the combined company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below and in
the sections entitled "Storage Dimensions Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Storage Dimensions
Business," "Artecon Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Artecon Business," as well as those discussed
elsewhere in this Joint Proxy Statement/Prospectus.
RISKS RELATING TO THE MERGER
EXCHANGE RATIO NOT DEPENDENT UPON CHANGES IN STORAGE DIMENSIONS STOCK
PRICE. While the Exchange Ratio is subject to change based on changes in the
number of shares of Storage Dimensions Common Stock and Artecon Common Stock
prior to the Effective Time, the Applicable Multiple and the one-for-one
exchange of Storage Dimensions Preferred Stock for Artecon Preferred Stock are
fixed and will not be adjusted in the event of any increase or decrease in the
market price of Storage Dimensions Common Stock. While dollar fluctuations in
the market price of Storage Dimensions Common Stock will not affect the Exchange
Ratio, they would change the aggregate value of the shares of Storage Dimensions
Common Stock issued in the Merger. The market price of Storage Dimensions Common
Stock at the Effective Time may vary from its price on the date of this Joint
Proxy Statement/Prospectus and on the date of the Storage Dimensions Special
Meeting and the Artecon Special Meeting. Such variations may be the result of
changes in the business, operations or prospects of Storage Dimensions, market
assessments of the likelihood that the Merger will be consummated, the timing
thereof and the prospects of the Merger and post-Merger operations, regulatory
considerations, general market and economic conditions and other factors. In the
event that the market price of Storage Dimensions Common Stock decreases or
increases prior to the Effective Time, the value at the Effective Time of
Artecon capital stock would correspondingly decrease or increase. Because the
Effective Time may occur at a date later than the Storage Dimensions Special
Meeting or the Artecon Special Meeting, there can be no assurance that the
market price of Storage Dimensions Common Stock on the date of such meetings
will be indicative of its price at the Effective Time. The Reorganization
Agreement provides that the Effective Time will occur as soon as practicable
following the later to occur of the date when Storage Dimensions stockholder
approval and Artecon shareholder approval are obtained and the satisfaction or
waiver of the other conditions set forth in the Reorganization Agreement.
Stockholders of Storage Dimensions and shareholders of Artecon are urged to
obtain current market quotations for Storage Dimensions Common Stock. See
"MARKET PRICE INFORMATION" and "THE REORGANIZATION AGREEMENT -- Terms of the
Merger."
NONREALIZATION OF SYNERGIES. The Merger involves the integration of two
companies that have previously operated independently and will require
substantial effort from each company, including the coordination of their
research and development and sales and marketing efforts and integration of
their product lines and personnel. There can be no assurance that Storage
Dimensions and Artecon will be able to integrate their operations without
encountering difficulties or experiencing the loss of key Storage Dimensions or
Artecon personnel or that the benefits expected from such integration will be
realized. In addition, the diversion of the attention of management and any
difficulties encountered in the transition process (including the interruption
of, or a loss of momentum in, the combined company's activities, problems
associated with integration of management information and reporting systems, and
delays in implementation of consolidation plans) could also have an adverse
impact on the combined company's ability to realize anticipated synergies from
the Merger. See "-- Recommendation of the Storage Dimensions Board; Storage
Dimensions Reasons for the Merger" and "-- Recommendation of the Artecon Board;
Artecon Reasons for the Merger."
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INCURRENCE OF SIGNIFICANT TRANSACTION CHARGES; DILUTIVE EFFECT TO
STOCKHOLDERS. The parties expect to incur costs estimated to be an aggregate of
approximately $5.1 million primarily for investment banking, legal and
accounting fees incurred in connection with the Merger and other costs
associated with combining the operations of the two companies, including
restructuring costs. These costs will be recorded by Artecon as part of the
purchase price at the time the Merger is consummated. Additional unanticipated
expenses may be incurred relating to the integration of the businesses of
Storage Dimensions and Artecon. There can be no assurance that combining the
businesses of Storage Dimensions and Artecon, even if achieved in an efficient
and effective manner, will result in combined results of operations and
financial condition superior to what would have been achieved by either company
independently. In accordance with purchase accounting rules, the historical book
values of the assets and liabilities of Storage Dimensions will be adjusted to
their fair values. The costs incurred to complete the Merger plus the excess of
the fair value of the consideration paid over the adjusted fair values of the
assets and liabilities of Storage Dimensions acquired will be recorded by
Artecon as goodwill which will be amortized over approximately 7 years. In
addition, the issuance of Storage Dimensions Common Stock in connection with the
Merger could reduce the market price of Storage Dimensions' Common Stock unless
revenue growth or cost savings and other business synergies sufficient to offset
the effect of such issuance can be achieved. Finally, as a result of the Merger,
any given Storage Dimensions stockholder's percentage ownership of Storage
Dimensions capital stock prior to the Merger will decrease substantially and the
percentage ownership of all pre-Merger Storage Dimensions stockholders will
decrease from 100% of the outstanding capital stock of Storage Dimensions
immediately prior to the Merger to approximately 37.5% of the outstanding
capital stock of Storage Dimensions immediately following the Merger.
EFFECT OF MERGER ON CUSTOMERS AND PARTNERS. Certain of Storage Dimensions'
and Artecon's existing customers or strategic partners may view themselves as
competitors of the other. As a consequence, each company's relationship with
these customers or strategic partners could be adversely affected during the
pendency of the Merger and after its completion.
VOLATILITY OF STOCK PRICES, ABSENCE OF PUBLIC MARKET FOR PREFERRED
STOCK. The market price of the Storage Dimensions Common Stock has been, and is
expected to continue to be, volatile. This volatility may result from a number
of factors, including fluctuations in the combined company's quarterly revenues
and net income, announcements of products by the combined company or its
competitors, and conditions in the network storage system market. In addition,
in the event that the Merger is not consummated, Storage Dimensions' stock price
may be adversely affected. Also, the stock market has experienced and continues
to experience extreme price and volume fluctuations which have affected the
market prices of securities, particularly those of technology companies, and
which often have been unrelated to the operating performance of the companies.
These broad market fluctuations, as well as general economic and political
conditions, may adversely affect the market price of the combined company's
Common Stock in future periods. In addition, following the Merger, Storage
Dimensions' Preferred Stock will not be publicly traded. As a result, there will
be no market for such stock and it is not expected that an active trading market
will ever develop for such shares.
CERTAIN TERMS OF THE REORGANIZATION AGREEMENT. The Reorganization Agreement
does not provide that the representations and warranties of either party must be
true and correct as of the closing of the Merger. As a result, neither party has
the right to terminate the Reorganization Agreement if, before closing, the
other party experiences a material adverse change in its business, financial
condition or results of operations.
EFFECT OF CERTAIN TERMS OF CHARTER DOCUMENTS AND DELAWARE ANTI-TAKEOVER
LAW. Certain provisions of Storage Dimensions' Certificate of Incorporation, as
amended, and Bylaws, as amended, the DGCL and Storage Dimensions'
indemnification agreements with certain officers and directors of Storage
Dimensions may be deemed to have an anti-takeover effect. Such provisions may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider to be in that stockholder's best interests, including attempts
that might result in a premium over the market price for the shares held by such
stockholder.
The Storage Dimensions Board may issue additional shares of Storage
Dimensions Common Stock or establish one or more classes or series of Storage
Dimensions Preferred Stock, having the number of shares
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<PAGE> 40
(up to 10,000,000), designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations as determined by the
Storage Dimensions Board without stockholder approval. Storage Dimensions'
Certificate of Incorporation, as amended, and Bylaws, as amended, contain a
number of provisions that could impede a takeover or change in control of
Storage Dimensions, including but not limited to the elimination of
stockholders' ability to take action by written consent and a fair price
requirement. In addition, upon approval of the Certificate of Amendment by the
Storage Dimensions stockholders, the Storage Dimensions Certificate of
Incorporation (i) will provide for a classified Board of Directors, (ii) will
eliminate the ability of stockholders to remove a director from office without
cause except, until the third annual meeting of the stockholders of Storage
Dimensions following the Merger, by the affirmative vote of at least 80% of the
outstanding voting stock of Storage Dimensions and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock of Storage Dimensions thereafter,
(iii) will designate a new Series A Preferred Stock (the "Series A Stock")
consisting of 2,494,159 shares and (iv) will change the name of Storage
Dimensions to "Artecon, Inc."
At the Effective Time of the Merger, all of such shares of Storage
Dimensions Preferred Stock will be issued to holders of the Sauey Preferred in
exchange for the 2,494,159 shares of Sauey Preferred held by such persons. Each
share of Storage Dimensions Preferred Stock will be convertible, at the option
of the holder, at any time after January 1, 1999 into such number of shares of
Storage Dimensions Common Stock as is determined in accordance with the
conversion ratio prescribed in the Certificate of Amendment. Each share of
Storage Dimensions Preferred Stock will be converted automatically into shares
of Storage Dimensions Common Stock, as prescribed in the Certificate of
Amendment, on the earlier of the close of business on the day on which the
Storage Dimensions Board approves such conversion or when the 20-day average
closing price of Storage Dimensions Common Stock equals or exceeds $9.00 per
share. The maximum number of shares of Storage Dimensions Common Stock issuable
upon conversion of the Storage Dimensions Preferred Stock being issued in the
Merger is approximately 831,000. In the event of any liquidation, dissolution or
winding up of Storage Dimensions, the holders of the Storage Dimensions
Preferred Stock are entitled to a liquidation preference of $2.00 per share plus
all accrued, accumulated or declared but unpaid dividends on each share of
Storage Dimensions Preferred Stock held by such holders. The shares of Storage
Dimensions Preferred Stock will be voted together with the Storage Dimensions
Common Stock as a single class, and the holders of each share of Storage
Dimensions Preferred Stock will be entitled to the number of votes equal to the
number of shares of Storage Dimensions Common Stock into which such shares of
Storage Dimensions Preferred Stock could be converted on the record date for the
vote. Assuming the conversion of the Storage Dimensions Preferred Stock into the
maximum number of shares of Storage Dimensions Common Stock, holders of the
Sauey Preferred will hold approximately 27% of the outstanding voting stock of
Storage Dimensions immediately following the Merger (which percentage includes
all shares of Storage Dimensions Common Stock held by such holders), giving
effect to the conversion of the Storage Dimensions Preferred Stock being issued
in the Merger and the exercise of outstanding Storage Dimensions stock options
with an exercise price of less than $3.96875 per share.
In addition, Storage Dimensions is subject to the anti-takeover provisions
of Section 203 of the DGCL. In general, the statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder.
Each of the foregoing provisions gives the Storage Dimensions Board, acting
without stockholder approval, the ability to prevent, or render more difficult
or costly, the completion of a takeover transaction that stockholders might view
as being in their best interests. See "DESCRIPTION OF CAPITAL STOCK --
Description of Storage Dimensions Capital Stock -- Effect of Certain Terms of
Charter Documents and Delaware Anti-Takeover Law" and "COMPARISON OF RIGHTS OF
STORAGE DIMENSIONS STOCKHOLDERS AND ARTECON SHAREHOLDERS -- Stockholder Approval
of Certain Business Combinations."
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RISKS RELATED TO THE BUSINESSES OF STORAGE DIMENSIONS AND ARTECON
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. While Storage Dimensions generated net income in 1996, it incurred
losses in 1993, 1994, 1995 and 1997. Artecon has similarly incurred losses in
prior periods. Storage Dimensions currently expects its revenues for the fiscal
quarter ending March 31, 1998 to be significantly less than its results of
operations for the fourth quarter of 1997 and for the first quarter of 1997.
Storage Dimensions attributes the decline to a combination of uncertainty in the
marketplace resulting from Storage Dimensions' announcement of the Merger in
late 1997 and continued sales force productivity issues. Artecon currently
expects its revenues for the fiscal quarter ending March 31, 1998 to be
significantly less than its results of operations for the quarter ended December
31, 1997. Artecon attributes the decline primarily to post-holiday seasonal
sales declines and uncertainty in the marketplace resulting from the
announcement of the Merger in late 1997. There can be no assurance that the
combined company will be profitable on a quarterly or annual basis.
Storage Dimensions' and Artecon's quarterly operating results have in the
past varied and may in the future vary significantly depending on a number of
factors, including: the level of competition; the size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the combined company
or its competitors; the impact of price protection measures and return
privileges granted by the combined company to its distributors and VARs; the
ability of the combined company to develop, introduce and market new products
and product enhancements on a timely basis; hardware component costs and
availability, particularly with respect to hardware components obtained from
sole sources; hardware supply constraints; the combined company's success in
expanding its sales and marketing programs; technological changes in the network
storage system market, in particular the PC-LAN and UNIX storage system markets;
the mix of sales among the combined company's sales channels; levels of
expenditures on research and development; changes in the combined company's
strategy; personnel changes; and general economic trends and other factors.
Sales for any future quarter are not predictable with any significant
degree of certainty. Storage Dimensions and Artecon generally operate with
limited order backlog because their products typically are shipped shortly after
orders are received. As a result, sales in any quarter are generally dependent
on orders booked and shipped in that quarter. Sales are also difficult to
forecast because the PC-LAN and UNIX storage system markets are rapidly evolving
and Storage Dimensions' and Artecon's sales cycles vary substantially from
customer to customer. Each company's customers generally have the right to
cancel orders at any time and a limited right to return products for a refund.
The cancellation of orders already placed and the return of products could have
a material adverse effect on operating results in any quarter. Due to the
typical timing of customer orders, each company often ships products
representing a significant portion of its net sales for a quarter during the
last month of that quarter. Any significant deferral of these sales could have a
material adverse effect on the results of operations in any particular quarter.
To the extent that the combined company completes significant sales earlier than
expected, operating results for subsequent quarters may be adversely affected.
The combined company's expense levels will be based, in part, on its
expectations as to future sales. As a result, if sales levels are below
expectations, net income may be disproportionately affected.
Over the past several years, Storage Dimensions has transitioned its focus
from desktop subsystem products to enterprise RAID products for use primarily in
PC-LAN network applications. As a result, Storage Dimensions has become
increasingly dependent on the market for these products and on its ability to
compete successfully in this market. Although Storage Dimensions has experienced
growth in its net sales of enterprise and OEM products in prior periods, Storage
Dimensions' net sales from its desktop products have declined during the same
periods. In recent periods, the level of net sales growth generated from Storage
Dimensions' enterprise and OEM products has not sustained a consistent
quarter-over-quarter growth in total net sales. There can be no assurance that
Storage Dimensions will experience sales growth with respect to its enterprise
and OEM products in future periods. Due to all of the foregoing factors,
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indicator of future performance.
It is possible that in some future quarter the combined company's operating
results may be
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below the expectations of public market analysts and investors. In such event,
the price of Storage Dimensions' Common Stock would likely be materially and
adversely affected.
RELIANCE ON KEY CUSTOMERS AND INDIRECT DISTRIBUTION CHANNELS. Each of
Storage Dimensions and Artecon sells its products through a direct sales force
and through multi-tiered distribution channels. In 1997, Storage Dimensions' top
ten customers, of which six were distributors or VARs, accounted for
approximately 42% of Storage Dimensions' total net sales. In particular, The Sun
Financial Group, an end user, accounted for approximately 10% of Storage
Dimensions' 1997 total net sales. In 1996, Storage Dimensions' top ten
customers, of which six were distributors or VARs, accounted for approximately
50% of its total net sales, and Tech Data and Xerox accounted for approximately
8% and 13%, respectively, of Storage Dimensions' total net sales. In addition,
the following customers of Artecon accounted for approximately that percentage
of Artecon's total revenues set forth below during the periods indicated: UUNET
Technologies (13.5%) and GTE Government Systems (11.9%) for the nine-months
ended December 31, 1997; Tracor Enterprise Solution (26.6%) for the fiscal year
ended March 31, 1997; and GTE Government Systems (10.0%) for the fiscal year
ended March 31, 1996. No other customer accounted for more than 10% of Artecon's
total revenues during the nine-month period ended December 31, 1997, or during
the fiscal years ended March 31, 1997, 1996 or 1995. Storage Dimensions and
Artecon expect that a high percentage of the combined company's sales for the
foreseeable future will be through indirect channels and to a limited number of
customers. There can be no assurance that orders from existing customers will
continue at their historical levels, or that the combined company will be able
to obtain orders from new customers. Storage Dimensions and Artecon generally
have not entered into long-term volume purchase contracts with their customers,
and customers generally have certain rights to extend or to delay the shipment
of their orders. Storage Dimensions provides price protection to distributors
such that, if the company reduces the price of its products, distributors are
entitled to a credit for the difference between the new, reduced price and the
price previously paid for products held in the distributor's inventory at the
time of the price reduction. As a result, price reductions could have an
immediate material adverse effect on the combined company's results of
operations, depending upon distributor inventory levels at the time of the price
reduction. In 1995, 1996 and 1997, Storage Dimensions issued approximately
$550,000, $840,000, and $485,000, respectively, of credits in connection with
such price protection. The combined company's distributors and VARs may also
carry competing product lines and could reduce or discontinue sales of the
combined company's products, which could have a material adverse effect on the
combined company's operating results. Although Storage Dimensions and Artecon
believe that they provide adequate allowances for product returns, there can be
no assurance that actual returns will not exceed recorded allowances which could
have a material adverse effect on the combined company's operating results. In
addition, there can be no assurance that existing end-user customers will not
purchase their storage equipment from the manufacturer that provides their
network computing systems and, as a result, reduce or eliminate purchases from
the combined company. The loss of one or more of the combined company's current
customers, particularly a principal customer, or cancellation or rescheduling of
orders already placed, could materially and adversely affect the combined
company's business, operating results or financial condition. See "STORAGE
DIMENSIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "ARTECON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE. The storage system
market is characterized by rapid technological change, changing customer needs,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and increased storage
capacities by the combined company's competitors and the emergence of new
industry standards could render the combined company's products obsolete and
unmarketable. The combined company's future success will depend upon its ability
to develop and to introduce new products with increasing storage capabilities
(including new software releases and enhancements) on a timely basis that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of its customers. There can be no assurance
that the combined company will be successful in developing and marketing any
other products that respond to technological changes or evolving industry
standards, that the combined company will not experience difficulties that could
delay or prevent the successful development,
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<PAGE> 43
introduction and marketing of new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the combined company is unable, for technological or other
reasons, to develop and introduce new products, in particular those for use with
Windows NT and UNIX systems, in a timely manner in response to changing market
conditions or customer requirements, the combined company's business, operating
results and financial condition will be materially and adversely affected.
Storage system products like those offered by Storage Dimensions and
Artecon may contain undetected software errors or failures when first introduced
or as new versions are released. There can be no assurance that, despite
testing, errors will not be found in new products after commencement of
commercial shipments, resulting in a loss of or delay in market acceptance,
which could have a material adverse effect on the combined company's business,
operating results or financial condition. Each company's standard warranty
provides that if the system does not function to published specifications the
combined company will repair or replace the defective component without charge.
Although to date each of Storage Dimensions' and Artecon's suppliers of hardware
components have generally covered the warranty costs associated with such
components, there can be no assurance that such manufacturers will continue to
be willing or able to cover such costs, and their failure to do so would result
in such costs being borne by the combined company. There can be no assurance
that the combined company's warranty costs will not be significant in the
future. Significant warranty costs, particularly those that exceed reserves,
could have a material adverse effect on the combined company's business,
operating results or financial condition.
Storage Dimensions' and Artecon's agreements with customers typically
contain provisions intended to limit exposure to potential product liability
claims. It is possible that the limitation of liability provisions contained in
Storage Dimensions' and Artecon's agreements may not be effective. Although
Storage Dimensions and Artecon have not received any product liability claims to
date, the sale and support of products by the combined company and the
incorporation of products from other companies may entail the risk of such
claims. A successful product liability claim against the combined company could
have a material adverse effect on the combined company's business, operating
results or financial condition.
DEPENDENCE ON KEY PERSONNEL. The combined company's future performance will
depend in significant part upon the continued service of its senior management
and key sales and technical personnel. The combined company expects to provide
incentives such as salary, benefits and option grants (which are typically
subject to vesting over four years) to attract and retain qualified employees.
In recent periods, Storage Dimensions and Artecon have experienced difficulties
retaining existing and attracting and training new, skilled personnel. Any
inability to attract, train and retain skilled sales personnel in future periods
or the loss of the services of one or more of the combined company's officers or
other key employees could have a material adverse effect on the combined
company's business, operating results or financial condition. The combined
company's future success will also depend on its ability to attract and retain
highly qualified technical and management personnel. Competition for such
personnel is intense, and there can be no assurance that the combined company
can retain its key technical and management employees or that it can attract,
assimilate or retain other highly qualified technical and management personnel
in the future.
DEPENDENCE ON GROWTH IN THE PC-LAN MARKET. Most of Storage Dimensions'
products address the PC-LAN market, in particular NetWare and Windows NT
applications. The combined company will likely continue to focus its development
and marketing efforts on storage system applications, including storage systems
for the UNIX market. The combined company's future financial performance will
depend in part on continued growth in the storage systems market. There can be
no assurance that the storage systems market will grow at rates currently
anticipated, or at all. If the storage systems market fails to grow or grows
more slowly than anticipated, or if storage systems based on emerging standards
other than standards adopted by the combined company become increasingly
accepted by the market, the combined company's business, operating results and
financial condition would be materially and adversely affected. During recent
years, segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production over capacity,
price erosion, work slowdowns and layoffs. The combined company's operations may
in the future experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from major customers and
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other factors affecting capital spending. There can be no assurance that such
factors will not have a material adverse effect on the combined company's
business, operating results or financial condition.
COMPETITION. The storage system market is intensely competitive. Storage
Dimensions competes in the storage systems market and experiences the greatest
competition from traditional suppliers of storage systems, such as Compaq
Corporation ("Compaq"), Hewlett-Packard Company ("HP") and International
Business Machines Corporation ("IBM"), who market storage systems as part of
their complete computer systems. Storage Dimensions also competes against
independent storage system suppliers, including DEC Storage Works "DEC"), MTI
Technology ("MTI"), Procom Technology, Inc., Auspex Systems, Inc., Data General
Corporation, EMC Corporation, Network Appliance, Inc., Storage Computer, Inc.
and Symbios Logic, Inc. Such competitors could develop and market products that
address the storage systems market, and in particular Windows NT applications.
Many of Storage Dimensions' current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than
Storage Dimensions, and as a result, may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, to devote greater
resources to the development, promotion and sale of products than can Storage
Dimensions, or to deliver competitive products at a lower end-user price.
Storage Dimensions also expects that competition will increase as a result of
industry consolidations. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of Storage
Dimensions' prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the combined company's business,
operating results or financial condition.
Artecon has a number of competitors in various markets, including HP, Sun,
IBM, Silicon Graphics ("SGI"), Compaq, DEC, DG Clariion, MTI, and EMC
Corporation, many of which have substantially greater name recognition,
engineering, manufacturing and marketing capabilities, and greater financial and
personnel resources than Artecon. In particular, a number of Artecon's customers
are also competitors, including Sun and SGI. Artecon expects to experience
increased competition from established and emerging computer storage hardware
and management software companies, particularly HP, Sun, IBM, Compaq, DEC, and
EMC Corporation. In addition, increased competitive pressure could lead to
intensified price-based competition, which could have a material adverse effect
on Artecon's results of operations. There also has been, and may continue to be,
a willingness on the part of certain large competitors to reduce prices in order
to preserve or gain market share. Artecon believes that pricing pressures are
likely to continue as competitors develop more competitive product offerings.
Storage Dimensions and Artecon believe that the principal competitive
factors affecting their markets include: fault-tolerant reliability,
performance, ease of use, scalability, configurability, price and customer
service and support. There can be no assurance that the combined company will be
able to successfully incorporate these factors into its products and to compete
against current or future competitors or that competitive pressures faced by the
combined company will not materially and adversely affect its business,
operating results or financial condition.
DEPENDENCE ON LIMITED NUMBER OF SUPPLIERS OF HIGH QUALITY
COMPONENTS. Storage Dimensions relies upon a limited number of suppliers of
several key components utilized in the assembly of Storage Dimensions' products.
For example, Storage Dimensions purchases disk drives primarily from Seagate
Technology, Inc. ("Seagate"), DLT tape drives exclusively from Quantum
Corporation ("Quantum") and DGR (Dynamic Growth and Reconfiguration) RAID
controllers exclusively from American Megatrends, Inc. In addition, Artecon
relies upon a limited number of suppliers of several key components utilized in
the assembly of Artecon's products, including Seagate, IBM, Quantum, Infortrend,
Intel, CMD, Mylex and Sony. Storage Dimensions' and Artecon's reliance on its
suppliers involves several risks, including: an inadequate supply of required
components; price increases; late deliveries; and poor component quality. These
risks are particularly significant with respect to suppliers of disk drives
because, in order to meet product performance requirements, Storage Dimensions
and Artecon must obtain disk drives with extremely high quality and capacity. In
addition, there is currently a significant market demand for disk drives, tape
drives and RAID controllers, and from time to time Storage Dimensions and
Artecon may experience component shortages, selective supply
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allocations and increased prices of such components. Although to date neither
Storage Dimensions nor Artecon has experienced shortages of such components,
there can be no assurance that the combined company will be able to obtain its
full requirements of such components in the future or that prices of such
components will not increase. In addition, there can be no assurance that
problems with respect to yield and quality of such components and timeliness of
deliveries will not occur. Disruption or termination of the supply of these
components could delay shipments of the combined company's products and could
have a material adverse effect on the combined company's business, operating
results or financial condition. Such delays could also damage relationships with
current and prospective customers.
In the past, due to Storage Dimensions' quality requirements, Storage
Dimensions has experienced delays in the shipments of its new products
principally due to an inability to qualify component parts from disk drive
manufacturers and other suppliers, resulting in delay or loss of product sales.
Storage Dimensions has currently qualified disk drives manufactured by Seagate,
tape drives from Quantum, and RAID controllers from Mylex Corporation and
American Megatrends. Although these delays in the past have not had a material
adverse effect upon Storage Dimensions' business, operating results or financial
condition, there can be no assurance that in the future any such delays will not
have such a material adverse effect on the combined company.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. Artecon's international
sales represented approximately 12.5%, 14.0%, 25.2% and 18.6% of Artecon's total
revenues for the nine months ended December 31, 1997 and for the fiscal years
ended March 31, 1997, 1996 and 1995, respectively. Artecon currently has sales
offices in Japan, France, England and the Netherlands. Artecon and Storage
Dimensions believe that the continued growth and profitability of the combined
company will require expansion of international operations, particularly in
Europe and Japan. Accordingly, following the Merger, Storage Dimensions intends
to expand its international operations and enter additional international
markets, which will require significant management attention and financial
resources. In addition, the combined company's international operations are
subject to a variety of risks associated with conducting business
internationally, including fluctuations in currency exchange rates, longer
payment cycles, difficulties in staffing and managing international operations,
problems in collecting accounts receivable, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, increases in tariffs, duties, price controls or other restrictions on
foreign currencies, and trade barriers imposed by foreign countries, any of
which could have a material adverse effect on the combined company's business,
operating results and financial condition. In addition, the combined company has
only limited experience in developing localized versions of its products and
marketing and distributing its products internationally. There can be no
assurance that the combined company will be able to successfully localize,
market, sell and deliver its products internationally. The inability of the
combined company to expand its international operations successfully and in a
timely manner could have a material adverse effect on the combined company's
business, operating results and financial condition.
A significant portion of Artecon's business is presently conducted in
currencies other than the U.S. dollar. Foreign currency transaction gains and
losses arising from normal business operations are credited to or charged
against earnings in the period incurred. As a result, fluctuations in the value
of the currencies in which the combined company conducts its business relative
to the U.S. dollar will continue to cause the currency transaction gains and
losses which Artecon has experienced in the past and continues to experience.
Due to the substantial volatility of currency exchange rates, among other
factors, the combined company cannot predict the effect of exchange rate
fluctuations upon future operating results. There can be no assurance that the
combined company will not experience currency losses in the future. Neither
Artecon or Storage Dimensions has previously undertaken hedging transactions to
cover its currency exposure but may hedge a portion of its currency exposure in
the future as management deems appropriate. See "ARTECON MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Storage Dimensions' and Artecon's
success depends significantly upon their respective proprietary technology.
Storage Dimensions and Artecon currently rely on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality agreements and
contractual provisions to protect their proprietary rights and seek to protect
their respective software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Storage
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Dimensions has registered its Storage Dimensions and LANStor trademarks and will
continue to evaluate the registration of additional trademarks as appropriate.
Storage Dimensions and Artecon have registered numerous trademarks and will
continue to evaluate the registration of additional trademarks as appropriate.
Storage Dimensions and Artecon generally enter into confidentiality agreements
with their employees and with key vendors and suppliers. Storage Dimensions
currently has one U.S. patent application pending associated with the
object-oriented layered architecture of its RAIDFlex array management software.
As of December 31, 1997, Artecon had been issued a total of seven U.S. patents
covering certain elements of its products. There can be no assurance that issued
patents will provide a meaningful competitive barrier or that any pending
patents at either company will ever be issued, that the combined company will
develop proprietary products or technologies that are patentable, that any
patent issued in the future will provide the combined company with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have a material adverse effect on the combined
company's ability to do business. Storage Dimensions and Artecon believe that
the rapidly changing technology in the computer storage industry makes future
success dependent more on the technical competence and creative skills of its
personnel than on any patents it may be able to obtain.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the combined company's proprietary technology. Storage Dimensions and
Artecon have from time to time received claims that they are infringing third
parties' intellectual property rights, and there can be no assurance that third
parties will not in the future claim infringement by the combined company with
respect to current or future products, trademarks or other proprietary rights.
Storage Dimensions and Artecon expect that companies in the storage system
market will increasingly be subject to infringement claims as the number of
products and competitors in the combined company's target markets grows. Any
such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the combined company to redesign its products or
require the combined company to enter into royalty or licensing agreements, any
of which could have a material adverse effect on the combined company's
business, operating results or financial condition. Despite the combined
company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the combined company's products or to obtain and use
information that Storage Dimensions regards as proprietary. For example, in
February 1998, Artecon filed a suit against certain former employees alleging,
among other things, trade secret misappropriation. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. There can be no assurance that the combined
company's means of protecting its proprietary rights will be adequate or that
the combined company's competitors will not independently develop similar
technology, duplicate the combined company's products or design around patents
issued to the combined company or other intellectual property rights of the
combined company. See "BUSINESS OF ARTECON -- Legal Proceedings."
EFFECT ON FUTURE STOCK SALES. An aggregate of approximately 4,500,623
shares of Storage Dimensions Common Stock beneficially owned by Capital Partners
and Maxtor Corporation have certain registration rights, including the right to
require registration of their shares under certain circumstances and subject to
certain conditions. The sale of a significant number of the foregoing shares at
one time pursuant to these registration rights may cause a reduction in the
market price of the Storage Dimensions Common Stock. See "DESCRIPTION OF STORAGE
DIMENSIONS CAPITAL STOCK -- Registration Rights."
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. The cost of making the combined
company's products Year 2000 compliant is not expected to be material.
Storage Dimensions believes that the purchasing patterns of customers and
potential customers may be affected by the Year 2000 issues in a variety of
ways. Many companies are expending significant resources to correct or patch
their current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the combined company. Conversely,
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Year 2000 issues may cause other companies to accelerate purchases, thereby
causing an increase in short-term demand and a consequent decrease in long-term
demand for products. Additionally, Year 2000 issues could cause a significant
number of companies, including current customers, to reevaluate their current
information system needs, and as a result consider switching to other systems or
suppliers. Any of the foregoing could result in a material adverse effect on the
combined company's business, operating results and financial condition.
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INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished to the Storage
Dimensions stockholders in connection with the solicitation of proxies by the
Storage Dimensions Board for use at the Storage Dimensions Special Meeting to be
held at the corporate offices of Storage Dimensions at 1656 McCarthy Boulevard,
Milpitas, CA 95035 on March 31, 1998, at 9:00 a.m., local time, and at any and
all adjournments or postponements thereof. This Joint Proxy Statement/Prospectus
also constitutes the Prospectus of Storage Dimensions with respect to the
issuance of shares of Storage Dimensions Common Stock and Storage Dimensions
Preferred Stock to the Artecon shareholders in connection with the Merger, as
described below.
This Joint Proxy Statement/Prospectus is also being furnished to the
Artecon shareholders in connection with the solicitation of proxies by the
Artecon Board for use at the Artecon Special Meeting to be held at the corporate
offices of Artecon at 6305 El Camino Real, Carlsbad, California 92009 on March
31, 1998, at 9:00 a.m., local time, and at any and all adjournments or
postponements thereof.
STORAGE DIMENSIONS SPECIAL MEETING
At the Storage Dimensions Special Meeting, the Storage Dimensions
stockholders will consider and vote upon the approval of the Business
Combination Proposal, the Certificate of Incorporation Amendments, the Stock
Plan Amendments and such other matters as may properly come before the Storage
Dimensions Special Meeting or any adjournments or postponements thereof.
THE STORAGE DIMENSIONS BOARD HAS UNANIMOUSLY APPROVED THE BUSINESS
COMBINATION PROPOSAL, THE CERTIFICATE OF INCORPORATION AMENDMENTS AND STOCK PLAN
AMENDMENTS AND UNANIMOUSLY RECOMMENDS THAT STORAGE DIMENSIONS STOCKHOLDERS VOTE
FOR THE BUSINESS COMBINATION PROPOSAL, THE CERTIFICATE OF INCORPORATION
AMENDMENTS AND STOCK PLAN AMENDMENTS. SEE "THE MERGER -- BACKGROUND OF THE
MERGER", "-- RECOMMENDATION OF THE STORAGE DIMENSIONS BOARD; STORAGE DIMENSIONS
REASONS FOR THE MERGER" AND "ADDITIONAL MATTERS FOR CONSIDERATION BY STORAGE
DIMENSIONS STOCKHOLDERS."
Record Date
The Storage Dimensions Board has fixed the close of business on February
23, 1998 as the Storage Dimensions Record Date for determining holders entitled
to notice of and to vote at the Storage Dimensions Special Meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Storage Dimensions Common Stock
is necessary to constitute a quorum at the Storage Dimensions Special Meeting.
Abstentions and broker non-votes will each be included in determining whether a
quorum is present.
Required Votes
Approval of the Business Combination Proposal and the Certificate of
Incorporation Amendments requires the affirmative vote of a majority of the
outstanding shares of Storage Dimensions Common Stock. Accordingly, abstentions
and broker non-votes are equivalent to negative votes for purposes of approving
the Business Combination Proposal and the Certificate of Incorporation
Amendments. The effectiveness of the Certificate of Incorporation Amendments is
subject to the approval of the Business Combination Proposal. Notwithstanding
any indication to the contrary, a vote against the Business Combination Proposal
will constitute a vote against the Certificate of Incorporation Amendments. In
addition, Proposals 2 and 3 are mutually dependent. That is, a vote against
Proposal 2 will constitute a vote against Proposal 3, and a vote against
Proposal 3 will constitute a vote against Proposal 2. Approval of the Stock Plan
Amendments will
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require the affirmative vote of the holders of a majority of the shares of
Storage Dimensions Common Stock present in person or represented by proxy at the
Storage Dimensions Special Meeting and voting with respect to the Stock Plan
Amendments. Abstentions are equivalent to negative votes for purposes of
approving the Stock Plan Amendments. Broker non-votes will not be counted in
determining whether the Stock Plan Amendments have been approved.
Voting Rights; Proxies
As of the Storage Dimensions Record Date, there were 8,022,430 shares of
Storage Dimensions Common Stock issued and outstanding, each of which entitles
the holder thereof to one vote. All shares of Storage Dimensions Common Stock
represented by properly executed proxies will, unless such proxies have been
previously revoked, be voted in accordance with the instructions indicated in
such proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF STORAGE DIMENSIONS COMMON
STOCK WILL BE VOTED IN FAVOR OF APPROVAL OF THE BUSINESS COMBINATION PROPOSAL,
THE CERTIFICATE OF INCORPORATION AMENDMENTS AND STOCK PLAN AMENDMENTS. Storage
Dimensions does not know of any matters other than as described in the
accompanying Notice of the Storage Dimensions Special Meeting that are to come
before the Storage Dimensions Special Meeting. If any other matter or matters
are properly presented for action at the Storage Dimensions Special Meeting, the
persons named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment,
unless such authorization is withheld. A Storage Dimensions stockholder giving a
proxy pursuant to this proxy solicitation may revoke it at any time before it is
exercised by giving a subsequent proxy, delivering to the Secretary of Storage
Dimensions at the address of Storage Dimensions set forth elsewhere in this
Joint Proxy Statement/Prospectus a written notice of revocation prior to the
voting of the proxy at the Storage Dimensions Special Meeting, or attending the
Storage Dimensions Special Meeting and informing the Secretary of Storage
Dimensions in writing that such stockholder wishes to vote his or her shares in
person. However, mere attendance at the Storage Dimensions Special Meeting will
not in and of itself have the effect of revoking the proxy. Notwithstanding the
foregoing, the holders of a majority of the outstanding shares of Common Stock
of Storage Dimensions and the holders of a majority of the outstanding shares of
Artecon Common Stock and Artecon Preferred Stock have agreed to vote in favor of
the Merger and the Certificate of Incorporation Amendments and not to change
their vote prior to the holding of the Storage Dimensions Special Meeting and
the Artecon Special Meeting. See "OTHER AGREEMENTS -- Artecon Voting Agreements"
and "-- Storage Dimensions Voting Agreements."
Votes cast by proxy or in person at the Storage Dimensions Special Meeting
will be tabulated by the election inspectors appointed for the meeting and such
inspectors will determine whether or not a quorum is present. The election
inspectors will treat abstentions as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. If a broker indicates
on the proxy that it does not have discretionary authority as to certain shares
to vote on a particular matter, those shares will be treated as present for
purposes of determining whether or not a quorum is present, but will not be
considered as present and entitled to vote with respect to that matter.
Solicitation of Proxies
The expenses of the solicitations of proxies for the Storage Dimensions
Special Meeting will be borne by Storage Dimensions. In addition to solicitation
by mail, proxies may be solicited by directors, officers and employees of
Storage Dimensions in person or by telephone, telegram or other means of
communication. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made by
Storage Dimensions with custodians, nominees and fiduciaries for forwarding of
proxy solicitation materials to beneficial owners of shares held of record by
such custodians, nominees and fiduciaries, and Storage Dimensions will reimburse
such custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
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THE MATTERS TO BE CONSIDERED AT THE STORAGE DIMENSIONS SPECIAL MEETING ARE
OF GREAT IMPORTANCE TO THE STORAGE DIMENSIONS STOCKHOLDERS. ACCORDINGLY, THE
STORAGE DIMENSIONS STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE
PRE-PAID ENVELOPE.
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ARTECON SPECIAL MEETING
At the Artecon Special Meeting, the Artecon shareholders will consider and
vote upon the Merger Proposal.
THE ARTECON BOARD HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL AND
UNANIMOUSLY RECOMMENDS THAT ARTECON SHAREHOLDERS VOTE FOR THE MERGER PROPOSAL.
SEE "THE MERGER -- BACKGROUND OF THE MERGER" AND "-- RECOMMENDATION OF THE
ARTECON BOARD; ARTECON REASONS FOR THE MERGER."
Record Date
The Artecon Board has fixed the close of business on February 23, 1998 as
the Artecon Record Date for determining holders entitled to notice of and to
vote at the Artecon Special Meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Artecon Common Stock and
Artecon Preferred Stock is necessary to constitute a quorum at the Artecon
Special Meeting. Abstentions will be included in determining whether a quorum is
present.
Required Votes
Approval of the Merger Proposal requires the affirmative vote of a majority
of the outstanding shares of Artecon Common Stock and Artecon Preferred Stock,
each voting as a separate class. Accordingly, abstentions are equivalent to
negative votes for purposes of approving the Merger Proposal.
Voting Rights; Proxies
As of the Artecon Record Date, there were 6,043,990 shares of Artecon
Common Stock and 2,517,159 shares of Artecon Preferred Stock, issued and
outstanding, each of which entitles the holder thereof to one vote. All shares
of Artecon capital stock represented by properly executed proxies will, unless
such proxies have been previously revoked, be voted in accordance with the
instructions indicated in such proxies.
IF NO INSTRUCTIONS ARE INDICATED, SUCH SHARES OF ARTECON CAPITAL STOCK WILL
BE VOTED IN FAVOR OF APPROVAL OF THE MERGER PROPOSAL. No additional matters
other than as described in the accompanying Notice of the Artecon Special
Meeting will come before the Artecon Special Meeting. An Artecon stockholder
giving a proxy pursuant to this proxy solicitation may revoke it at any time
before it is exercised by giving a subsequent proxy, delivering to the Secretary
of Artecon at the address of Artecon set forth elsewhere in this Joint Proxy
Statement/Prospectus a written notice of revocation prior to the voting of the
proxy at the Artecon Special Meeting, or attending the Artecon Special Meeting
and informing the Secretary of Artecon in writing that such shareholder wishes
to vote his or her shares in person. However, mere attendance at the Artecon
Special Meeting will not in and of itself have the effect of revoking the proxy.
Notwithstanding the foregoing, the holders of a majority of the outstanding
shares of Storage Dimensions Common Stock and the holders of a majority of the
outstanding shares of Artecon Common Stock and Artecon Preferred Stock have
agreed to vote in favor of the Merger and not to change their vote prior to the
holding of the Storage Dimensions Special Meeting and the Artecon Special
Meeting. See "OTHER AGREEMENTS -- Artecon Voting Agreements" and "-- Storage
Dimensions Voting Agreements."
Votes cast by proxy or in person at the Artecon Special Meeting will be
tabulated by the election inspectors appointed for the meeting and such
inspectors will determine whether or not a quorum is present.
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Solicitation of Proxies
The expenses of the solicitation of proxies for use at the Artecon Special
Meeting will be borne by Artecon. In addition to solicitation by mail, proxies
may be solicited by directors, officers and employees of Artecon in person or by
telephone, telegram or other means of communication. These persons will receive
no additional compensation for solicitation of proxies, but may be reimbursed
for reasonable out-of-pocket expenses in connection with such solicitation.
THE MATTERS TO BE CONSIDERED AT THE ARTECON SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE ARTECON SHAREHOLDERS. ACCORDINGLY, THE ARTECON SHAREHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
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THE MERGER
This section of the Joint Proxy Statement/Prospectus, as well as the next
two sections of the Joint Proxy Statement/Prospectus entitled "The
Reorganization Agreement" and "Other Agreements," describe certain aspects of
the proposed Merger. To the extent that the following descriptions relate to the
Reorganization Agreement, or the other agreements described under "Other
Agreements," they do not purport to be complete and are qualified in their
entirety by reference to the Reorganization Agreement, which is attached as
Annex A to this Joint Proxy Statement/Prospectus, to the Certificate of
Amendment of the Storage Dimensions Certificate of Incorporation, which is
attached as Annex B to this Joint Proxy Statement/Prospectus, to the Voting
Agreements, which are attached as Annexes E and F to this Joint Proxy
Statement/Prospectus, and to each of the other agreements described herein which
are filed as exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part, all of which documents are incorporated herein
by reference. All stockholders are urged to read the Reorganization Agreement,
the Certificate of Amendment, the Voting Agreements and such other agreements in
their entirety.
GENERAL
The Reorganization Agreement provides for the merger of Merger Sub with and
into Artecon. As a result of the Merger, Merger Sub will cease to exist, Artecon
will become a wholly-owned subsidiary of Storage Dimensions, and the former
shareholders of Artecon will become stockholders of Storage Dimensions. The
Reorganization Agreement provides that the Merger will be consummated if the
required approvals of the Artecon shareholders and the Storage Dimensions
stockholders are obtained and all other conditions to the Merger are satisfied
or waived.
In the Merger, Storage Dimensions will issue an aggregate of approximately
13,120,000 million shares of Storage Dimensions Common Stock to the Artecon
shareholders. Such shares would have a value of approximately $52,480,000, based
upon the closing price of Storage Dimensions Common Stock as reported on the
Nasdaq National Market on February 23, 1998. In addition, Storage Dimensions
will issue an aggregate of 2,494,159 shares of Storage Dimensions Series A
Preferred Stock to certain Artecon shareholders, which shares will not be
publicly traded. Immediately following the Business Combination, the former
holders of Artecon capital stock will hold approximately 62.5% of the
outstanding capital stock of Storage Dimensions and the current holders of
Storage Dimensions Common Stock will hold approximately 37.5% of the outstanding
capital stock of Storage Dimensions, in each case giving effect to the
conversion of the Storage Dimensions Series A Preferred Stock being issued in
the Merger and the exercise of outstanding Storage Dimensions stock options with
an exercise price of less than $3.96875 per share. While the percentage of
outstanding capital stock of Storage Dimensions to be held by former holders of
Artecon Common Stock and current holders of Storage Dimensions Common Stock
following the Merger is fixed, the exact number of shares of Storage Dimensions
Common Stock issuable to the former Artecon shareholders (but not shares of
Storage Dimensions Preferred Stock) is subject to modest change based upon
changes in the number of outstanding shares of Storage Dimensions Common Stock
and Artecon Common Stock prior to the Merger. Based upon the number of shares of
each company outstanding on February 23, 1998, approximately 2.16 shares of
Storage Dimensions Common Stock would be issued for each share of Artecon Common
Stock in the Merger. While dollar fluctuations in the market price of Storage
Dimensions Common Stock will not affect the Exchange Ratio, they would change
the aggregate value of shares of Storage Dimensions Common Stock issued in the
Merger.
More specifically the exact number of shares of Storage Dimensions Common
Stock into which each share of Artecon Common Stock will be converted will be
determined as of the Effective Time (as defined below) as follows: the Exchange
Ratio will be a fraction the numerator of which is the number of Merger Shares
(as defined below) and the denominator of which is the number of Artecon Shares
(as defined below). "Merger Shares" shall mean the shares of Storage Dimensions
Common Stock to be issued to holders of Artecon Common Stock in the Merger and
shall be equal to the product of (A) the Applicable Multiple times (B) the sum
of (x) the number of shares of Storage Dimensions Common Stock outstanding
immediately prior to the Effective Time plus (y) the maximum number of shares of
Storage Dimensions Common Stock issuable upon exercise of any options to
purchase Storage Dimensions Common Stock (without regard to
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vesting) with option exercise prices of less than $3.96875. "Artecon Shares"
shall mean the sum of (A) the number of shares of Artecon Common Stock
outstanding immediately prior to the Effective Time plus (B) the maximum number
of shares of Artecon Common Stock underlying any instruments convertible into or
exchangeable for Artecon Common Stock (without regard to vesting) outstanding
immediately prior to the Effective Time, including shares of Artecon Preferred
Stock other than the 2,494,159 shares of Artecon Preferred Stock held by W. R.
Sauey and certain of his affiliates. Such shares of Artecon Preferred Stock held
by W.R. Sauey and such affiliates (the "Sauey Preferred") will be converted into
2,494,159 shares of Storage Dimensions Preferred Stock pursuant to the Merger.
Although the Applicable Multiple is fixed, the Exchange Ratio is subject to
modest change based upon changes in the number of shares of Storage Dimensions
Common Stock and Artecon Common Stock outstanding immediately prior to the
Effective Time.
In addition, each share of Artecon Preferred Stock outstanding at the
Effective Time (other than Dissenting Shares) will be converted into the right
to receive one share of Storage Dimensions Preferred Stock. All holders of
Artecon Preferred Stock, other than the Sauey Preferred, have agreed to convert
such Artecon Preferred Stock into shares of Artecon Common Stock prior to the
Effective Time, which shares will then be converted into Storage Dimensions
Common Stock pursuant to the Merger.
EFFECTIVE TIME
The Merger will become effective (the "Effective Time") upon the filing and
acceptance of a certificate of merger with the Secretary of State of the State
of California (the "Certificate of Merger"). The filing of the Certificate of
Merger will occur as soon as practicable after the latest to occur of the
approval of the Merger by the Artecon shareholders or the Storage Dimensions
stockholders, subject to the satisfaction or waiver of the other conditions to
the consummation of the Merger. If the requisite approvals of stockholders of
Storage Dimensions and shareholders of Artecon are received and all other
conditions to the Merger are satisfied or waived, the Merger is anticipated to
close on or about March 31, 1998.
The Reorganization Agreement may be terminated under certain circumstances
by any party if the Merger shall not have been consummated on or before May 31,
1998. The Reorganization Agreement may also be terminated under certain other
circumstances. See "THE REORGANIZATION AGREEMENT -- Conditions to the Merger"
and "-- Termination of the Reorganization Agreement."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF ARTECON CERTIFICATES
The conversion of Artecon capital stock into the right to receive Storage
Dimensions capital stock will occur automatically at the Effective Time. As soon
as practicable after the Effective Time, Storage Dimensions or its designee will
mail to the holders of Artecon capital stock a letter of transmittal in
customary form, together with instructions for effecting the surrender of
Artecon stock certificates in exchange for certificates representing Storage
Dimensions Common Stock or Preferred Stock. Upon surrender of an Artecon stock
certificate to Storage Dimensions or its designee and a duly executed letter of
transmittal, the holder of such Artecon stock certificate will be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Storage Dimensions Common Stock or Storage Dimensions Preferred Stock
that such holder has the right to receive and cash in lieu of any fractional
share of Storage Dimensions Common Stock.
If any issuance of certificates representing shares of Storage Dimensions
Common Stock or Storage Dimensions Preferred Stock in exchange for certificates
representing shares of Artecon Common Stock or Artecon Preferred Stock is to be
made to a person other than the holder of Artecon stock certificates in whose
name such Artecon certificates are registered at the Effective Time, such
certificates must be properly endorsed or otherwise in proper form for transfer
and the Artecon shareholder requesting such issuance must either pay any
required tax or establish to the satisfaction of Storage Dimensions that such
tax is not payable.
After the Effective Time, there will be no further transfers of Artecon
Common Stock or Artecon Preferred Stock on the stock transfer books of Artecon.
If a certificate representing Artecon Common Stock or Artecon Preferred Stock is
presented for transfer after the Effective Time, it will be canceled and
exchanged for a certificate representing the appropriate number of full shares
of Storage Dimensions Common
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Stock or Storage Dimensions Preferred Stock and cash in lieu of fractional
shares and any dividends and distributions with respect to Storage Dimensions
Common Stock with a record date after the Effective Time.
After the Effective Time and until surrendered, certificates representing
shares of Artecon Common Stock or Artecon Preferred Stock will be deemed for all
corporate purposes, other than the payment of dividends and distributions, to
evidence ownership of the number of full shares of Storage Dimensions Common
Stock or Storage Dimensions Preferred Stock into which such shares of Artecon
Common Stock or Artecon Preferred Stock were converted at the Effective Time. No
dividends or other distributions, if any, payable to holders of Storage
Dimensions Common Stock or Storage Dimensions Preferred Stock will be paid to
the holders of any certificates for shares of Artecon Common Stock or Artecon
Preferred Stock until such certificates are surrendered. Upon surrender of such
certificates, all such declared dividends and distributions which shall have
become payable with respect to Storage Dimensions Common Stock or Storage
Dimensions Preferred Stock in respect of a record date that occurred after the
Effective Time will be paid to the holder of record of the shares of Storage
Dimensions Common Stock or Storage Dimensions Preferred Stock represented by the
certificate issued in exchange therefor, without interest. See "THE
REORGANIZATION AGREEMENT -- Exchange of Certificates."
ARTECON SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
BACKGROUND OF THE MERGER
Storage Dimensions
In late 1996, the Storage Dimensions Board began a thorough review of the
strategic alternatives available to expand its business. Alternatives considered
included combining with another industry participant, selling the business to a
larger company and effecting an initial public offering of Storage Dimensions
Common Stock in order to reduce its debt burden and finance expanding
operations. In late 1996 and early 1997, Storage Dimensions contacted potential
business combination/acquisition candidates, including Artecon. Storage
Dimensions also began its initial public offering process. As the business
combination/ acquisition activities did not look as promising as effecting an
initial public offering, Storage Dimensions elected to discontinue the
combination/acquisition activities and focus its efforts instead on completing a
public offering. In March 1997, Storage Dimensions completed its initial public
offering.
Beginning in mid-1997, the Storage Dimensions Board again began to consider
the benefits of developing relationships with other participants in the
industry. It was anticipated that this could provide additional strength to
counter the growing competitiveness of the industry and the recent unfavorable
financial results of Storage Dimensions. In September 1997, Storage Dimensions
retained Salomon Smith Barney as its financial advisor to assist Storage
Dimensions in identifying potential strategic transaction partners. Storage
Dimensions began to hold discussions in the fall of 1997 with a third party, but
these discussions did not result in any definitive terms or an offer to enter
into a strategic combination with Storage Dimensions.
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Artecon
In February and March 1995, the Artecon Board and senior management of
Artecon began to discuss alternative strategies for the long-term growth of
Artecon. The alternatives discussed included an initial public offering of
Artecon's Common Stock, joint ventures and other strategic business
arrangements, including possible acquisitions of companies with complementary
products or market position. Due to market conditions at the time, the Artecon
Board determined that the best course of action would be to explore possible
business combinations with properly situated companies, to be followed by an
initial public offering, if then appropriate.
At the end of 1995 and during 1996, the Artecon Board and senior management
of Artecon identified various companies that it considered to be potential
candidates to be approached for a possible business combination, including
Storage Dimensions and Falcon Systems, Inc. ("Falcon"). The Artecon Board
reviewed the business, financial condition and performance, prospects,
technology and product offerings of such candidates, focusing efforts on Storage
Dimensions and Falcon. In the summer of 1996, Artecon had discussions with
Falcon regarding a potential business combination, which discussions
subsequently were terminated. At various times between September 1996 and
January 1997, Artecon met informally with management of Storage Dimensions to
discuss a possible business combination. By January 1997, however, Storage
Dimensions was in the process of its initial public offering and both parties
felt it was in their best interests to terminate discussions.
In August 1997, Artecon completed the acquisition of substantially all of
the assets and certain liabilities of Falcon (the "Falcon Acquisition"). The
Falcon Acquisition added new products and additional domestic sales offices and
sales personnel to Artecon's business operations. Through the Falcon
Acquisition, Artecon significantly expanded its customer and revenue base, and
expects to be able to take advantage of certain economies of scale through the
consolidation of the companies' business operations and customer service,
accounting and administrative functions.
Contacts between the Parties
In early November 1997, a telephone conference between the Storage
Dimensions Chairman of the Board and members of Artecon management was held at
which the potential benefits of a business combination of the two parties were
discussed. The parties agreed to continue to further explore a potential
business combination.
On November 19, 1997, the Vice Chairman of the Board and Chief Executive
Officer of Storage Dimensions visited Artecon's facility in Carlsbad, California
and met with members of Artecon management. During these discussions, the
participants continued to evaluate the potential benefits of a business
combination and performed due diligence investigations of each other.
On November 28, 1997, the Chairman and Vice Chairman of the Storage
Dimensions Board met with the Chairman of the Board and the Chief Executive
Officer of Artecon. The specific terms of a business combination, including
percentage ownership by each party were discussed at length. Both parties agreed
to hold further discussions to continue to negotiate specific terms. To
facilitate such discussions, a mutual confidentiality and nonsolicitation
agreement was signed by both parties on December 4, 1997.
On December 8, 1997, representatives of Artecon visited Storage Dimensions
for the purpose of conducting their due diligence investigation of Storage
Dimensions and held several meetings with Storage Dimensions management.
On December 11, 1997, Storage Dimensions management, representatives of its
auditors and Salomon Smith Barney visited Artecon to continue their due
diligence investigation of Artecon and held several meetings with members of
Artecon management.
From December 15 through December 18, 1997, Storage Dimensions management
and its auditors continued to meet with Artecon management to continue their due
diligence review of Artecon.
On December 19, 1997, Storage Dimensions held a meeting of its Board of
Directors at which the potential synergies of a business combination with
Artecon were reviewed. Members of Storage Dimensions
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management reported on their financial review of Artecon. Storage Dimensions'
legal counsel was also present at this meeting and reviewed the progress of the
drafting of definitive merger documents, the terms thereof and due diligence
issues identified to date.
Also on December 19, 1997, Artecon held a meeting of its Board of Directors
to review and discuss the proposed terms of the potential business combination
between Artecon and Storage Dimensions. Artecon's legal counsel reviewed the
terms of the proposed combination and due diligence issues disclosed in legal
counsel's review of Storage Dimensions' documents.
On December 20, 1997, another Storage Dimensions Board meeting was held. At
this meeting, Salomon Smith Barney reviewed with the Board certain financial
aspects of the proposed transaction. Extensive discussions ensued concerning the
transaction and Storage Dimensions' strategic alternatives. Storage Dimensions'
legal counsel also participated in this meeting and reviewed with the Board
draft merger documents and due diligence issues.
On December 22, 1997, another Storage Dimensions Board meeting was held. At
the meeting, Storage Dimensions' legal counsel reviewed the terms of the
proposed definitive merger and related documents and final due diligence issues.
Also at such meeting, Salomon Smith Barney rendered its opinion to the effect
that, as of such date and based upon and subject to certain matters stated in
such opinion, the Merger Consideration was fair, from a financial point of view,
to Storage Dimensions, and reviewed the financial analyses performed by Salomon
Smith Barney in connection with such opinion. After extensive discussion, the
Storage Dimensions Board unanimously approved the Merger and the Reorganization
Agreement.
On December 22, 1997, the Artecon Board held another meeting at which
Artecon's legal counsel reviewed the terms of the proposed merger contained in
the definitive merger documents. In particular, the Artecon Board discussed with
legal counsel certain terms of the Reorganization Agreement, the Voting
Agreements and the proposed amendments to the Storage Dimensions Certificate of
Incorporation to be filed in connection with the Merger. Following full
discussion of the proposed merger, the Artecon Board unanimously approved the
Merger Proposal and the transactions contemplated thereby.
On the same day, the Reorganization Agreement, Voting Agreements and
Affiliate Agreements were executed by the parties.
RECOMMENDATION OF THE STORAGE DIMENSIONS BOARD; STORAGE DIMENSIONS REASONS FOR
THE MERGER
The Storage Dimensions Board has unanimously determined that the terms of
the Reorganization Agreement and the Merger are fair to, and in the best
interests of, the Storage Dimensions stockholders. Accordingly, the Storage
Dimensions Board has unanimously approved the Reorganization Agreement and
unanimously recommends that the Storage Dimensions stockholders vote FOR
approval of the Business Combination Proposal. In reaching its determination,
the Storage Dimensions Board consulted with Storage Dimensions' management, as
well as its legal counsel, accountants and financial advisor, and gave
significant consideration to a number of factors bearing on its decision. The
post-Merger ownership between Storage Dimensions stockholders and Artecon
shareholders was determined in arm's-length negotiation. The ownership
allocation ultimately agreed to by the Storage Dimensions Board was approved by
such Board based upon the Storage Dimensions Board's evaluation of a number of
factors including the amount of revenue contributed by each party in the Merger,
the amount of Earnings Before Income Taxes ("EBIT") contributed by each party in
the Merger, the historical gross margins of each party, relative balance sheet
contributions of each party and technology contributions by each party. The
following are the primary reasons the Storage Dimensions Board believes the
Merger will be beneficial to Storage Dimensions and its stockholders:
- The belief that the Merger represents an opportunity to more rapidly
increase sales revenue through further penetration of the existing
customers of both organizations. In particular, the potential for
expanded product offerings into the UNIX marketplace with existing
Storage Dimensions customers and the penetration with Windows NT products
into the existing Artecon customer base was considered.
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- The belief that the foreign sales capabilities of Artecon would give
Storage Dimensions access to these markets far sooner and more
economically than it would be able to achieve on its own.
- The belief that Storage Dimensions has significant software expertise in
the area of storage management (RAIDScape software) and clustered storage
systems (SuperFlex 5500); and that Artecon has significant hardware
design expertise (Lynx, Sphinx, AerReal).
- The belief that the combined research and development staff will be more
productive and allow a sharper focus on the key competencies of each
company.
- The belief that the combined purchasing power of the two companies could
result in significant cost reductions for key components, particularly
disk drives.
- The belief that the efficiencies of combining operations and
administrative functions would result in cost savings by eliminating
certain fixed costs.
- The belief that the larger market presence of the combined company would
result in significant increases in marketing strength and presence and
would improve the combined company's competitive posture in both industry
segments.
- The belief that the increased size of the combined company would enhance
its ability to attract and retain skilled personnel, especially in the
area of sales, operations, and research and development.
- The belief that there is a significant potential enhancement of the
strategic and market position of the combined company beyond that
achievable by Storage Dimensions alone.
In addition to the reasons set forth above, during the course of its
deliberations concerning the Merger, the Storage Dimensions Board consulted with
Storage Dimensions' legal counsel and financial advisors as well as Storage
Dimensions' management, and reviewed a number of other factors relevant to the
Merger, including:
- Information concerning the business, assets, operations, properties,
management, financial condition, operating results, competitive position
and prospects of Storage Dimensions and Artecon.
- Reports from its legal counsel on specific terms of the Reorganization
Agreement, the Storage Dimensions Voting Agreements and the Certificate
of Amendment;
- The opinion of Salomon Smith Barney to the effect that, as of December
22, 1997 and based upon and subject to certain matters stated in such
opinion, the Merger Consideration was fair, from a financial point of
view, to Storage Dimensions (See "-- Opinion of Financial Advisor to
Storage Dimensions").
The Storage Dimensions Board also considered a number of potentially
negative factors in its deliberations concerning the Merger, including:
- The risk that the combined company might not be able to achieve revenues
equal to the sum of the anticipated revenues of Storage Dimensions and
Artecon as independent entities.
- The risk that revenue might shrink if some significant customers reduce
or terminate their purchase of Storage Dimensions and/or Artecon products
because of uncertainties concerning the Merger.
- The risk that the combined company might not achieve the expected revenue
and operating synergies.
- The adverse effects of one-time charges expected to be incurred in
connection with the costs of the Merger and the subsequent integration of
the companies, including write-offs for in-process research and
development expenses of Storage Dimensions.
- The potential adverse effects on the combined company's results of
operations of amortizing the goodwill that would be recorded in
connection with the Merger.
- The risk that certain key employees or members of management of either
Storage Dimensions or Artecon may decide not to continue employment with
the combined company.
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- The risk that other benefits sought to be achieved by the Merger would
not be obtained.
After carefully considering the potentially negative factors set forth
above, the Storage Dimensions Board concluded that the potential benefits
attendant to the Merger outweighed such negative factors and determined that the
Merger is fair to and in the best interest of the Storage Dimensions
stockholders.
The foregoing discussion of the information and positive and negative
factors considered by the Storage Dimensions Board in approving of the Business
Combination Proposal is not intended to be exhaustive, but includes the factors
considered by the Storage Dimensions Board to have been material in their
analysis of the Business Combination Proposal. In considering the Business
Combination Proposal, given the number and diversity of the potentially positive
and negative factors considered, the Storage Dimensions Board did not find it
practical or feasible to quantify or otherwise attempt to assign any relative or
specific values to any of the foregoing factors. In making their determination,
individual directors may have accorded different values to different factors.
RECOMMENDATION OF THE ARTECON BOARD; ARTECON REASONS FOR THE MERGER
The Artecon Board has unanimously determined that the terms of the
Reorganization Agreement and the transactions contemplated thereby are fair to,
and in the best interests of, the Artecon shareholders. Accordingly, the Artecon
Board has unanimously approved the Merger Proposal and unanimously recommends
that the Artecon shareholders vote FOR approval of the Merger Proposal. The
Artecon Board believes that the Merger will result in greater value to Artecon's
shareholders than would otherwise be realized through continued growth of
Artecon as an independent entity.
The following list includes some of the factors the Artecon Board
considered material in its evaluation of the Merger:
- The belief that the Merger represents an opportunity to increase
Artecon's product and services offerings and market penetration in a
shorter period of time than the continued growth of Artecon as an
independent entity.
- The belief that the immediate increase in customer base of the combined
company would provide Artecon with the size and breadth of product
offerings necessary to enhance its market position within the UNIX and
Windows NT markets.
- The belief that the combined company would be able to include additional
product enhancement in its Windows NT platforms, enabling it to meet the
needs of customers who use Windows NT as well as UNIX platforms (i.e.,
customers would be able to call one vendor to provide them with
peripherals that operate on both the Windows NT and UNIX platforms).
- The belief that Storage Dimensions' software products in development
would add significant value and key differentiation in the marketplace
(RAIDScape software and clustered storage systems software for Windows NT
applications).
- The belief that the larger revenue and asset base of the combined company
would likely enhance the combined company's access to equity and debt
capital.
- The belief that the combined company would likely realize certain
operating efficiencies as a result of the Merger, including in the areas
of research and development and administration.
- The belief that the increased size of the combined company would enhance
its ability to attract and retain skilled personnel, especially in the
area of sales, operations and research and development.
- The liquidity for the Artecon shareholders that would result from the
Merger.
The Artecon Board also considered a number of potentially negative factors
concerning the Merger, including:
- The risk that the combined company might not be able to achieve revenues
equal to the sum of the anticipated revenues of Storage Dimensions and
Artecon as independent entities.
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- The risk that the combined company might not realize the anticipated
economies of scale or combined operating efficiencies.
- The adverse effects of one-time charges expected to be incurred in
connection with the costs of the Merger and the subsequent integration of
the companies, including write-offs for in-process research and
development expenses of Storage Dimensions.
- The potential adverse effects on the combined company's results of
operations of amortizing the goodwill that would be recorded in
connection with the Merger.
- The potential that certain key employees or members of management of
either Storage Dimensions or Artecon may determine not to continue
employment with the combined company.
- The risk that other benefits sought to be achieved by the Merger would
not be obtained.
After carefully considering the potentially negative factors set forth
above, the Artecon Board concluded that the potential benefits attendant to the
Merger outweighed such negative factors and determined that the Merger is fair
to and in the best interest of the Artecon shareholders. On December 22, 1997,
the Artecon Board unanimously approved the Merger Proposal and recommended that
the Artecon shareholders vote in favor of the Merger Proposal.
The foregoing discussion of the information and positive and negative
factors considered by the Artecon Board in approving the Merger Proposal is not
intended to be exhaustive, but includes the factors considered by the Artecon
Board to have been material in their analysis of the Merger Proposal. In
considering the Merger Proposal, given the number and diversity of the
potentially positive and negative factors considered, the Artecon Board did not
find it practical or feasible to quantify or otherwise attempt to assign any
relative or specific values to any of the foregoing factors. In making their
determination, individual directors may have accorded different values to
different factors.
OPINION OF FINANCIAL ADVISOR TO STORAGE DIMENSIONS
Salomon Smith Barney was retained by Storage Dimensions to act as its
financial advisor in connection with the proposed Merger. On December 22, 1997,
at a meeting of the Board of Directors of Storage Dimensions held to evaluate
the proposed Merger, Salomon Smith Barney delivered an oral opinion (which
opinion was subsequently confirmed by delivery of a written opinion dated
December 22, 1997) to the Board of Directors of Storage Dimensions to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Merger Consideration was fair, from a financial
point of view, to Storage Dimensions. Salomon Smith Barney's opinion does not
address the fairness of the Merger Consideration from a financial point of view
to the stockholders of Storage Dimensions since the stockholders of Storage
Dimensions will not be asked to convert their shares of Storage Dimensions
Common Stock in the Merger.
In arriving at its opinion, Salomon Smith Barney reviewed the
Reorganization Agreement and held discussions with certain senior officers,
directors and other representatives and advisors of Storage Dimensions and
certain senior officers and other representatives and advisors of Artecon
concerning the businesses, operations and prospects of Storage Dimensions and
Artecon. Salomon Smith Barney examined certain publicly available business and
financial information relating to Storage Dimensions and certain available
business and financial information relating to Artecon as well as certain
financial forecasts and other information and data for Storage Dimensions and
Artecon which were provided to or otherwise discussed with Salomon Smith Barney
by the respective managements of Storage Dimensions and Artecon, including
information relating to certain strategic implications and operational benefits
anticipated to result from the Merger. Salomon Smith Barney reviewed the
financial terms of the Merger as set forth in the Reorganization Agreement in
relation to, among other things: current and historical market prices and
trading volumes of Storage Dimensions Common Stock; the historical and projected
earnings and other operating data of Storage Dimensions and Artecon; and the
capitalization and financial condition of Storage Dimensions and Artecon.
Salomon Smith Barney also considered, to the extent publicly available, the
financial terms of certain other similar transactions recently effected which
Salomon Smith Barney considered relevant in evaluating the Merger and analyzed
certain financial, stock market and other publicly available information
relating to the
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businesses of other companies whose operations Salomon Smith Barney considered
relevant in evaluating those of Storage Dimensions and Artecon. Salomon Smith
Barney also evaluated the potential pro forma financial impact of the Merger on
Storage Dimensions. In addition to the foregoing, Salomon Smith Barney conducted
such other analyses and examinations and considered such other financial,
economic and market criteria as Salomon Smith Barney deemed appropriate in
arriving at its opinion. Salomon Smith Barney noted that its opinion was
necessarily based upon information available, and financial, stock market and
other conditions and circumstances existing and disclosed, to Salomon Smith
Barney as of the date of its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. With respect to financial
forecasts and other information and data provided to or otherwise reviewed by or
discussed with Salomon Smith Barney, the managements of Storage Dimensions and
Artecon advised Salomon Smith Barney that such forecasts and other information
and data were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of Storage
Dimensions and Artecon as to the future financial performance of Storage
Dimensions and Artecon and the strategic implications and operational benefits
(including the amount, timing and achievability thereof) anticipated to result
from the Merger. Salomon Smith Barney assumed, with the consent of the Board of
Directors of Storage Dimensions, that the Merger will be treated as a tax-free
reorganization for federal income tax purposes. Salomon Smith Barney also
assumed, with the consent of the Board of Directors of Storage Dimensions, that
the number of fully diluted shares of Storage Dimensions Common Stock
outstanding immediately prior to the Effective Time would not vary materially
from the number of fully diluted shares of Storage Dimensions Common Stock
outstanding as of December 22, 1997. The opinion of Salomon Smith Barney, as set
forth therein, relates to the relative values of Storage Dimensions and Artecon.
Salomon Smith Barney did not express any opinion as to what the value of the
Storage Dimensions Common Stock or Storage Dimensions Preferred Stock actually
will be when issued pursuant to the Merger, what the value of the Storage
Dimensions Common Stock will be upon conversion of the Storage Dimensions
Preferred Stock or the prices at which the Storage Dimensions Common Stock or
Storage Dimensions Preferred Stock will trade or otherwise be transferable
subsequent to the Merger. Salomon Smith Barney did not make and was not provided
with an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Storage Dimensions or Artecon nor did Salomon Smith
Barney make any physical inspection of the properties or assets of Storage
Dimensions or Artecon. Salomon Smith Barney was not requested to consider, and
Salomon Smith Barney's opinion does not address, the relative merits of the
Merger as compared to any alternative business strategies that might exist for
Storage Dimensions or the effect of any other transaction in which Storage
Dimensions might engage. Although Salomon Smith Barney evaluated the Merger
Consideration from a financial point of view, Salomon Smith Barney was not asked
to and did not recommend the specific consideration payable in the Merger, which
was determined through negotiation between Storage Dimensions and Artecon. No
other limitations were imposed by Storage Dimensions on Salomon Smith Barney
with respect to the investigations made or procedures followed by Salomon Smith
Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON SMITH BARNEY DATED DECEMBER
22, 1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C AND SHOULD
BE READ CAREFULLY IN ITS ENTIRETY. THE OPINION OF SALOMON SMITH BARNEY IS
DIRECTED TO THE BOARD OF DIRECTORS OF STORAGE DIMENSIONS AND RELATES ONLY TO THE
FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO STORAGE
DIMENSIONS, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE STORAGE DIMENSIONS SPECIAL MEETING. THE
SUMMARY OF THE OPINION OF SALOMON SMITH BARNEY SET FORTH IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The summary
of such analyses does not purport to be a complete description of the analyses
underlying Salomon Smith Barney's opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods
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of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Salomon Smith Barney believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could create
a misleading or incomplete view of the processes underlying such analyses and
opinion. In its analyses, Salomon Smith Barney made numerous assumptions with
respect to Storage Dimensions, Artecon, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Storage Dimensions and Artecon. The estimates contained in
such analyses and the valuation ranges resulting from any particular analysis
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than those
suggested by such analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the Board of Directors of Storage Dimensions in its evaluation of
the Merger and should not be viewed as determinative of the views of the Board
of Directors or management of Storage Dimensions with respect to the Merger
Consideration or the proposed Merger.
Salomon Smith Barney's financial analyses assume an implied value for the
Storage Dimensions Common Stock component of the Merger Consideration of
approximately $51.6 million, calculated based on the aggregate number of shares
of Storage Dimensions Common Stock issuable in the Merger (12,891,817 shares,
based on the number of outstanding shares of Storage Dimensions Common Stock on
December 19, 1997) multiplied by the closing price for Storage Dimensions Common
Stock on December 19, 1997 ($4.00 per share).
Selected Company Analysis. Using publicly available information, Salomon
Smith Barney analyzed, among other things, the market values and trading
multiples of Storage Dimensions and the following selected publicly traded
companies in the systems storage industry, consisting of: (i) small
capitalization disk systems companies: Auspex Systems, Inc.; Box Hill Systems
Corp.; Ciprico Inc.; Procom Technology, Inc.; and Storage Computer Corporation
(the "Small Cap Disk Systems Companies"); (ii) large capitalization disk systems
companies: EMC Corporation; Data General Corporation; MTI Technology
Corporation; and Network Appliance, Inc. (the "Large Cap Disk Systems
Companies"); and (iii) tape systems companies: Advanced Digital Information
Corporation; Exabyte Corporation; Overland Data, Inc.; and Storage Technology
Corporation (the "Tape Systems Companies" and, together with the Small Cap Disk
Systems Companies and the Large Cap Disk Systems Companies, the "Selected
Companies"). With respect to the Selected Companies, Salomon Smith Barney
focused primarily on the Small Cap Disk Systems Companies, which companies
Salomon Smith Barney considered to be most similar to Storage Dimensions and
Artecon. Salomon Smith Barney compared market values as a multiple of, among
other things, estimated calendar 1997 and 1998 net income, and adjusted market
values (market value, plus total debt, less cash, plus operating leases
capitalized at 12.5%) as multiples of, among other things, latest 12 months
revenues and earnings before interest and taxes ("EBIT"). Salomon Smith Barney
also compared the implied trading multiples for the combined company based on
the trading multiples of the Small Cap Disk Systems Companies. All multiples
were based on closing stock prices as of December 19, 1997. Net income estimates
for the Selected Companies were based on estimates of selected investment
banking firms and net income estimates for Storage Dimensions and Artecon were
based on internal estimates of the managements of Storage Dimensions and
Artecon. For purposes of its analysis, Salomon Smith Barney reviewed Artecon's
estimated calendar 1997 financial results pro forma for the Falcon Acquisition.
Applying a range of multiples for the Small Cap Disk Systems Companies of
estimated calendar 1997 net income and latest 12 months EBIT to the estimated
calendar 1997 net income and EBIT of Storage Dimensions resulted in negative
equity values for Storage Dimensions. The implied equity reference range for
Storage Dimensions based on latest 12 months revenue multiples of the Small Cap
Disk Systems Companies was not meaningful given the lack of profitability in the
operations of Storage Dimensions over the ninemonth period preceding December
19, 1997. Estimated calendar 1997 net income and latest 12 months EBIT multiples
for the Small Cap Disk System Companies also were deemed not to be meaningful
when applied to Artecon's estimated calendar 1997 net income and EBIT given the
fact that operating losses incurred by Falcon prior to the Falcon Acquisition
substantially
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reduced Artecon's estimated calendar 1997 net income and EBIT. Applying a range
of multiples (excluding outliers) for the Small Cap Disk Systems Companies of
estimated calendar 1998 net income of 10.3x to 14.3x to corresponding financial
data for Storage Dimensions resulted in an equity reference range for Storage
Dimensions of approximately $3.79 to $5.26 per share, as compared to the market
value for Storage Dimensions of $4.00 per share based on a closing price of
Storage Dimensions Common Stock on December 19, 1997. Applying a range of
multiples (excluding outliers) for the Small Cap Disk Systems Companies of
estimated calendar 1998 net income and latest 12 months revenues of 10.3x to
14.3x and 0.9x to 1.5x, respectively, to the estimated calendar 1998 net income
and estimated calendar 1997 revenues of Artecon resulted in an equity reference
range for Artecon of approximately $78.1 million to $123.5 million, as compared
to the equity value implied by the Merger Consideration of approximately $51.6
million based on a closing price of Storage Dimensions Common Stock on December
19, 1997. Based on internal estimates of the managements of Storage Dimensions
and Artecon as to the estimated calendar 1998 earnings per share ("EPS") of the
pro forma combined company and the cost savings and other potential synergies
anticipated by the managements of Storage Dimensions and Artecon to result from
the Merger, and applying a range of estimated calendar 1998 price to earnings
multiples of the Small Cap Disk Systems Companies of 10.0x to 14.0x to
corresponding financial data for the pro forma combined company, resulted in an
implied equity reference range for the combined company of approximately $4.71
to $9.03 per share.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Salomon Smith Barney analyzed the purchase price and
implied transaction value multiples paid in the following selected transactions
in the systems storage industry, consisting of (acquiror/target): Fujitsu
Limited/Amdahl Corporation (the "Fujitsu/Amdahl Transaction"); Compaq Computer
Corporation/Tandem Computers Incorporated; Gateway 2000, Inc./Advanced Logic
Research, Inc. (the "Gateway/Advanced Logic Transaction"); Silicon Graphics,
Inc./Cray Research, Inc.; EMC Corporation/McData Corporation; Hewlett-Packard
Company/Convex Computer Corporation; and Seagate Technology, Inc./Conner
Peripherals, Inc. (the "Seagate/Conner Transaction"). With respect to such
transactions, Salomon Smith Barney focused primarily on the Fujitsu/Amdahl
Transaction, the Gateway/Advanced Logic Transaction and the Seagate/ Conner
Transaction, which involved companies Salomon Smith Barney considered to be most
similar to Storage and Artecon (collectively, the "Selected Transactions").
Salomon Smith Barney compared purchase prices in the Selected Transactions as a
multiple of, among other things, latest 12 months net income, and transaction
values as multiples of, among other things, latest 12 months revenues and EBIT.
All multiples for the Selected Transactions were based on information available
at the time of announcement of the transaction. Applying the range of multiples
for the Selected Transactions of latest 12 months net income and EBIT to the
estimated calendar 1997 net income and EBIT of Storage Dimensions resulted in
negative equity values for Storage Dimensions. Latest 12 months net income
multiples for the Selected Transactions were deemed not to be meaningful when
applied to Artecon's estimated calendar 1997 net income given the fact that
operating losses incurred by Falcon prior to the Falcon Acquisition
substantially reduced Artecon's estimated calendar 1997 net income. Applying a
range of multiples (excluding outliers) for the Selected Transactions of latest
12 months revenues of 0.5x to 0.7x to estimated calendar 1997 revenues for
Storage Dimensions resulted in an equity reference range for Storage Dimensions
of approximately $5.28 to $7.06 per share, as compared to the market value for
Storage Dimensions of $4.00 per share based on a closing price of Storage
Dimensions Common Stock on December 19, 1997. Applying a range of multiples
(excluding outliers) for the Selected Transactions of latest 12 months revenues
and EBIT to the estimated calendar 1997 revenues and EBIT of Artecon resulted in
an equity reference range for Artecon of approximately $36.8 million to $76.9
million, as compared to the equity value implied by the Merger Consideration of
approximately $51.6 million based on a closing price of Storage Dimensions
Common Stock on December 19, 1997.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to Storage Dimensions, Artecon or the Merger. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the Selected Companies, Selected
Transactions or the business segment, company or transaction to which they are
being compared.
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Contribution Analysis. Salomon Smith Barney analyzed the respective
contributions of Storage Dimensions and Artecon to, among other things, the
revenues, EBIT and net income of the combined company for the calendar year
ended December 1996 and latest 12 months ended September 30, 1997 and the
estimated revenues, EBIT and net income of the combined company for calendar
years 1997 and 1998, based on internal estimates of the managements of Storage
Dimensions and Artecon. This analysis indicated that (i) for the calendar year
ended December 31, 1996, Storage Dimensions would have contributed approximately
39.7% of revenues, 66.0% of EBIT and 64.2% of net income, and Artecon would have
contributed 60.3% of revenues, 34.0% of EBIT and 35.8% of net income, of the
combined company, (ii) for the latest 12 months ended September 30, 1997,
Storage Dimensions would have contributed approximately 41.5% of revenues, 45.7%
of EBIT and (92.5)% of net income, and Artecon would have contributed
approximately 58.5% of revenues, 54.3% of EBIT and 192.5% of net income, of the
combined company, (iii) in estimated calendar year 1997, Storage Dimensions
would contribute approximately 42.9% of revenues and (52.0)% of EBIT, and
Artecon would contribute approximately 57.1% of revenues and 152.0% of EBIT of
the combined company (net income figures were not meaningful given the fact that
Storage Dimensions net losses are expected to exceed Artecon's net income in
calendar 1997), and (iv) in estimated calendar year 1998, Storage Dimensions
would contribute approximately 41.7% of revenues, 23.6% of EBIT and 27.2% of net
income, and Artecon would contribute approximately 58.3% of revenues, 76.4% of
EBIT and 72.8% of net income, of the combined company. Based on the Merger
Consideration, current stockholders of Storage Dimensions and Artecon would own
approximately 37.5% and 62.5%, respectively, of the equity value of the combined
company upon consummation of the Merger (giving effect to the exercise of
Storage Dimensions stock options with an exercise price of less than $3.94 per
share), and Storage Dimensions and Artecon would constitute approximately 27.5%
and 72.5%, respectively, of the enterprise value of the combined company (giving
effect to the exercise of Storage Dimensions stock options with an exercise
price of less than $3.94 per share).
Discounted Cash Flow Analysis. Salomon Smith Barney performed separate
discounted cash flow analyses of the projected free cash flows of Storage
Dimensions and Artecon for fiscal years ended December 31, 1998 through 2002,
based on internal estimates of the managements of Storage Dimensions and
Artecon. The stand-alone discounted cash flow analyses of Storage Dimensions and
Artecon were determined by (i) adding (x) the present value of the projected
free cash flows of Storage Dimensions and Artecon over the five-year period from
1998 to 2002 and (y) the present value of the estimated terminal values of
Storage Dimensions and Artecon in year 2002 and (ii) subtracting the current net
debt of Storage Dimensions and Artecon. The ranges of estimated terminal values
for Storage Dimensions and Artecon at the end of the five-year period were
calculated by applying terminal value multiples of 8.0x to 10.0x to the
projected 2002 earnings before interest, taxes, depreciation and amortization
("EBITDA") of Storage Dimensions and Artecon. The cash flows and terminal values
of Storage Dimensions and Artecon were discounted to present value using
discount rates ranging from 17.5% to 22.5%. Utilizing such terminal multiples
and discount rates, this analysis resulted in an equity reference range for
Storage Dimensions of approximately $3.63 to $4.82 per share, as compared to the
market value for Storage Dimensions of $4.00 per share based on a closing stock
price of Storage Dimensions Common Stock on December 19, 1997, and an equity
reference range for Artecon of approximately $75.8 million to $114.8 million, as
compared to the equity value implied by the Merger Consideration of
approximately $51.6 million.
Pro Forma Merger Analysis. Salomon Smith Barney analyzed certain pro forma
effects resulting from the Merger, including, among other things, the impact of
the Merger on the projected earnings per share ("EPS") of Storage Dimensions for
the calendar year 1998, based on internal estimates of the managements of
Storage Dimensions and Artecon. The results of the pro forma merger analysis
suggested that the Merger could be accretive to the fully diluted EPS of Storage
Dimensions in calendar year 1998, both before and after giving effect to certain
cost savings and other potential synergies anticipated by the managements of
Storage Dimensions and Artecon to result from the Merger. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Salomon
Smith Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of (i) historical
and projected financial results of Storage Dimensions and Artecon; (ii) the
history of
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trading prices and volume for Storage Dimensions Common Stock and the
relationship between movements in Storage Dimensions Common Stock, movements in
the common stock of the Small Cap Disk System Companies and the Large Cap Disk
System Companies and movements in the NASDAQ Composite Index; (iii) selected
published analysts' reports on Storage Dimensions, including analysts' estimates
as to the earnings growth potential of Storage Dimensions; and (iv) the pro
forma ownership of the combined company, both before and after giving effect to
the conversion of the Storage Preferred Stock issuable in the Merger.
Pursuant to the terms of Salomon Smith Barney's engagement, Storage
Dimensions has agreed to pay Salomon Smith Barney for its services in connection
with the Merger an aggregate financial advisory fee based on a percentage of the
total market value of Storage Dimensions on a fully diluted basis. The fee
payable to Salomon Smith Barney is currently estimated to be approximately
$606,800. Storage Dimensions has also agreed to reimburse Salomon Smith Barney
for travel and other out-of-pocket expenses incurred by Salomon Smith Barney in
performing its services, including the fees and expenses of its legal counsel,
and to indemnify Salomon Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Salomon Smith Barney's engagement.
Salomon Smith Barney has advised Storage Dimensions that, in the ordinary
course of business, Salomon Smith Barney and its affiliates may actively trade
or hold the securities of Storage Dimensions for their own account or for the
account of customers and, accordingly, may at any time hold a long or short
position in such securities. Salomon Smith Barney has in the past provided
investment banking services to Storage Dimensions unrelated to the Merger, for
which services Salomon Smith Barney has received compensation. In addition,
Salomon Smith Barney and its affiliates (including Travelers Group Inc. and its
affiliates) may maintain relationships with Storage Dimensions and Artecon.
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by Storage Dimensions based on its experience, expertise
and familiarity with Storage Dimensions and its business. Salomon Smith Barney
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the respective recommendations of the Storage Dimensions
Board and the Artecon Board with respect to the Merger, the Storage Dimensions
stockholders and Artecon shareholders should be aware that certain members of
the Artecon Board and the Storage Dimensions Board and certain executive
officers of each company have certain interests in the Merger that are in
addition to the interests of shareholders generally.
In particular, pursuant to the Reorganization Agreement, James Lambert,
Jason Sauey and W.R. Sauey, current directors of Artecon, will become members of
the Storage Dimensions Board at the Effective Time. Current Storage Dimensions
directors Chong Sup Park and Brian Fitzgerald will remain on the Board. In
addition, James Lambert, Tesfaye Hailemichael and Dana Kammersgard, currently
President and Chief Executive Officer, Chief Financial Officer and a director of
Artecon, respectively, shall serve as President and Chief Executive Officer,
Chief Financial Officer and Secretary of Storage Dimensions, respectively,
following the Merger.
In addition, in connection with the Merger, Storage Dimensions and each of
David Eeg and Robert Bylin, President and Chief Executive Officer and Chief
Financial Officer of Storage Dimensions, respectively, amended the employment
agreements of such persons to provide certain severance benefits upon
termination of their relationship with Storage Dimensions. Moreover, as a result
of the Merger, stock options held by all Storage Dimensions employees, including
executive officers (but excluding options granted after December 22, 1997), will
become fully vested and exercisable. See "-- Effect on Storage Dimensions
Options" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF STORAGE
DIMENSIONS."
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W.R. Sauey, a director of Artecon, and certain entities affiliated with Mr.
Sauey, are the owners of an aggregate of 2,494,159 shares of Artecon Preferred
Stock and will receive all of the Storage Dimensions Preferred Stock being
issued in the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Artecon
Common Stock and Artecon Preferred Stock. This discussion is based on currently
existing provisions of the Code, existing and proposed Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to Storage Dimensions, Merger Sub, Artecon or
the Artecon shareholders as described herein.
The Artecon shareholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Artecon shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, banks, insurance companies or
tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions or who hold their shares as part of a hedging, straddle, conversion
or other risk reduction transaction. In addition, the following discussion does
not address the tax consequences of the Merger under foreign, state or local tax
laws or the tax consequences of any other transactions effectuated prior to or
after the Merger (whether or not such transactions are in connection with the
Merger). THE ARTECON SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR
PARTICULAR CIRCUMSTANCES.
Neither Storage Dimensions nor Artecon has requested a ruling from the
Internal Revenue Service (the "IRS") with regard to any of the federal income
tax consequences of the Merger. The obligations of Storage Dimensions and
Artecon to consummate the Merger are conditioned on the receipt by Storage
Dimensions of an opinion from Wilson Sonsini Goodrich & Rosati, P.C. ("Wilson
Sonsini") and the receipt by Artecon of an opinion from Cooley Godward LLP
("Cooley Godward"), that the Merger constitutes a reorganization (a
"Reorganization") within the meaning of Section 368(a) of the Code
(collectively, the "Tax Opinions"). The Tax Opinions will be subject to certain
assumptions and qualifications and will be based on the truth and accuracy of
certain representations of Storage Dimensions, Merger Sub, Artecon and certain
Artecon shareholders, including representations in certain certificates
delivered to counsel by the respective managements of Storage Dimensions, Merger
Sub, Artecon and certain Artecon shareholders. Of particular importance are the
assumptions and representations relating to the "continuity of interest"
requirement discussed below.
The discussion below assumes that the Merger will qualify as a
Reorganization, based upon the Tax Opinions. The tax description set forth below
has been prepared and reviewed by Wilson Sonsini and Cooley Godward, and in
their opinion, to the extent such description relates to statements of law, it
is correct in all material respects. Subject to the limitations and
qualifications referred to herein, and as a result of the Merger's qualifying as
a Reorganization, the following federal income tax consequences should, under
currently applicable law, result:
(a) No gain or loss will be recognized by the holders of Artecon Common
Stock and Artecon Preferred Stock upon the receipt of Storage
Dimensions Common Stock or Storage Dimensions Preferred Stock, solely
in exchange for such Artecon Common Stock or Artecon Preferred Stock in
the Merger (except to the extent of cash received in connection with
Dissenting Shares and in lieu of a fractional share of Storage
Dimensions Common Stock).
(b) The aggregate tax basis of the Storage Dimensions Common Stock or
Storage Dimensions Preferred Stock so received by the Artecon
shareholders in the Merger (including any fractional share of Storage
Dimensions Common Stock not actually received) will be the same as the
aggregate tax
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basis of the Artecon Common Stock or Artecon Preferred Stock, as the
case may be, surrendered in exchange therefor.
(c) The holding period of the Storage Dimensions Common Stock or Storage
Dimensions Preferred Stock so received by each Artecon shareholder in
the Merger will include the period for which the Artecon Common Stock
or Artecon Preferred Stock, as the case may be, surrendered in exchange
therefor was considered to be held, provided that the Artecon Common
Stock or Artecon Preferred Stock so surrendered is held as a capital
asset at the Effective Time of the Merger.
(d) Cash payments received by holders of Artecon Common Stock in lieu of a
fractional share of Storage Dimensions Common Stock will be treated as
if such fractional share had been issued in the Merger and then
redeemed by Storage Dimensions. An Artecon shareholder receiving such
cash will recognize gain or loss upon such payment, measured by the
difference (if any) between the amount of cash received and the basis
in such fractional share. The gain or loss should be capital gain or
loss provided that such share of Artecon Common Stock was held as a
capital asset at the Effective Time of the Merger.
(e) A shareholder of Artecon who exercises dissenters' rights under any
applicable law with respect to a share of Artecon Common Stock or
Artecon Preferred Stock and receives payments for such stock in cash
will recognize capital gain or loss (if such stock was held as a
capital asset at the Effective Time of the Merger) measured by the
difference between the amount of cash received and the shareholder's
basis in such share, provided such payment is neither essentially
equivalent to a dividend within the meaning of Section 302 of the Code
nor has the effect of a distribution of a dividend within the meaning
of Section 356(a)(2) of the Code (collectively, a "Dividend Equivalent
Transaction"). A sale of Artecon shares incident to an exercise of
dissenters' rights will generally not be a Dividend Equivalent
Transaction if, as a result of such exercise, the dissenting
shareholder owns no shares of Storage Dimensions capital stock (either
actually or constructively within the meaning of Section 318 of the
Code).
(f) None of Storage Dimensions, Merger Sub or Artecon will recognize gain
solely as a result of the Merger.
One key assumption underlying the Tax Opinions is that the "continuity of
interest" requirement will be satisfied in the Merger. To satisfy the
"continuity of interest" requirement, the Artecon shareholders must not,
pursuant to a plan or intent existing at or prior to the Effective Time of the
Merger, dispose of or transfer so much of either (i) their Artecon Common Stock
or Artecon Preferred Stock in anticipation of the Merger or (ii) the Storage
Dimensions Common Stock or Storage Dimensions Preferred Stock to be received in
the Merger (collectively, "Planned Dispositions"), such that the Artecon
shareholders, as a group, would no longer have a significant equity interest in
the Artecon business being conducted by Storage Dimensions after the Merger.
Artecon shareholders will generally be regarded as having a significant equity
interest as long as the Storage Dimensions Common Stock or Storage Dimensions
Preferred Stock received in the Merger (after taking into account Planned
Dispositions), in the aggregate, represents a substantial portion of the entire
consideration received by the Artecon shareholders in the Merger. No assurance
can be made that the "continuity of interest" requirement will be satisfied, and
if such requirement is not satisfied, the Merger would not be treated as a
Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in significant tax consequences. An Artecon shareholder would
recognize gain or loss with respect to each share of Artecon Common Stock or
Artecon Preferred Stock surrendered equal to the difference between the Artecon
shareholder's basis in such share and the fair market value, as of the Effective
Time of the Merger, of the Storage Dimensions Common Stock or Storage Dimensions
Preferred Stock received in exchange therefor. In such event, an Artecon
shareholder's aggregate basis in the Storage Dimensions Common Stock or Storage
Dimensions Preferred Stock so received would equal its fair market value, and
such shareholder's holding period for such stock would begin the day after the
Merger.
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Certain noncorporate Artecon shareholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Storage Dimensions Common Stock or Dissenting Shares. Backup
withholding will not apply, however, to a shareholder who furnishes a current
taxpayer identification number ("TIN") and certifies that he or she is not
subject to backup withholding on the substitute Form W-9 included in the
Transmittal Letter, who provides a certificate of foreign status on Form W-8, or
who is otherwise exempt from backup withholding. A shareholder who fails to
provide the correct TIN on Form W-9 may be subject to a $50 penalty imposed by
the IRS.
Each Artecon shareholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
ACCOUNTING TREATMENT
For accounting purposes, the Merger will be treated as a purchase of
Storage Dimensions by Artecon since the holders of Artecon capital stock would
hold and have voting power with respect to approximately 62.5% of the total
issued and outstanding voting capital stock of Storage Dimensions immediately
following the Merger. See "STOCK OWNERSHIP OF STORAGE DIMENSIONS FOLLOWING THE
MERGER." The purchase price will be determined by reference to the average of
the closing bid and ask prices per share of Storage Dimensions Common Stock as
traded on the Nasdaq National Market on December 18, 1997.
EFFECT ON ARTECON OPTIONS, WARRANTS AND RIGHTS
Under the terms of the Reorganization Agreement, each Artecon option,
warrant or right to purchase Artecon Common Stock shall be converted into an
option, warrant or right to acquire, on the same terms and conditions as were
applicable to such option, warrant or right on the date of the Reorganization
Agreement, the number of shares of Storage Dimensions Common Stock equal to the
number of shares of Artecon Common Stock subject to such Artecon option, warrant
or right immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounding down to the nearest whole share (with cash, less the applicable
exercise price, being payable for any fraction of a share). The per share
exercise price under each such Artecon option, warrant or right shall be
adjusted by dividing the per share exercise price under such Artecon option,
warrant or right by the Exchange Ratio and rounding up to the nearest cent.
After the Effective Time, Storage Dimensions will file a Registration Statement
on Form S-8 with respect to the shares of Storage Dimensions Common Stock
subject to such options, if any.
EFFECT ON STORAGE DIMENSIONS OPTIONS
As a result of the Merger, all outstanding options granted prior to
December 22, 1997 under the 1996 Stock Option Plan and 1993 Stock Option Plan
shall become fully vested and exercisable. No other adjustments to any
outstanding Storage Dimensions stock options will occur as a result of the
Merger.
REGULATORY MATTERS
The consummation of the Merger is subject to the expiration or termination
of the relevant waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Storage Dimensions and
W. R. Sauey, a principal shareholder of Artecon, have filed notification and
report forms under the HSR Act. Artecon is not required to make any filings
under the HSR Act in connection with the Merger, as it is exempt from such
filing requirements under certain provisions of the HSR Act. Effective February
13, 1998 the waiting period under the HSR Act was terminated. See "OTHER
MATTERS -- Regulatory Approvals Required."
FEDERAL SECURITIES LAW CONSEQUENCES
All of the Storage Dimensions Common Stock issued in connection with the
Merger will be freely transferable, except that any Storage Dimensions Common
Stock received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act) of Artecon or Storage Dimensions prior to the
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Merger may be sold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act with respect to affiliates of
Artecon, or Rule 144 under the Securities Act with respect to persons who are or
become affiliates of Storage Dimensions, or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Artecon or Storage
Dimensions generally include individuals or entities that control, are
controlled by, or are under common control with, such corporation and may
include certain officers and directors of such corporation as well as principal
stockholders of such corporation.
Affiliates of Artecon may not sell their shares of Storage Dimensions
Common Stock acquired in connection with the Merger, except pursuant to an
effective registration under the Securities Act covering such shares or in
compliance with Rule 145 (or Rule 144 under the Securities Act in the case of
persons who are or become affiliates of Storage Dimensions) or another
applicable exemption from the registration requirements of the Securities Act.
In general, under Rule 145, for one year following the Effective Time an
affiliate (together with certain related persons) would be entitled to sell
shares of Storage Dimensions Common Stock acquired in connection with the Merger
only through unsolicited "brokers" transactions" or in transactions directly
with a "market maker," as such terms are defined in Rule 145. Additionally, the
number of shares to be sold by an affiliate (together with certain related
persons and certain persons acting in concert) within any three-month period for
purposes of Rule 145 may not exceed the greater of 1% of the outstanding shares
of Storage Dimensions Common Stock or the average weekly trading volume of such
stock during the four calendar weeks preceding such sale. Rule 145 would only
remain available, however, to affiliates if Storage Dimensions remained current
with its informational filings under the Exchange Act. One year after the
Effective Time, an affiliate would be able to sell such Storage Dimensions
Common Stock without such manner of sale or volume limitations provided that
Storage Dimensions was current with its Exchange Act informational filings and
such affiliate was not then an affiliate of Storage Dimensions. Two years after
the Effective Time, an affiliate would be able to sell such shares of Storage
Dimensions Common Stock without any restrictions so long as such affiliate had
not been an affiliate of Storage Dimensions for at least three months prior
thereto.
The shares of Storage Dimensions Preferred Stock issuable in the Merger
will not be registered and will not be transferable unless registered or
transferred pursuant to an exemption from the Securities Act. The shares of
Storage Dimensions Common Stock issuable upon conversion of the Storage
Dimensions Preferred Stock shall be registered under the Securities Act but
shall be subject to restrictions on transfer for stock held by affiliates.
STOCK LISTING
It is a condition to Storage Dimensions' and Artecon's obligation to
consummate the Merger that the shares of Storage Dimensions Common Stock to be
issued pursuant to the Reorganization Agreement be approved for listing on the
Nasdaq National Market. An application will be filed for listing such shares of
Storage Dimensions Common Stock on the Nasdaq National Market prior to
consummation of the Merger. Upon consummation of the Merger, the name of Storage
Dimensions will be changed to "Artecon, Inc." and the Storage Dimensions Common
Stock will be traded on the Nasdaq National Market under the symbol "ARTE."
Following the Merger, the Storage Dimensions Preferred Stock will not be
publicly traded.
APPRAISAL AND DISSENTERS' RIGHTS
If the Reorganization Agreement is approved by the required vote of Artecon
shareholders and is not abandoned or terminated, holders of Artecon capital
stock who did not vote in favor of the Merger may, by complying with Sections
1300 through 1312 of the CGCL, be entitled to dissenters' rights as described
therein. The record holders of the shares of Artecon capital stock that are
eligible to, and do, exercise their dissenters' rights with respect to the
Merger are referred to herein as "Dissenting Shareholders," and the shares of
stock with respect to which they exercise dissenters' rights are referred to
herein as "Dissenting Shares."
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The following discussion is not a complete statement of the CGCL relating
to dissenters' rights, and is qualified in its entirety by reference to Sections
1300 through 1312 of the CGCL attached to this Joint Proxy Statement/Prospectus
as Appendix D and incorporated herein by reference. This discussion and Sections
1300 through 1312 of the CGCL should be reviewed carefully by any holder who
wishes to exercise statutory dissenters' rights or wishes to preserve the right
to do so, since failure to comply with the required procedures will result in
the loss of such rights.
Shares of Artecon capital stock must satisfy each of the following
requirements to qualify as Dissenting Shares under the CGCL: (i) the shares of
Artecon capital stock must have been outstanding on the Artecon Record Date;
(ii) the shares of Artecon capital stock must not have been voted in favor of
the Merger; (iii) the holder of such shares of Artecon capital stock must make a
written demand that Artecon repurchase such shares of Artecon capital stock at
fair market value (as described below); and (iv) the holder of such shares of
Artecon capital stock must submit certificates for endorsement (as described
below). A vote by proxy or in person against the Merger does not in and of
itself constitute a demand for appraisal under the CGCL.
Pursuant to Sections 1300 through 1312 of the CGCL, holders of Dissenting
Shares may require Artecon to repurchase their Dissenting Shares at a price
equal to the fair market value of such shares determined as of the day before
the first announcement of the terms of the Merger, excluding any appreciation or
depreciation as a consequence of the proposed Merger, but adjusted for any stock
split, reverse stock split or stock dividend that becomes effective thereafter.
Within ten days following approval of the Merger by Artecon shareholders,
Artecon is required to mail to each holder of shares of Artecon not voted in
favor of the Merger a notice of the approval of the Merger, a statement of the
price determined by Artecon to represent the fair market value of Dissenting
Shares (which shall constitute an offer by Artecon to purchase such Dissenting
Shares at such stated price), and a description of the procedures for such
holders to exercise their rights as Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
Merger by the outstanding shares is mailed to Dissenting Shareholders, a
Dissenting Shareholder must demand that Artecon repurchase such shareholder's
Dissenting Shares in a statement setting forth the number and class of
Dissenting Shares held of record by such Dissenting Shareholder that the
Dissenting Shareholder demands that Artecon purchase, and a statement of which
the Dissenting Shareholder claims to be the fair market value of the Dissenting
Shares as of the day before the announcement of the proposed Merger. The
statement of fair market value in such demand by the Dissenting Shareholder
constitutes an offer by the Dissenting Shareholder to sell the Dissenting Shares
at such price within such 30-day period. Such holder must also submit to Artecon
or its transfer agent certificates representing any Dissenting Shares that the
Dissenting Shareholder demands Artecon purchase, so that such Dissenting Shares
may either be stamped or endorsed with the statement that the shares are not
Dissenting Shares or exchanged for certificates of appropriate denomination so
stamped or endorsed.
If upon the Dissenting Shareholder's surrender of the certificates
representing the Dissenting Shares Artecon and a Dissenting Shareholder agree
upon the price to be paid for the Dissenting Shares and agree that such shares
are Dissenting Shares, then the agreed price is required by law to be paid to
the Dissenting Shareholder within the later of 30 days after the date of such
agreement or 30 days after any statutory or contractual conditions to the
consummation of the Merger are satisfied or waived.
If Artecon and a Dissenting Shareholder disagree as to the price for such
Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of the approval of the Merger by Artecon shareholders is mailed, to resolve such
dispute. In such action, the court will determine whether the shares of Artecon
Common Stock held by such shareholder are Dissenting Shares, the fair market
value of such shares of Artecon Common Stock, or both. The CGCL provides, among
other things, that a Dissenting Shareholder may not withdraw the demand for
payment of the fair market value of Dissenting Shares unless Artecon consents to
such request for withdrawal.
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Under the DGCL, Storage Dimensions stockholders are not entitled to
dissenters' or appraisal rights with respect to the proposed Merger.
MERGER EXPENSES AND FEES AND OTHER COSTS
Each of Storage Dimensions and Artecon will pay its own expenses in
connection with the Merger, with certain exceptions in case of certain
terminations of the Reorganization Agreement. See "THE REORGANIZATION
AGREEMENT -- Termination Fees."
THE REORGANIZATION AGREEMENT
The description of the Reorganization Agreement set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Reorganization Agreement, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Annex A and incorporated herein by reference. All
stockholders are urged to read the Reorganization Agreement in its entirety.
TERMS OF THE MERGER
The Merger. At the Effective Time and subject to and upon the terms and
conditions of the Reorganization Agreement and the CGCL, Merger Sub will be
merged with and into Artecon, the separate corporate existence of Merger Sub
will cease, and Artecon will continue as the surviving corporation and a
wholly-owned subsidiary of Storage Dimensions (the "Surviving Corporation"). In
the Merger, each outstanding share of Artecon Common Stock (other than
Dissenting Shares) will be converted into the right to receive the number of
shares of Storage Dimensions Common Stock, equal to the Exchange Ratio, which,
for purposes of this Joint Proxy Statement/Prospectus, has been estimated to be
approximately 2.16. The exact number of shares of Storage Dimensions Common
Stock into which each share of Artecon Common Stock will be converted will be
determined as of the Effective Time as follows: the Exchange Ratio will be a
fraction the numerator of which is the number of Merger Shares (as defined
below) and the denominator of which is the number of Artecon Shares (as defined
below). "Merger Shares" shall mean the shares of Storage Dimensions Common Stock
to be issued to holders of Artecon Common Stock in the Merger and shall be equal
to the product of (A) 1.5641 times (B) the sum of (x) the number of shares of
Storage Dimensions Common Stock outstanding immediately prior to the Effective
Time plus (y) the maximum number of shares of Storage Dimensions Common Stock
issuable upon exercise of any options to purchase Storage Dimensions Common
Stock (without regard to vesting) with option exercise prices of less than
$3.96875. "Artecon Shares" shall mean the sum of (A) the number of shares of
Artecon Common Stock outstanding immediately prior to the Effective Time plus
(B) the maximum number of shares of Artecon Common Stock underlying any
instruments convertible into or exchangeable for Artecon Common Stock (without
regard to vesting) outstanding immediately prior to the Effective Time,
including shares of Artecon Preferred Stock other than the 2,494,159 shares of
Artecon Preferred stock held by W.R. Sauey and certain affiliates of W.R. Sauey.
Such shares of Artecon Preferred Stock held by W.R. Sauey and such affiliates
(the "Sauey Preferred") will be converted into 2,494,159 shares of Storage
Dimensions Preferred Stock pursuant to the Merger. Although the Applicable
Multiple is fixed, the Exchange Ratio is subject to change based upon changes in
the number of shares of Storage Dimensions Common Stock and Artecon Common Stock
outstanding immediately prior to the Effective Time. While dollar fluctuations
in the market price of Storage Dimensions Common Stock will not affect the
Exchange Ratio, they would change the aggregate value of the shares of Storage
Dimensions Common Stock issued in the Merger.
In addition, each share of Artecon Preferred Stock (other than Dissenting
Shares) outstanding as of the Effective Time will be converted into the right to
receive one share of newly designated Storage Dimensions Preferred Stock. All
holders of Artecon Preferred Stock, other than the Sauey Preferred, have agreed
to convert such Artecon Preferred Stock into shares of Artecon Common Stock
prior to the Effective Time, which shares will then be converted into Storage
Dimensions Common Stock pursuant to the Merger. In addition, outstanding
options, warrants and rights to purchase Artecon Common Stock will be converted
into options, warrants and rights to purchase Storage Dimensions Common Stock on
the same basis as the Artecon
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Common Stock and appropriate adjustment will be made to the exercise price of
each such option, warrant or right.
Effective Time. Contemporaneously with or as promptly as practicable after
the approval of the Merger Proposal by the Artecon shareholders and the approval
of the Business Combination Proposal by the Storage Dimensions stockholders, and
subject to the satisfaction or waiver of the other conditions to the Merger, the
Merger will be consummated by filing a Certificate of Merger, together with any
required related certificates, with the Secretary of State of the State of
California in accordance with the provisions of the CGCL.
Articles and Certificate of Incorporation and Bylaws. The Reorganization
Agreement provides that the Articles of Incorporation and Bylaws of Merger Sub,
as in effect immediately prior to the Effective Time, will be the Articles of
Incorporation and Bylaws of the Surviving Corporation, except that the name of
the Surviving Corporation will be changed to "Artecon California." In addition,
the Reorganization Agreement provides that the Certificate of Incorporation of
Storage Dimensions will be amended effective on the Effective Time to (i) change
its name from Storage Dimensions to "Artecon, Inc."; (ii) provide for a
classified Board of Directors whereby the directors will be separated into three
classes, with members of each class serving for a three year term; (iii) provide
that a director may not be removed from office without cause except, until the
third annual meeting of stockholders of Storage Dimensions after the Merger, by
the affirmative vote of at least 80% of the outstanding voting stock of Storage
Dimensions and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock of Storage Dimensions thereafter; and (iv) designate a new Series A
Preferred Stock, of which 2,494,159 shares will be authorized. See "OTHER
AGREEMENTS -- Amendment to Storage Dimensions Certificate of Incorporation."
Directors and Officers. Pursuant to the Reorganization Agreement, James
Lambert, Jason Sauey and W.R. Sauey, currently directors of Artecon, will become
members of the Storage Dimensions Board at the Effective Time. Brian Fitzgerald
and Chong Sup Park, currently directors of Storage Dimensions, will remain on
the Storage Dimensions Board. In addition, James Lambert, Tesfaye Hailemichael
and Dana Kammersgard, currently the President and Chief Executive Officer, Chief
Financial Officer and a director, respectively, of Artecon, will be appointed
President and Chief Executive Officer, Chief Financial Officer and Secretary,
respectively, of Storage Dimensions at the Effective Time. At the Effective
Time, the directors of Artecon, as the surviving corporation in the Merger, will
be W. R. Sauey and James Lambert, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation.
Conversion of Artecon Capital Stock in the Merger. At the Effective Time,
each share of Artecon Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares owned by Storage Dimensions, Artecon,
Merger Sub or any direct or indirect wholly-owned subsidiary of Storage
Dimensions or Artecon and other than Dissenting Shares) will be converted into
the right to receive approximately 2.16 shares of Storage Dimensions Common
Stock. At the Effective Time, each share of Artecon Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Dissenting
Shares) will be converted into the right to receive one share of newly
designated Storage Dimensions Preferred Stock. Cash will be paid to Artecon
shareholders in lieu of any fractional shares of Storage Dimensions Common Stock
to which they would otherwise be entitled. See "THE MERGER -- Fractional Shares"
and "-- Exchange of Certificates."
Artecon Options, Warrants and Rights. Under the terms of the Reorganization
Agreement, each option, warrant or right to purchase Artecon Common Stock
outstanding at the Effective Time, if any, will be converted into an equivalent
option, warrant or right to acquire the number of shares of Storage Dimensions
Common Stock equal to the number of shares of Artecon Common Stock subject to
such Artecon option, warrant or right immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounding down to the nearest whole share (with
cash, less the applicable exercise price, being payable for any fraction of a
share). The per share exercise price under each such Artecon option, warrant or
right shall be adjusted by dividing the per share exercise price under such
Artecon option, warrant or right by the Exchange Ratio and rounding up to the
nearest cent. Each such option, warrant and right issued in the Merger will
continue to have and be subject to the same terms and conditions set forth in
the stock option plan or other agreement
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under which such option, warrant or right was issued, as in effect on the date
of the Reorganization Agreement. See "THE MERGER -- Effect on Artecon Options,
Warrants and Rights."
Fractional Shares. No certificates or scrip representing less than one
share of Storage Dimensions Common Stock shall be issued in connection with the
Merger. In lieu of any such fractional share, each holder of a certificate or
certificates representing Artecon Common Stock who would otherwise have been
entitled to a fraction of a share of Storage Dimensions Common Stock upon
surrender of such certificates for exchange shall be paid in cash upon such
surrender the dollar amount determined by multiplying such fraction by the
closing price per share of Storage Dimensions Common Stock as reported on the
Nasdaq National Market on the Effective Date.
EXCHANGE OF CERTIFICATES
Exchange Agent. Storage Dimensions will supply, or shall cause to be
supplied, to Boston Equiserve, as Exchange Agent, certificates evidencing shares
of Storage Dimensions Common Stock and Storage Dimensions Preferred Stock to be
issued in exchange for outstanding Artecon Common Stock and Artecon Preferred
Stock, respectively, in accordance with the Reorganization Agreement.
Exchange Procedures. At or as soon as practicable after the Effective Time,
the holders of Artecon Common Stock and Artecon Preferred Stock will surrender
their certificates representing Artecon Common Stock or Artecon Preferred Stock
in exchange for certificates evidencing Storage Dimensions Common Stock or
Storage Dimensions Preferred Stock, as the case may be.
Upon surrender of a certificate representing Artecon Common Stock or
Artecon Preferred Stock for cancellation to the Exchange Agent, and such other
customary documents as may be required, the holder of such certificate will be
entitled to receive in exchange therefor: (i) certificates evidencing that
number of whole shares of Storage Dimensions Common Stock or Storage Dimensions
Preferred Stock which such holder has the right to receive in the Merger; (ii)
any dividends or other distributions on the shares of Storage Dimensions Common
Stock or Storage Dimensions Preferred Stock which such holder is entitled to
receive; and (iii) cash in respect of fractional shares of Storage Dimensions
Common Stock, and the certificate representing Artecon Common Stock or Artecon
Preferred Stock so surrendered will be canceled. In the event of a transfer of
ownership of shares of Artecon Common Stock or Artecon Preferred Stock which is
not registered in the transfer records of Artecon as of the Effective Time, the
Merger Consideration, the shares of Storage Dimensions Common Stock and Storage
Dimensions Preferred Stock (and any cash in lieu of fractional shares) to be
issued in exchange therefor, may be issued and paid to a transferee if the
certificate evidencing such shares of Artecon Common Stock or Artecon Preferred
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until so surrendered, each outstanding
certificate that, prior to the Effective Time, represented shares of Artecon
Common Stock or Artecon Preferred Stock will be deemed from and after the
Effective Time, for all corporate purposes (other than payment of dividends or
as described below under "Withholding Rights"), to evidence the ownership of the
number of whole shares of Storage Dimensions Common Stock or Storage Dimensions
Preferred Stock into which such shares of Artecon Common Stock or Artecon
Preferred Stock shall have been so converted.
Withholding Rights. The Exchange Agent will be entitled to deduct and
withhold from the Storage Dimensions Common Stock or Storage Dimensions
Preferred Stock otherwise payable pursuant to the Reorganization Agreement to
any Artecon shareholder such amounts as Storage Dimensions or its designee is
required to deduct and withhold with respect to the making of such payment under
any provision of federal, state, local or foreign tax law. To the extent that
amounts are so withheld by Storage Dimensions or its designee, such withheld
amounts shall be treated for purposes of the Reorganization Agreement as having
been paid to the holder of the shares of Artecon Common Stock or Artecon
Preferred Stock in respect of which such deduction and withholding was made by
Storage Dimensions or its designee.
Lost, Stolen or Destroyed Certificates. In the event any certificates
representing shares of Artecon Common Stock or Artecon Preferred Stock have been
lost, stolen or destroyed, the Exchange Agent will issue shares of Storage
Dimensions Common Stock or Storage Dimensions Preferred Stock in exchange for
such
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lost, stolen or destroyed certificates upon the making of an affidavit of that
fact by the owner of such certificates as indemnity against any claim that may
be made against Storage Dimensions, Merger Sub or its designee with respect to
the certificates alleged to have been lost, stolen or destroyed.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains various customary representations and
warranties made by Artecon, Storage Dimensions and Merger Sub, relating to,
among other things, the following matters: (i) corporate organization, standing,
qualification, approvals and similar matters; (ii) force and effect of charter
and bylaws; (iii) the capital structure of each company; (iv) the fair
presentation of the financial statements in accordance with generally accepted
accounting principles; (v) conduct of business in the ordinary course and the
absence of any material adverse changes in each company; (vi) the maintenance of
good and valid title to all assets purported to be owned by each company; (vii)
the accurate representation of all accounts receivable, loans and advances in
documents furnished in connection with the Reorganization Agreement; (viii) the
adequacy of leased real property and other assets owned or leased for their
contemplated uses; (ix) ownership, rights to use and absence of violations or
claims or restrictions with respect to intellectual property; (x) the delivery
of and the absence of breach in any material agreement; (xi) the absence of
undisclosed liabilities; (xii) compliance with legal requirements; (xiii)
possession of all governmental authorization for conduct of business in the
ordinary course; (xiv) payment of taxes and certain other tax matters; (xv)
employee and labor matters including maintenance of certain employee benefits;
(xvi) compliance with environmental laws; (xvii) maintenance of adequate
insurance; (xviii) the absence of certain related party transactions; (xix) the
absence of pending or threatened litigation; (xx) proper authority of each
company to enter into the Reorganization Agreement; (xxi) the noncontravention
by the Reorganization Agreement of each company's charter documents, applicable
governmental and legal requirements, and material contracts to which a company
is a party, and the delivery of all necessary consents to the Reorganization
Agreement; (xxii) obtaining the vote required to approve the Reorganization
Agreement, the Merger and the transactions contemplated thereby; (xxiii) the
execution of certain actions by the respective Boards of Directors; (xxiv) full
disclosure; (xxv) the absence of brokers', finders' and investment bankers' fees
(other than the fees and expenses owed to Salomon Smith Barney); and (xxvi) in
the case of Storage Dimensions and Merger Sub, the receipt of the opinion of
Salomon Smith Barney, financial advisor to Storage Dimensions as to the fairness
of the Merger Consideration to Storage Dimensions from a financial point of
view.
CONDUCT OF BUSINESS PENDING THE MERGER
Operation of Artecon's Business Prior to the Merger. Pursuant to the
Reorganization Agreement, Artecon has agreed that, from the date of the
execution of the Reorganization Agreement until the Effective Time (the
"Pre-Closing Period"), it will provide Storage Dimensions with reasonable access
to Artecon's personnel, assets, documents and other information relating to it.
Artecon has also agreed that, during the Pre-Closing Period, it will not:
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities except for repurchases from employees of unvested shares upon
termination of employment;
(b) sell, issue, or grant any capital stock or other security, any
option, call, warrant or right to acquire any capital stock or other
security, or any instrument convertible into or exchangeable for any
capital stock or other security (except that (1) Artecon may issue Artecon
Common Stock upon the valid exercise of stock options outstanding as of the
date of the Reorganization Agreement or upon conversion of convertible
securities outstanding as of such date and (2) Artecon may continue to
grant stock options in the ordinary course and consistent with past
practice, provided that any such options shall be subject to Artecon's
standard vesting schedule (but such options shall not vest more than 25%
per year following the grant thereof) and in no event shall any such
options contain any provisions pursuant to which the vesting of such
options may or would be accelerated in any respect upon any change in
control transaction or any other transaction, including without limitation
the Merger, or any similar provision);
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(c) amend or waive any of its rights under, or permit the acceleration
of vesting under any provision of any agreement evidencing any outstanding
Artecon option or warrant;
(d) amend or permit the adoption of any amendment to its articles of
incorporation or bylaws, or effect or permit itself or any of its
subsidiaries to become a party to any merger, consolidation, business
combination, recapitalization, stock split, reverse stock split or similar
transaction;
(e) form any subsidiary or acquire any equity interest in any other
entity;
(f) make any capital expenditure exceeding $300,000 in the aggregate
during the Pre-Closing Period;
(g) enter into or become bound by, or permit any of the assets owned
or used by it to become bound by, any material contract except in the
ordinary course of business, or amend or prematurely terminate, or waive
any material right or remedy under, any material contract;
(h) acquire, lease or license any asset to or from any third party;
(i) lend money to any third party, or incur or guarantee any
indebtedness (except in the ordinary course of business under existing bank
lines of credit);
(j) pay any bonus or make any profit-sharing or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees, other than in the ordinary course of business and
solely with respect to non-officers and non-directors, or establish, adopt
or amend any employee benefit plan;
(k) change any of its methods of accounting or accounting practices in
any respect;
(l) make any tax election;
(m) commence or settle any legal proceeding not disclosed in Artecon's
disclosure schedule;
(n) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with its
practices; or
(o) agree or commit to take any action described in the clauses "(a)"
through "(n)" above.
In addition, Artecon has agreed on behalf of itself and its subsidiaries,
that it will (i) conduct its business and operations in the ordinary course and
in substantially the same manner as such business and operations have been
conducted prior to the date of the Reorganization Agreement; (ii) use reasonable
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and maintain its relations and
goodwill with all suppliers, customers, landlords, creditors, employees and
other persons having business relationships with Artecon or any subsidiary;
(iii) keep in full force all insurance policies in place as of the date of the
Reorganization Agreement; and (iv) cause its officers to report regularly to
Storage Dimensions concerning the status of Artecon's and its subsidiaries'
businesses, taken as a whole.
Operation of Storage Dimensions' Business Prior to the Merger. Pursuant to
the Reorganization Agreement, Storage Dimensions has agreed that during the
Pre-Closing Period, it will provide Artecon with reasonable access to Storage
Dimensions' personnel, assets, documents and other information relating to it.
Storage Dimensions has also agreed that, during the Pre-Closing Period, it will
not:
(a) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities;
(b) without the written consent of Artecon, sell, issue or authorize
the issuance of (i) any capital stock or other security, (ii) any option,
call, warrant or right to acquire, or relating to, any capital stock or
other security, or (iii) any instrument convertible into or exchangeable
for any capital stock or other security (except that Storage Dimensions may
issue Storage Dimensions Common Stock upon the exercise of options
outstanding as of the date of the Reorganization Agreement and sell shares
of Storage
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Dimensions Common Stock under its 1996 Employee Stock Purchase Plan in
accordance with the terms of such plan);
(c) amend or waive any of its rights under, or (except pursuant to the
express terms of Storage Dimensions options outstanding on the date of the
Reorganization Agreement and listed on Storage Dimensions' disclosure
schedule which provide for automatic acceleration upon consummation of the
Merger) permit the acceleration of vesting under (i) any provision of its
stock plans, (ii) any provision of any agreement evidencing any outstanding
option or warrant, or (iii) any provision of any restricted stock purchase
agreement;
(d) amend or permit the adoption of any amendment to its certificate
of incorporation or bylaws, or effect or permit itself or any of its
subsidiaries to become a party to any acquisition transaction,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(e) form any subsidiary or acquire any equity interest or other
interest in any other entity;
(f) make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made by Storage
Dimensions or any subsidiary during the Pre-Closing Period, do not exceed
$100,000 in the aggregate;
(g) enter into or become bound by, or permit any of the assets owned
or used by it to become bound by, any material contract except in the
ordinary course of business, or amend or prematurely terminate, or waive
any material right or remedy under, any material contract;
(h) (1) acquire, lease or license any material right or other material
asset from any other person, (2) sell or otherwise dispose of, or lease or
license, any material right or other material asset to any other person, or
(3) waive or relinquish any material right, other than in the ordinary
course of business and except for immaterial assets acquired, leased,
licensed or disposed of by Storage Dimensions pursuant to contracts that
are not material contracts;
(i) lend money to any person, or incur or guarantee any indebtedness,
except for routine advances of expenses to employees in the ordinary course
of business and except that Storage Dimensions and each subsidiary may make
routine borrowings in the ordinary course of business under its existing
bank lines of credit disclosed in the filings made by Storage Dimensions
with the Commission;
(j) pay any bonus or make any profit-sharing or similar payment to, or
increase the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees other than in the ordinary course of business and
solely with respect to non-officers and non-directors, or establish, adopt
or amend any employee benefit plan;
(k) materially change its accounting methods or practices in any
respect;
(l) make any tax election;
(m) commence or settle any legal proceeding;
(n) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with its
past practices; and
(o) agree or commit to take any action described in clauses "(a)"
through "(n)" above.
In addition, Storage Dimensions has agreed, on behalf of itself and its
subsidiaries, that it will (i) conduct its business and operations in the
ordinary course and in substantially the same manner as such business and
operations have been conducted prior to the date of the Reorganization
Agreement; (ii) use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and employees
and maintain its relations and goodwill with all suppliers, customers,
landlords, creditors, employees and other persons having business relationships
with Storage Dimensions or any subsidiary; (iii) keep in full force all
insurance policies in place as of the date of the Reorganization Agreement; and
(iv) cause its officers to report regularly to Artecon concerning the status of
Storage Dimensions and its subsidiaries' businesses, taken as a whole.
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ADDITIONAL COVENANTS
The Reorganization Agreement also contains certain additional covenants of
the parties, including covenants relating to: (i) the preparation and filing of
notices and filings, and obtaining approvals, consents, ratifications,
permissions, waivers and authorizations; (ii) press releases, public statements
and other disclosures regarding the Merger, the Reorganization Agreement and
transactions contemplated thereby; (iii) the use of reasonable efforts to
satisfy all conditions precedent to effect the Merger; (iv) the preparation and
filing of the Registration Statement and Joint Proxy Statement/Prospectus by
each party; (v) the filing by Storage Dimensions of all filings with state
regulatory authorities and the National Association of Securities Dealers, Inc.
necessary to ensure that Storage Dimensions Common Stock complies with the
securities laws of every jurisdiction; (vi) the amendment by Storage Dimensions
of its employee stock purchase plan to allow the participation of eligible
Artecon employees within five (5) days following the closing of the Merger;
(vii) the use of reasonable efforts to take all necessary actions to consummate
the Merger; and (viii) regulatory approvals, including the preparation and
filing of notifications required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to the Reorganization Agreement, Storage Dimensions has agreed
that, from and after the consummation of the Merger, it will fulfill and honor
in all material respects the obligations of Storage Dimensions and Artecon
pursuant to (i) each indemnification agreement in effect at such time between
Storage Dimensions and each person who is or was a director or officer of
Storage Dimensions and Artecon at or prior to the Effective Time and (ii) any
indemnification provisions under Storage Dimensions' Certificate of
Incorporation or Artecon's Articles of Incorporation or either company's Bylaws,
as each was in effect on the date of the Reorganization Agreement (each person
to be indemnified pursuant to this Reorganization Agreement is referred to
individually as an "Indemnified Party"). Pursuant to the Reorganization
Agreement, Storage Dimensions has also agreed that, following the Merger, its
charter documents will continue to contain the provisions with respect to
indemnification and exculpation from liability set forth in such documents as of
the date of the Reorganization Agreement and such provisions will not be
amended, repealed or otherwise modified for a period of six years after the
Effective Time in any manner that would adversely affect the rights thereunder
of any Indemnified Party.
NO SOLICITATION
Pursuant to the Reorganization Agreement, each of Storage Dimensions and
Artecon has agreed that it will not directly or indirectly, and will not
authorize or permit its representative directly or indirectly to: (a) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal (as defined below) or take any action that could reasonably
be expected to lead to an Acquisition Proposal, (b) furnish any information
regarding itself to any third party in connection with or in response to an
Acquisition Proposal, (c) continue or engage in discussions or negotiations with
any third party with respect to any Acquisition Proposal, (d) approve, endorse
or recommend any Acquisition Proposal or (e) enter into any letter of intent or
similar document or any contract contemplating or otherwise relating to any
Acquisition Transaction. An "Acquisition Proposal" means any offer or proposal
(other than an offer or proposal by Storage Dimensions or Artecon) contemplating
or otherwise relating to any Artecon or Storage Dimensions Acquisition
Transaction. An "Acquisition Transaction" means any transaction or series of
related transaction involving, (i) other than the transaction contemplated by
the Reorganization Agreement, any merger, consolidation, share exchange,
business combination, issuance of securities, acquisition of securities, tender
offer, exchange offer or other similar transaction; (ii) any sale, lease
exchange, transfer or other disposition of the assets of Storage Dimensions, any
Storage Dimensions subsidiary, Artecon or any Artecon subsidiary constituting
more than 10% of the consolidated assets of Storage Dimensions or Artecon or
accounting for more than 10% of the consolidated revenues of Storage Dimensions
or Artecon in any one transaction or in a series of related transactions; (iii)
any offer to purchase, tender offer, exchange offer or any similar transaction
or series of related transactions made by any Person involving more than 10% of
the outstanding shares of the capital stock of Storage Dimensions or Artecon or
any shares of the capital stock of any Storage Dimensions
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subsidiary or Artecon subsidiary; (iv) any merger, consolidation, business
combination, share exchange, reorganization or other similar transaction or
series of related transactions involving Storage Dimensions or Artecon or any
Storage Dimensions subsidiary or Artecon subsidiary; and (v) any assignment,
transfer or licensing or other disposition of, in whole or in part, the Storage
Dimensions or Artecon Proprietary Assets (as defined in the Reorganization
Agreement), other than in the ordinary course of business.
Notwithstanding the foregoing, but subject to the restrictions on the
conduct of Storage Dimensions' and Artecon's respective businesses described
above, prior to the approval of the Merger by the Storage Dimensions
stockholders or the Artecon shareholders, Storage Dimensions or Artecon may
furnish nonpublic information regarding the parties to, or enter into
discussions and participate in negotiations with, any third party in response to
an Acquisition Proposal that is submitted by such third party if (A) the Board
of such company concludes in good faith, after consultation with outside legal
counsel, that such action is required in order for the Board to comply with its
fiduciary obligations to such company's securityholders under applicable law,
(B) prior to furnishing any such nonpublic information to, or entering into
discussions or negotiations with, such third party, such company gives the other
written notice of the identity of such third party and of such company's
intention to furnish nonpublic information to, or enter into discussions or
negotiations with, such third party, and such company receives from such third
party an executed confidentiality agreement containing customary and reasonable
limitations on the use and disclosure of all nonpublic written and oral
information furnished to such third party by or on behalf of such company, (C)
prior to furnishing any such nonpublic information to such person, such company
furnishes such nonpublic information to the other company (to the extent such
nonpublic information has not been previously furnished to the other company),
and (D) neither such company nor any representative of such company violates any
of the non-solicitation provisions set forth in the Reorganization Agreement.
Storage Dimensions and Artecon also agreed in the Reorganization Agreement that
any violation of any of the above restrictions by any representative of Artecon,
whether or not such representative is purporting to act on behalf of Artecon,
will be deemed to constitute a breach of the Reorganization Agreement. In
addition, each of Artecon and Storage Dimensions has agreed to promptly advise
the other of any Acquisition Proposal made during the Pre-Closing Period and of
any such Acquisition Proposal and any modification or proposed modification
thereto and immediately cease and cause to be terminated any existing
discussions with any person that relate to any Acquisition Proposal.
CONDITIONS TO THE MERGER
Storage Dimensions and Merger Sub. The obligations of Storage Dimensions
and Merger Sub to effect the Merger and otherwise consummate the transactions
contemplated by the Reorganization Agreement are subject to the satisfaction, at
or prior to the closing of the Merger, of each of the following conditions: (i)
the representations and warranties of Artecon contained in the Reorganization
Agreement are accurate in all material respects as of the date of the
Reorganization Agreement, (ii) each material covenant or obligation that Artecon
is required to comply with or to perform at or prior to the consummation of the
Merger shall have been complied with and performed in all material respects;
(iii) the Registration Statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been issued
by the Commission with respect to the Registration Statement; (iv) the issuance
of the Storage Dimensions Common Stock in the Merger, the Reorganization
Agreement, the Merger and the amendment of Storage Dimensions' Certificate of
Incorporation shall have been adopted and approved by the Storage Dimensions
stockholders, and the Reorganization Agreement and the Merger shall have been
adopted and approved by the Artecon shareholders; (v) Storage Dimensions shall
have received (A) a legal opinion of Cooley Godward with respect to certain
matters and (B) a closing certificate executed by Artecon's Chief Executive
Officer evidencing compliance with certain conditions set forth in the
Reorganization Agreement; (vi) Artecon shall have received a legal opinion of
Cooley Godward LLP to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (vii) the
Agreement for Repurchase of Preferred Shares of Stock of Artecon, dated December
22, 1994, by and among Artecon, Flambeau Corp., Flambeau Products Corp., Seats,
Inc. and W.R. Sauey shall have been terminated; (viii) no injunction or other
order preventing the consummation of the Merger shall have been issued by any
court, and there shall not be any legal requirement applicable to the Merger
that makes consummation of the Merger illegal; (ix) if applicable, the waiting
period applicable to the consummation of the Merger under the HSR
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Act shall have expired or been terminated; and (x) Artecon and Storage
Dimensions shall have obtained all consents as required pursuant to the
Reorganization Agreement.
Artecon. The obligations of Artecon to effect the Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction, at or prior to the Closing, of the following
conditions: (i) the representations and warranties of Storage Dimensions and
Merger Sub contained in the Reorganization Agreement shall have been accurate in
all material respects as of the date of the Reorganization Agreement; (ii) each
material covenant or obligation that Storage Dimensions and Merger Sub are
required to comply with or to perform at or prior to the consummation of the
Merger shall have been complied with and performed in all material respects;
(iii) the Registration Statement shall have become effective in accordance with
the provisions of the Securities Act, and no stop order shall have been issued
by the Commission with respect to the Registration Statement; (iv) the issuance
of Storage Dimensions Common Stock in the Merger, the Reorganization Agreement,
the Merger and the amendment of Storage Dimensions' Certificate of Incorporation
shall have been adopted and approved by the Storage Dimensions stockholders, and
the Reorganization Agreement and the Merger shall have been adopted and approved
by the Artecon shareholders; (v) Storage Dimensions shall have received a legal
opinion of Wilson Sonsini to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (vi) Artecon
shall have received (A) a closing certificate executed by the Chief Executive
Officer of Storage Dimensions evidencing compliance with certain conditions set
forth in the Reorganization Agreement, (B) the written resignations of certain
directors of Storage Dimensions, effective as of the Effective Time and (C) a
legal opinion of Wilson Sonsini with respect to certain matters; (vii) the
shares of Storage Dimensions Common Stock to be issued in the Merger shall have
been approved for listing on the Nasdaq National Market; (viii) if applicable,
the waiting period applicable to the consummation of the Merger under the HSR
Act shall have expired or been terminated; (ix) Artecon and Storage Dimensions
shall have obtained all consents as required pursuant to the Reorganization
Agreement; and (x) no injunction or other order preventing the consummation of
the Merger shall have been issued by any court, and there shall not be any legal
requirement applicable to the Merger that makes consummation of the Merger
illegal.
It is not a condition to the obligations of either party that the
representations and warranties of the other made in the Reorganization Agreement
continue to be true as of the closing of the Merger. See "RISK
FACTORS -- Certain Terms of the Reorganization Agreement."
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time, whether before or after the approval of the Merger
by the stockholders of Storage Dimensions or the shareholders of Artecon: (i) by
written mutual consent of Storage Dimensions and Artecon; (ii) by either Storage
Dimensions or Artecon if the Merger is not consummated by May 31, 1998, (unless
the failure to consummate the Merger is attributable to a failure on the part of
the party seeking to terminate the Reorganization Agreement to perform any
material obligation required to be performed by such party at or prior to the
Effective Time); (iii) by either Storage Dimensions or Artecon if a court of
competent jurisdiction or other governmental body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger; (iv) by either Storage Dimensions or Artecon if the Artecon Special
Meeting has been held and Artecon's shareholders have not approved the Merger at
the Artecon Special Meeting (provided, however, that the right to terminate the
Reorganization Agreement as provided in this clause "(iv)" will not be available
to Artecon where the failure to obtain the required Artecon shareholder approval
shall have been caused by the failure on the part of Artecon to perform any
material obligation required to have been performed by Artecon under the
Reorganization Agreement; (v) by either Storage Dimensions or Artecon if the
Storage Dimensions Special Meeting has been held and the Storage Dimensions
stockholders have not approved the Business Combination Proposal at the Storage
Dimensions Special Meeting (provided, however, that the right to terminate the
Reorganization Agreement as provided in this clause "(v)" will not be available
to Storage Dimensions where the failure to obtain the required Storage
Dimensions stockholder approval shall have been caused by the failure on the
part of Storage Dimensions to perform any material obligation required
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to have been performed by Storage Dimensions under the Reorganization
Agreement); (vi) at any time prior to approval of the Merger and the
Reorganization Agreement by the Storage Dimensions stockholders and the Artecon
shareholders, by Artecon if a Storage Dimensions Triggering Event (as defined
below) shall have occurred or by Storage Dimensions if an Artecon Triggering
Event (as defined below) shall have occurred; (vii) by Storage Dimensions if any
of Artecon's covenants contained in the Reorganization Agreement shall have been
breached in any material respect; provided, however, that if a breach of a
covenant by Artecon is curable by Artecon and Artecon is continuing to exercise
all reasonable efforts to cure such inaccuracy or breach, and provided further
that Storage Dimensions may not terminate the Reorganization Agreement as
provided in this clause "(vii)" if it shall have materially breached the
Reorganization Agreement; or (viii) by Artecon if any of Storage Dimensions'
covenants contained in the Reorganization Agreement shall have been breached in
any material respect; provided, however, that if a breach of a covenant by
Storage Dimensions is curable by Storage Dimensions and Storage Dimensions is
continuing to exercise all reasonable efforts to cure such inaccuracy or breach,
and provided further that Artecon may not terminate the Reorganization Agreement
as provided in this clause "(viii)" if it shall have materially breached the
Reorganization Agreement.
An "Artecon Triggering Event" shall be deemed to have occurred if: (i) the
Artecon Board shall have failed to recommend, or shall for any reason have
withdrawn or shall have amended or modified in a manner adverse to Storage
Dimensions its unanimous recommendation in favor of, the Merger or approval or
adoption of this Agreement; (ii) Artecon shall have failed to include in the
Joint Proxy Statement/Prospectus the unanimous recommendation of the Artecon
Board in favor of approval and adoption of the Reorganization Agreement and the
Merger; (iii) the Artecon Board shall have approved, endorsed or recommended any
Acquisition Proposal; (iv) Artecon shall have entered into any letter of intent
or similar document or any agreement relating to any Acquisition Proposal; (v)
Artecon shall have failed to hold the Artecon Special Meeting as promptly as
practicable and in any event within 45 days after the Joint Proxy Statement/
Prospectus was filed with the Commission; (vi) a tender or exchange offer
relating to securities of Artecon shall have been commenced and Artecon shall
not have sent to its securityholders, within five business days after the
commencement of such tender or exchange offer, a statement disclosing that
Artecon recommends rejection of such tender or exchange offer; (vii) an
Acquisition Proposal is publicly announced, and Artecon (A) fails to issue a
press release announcing its opposition to such Acquisition Proposal within five
business days after such Acquisition Proposal is announced or (B) otherwise
fails to actively oppose such Acquisition Proposal; or (viii) a person or group
(as defined in the Exchange Act and the rules promulgated thereunder) shall have
acquired more than fifty percent (50%) of Artecon's voting securities (excluding
persons and groups that, as of the date of the Reorganization Agreement, held
more than fifty percent (50%) of Artecon's voting securities or that may be
deemed to have acquired such percentage upon execution of the Artecon Voting
Agreements).
A "Storage Dimensions Triggering Event" shall be deemed to have occurred
if: (i) the Storage Dimensions Board shall have failed to recommend, or shall
for any reason have withdrawn or shall have amended or modified in a manner
adverse to Artecon its unanimous recommendation in favor of, the Merger or
approval or adoption of the Reorganization Agreement; (ii) Storage Dimensions
shall have failed to include in the Joint Proxy Statement/Prospectus the
unanimous recommendation of the Storage Dimensions Board in favor of approval
and adoption of the Reorganization Agreement and the Merger; (iii) the Storage
Dimensions Board shall have approved, endorsed or recommended any Acquisition
Proposal; (iv) Storage Dimensions shall have entered into any letter of intent
or similar document or any agreement relating to any Acquisition Proposal; (v)
Storage Dimensions shall have failed to hold the Storage Dimensions Special
Meeting as promptly as practicable and in any event within 45 days after the
Joint Proxy Statement/ Prospectus was filed with the Commission; (vi) a tender
or exchange offer relating to securities of Storage Dimensions shall have been
commenced and Storage Dimensions shall not have sent to its securityholders,
within five business days after the commencement of such tender or exchange
offer, a statement disclosing that Storage Dimensions recommends rejection of
such tender or exchange offer; (vii) an Acquisition Proposal is publicly
announced, and Storage Dimensions (A) fails to issue a press release announcing
its opposition to such Acquisition Proposal within five business days after such
Acquisition Proposal is announced or (B) otherwise fails to actively oppose such
Acquisition Proposal; or (viii) a person or group (as defined in
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the Exchange Act and the rules promulgated thereunder) shall have acquired more
than fifty percent (50%) of Storage Dimensions' voting securities (excluding
persons and groups that, as of the date of the Reorganization Agreement, held
more than fifty percent (50%) of Storage Dimensions' voting securities or that
may be deemed to have acquired such percentage upon execution of the Storage
Dimensions Voting Agreements).
TERMINATION FEES
Storage Dimensions has agreed that if the Reorganization Agreement is
terminated (i) by Storage Dimensions or Artecon as a result of the Storage
Dimensions stockholders' failure to approve the Merger, or (ii) by Artecon
following a Storage Dimensions Triggering Event, each as described above, then
Storage Dimensions will pay to Artecon, in cash, a nonrefundable fee in the
amount of $1,500,000, along with all of Artecon's out-of-pocket costs through
the date of termination.
Artecon has agreed that if the Reorganization Agreement is terminated (i)
by Storage Dimensions or Artecon as a result of the Artecon shareholders'
failure to approve the Merger, or (ii) by Storage Dimensions following an
Artecon Triggering Event, each as described above, then Artecon will pay to
Storage Dimensions, in cash, a nonrefundable fee in the amount of $1,500,000,
along with all of Storage Dimensions' out-of-pocket costs through the date of
termination.
OTHER FEES AND EXPENSES
Except as set forth above, each party to the Reorganization Agreement shall
bear and pay all fees, costs, and expenses incurred by such party in connection
with the Merger.
AMENDMENT; WAIVER
The Reorganization Agreement may be amended only by an instrument in
writing signed by each of Storage Dimensions, Merger Sub and Artecon.
No delay or failure on the part of any person to exercise any power, right,
privilege or remedy under the Reorganization Agreement will operate as a waiver
of such power, right, privilege or remedy, and no single or partial exercise of
any such power, right, privilege or remedy will preclude any other or further
exercise of any other power, right, privilege or remedy.
OTHER AGREEMENTS
ARTECON VOTING AGREEMENTS
Pursuant to certain Voting Agreements entered into in favor of Storage
Dimensions, W.R. Sauey, James Lambert, Flambeau Corp., Flambeau Products Corp.,
Dana Kammersgard and Seats, Inc. (collectively, such Artecon shareholders are
referred to as the "Artecon Subject Shareholders" and the approximately
4,024,296 shares of Artecon Common Stock and 2,496,659 shares of Artecon
Preferred Stock held by the Artecon Subject Shareholders in the aggregate are
referred to as the "Artecon Subject Shares"), who hold in the aggregate
approximately 66.6% of the outstanding Artecon Common Stock and 99.2% of the
outstanding Artecon Preferred Stock, have agreed that, prior to the earlier of
the valid termination of the Reorganization Agreement or the Effective Time (the
"Expiration Date"), they will vote the Artecon Subject Shares in favor of: (i)
the Merger; (ii) the execution and delivery by Artecon of the Reorganization
Agreement; (iii) the adoption and approval of the terms thereof; and (iv) each
of the other actions contemplated by the Reorganization Agreement and any action
required in furtherance thereof. The Artecon Subject Shareholders have also
agreed that prior to the Expiration Date they will not enter into any agreement
or understanding with any person to vote or give instructions with respect to
the Artecon Subject Shares in any manner inconsistent with the Voting Agreement.
In addition, under certain circumstances, the Artecon Subject Shareholders have
agreed to vote against any action or agreement that would result in a breach of
any representation, warranty,
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covenant or obligation of Artecon in the Reorganization Agreement and against
competing acquisition proposals to the Merger.
The Artecon Subject Shareholders have also delivered to Storage Dimensions
an irrevocable proxy with respect to matters covered by the Voting Agreement and
have agreed to waive any rights of appraisal and any dissenters' rights that
they may have in connection with the Merger. The Artecon Subject Shareholders
have further agreed that during the period commencing on the date of the Voting
Agreement and ending on the Expiration Date, they will not: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
competing acquisition proposal or take any action that could reasonably be
expected to lead to such an acquisition proposal; (ii) furnish any information
regarding Artecon to any person in connection with or in response to such an
acquisition proposal; (iii) engage in discussions or negotiations with any
person with respect to such an acquisition proposal; (iv) approve, endorse or
recommend such an acquisition proposal; or (v) enter into any letter of intent
or similar document or any contract contemplating or otherwise relating to such
an acquisition transaction. A copy of the form of Artecon Voting Agreement is
attached hereto as Annex E.
STORAGE DIMENSIONS VOTING AGREEMENTS
Pursuant to certain Voting Agreements entered into in favor of Artecon, CP
Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 48, Capital Partners, Inc.,
FGS, Inc. and Maxtor Corporation (collectively, such Storage Dimensions
stockholders are referred to as the "Storage Dimensions Subject Stockholders"
and the approximately 4,500,623 shares of Storage Dimensions Common Stock held
by the Storage Dimensions Subject Stockholders in the aggregate are referred to
as the "Storage Dimensions Subject Shares"), who hold in the aggregate
approximately 56.1% of the outstanding Storage Dimensions Common Stock, have
agreed that, prior to the Expiration Date, they will vote the Storage Dimensions
Subject Shares in favor of: (i) the Merger and the Certificate of Incorporation
Amendments; (ii) the execution and delivery by Storage Dimensions of the
Reorganization Agreement; (iii) the adoption and approval of the terms thereof;
and (iv) each of the other actions contemplated by the Reorganization Agreement
and any action required in furtherance thereof. The Storage Dimensions Subject
Stockholders have also agreed that prior to the Expiration Date they will not
enter into any agreement or understanding with any person to vote or give
instructions with respect to the Storage Dimensions Subject Shares in any manner
inconsistent with the Voting Agreement. In addition, under certain
circumstances, the Storage Dimensions Stockholders have agreed to vote against
any action or agreement that would result in a breach of any representation,
warranty, covenant or obligation of Storage Dimensions in the Reorganization
Agreement and against competing acquisition proposals to the Merger.
The Storage Dimensions Subject stockholders have also delivered to Artecon
an irrevocable proxy with respect to matters covered by the Voting Agreements
and have agreed to waive any rights of appraisal and any dissenters' rights that
they may have in connection with the Merger. The Storage Dimensions Subject \
Stockholders have further agreed that during the period commencing on the date
of the Voting Agreement and ending on the Expiration Date, they will not (i)
solicit, initiate, encourage or induce the making, submission or announcement of
any competing acquisition proposal or take any action that could reasonably be
expected to lead to such an acquisition proposal, (ii) furnish any information
regarding Storage Dimensions to any person in connection with or in response to
such an acquisition proposal, (iii) engage in discussions or negotiations with
any person with respect to such an acquisition proposal, (iv) approve, endorse
or recommend such an acquisition proposal or (v) enter into any letter of intent
or similar document or any contract contemplating or otherwise relating to such
an acquisition transaction. A copy of the form of Storage Dimensions Voting
Agreement is attached hereto as Annex F.
AFFILIATE AGREEMENTS
Each Artecon shareholder who may be deemed to be an affiliate of Storage
Dimensions as a result of the Merger, as such term is defined in Rule 145 of the
Act (the "Affiliate"), will execute an agreement (the "Affiliate Agreement")
that prohibits the sale, transfer or other disposition of Storage Dimensions
Common Stock received by such stockholder of Artecon unless at such time: (i)
such sale, transfer or other disposition
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is effected pursuant to an effective registration statement under the Act; (ii)
such sale, transfer or other disposition is made in conformity with the
requirements of Rule 145 promulgated under the Act; (iii) counsel reasonably
satisfactory to Storage Dimensions shall have advised Storage Dimensions in a
written opinion letter (satisfactory in form and content to Storage Dimensions),
upon which Storage Dimensions may rely, that such sale, transfer or other
disposition will be exempt from registration under the Act; or (iv) an
authorized representative of the Commission shall have rendered written advice
to the Affiliate to the effect that the Commission would take no action, or that
the staff of the Commission would not recommend that the Commission take action,
with respect to such sale, transfer or other disposition, and a copy of such
written advice and all other related communications with the Commission shall
have been delivered to Storage Dimensions.
STANDSTILL AGREEMENT
Pursuant to a Standstill Agreement entered into concurrently with the
Reorganization Agreement, among Artecon, Storage Dimensions and certain
stockholders of Storage Dimensions holding, in the aggregate, 2,900,623 shares
of Storage Dimensions Common Stock, (the "Capital Partners Stockholders"), the
Capital Partners Stockholders have agreed until the earlier of five years from
the closing of the Merger or the date when the Capital Partners Stockholders
hold less than 5% of the outstanding voting stock of Storage Dimensions, they
will not, among other things; (i) acquire any additional shares of Storage
Dimensions capital stock; (ii) solicit proxies to initiate any stockholder
proposal or tender offer; or (iii) enter into a voting agreement (other than the
Storage Dimensions Voting Agreements entered into in connection with the
Reorganization Agreement). Notwithstanding the foregoing, the Capital Partners
Stockholders may acquire that number of shares of Storage Dimensions capital
stock equal to that amount necessary for the Capital Partners Stockholders to
maintain their percentage ownership interest of Storage Dimensions capital stock
held by such parties immediately following the Effective Time.
AMENDMENT TO STORAGE DIMENSIONS CERTIFICATE OF INCORPORATION
In connection with the Merger, Storage Dimensions will amend its
Certificate of Incorporation in order to: (i) change its name to "Artecon, Inc."
and (ii) designate a new Series A Preferred Stock, of which 2,494,159 shares
will be authorized. In addition, Storage Dimensions stockholders are being asked
to approve amendments to the Storage Dimensions Certificate of Incorporation to
(i) provide for a classified Board of Directors whereby the directors will be
separated into three classes, with members of each class serving for a three
year term; and (ii) provide that a director may not be removed from office
without cause except, until the third annual meeting of stockholders of Storage
Dimensions following the Merger, by the affirmative vote of at least 80% of the
outstanding voting stock of Storage Dimensions and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock of Storage Dimensions thereafter.
The following is a summary of the provisions of the Certificate of Amendment to
the Storage Dimensions Certificate of Incorporation (the "Certificate of
Amendment"), as proposed to be amended as a result of the Merger and the
Certificate of Incorporation Amendments. Such summary is qualified in its
entirety by the Certificate of Amendment attached as Annex A to this Joint Proxy
Statement/Prospectus and is incorporated by reference herein.
Name Change. Pursuant to the Certificate of Amendment, effective upon the
Effective Time, Storage Dimensions will change its name to "Artecon, Inc."
Classified Board. Under the terms of the Certificate of Amendment,
following the Merger, the Storage Dimensions Board will be divided into three
classes, serving staggered terms of three years. Jason Sauey and Chong Sup Park
will serve as Class II directors, whose term will expire at the second Annual
Meeting following the Merger. W.R. Sauey, James Lambert and Brian Fitzgerald
will serve as Class III directors, whose term will expire at the third Annual
Meeting following the Merger. Two additional directors chosen by the Storage
Dimensions Board and the Artecon Board together, either before the Merger or
shortly thereafter, will serve as Class I directors, whose term will expire at
the first Annual Meeting following the Merger. Officers serve at the discretion
of Storage Dimensions' Board of Directors. See "MANAGEMENT OF STORAGE DIMENSIONS
AFTER THE MERGER."
Removal of Directors. A director may not be removed from office without
cause under the Certificate of Amendment except, until the third annual meeting
of stockholders of Storage Dimensions following the
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Merger, by the affirmative vote of at least 80% of the outstanding voting stock
of Storage Dimensions and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock of Storage Dimensions thereafter.
Storage Dimensions Preferred Stock. The Certificate of Amendment designates
a new Series A Preferred Stock of Storage Dimensions consisting of 2,494,159
shares (the "Series A Stock"). Each share of Series A Stock shall be
convertible, at the option of the holder, at any time after January 1, 1999,
into such number of fully paid and nonassessable shares of Storage Dimensions
Common Stock as is determined by dividing two dollars ($2.00) by the greater of
(a) $6.00 and (b) the average of the closing price of the Storage Dimensions
Common Stock during the 20 trading days ending on the date that is two days
prior to the date on which conversion is requested. Each share of Series A Stock
shall be converted automatically into fully paid and nonassessable shares of
Storage Dimensions Common Stock on the earlier of (a) the close of business on
the day on which the Storage Dimensions Board shall have duly and unanimously
adopted a resolution requesting such conversion, in which case the number of
shares of Storage Dimensions Common Stock issuable upon conversion of the Series
A Stock shall be determined by dividing two dollars ($2.00) by the average of
the closing price of the Storage Dimensions Common Stock during the 20 trading
days ending on the date that is two days prior to the date on which the Storage
Dimensions Board requests conversion; and (b) at the close of business on the
first business day following the date on which the average of the closing per
share sales price of the Storage Dimensions Common Stock as reported on the
Nasdaq National Market (or any other U.S. securities market or exchange on which
the Storage Dimensions Common Stock may trade) for 20 consecutive trading days
equals or exceeds nine dollars ($9.00) per share (the "Average Price"), in which
case the number of shares of Storage Dimensions Common Stock issuable upon
conversion of each share of Series A Stock shall be determined by dividing two
dollars ($2.00) by the Average Price. The maximum number of shares of Storage
Dimensions Common Stock issuable upon conversion of the Series A Stock being
issued in the Merger is approximately 831,000. Following the amendment of its
Certificate of Incorporation, Storage Dimensions will continue to have 7,505,841
shares of undesignated Preferred Stock. The Board of Directors has the authority
to issue the shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
unissued series of Preferred Stock and to fix the number of shares constituting
any series and the designations of such series, without any further vote or
action by the stockholders. Although it presently has no intention to do so, the
Storage Dimensions Board of Directors, without stockholder approval, may issue
additional Storage Dimensions Preferred Stock with voting and conversion rights
which could adversely affect the voting power of the holders of Storage
Dimensions Common Stock. The issuance of additional Storage Dimensions Preferred
Stock may have the effect of delaying, deferring or preventing a change in
control of Storage Dimensions.
In the event of any liquidation, dissolution or winding up of Storage
Dimensions, the holders of the Series A Stock are entitled to receive, prior and
in preference to any distribution of any of the assets or surplus funds of
Storage Dimensions, an amount equal to two dollars ($2.00) per share (as
adjusted for any stock dividends, combinations or splits, reclassifications or
the like with respect to such shares) plus all accrued, accumulated or declared
but unpaid dividends on each share of Series A Stock held by such holders. After
payment to the holders of the Series A Stock of the amount described above, the
entire remaining assets and funds of Storage Dimensions legally available for
distribution will be distributed ratably among the holders of the Storage
Dimensions Common Stock in proportion to the number of shares then held by such
holders. A "liquidation" includes any merger in which the holders of Storage
Dimensions Common Stock no longer hold a majority of such stock or sale of
substantially all of Storage Dimensions assets.
The shares of Series A Stock will be voted together with the Storage
Dimensions Common Stock as a single class at any annual or special meeting of
stockholders of Storage Dimensions following the Merger. The holders of each
share of Series A Stock shall be entitled to the number of votes equal to the
number of shares of Storage Dimensions Common Stock into which such share of
Series A Stock could be converted on the record date for the vote.
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STORAGE DIMENSIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Storage Dimensions should be read in conjunction with the
consolidated financial statements and the related notes thereto included herein.
The discussion in this Joint Proxy Statement/Prospectus contains forward-looking
statements that involve risks and uncertainties. Storage Dimensions' actual
results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section and the sections entitled
"Risk Factors," and "Storage Dimensions Business," as well as those discussed
elsewhere in this Joint Proxy Statement/Prospectus.
OVERVIEW
Storage Dimensions was formed in late 1992 to acquire the assets of the
"Storage Dimensions" subsidiary of Maxtor (the "Predecessor") for an aggregate
of $21.4 million (the "Storage Acquisition"). The Storage Acquisition, which was
completed in December 1992, was financed through equity investments in Storage
Dimensions made by the Capital Partners Group by certain members of management
and by Maxtor. A portion of the purchase price was also funded through bank
borrowings and through a subordinated term loan in the principal amount of $4
million payable to Maxtor. The note payable to Maxtor was originally due
December 31, 1995 but the maturity date was extended to the earlier to occur of
the completion of Storage Dimension's initial public offering or May 10, 1997. A
portion of the proceeds from Storage Dimension's initial public offering was
used to repay the remaining balance due to Maxtor.
Prior to the Storage Acquisition, the Predecessor was primarily engaged in
designing, manufacturing and selling high volume storage products that attached
to PCs and Macintosh computers and low-end servers. These desktop products
generally incorporated Maxtor disk drives. As part of its strategy to develop a
business that could successfully operate independently from Maxtor and would
generate higher gross margins, during 1992 the Predecessor began to sell RAID
products targeted at the enterprise storage markets. For the nine months ended
December 31, 1992, desktop and enterprise/OEM product sales represented 85.9%
and 14.1%, respectively, of total net sales. In furtherance of its long-term
strategy, the transition was accelerated following the Storage Acquisition such
that, in 1994 enterprise/OEM product sales represented a majority of total net
sales and, for the year ended December 31, 1997, enterprise/OEM product sales
represented substantially all of Storage Dimensions net sales. As the mix
shifted from desktop products to enterprise/OEM products, the gross margins
improved from 26.2% in 1993 to 37.3% in 1996, but declined to 35.9% in 1997.
Storage Dimensions does not expect sales of desktop products to represent a
material portion of its net sales in future periods.
The transition from desktop storage to enterprise RAID storage products
required a significant investment in research and development, sales and
marketing, and operations. To implement this transition, Storage Dimensions
significantly enhanced its infrastructure and employee expertise during 1995,
1996 and 1997, and operating expenses increased from 30.4% of sales in 1994 to
39.2% in 1997. The largest single expense associated with this transition was
the staffing of a direct end-user sales organization starting in the third
quarter of 1994.
The absorption of fixed manufacturing overhead suffered during the
transition from desktop to enterprise/OEM products as manufacturing volume
decreased and RAID systems required more sophisticated and time consuming
integration and test processes. The sale of the Storage Dimensions' Macintosh
product line in 1994 further reduced volume and exacerbated the unfavorable
overhead absorption situation. By the end of 1995 and continuing through 1996,
the higher manufacturing volumes of the Storage Dimensions' RAID enterprise/OEM
products resulted in greater overhead absorption and reductions in the per-unit
manufacturing costs of such products. Gains from this effect leveled off in
1997, so that at the end of 1997 Storage Dimensions still had significant excess
manufacturing capacity remaining. As a result, if manufacturing volumes were to
increase, the Storage Dimensions would expect to achieve further economies of
scale and lower per-unit manufacturing costs.
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Revenue from product sales is recognized upon shipment. Net sales reflect
the invoiced amount for goods shipped less reserves for estimated returns.
Storage Dimensions provides price protection to its distributors such that, if
Storage Dimensions reduces the price of its products, distributors are entitled
to a credit for the difference between the new, reduced price and the price they
previously paid for products which are held in the distributor's inventory at
the time of the price reduction. As a result, price reductions could have a
material adverse effect on results of operations, depending upon distributor
inventory levels at the time of the price reduction. In 1994, 1995, 1996 and
1997, Storage Dimensions issued approximately $161,000, $550,000, $840,000 and
$485,000, respectively, of credits in connection with such price protection.
Storage Dimensions utilizes a direct sales force to penetrate major new
accounts, to create demand for its products, and to secure repeat business from
existing customers. Storage Dimensions also maintains reseller distribution
channels that facilitate procurement of Storage Dimensions' products by small
and medium-sized end-users, producing incremental revenues from its marketing,
sales and promotional efforts. In addition, certain large customers prefer to
source through the reseller channels as part of their overall network equipment
sourcing and integration strategy. Therefore, Storage Dimensions' resellers also
fulfill some large customer orders that were generated by Storage Dimensions'
direct sales force.
After expanding its field sales force throughout 1997, Storage Dimensions
reevaluated the effectiveness of its field sales force strategy in early 1998.
As a result, five single-person sales offices in smaller geographic markets were
closed in order to focus resources in the major metropolitan areas where larger
sales offices are already established, and certain management positions in the
sales organization were eliminated. Storage Dimensions intends to use its
independent resellers to more efficiently serve the smaller geographic markets.
Storage Dimensions believes that this new structure will allow for future sales
growth while helping to control costs. Storage Dimensions intends to support and
expand as appropriate its direct sales force in key markets while seeking to
expand its reach into smaller markets through enhanced reseller arrangements.
Storage Dimensions believes it can continue to generate additional sales at
lower incremental selling costs. Storage Dimensions is prepared to expand its
field sales operations in these major areas to further leverage its current
investment.
Storage Dimensions currently expects its revenues for the fiscal quarter
ending March 31, 1998 to be significantly less than its results of operations
for the fourth quarter of 1997 and for the first quarter of 1997. Storage
Dimensions attributes the decline to a combination of uncertainty in the
marketplace resulting from Storage Dimensions' announcement of the Merger in
late 1997 and continued sales force productivity issues.
The following discussion and analysis has been prepared without giving
effect to the Merger. Should the Merger be completed, the business of Storage
Dimensions and Artecon will be combined and, accordingly, the historical
liquidity and results of operations of Storage Dimensions would not be
indicative of the Combined Company's future liquidity or operating results.
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RESULTS OF OPERATIONS
The following table sets forth certain items from Storage Dimensions'
consolidated statement of operations as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996 1997
----- ----- ----- -----------
<S> <C> <C> <C> <C>
Net sales:
Enterprise and OEM.............................. 65.5% 87.2% 96.6% 99.5%
Desktop......................................... 34.5 12.8 3.4 0.5
----- ----- ----- -----
Total net sales......................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Cost of sales..................................... 68.6 61.8 62.7 64.1
----- ----- ----- -----
Gross profit...................................... 31.4 38.2 37.3 35.9
----- ----- ----- -----
Operating expenses:
Sales and marketing............................. 17.4 22.2 19.5 24.5
Research and development........................ 7.1 8.9 8.1 8.8
General and administrative...................... 5.4 5.6 5.3 5.9
Advisory fee.................................... 0.6 0.6 1.0 --
----- ----- ----- -----
Total operating expenses................ 30.5 37.3 33.9 39.2
----- ----- ----- -----
Income (loss) from operations..................... 0.9 0.9 3.4 (3.3)
Other income (expense), net....................... (1.6) (1.9) (1.6) (0.1)
----- ----- ----- -----
Income (loss) before provision for income taxes... (0.7) (1.0) 1.8 (3.4)
Provision for income taxes........................ -- -- 0.2 0.2
----- ----- ----- -----
Net income (loss)................................. 0.7% (1.0)% 1.6% (3.6)%
===== ===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Net Sales. Net sales decreased 1.4% to $71.3 million in 1997, compared to
$72.3 million during 1996. Sales of Enterprise/OEM products accounted for
virtually all of the 1997 revenue, as the shift away from older Desktop products
was completed. Revenues were essentially unchanged compared to the prior year
primarily due to pricing declines in the first half of 1997, slow growth in
sales force productivity throughout the year and a drop in revenue from sales to
Xerox, Storage Dimensions' primary OEM customer. Revenue from Xerox decreased
from approximately 13% of net revenue in 1996 to approximately 6% of net revenue
in 1997. The continued penetration into the emerging Windows-NT marketplace was
offset by declines in the Novell NetWare arena due to Novell's loss of market
share to Microsoft's Windows NT. Products first introduced in 1997 did not
account for significant growth.
Gross Profit. Gross profit for 1997 was $25.6 million, or 35.9% of net
sales, compared to $27.0 million, or 37.3% of net sales in 1996. The decrease in
gross profit as a percentage of net sales in 1997 was primarily attributable to
inventory write downs brought about by rapid declines in the cost of disk drives
in the second quarter, and increased pricing pressure from competition. The
adverse effects of pricing pressures were partially offset by reductions in
material costs and a decline in the volume of relatively low margin OEM
business. Storage Dimensions' gross margin has been and will continue to be
affected by a variety of factors, including: competition; product configuration;
the mix of direct versus indirect sales; the mix of enterprise, OEM and desktop
products sold in any given period; the availability of new products and product
enhancements which tend to carry higher gross margins than older products; and
the cost and availability of components.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and commissions, advertising and promotional costs and customer service
and support expenses. Sales and marketing expenses for 1997 totaled $17.5
million, or 24.5% of net sales, compared to $14.1 million, or 19.5% of net sales
in 1996. The increase in absolute amount was caused largely by the expenses of
expanding the direct sales force and to a lesser extent from the costs of new
product introductions. The increase in sales and marketing expense as a
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<PAGE> 88
percentage of net sales in 1997 resulted from the slow increase in productivity
of the new sales representatives and the decline in OEM revenue. There can be no
assurance that an increase in these expenses will result in a proportional
increase in net sales and the sales and marketing expense as a percentage
revenue is expected to fluctuate in future periods.
Research and Development. Research and development expenses consist
primarily of employee compensation, prototype expenses and fees paid to outside
consultants. To date no software development costs have been capitalized.
Research and development expenses for 1997 totaled $6.3 million, or 8.8% of net
sales, compared to $5.9 million, or 8.1% of net sales in 1996. The increase in
research and development spending in absolute amount during 1997 was primarily a
result of increased staffing levels necessary to support continued development
of RAID products, primarily for the RAIDPro product and clustering solutions.
The increase as a percentage of net sales was a result of the increase in the
level of research and engineering spending. Storage Dimensions believes that
significant investments in research and development will continue to be required
to remain competitive and expects that these expenditures will increase in
absolute dollars and fluctuate as a percentage of net sales in future periods.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing the Storage
Dimension's administrative functions. General and administrative expenses for
1997 totaled $4.2 million, or 5.9% of net sales, compared to $3.8 million, or
5.3% of net sales in 1996. General and administrative expenses increased in
absolute amount primarily as a result of the additional costs associated with
operating as a public company and increased consulting costs.
Advisory Fee. The advisory fees formerly consisted of amounts payable to
Capital Partners pursuant to the Advisory Agreement that was terminated in 1996.
Consequently, there were no fees in 1997 compared to fees of $729,000 in 1996.
The 1996 fees included a one-time payment of $360,000 made in connection with
the termination of the Advisory Agreement.
Other Income (Expense), Net. Other income (expense), net consists primarily
of interest income on investments offset by interest payments on outstanding
debt. Other income (expense), net was a net expense of $68,000 in 1997 compared
to a net expense of $1,155,000 in 1996. The drop in the interest expense comes
from the investment of the proceeds from Storage Dimensions public offering in
the second quarter. Some interest expense continues to be recorded from the
expenses associated with maintaining Storage Dimensions' current but unused line
of credit.
Income Taxes. Income tax expenses incurred in 1996 and 1997 consist of
federal alternative minimum taxes and California minimum franchise taxes for
state taxes and taxes paid outside the United States. In determining likelihood
of future realization of deferred tax assets, management considered various
factors including Storage Dimensions's past history of losses and variability in
quarterly results, and the significant competitive pressures in the industry in
which Storage Dimensions operates. See "RISK FACTORS -- History of Operating
Losses of Storage Dimensions; Potential Fluctuations in Quarterly Results." In
the opinion of management, based on these factors, as of December 31, 1997, it
was considered more likely then not that the gross deferred tax assets would not
be realized. Accordingly, at December 31, 1997, Storage Dimensions recorded a
full valuation allowance for these deferred tax assets. A future change in
Storage Dimensions's assessment of the likelihood of future realization of
deferred tax assets could result in a reduction of the valuation allowance, a
corresponding reduction in Storage Dimensions's income tax expense recorded for
financial statement purposes and a corresponding increase in net income. This
would not, however, result in a change in actual income taxes payable by Storage
Dimensions in any future period. See Note 5 of Notes to the Consolidated
Financial Statements.
1996 COMPARED TO 1995
Net Sales. Net sales increased 20.2% to $72.3 million in 1996, compared to
$60.2 million during 1995. Sales increased primarily due to a 33.1% increase to
$69.9 million for Enterprise/OEM products, reflecting the continued shift in
Storage Dimensions's product strategy toward these newer products.
Enterprise/OEM products accounted for 96.6% of net sales, up from 87.2% in 1995.
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Gross Profit. Gross profit for 1996 was $27.0 million, or 37.3% of net
sales, compared to $23.0 million, or 38.2% of net sales in 1995. The decrease in
gross profit as a percentage of net sales in 1996 was primarily attributable to
pricing pressures in the market for products using 4 gigabyte disk drives during
the first half of 1996, as well as a relative increase in OEM sales which
generally carry lower gross profit margins than enterprise products. The adverse
effects of these factors were partially offset by the overall increase in sales
of enterprise products which tend to carry higher gross margins, manufacturing
efficiencies resulting from the higher level of sales of enterprise/OEM products
and the elimination from Storage Dimensions's desktop product line of certain
lower-margin, commodity-like products.
Sales and Marketing. Sales and marketing expenses for 1996 totaled $14.1
million, or 19.5% of net sales, compared to $13.3 million, or 22.2% of net sales
in 1995. Sales and marketing expense in 1996 in absolute amount was relatively
flat compared to 1995, as Storage Dimensions did not significantly increase its
sales staff during most of 1996. The decrease in sales and marketing expense as
a percentage of net sales in 1996 resulted from increased productivity of the
sales and marketing organization.
Research and Development. Research and development expenses for 1996
totaled $5.9 million, or 8.1% of net sales, compared to $5.4 million, or 8.9% of
net sales in 1995. The increase in research and development spending in absolute
amount during 1996 was primarily a result of increased staffing levels necessary
to support continued development of RAID products.
General and Administrative. General and administrative expenses for 1996
totaled $3.8 million, or 5.3% of net sales, compared to $3.4 million, or 5.6% of
net sales in 1995. General and administrative expenses increased in absolute
amount primarily as a result of consulting costs associated with strategic
planning activities.
Advisory Fee. Advisory fees totaled $729,000, or 1.0% of net sales in 1996,
compared to $360,000, or 0.6% of net sales in 1995. The 1996 amount includes a
one-time payment of $360,000 made in connection with termination of the Advisory
Agreement.
Other Income (Expense), Net. Other income (expense), net was an expense of
$1.2 million in 1996, up from an expense of $1.1 million in 1995. The difference
primarily represents a one-time charge relating to the refinancing of Storage
Dimensions's revolving line of credit during 1996.
Income Taxes. Income tax expenses incurred in 1995 and 1996 were minimal as
a result of operating losses incurred and the carry forward of prior period
losses. These carry forwards were virtually exhausted as of December 31, 1996.
Remaining gross deferred tax assets of $1,695,000 at December 31, 1996 are
primarily attributable to differences between the financial accounting and tax
deductibility of certain items including inventory reserves, depreciation and
amortization, research and development credits and compensation accruals. In the
opinion of management, as of December 31, 1996, it was considered more likely
than not that the gross deferred tax assets would not be realized. Accordingly,
at December 31, 1996, Storage Dimensions recorded a full valuation allowance for
these deferred tax assets. See Note 5 of Notes to the Storage Dimensions
Consolidated Financial Statements.
1995 COMPARED TO 1994
Net Sales. Net sales decreased 1.7% to $60.2 million in 1995, compared to
$61.2 million during 1994. Sales decreased primarily due to a 63% decrease in
sales of desktop products, partially offset by a 30% increase in sales of
enterprise/OEM products. Enterprise/OEM products accounted for 87.2% of the net
sales in 1995, up from 65.5% of net sales in 1994.
Gross Profit. Gross profit for 1995 was $23.0 million, or 38.2% of net
sales, compared to $19.2 million, or 31.4% of net sales in 1994. The increase in
gross profit as a percentage of net sales in 1995 was primarily attributable to
a favorable sales mix of higher-end enterprise systems included in
enterprise/OEM product revenues partially offset by an unfavorable mix in sales
of lower margin desktop products included in desktop product revenues in the
period.
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Sales and Marketing. Sales and marketing expenses for 1995 totaled $13.3
million, or 22.2% of net sales, compared to $10.7 million, or 17.4% of net sales
in 1994. Sales and marketing expenses increased in absolute amount and as a
percent of net sales in 1995 primarily as a result of Storage Dimensions'
efforts to build its sales and marketing organization to support the transition
from indirect to direct sales efforts.
Research and Development. Research and development expenses for 1995
totaled $5.4 million, or 8.9% of net sales, compared to $4.3 million, or 7.1% of
net sales in 1994. The increase in research and development spending in both
absolute amount and as a percentage of net sales during 1995 was primarily a
result of development activities related to Storage Dimensions' RAID products.
General and Administrative. General and administrative expenses for 1995
totaled $3.4 million, or 5.65% of net sales, compared to $3.3 million, or 5.4%
of net sales in 1994. General and administrative expenses in both absolute
amount and as a percentage of net sales were relatively flat from 1994 to 1995
as management responded to flat overall sales levels.
Advisory Fee. Advisory fees totaled $360,000 and $362,000 in 1995 and 1994,
respectively, and constituted 0.6% of net sales in both years.
Other Income (Expense), Net. Other income (expense), net was an expense of
$1.1 million in 1995, up from an expense of $983,000 in 1994. The increase in
1995 was primarily attributable to higher average loan balances during the year
as well as an increased interest rate on the loan payable to Maxtor. See
"Certain Transactions."
Income Taxes. Income tax expenses incurred in 1994 and 1995 were minimal as
a result of operating losses incurred. Gross deferred tax assets of $2,259,000
at December 31, 1995 are primarily attributable to operating loss carryforwards
and differences between the financial accounting and tax deductibility of
certain items including inventory reserves, depreciation and amortization,
research and development credits and compensation accruals. In the opinion of
management, as of December 31, 1995, is was considered more likely than not that
the net deferred tax assets would not be realized. Accordingly, at December 31,
1995, Storage Dimensions recorded a full valuation allowance for these deferred
tax assets. See Note 5 of Notes to the Storage Dimensions Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, Storage Dimensions' working capital was $17.3
million, up from $2.5 million at December 31, 1996. The increased in working
capital was primarily attributable to the proceeds of Storage Dimensions'
initial public offering in 1997 offset by the repayment of short-term debt with
a portion of such proceeds and the effects of the operating losses in 1997. Net
accounts receivable increased slightly to $12.2 million at December 31, 1997,
compared to $11.9 million at December 31, 1996, as a result of slowness in
payments at year end. Inventories decreased to $5.6 million at December 31,
1997, from $6.3 million at December 31, 1996, primarily as a result of the
reduction in strategic supplies as the risk of shortages identified in late 1996
has abated. Accounts payable decreased to $4.0 million at December 31, 1997,
compared to $5.1 million at December 31, 1996 largely from the effects of
payment timing related to the increase of strategic inventories at the end of
1996.
Storage Dimensions has an $11 million revolving line of credit expiring in
May 1998. The borrowings under the line of credit bear interest at the rate of
prime plus 0.75% (9.25% at December 31, 1997). Borrowings are secured by all
Storage Dimensions' assets. There were no borrowings outstanding under the line
of credit at December 31, 1997 and, as of such date, $11 million was available
for borrowings. There are no financial covenants in the line of credit.
Storage Dimensions presently expects that current cash resources, together
with cash generated from operations should be sufficient to meet its operating
and capital requirements for the next twelve months. Storage Dimensions may,
however, need additional capital prior to that time. There can be no assurance
that additional capital will be available to Storage Dimensions on favorable
terms or at all.
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STORAGE DIMENSIONS BUSINESS
The discussion in this Joint Proxy Statement/Prospectus contains
forward-looking statements which involve risks and uncertainties. Storage
Dimensions' actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, without limitation, those discussed in this section and the
sections entitled "Risk Factors," "Storage Dimensions' Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as those
discussed elsewhere in this Joint Proxy Statement/Prospectus.
Storage Dimensions designs, manufactures, markets and supports
high-performance data storage systems for open systems network applications.
Open systems networks are comprised of equipment that conforms to industry
standards of interoperability. Storage Dimensions currently focuses on the
PC-LAN market by developing and marketing a broad family of disk and tape
storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability (minimum downtime) requirements of its
customers while at the same time reducing life-cycle cost of ownership
(consisting of the purchase price of the equipment plus the cost of operating
this equipment over its life span). Storage Dimensions' products combine its
proprietary software with industry-standard hardware, such as disk drives, tape
drives and RAID controllers, which allows Storage Dimensions to leverage the
product development and manufacturing capabilities and efficiencies of industry
OEM manufacturers and to offer its customers products that take advantage of
what Storage Dimensions believes to be the best technology available. Storage
Dimensions' products have won numerous industry awards in product comparisons
and editorial reviews. As the leading independent supplier of high capacity RAID
storage systems for the PC-LAN market, Storage Dimensions believes that it is
well-positioned to take advantage of new opportunities being created by the
projected growth in the PC-LAN market, in particular the market for systems
utilizing Windows NT and NetWare.
INDUSTRY BACKGROUND
The increased use of network computing to support business-critical
enterprise applications is fueling rapid demand growth for network disk storage
systems incorporating high performance, fault tolerance and high availability.
In addition, capacity requirements for network storage are accelerating, due to
the deployment of data-intensive new applications, such as relational databases,
decision support systems, the Internet and intranets, video/multimedia and
document management. Storage Dimensions believes that these factors will also
increase the demand for high-speed network tape backup, which provides
additional protection against data loss in the event of various system
malfunctions.
RAID technology has facilitated this rapid expansion of network storage.
Traditionally, storage fault-tolerance was achieved using a technique called
mirroring, which involves the recording of duplicate data records on redundant
disks. Although effective, mirroring is an expensive means to protect against
data loss. In 1987, a team of researchers at the University of California at
Berkeley defined the concept of RAID, which utilizes parity algorithms to
achieve data redundancy at a significantly lower cost than mirroring. The
subsequent widespread implementation of RAID technology has removed a major
barrier to the proliferation of network computing by providing a cost-effective
method for achieving high storage reliability in enterprise network
applications.
Historically, enterprise computing products have been categorized into
three general markets: (1) proprietary/mainframe systems; (2) RISC-based UNIX
multiuser systems; and (3) Intel-based local area networks ("PC-LAN market"). In
each of these markets, independent third-party suppliers have emerged to offer
advanced storage systems as alternatives to the storage systems offered by the
computer manufacturers themselves. To maximize their probability for success,
these independent storage system suppliers have generally focused on
opportunities within one of the three specific markets and tailored their
business, marketing and sales strategies accordingly. As a result, the markets
for storage systems are not monolithic in nature, but, rather, each of the three
markets is unique with its own principal competitors. Moreover, it is often
difficult for an industry participant to move from one market to another without
implementing major changes in business strategy that can undermine its
competitiveness in its original target market.
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Among the three principal enterprise computing markets, the PC-LAN market
is experiencing the fastest growth, according to IDC. The PC-LAN market emerged
in the late 1980s with the proliferation of desktop PCs and the development of
network operating systems (such as NetWare) that could efficiently tie PC's
together for resource and information sharing. This expansion is now being
fueled by the deployment of Intel-based servers using Pentium and Pentium Pro
microprocessors, which offer the computing power of RISC-based architectures at
a significantly lower cost. IDC projects that the U.S. market for PC-LAN storage
systems employing RAID technology will grow from $1.4 billion in 1995 to $6.0
billion in 2000, a compound annual growth rate of 34%. These trends are further
reinforced by the rapid adoption of the Windows NT operating system, which is
increasingly being used in mid-range database and application servers instead of
UNIX operating systems. IDC further projects that the U.S. market for PC-LAN
RAID storage systems running on Windows NT servers will grow from $0.3 billion
in 1995 to $2.1 billion in 2000, a compound annual growth rate of 50%.
One of the key issues facing end-users of PC-LAN networks is the ongoing
cost of network maintenance and administration. For example, the Gartner Group
has estimated that the purchase price of hardware and software comprises only
20% of the three-year cost of network ownership. The remaining 80% of a
network's life-cycle cost of ownership consists of other associated expenses,
such as downtime, troubleshooting, repair, administration, training and user
support. With respect to network storage, there are many opportunities for the
storage system software to assist the enduser in lowering the life-cycle cost of
ownership, by providing useful functionality such as ease of installation, ease
of reconfiguration, robust management of failure conditions, remote monitoring
and alerting, diagnostic and troubleshooting support and ease of repair.
Moreover, as enterprises adopt the latest generation networking
technologies to achieve higher levels of performance and reliability, complex
issues can arise surrounding integration of new system components into the
existing environment. For example, storage systems provided by server
manufacturers oftentimes are mounted internally to the server, are not
compatible with other manufacturers' servers, and cannot be readily migrated to
new servers or operating systems as requirements change. In such cases, the
adoption of new technologies, such as Pentium Pro-based servers and Windows NT,
can result in the premature, technological obsolescence of existing network
storage investments. On the other hand, these costs can be significantly reduced
by utilizing a server-independent storage system that is designed for use in a
heterogenous environment, supporting a range of servers and operating systems.
Therefore, to achieve the objective of minimizing the life-cycle cost of
network storage, end-users need comprehensive storage solutions that incorporate
a number of features in addition to RAID fault-tolerance including: (1) high
availability with minimum system downtime (planned and unplanned); (2)
complementary high-performance tape backup solutions; (3) easy network storage
management and administration; (4) cross-platform support for heterogeneous
network hardware and environments; and (5) a comprehensive customer service and
support program. Many suppliers today offer only a portion of these features.
THE STORAGE DIMENSIONS SOLUTION
Storage Dimensions currently focuses on the PC-LAN storage system market by
developing and marketing a comprehensive family of disk and tape storage systems
that are designed to satisfy the high-performance, fault-tolerance and
high-availability requirements of its customers while at the same time reducing
life-cycle cost of ownership. Storage Dimensions' solution combines its
proprietary software with industry-standard hardware, such as disk drives, tape
drives and RAID controllers, which allows Storage Dimensions to leverage the
product development and manufacturing capabilities and efficiencies of industry
OEM manufacturers and to offer its customers products that take advantage of
what Storage Dimensions believes to be the best technology available. Storage
Dimensions provides a complete, integrated solution for the PC-LAN storage
system market by offering the following features:
High availability with minimum system downtime. Storage Dimensions'
SuperFlex and RAIDPRO disk storage products are engineered to provide redundancy
and fault-tolerance for critical components such as disk drives, power supplies
and cooling systems. Redundant components are easily serviced and hot-swappable,
to allow replacement by end-user service personnel while the system remains
online.
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Moreover, the storage management software is designed to provide robust
management of failure conditions, remote monitoring, automatic notification of
failure events and online diagnostic and troubleshooting support.
Complementary high-performance tape back-up solutions. To complement its
disk products, Storage Dimensions has engineered a family of high-speed,
high-reliability MEGAFLEX tape backup systems that are designed to address the
challenges of backing up increasing amounts of data in ever-shortening time
periods. These tape products are developed and tested to be easily integrated
and fully compatible with Storage Dimensions' storage systems. In addition,
these products are marketed on a stand-alone basis for use with other
manufacturers' disk storage systems.
Easy network storage management and administration. Storage Dimensions
engineers its integration software to make its disk storage systems easy to
install, use, reconfigure, troubleshoot and administer. In addition, for the
NetWare and Windows NT environments, Storage Dimensions has developed
VantagePoint network storage management software that provides remote
monitoring, problem alerting, configuration documentation and performance
measurement of multiple storage systems from a single network console.
Cross-platform support for heterogeneous network hardware. Storage
Dimensions designs external storage systems that are easily integrated with the
computer systems from a broad range of manufacturers. This cross-platform
capability affords significant economic advantages to end-users who have
heterogeneous and dynamic network environments by letting them standardize on a
single external storage system that can be easily reconfigured and redeployed as
requirements change, as compared to internal storage which is dedicated to a
specific manufacturer's server. Thus, as application needs evolve over time and
new generation servers are procured, Storage Dimensions' storage systems can be
readily migrated and resized to meet changing circumstances instead of being
prematurely obsoleted. In particular, Storage Dimensions' products are
engineered to support a seamless transition to Windows NT, without the need to
prematurely retire storage systems originally purchased to support NetWare or
other network operating systems. This provides important investment protection
in the network environment, where the capital expenditures on storage systems
are often equal to or greater than those spent on servers.
A comprehensive customer service and support program. Storage Dimensions
also provides a complementary suite of service and support programs targeted at
lowering the maintenance cost of its storage systems, including an artificial
intelligence knowledge base that helps Storage Dimensions provide fast and
accurate diagnosis of technical problems, 24-hour access to technical support
and replacement parts, overnight replacement of failed components and
comprehensive site agreements.
STORAGE DIMENSIONS STRATEGY
Storage Dimensions' objective is to leverage its position as the leading
independent supplier of PC-LAN storage systems to capitalize on opportunities
presented by the projected growth in this market. Storage Dimensions believes it
is in a unique position to capitalize on the significant growth projected for
RAID network storage for PC-LAN servers, and in particular, networks using
Windows NT for fileservers, database servers, the Internet and intranet
communications servers and dedicated applications servers. Key elements of
Storage Dimensions' strategy include the following:
Focus on products for PC-LAN storage systems market. Storage Dimensions
intends to continue to concentrate its engineering and development efforts on
designing storage system products that are compatible with both NetWare, the
current leading LAN operating system, and Windows NT, a newly emerging industry
standard that is expected to become widely accepted by the year 2000. Storage
Dimensions strives to leverage its existing customer base of major corporations,
institutions and government agencies, many of whom are expected to expand their
PC-LAN implementations, particularly through the adoption of Windows NT, within
the next five years.
Support customers' transition to Windows NT. Storage Dimensions intends to
continue to design products that can be used in heterogeneous and dynamic
network environments, thus allowing its customers to standardize on a single
storage system that can be easily reconfigured and redeployed as requirements
change. In particular, Storage Dimensions will continue to focus its product
development efforts on providing an easy,
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seamless transition to Windows NT, without the need to obsolete or retire prior
investments in Storage Dimensions' disk and tape storage systems.
Leverage proprietary systems integration software. Storage Dimensions has
developed an extensive, objectoriented software library which it uses to quickly
integrate new hardware products into its storage systems. Storage Dimensions'
strategy is to continue to expand its software library by adding new features
and functionality in an incremental manner, building on its earlier investments,
and to leverage this library to bring new products and features to market
quickly.
Incorporate leading edge hardware in new products. Storage Dimensions
intends to continue to combine leading edge hardware with its proprietary
software to produce state-of-the-art storage solutions for the PC-LAN storage
systems market. Storage Dimensions also strives to develop and maintain close
relationships with key suppliers of storage system components and technologies,
such as American Megatrends, Cheyenne Software, Inc. ("Cheyenne"), Mylex,
Seagate, The Qualix Group, Inc. ("Qualix") and Quantum, which Storage Dimensions
believes enables it to quickly introduce new products that incorporate the
latest technological advances.
Differentiate through proprietary storage management software. Storage
Dimensions has developed VantagePoint, a network storage management software
program that allows remote monitoring and oversight of multiple storage systems
on the network from a single central console. Storage Dimensions believes that
efficient network management differentiates its products from those of its
competitors and intends to continue to enhance its network management product
offerings.
Differentiate through customer service and support. Storage Dimensions
believes that comprehensive, proactive and responsive customer service and
support are essential to be a market leader in the PC-LAN storage system market,
and it intends to continue to enhance its service and support programs. Storage
Dimensions has already made, and intends to continue to make in the future,
major investments in customer service and support, in order to offer a wide
range of service and support options to its customers.
Leverage field sales and channel investments. Storage Dimensions utilizes a
direct sales force to penetrate major new accounts, to create demand for its
products and to secure repeat business from existing customers. Storage
Dimensions also maintains reseller distribution channels that facilitate
procurement of Storage Dimensions' products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales and promotional
efforts. With its basic field sales organization and distribution channels in
place, Storage Dimensions believes that it can generate additional sales at a
lower incremental selling cost, and intends to expand its field sales operations
to further leverage its current investment.
PRODUCTS
Storage Dimensions develops and markets a broad and integrated family of
disk and tape storage systems that are designed to satisfy the high-performance,
fault-tolerance and high-availability requirements of its customers while at the
same time reducing life-cycle cost of ownership. Storage Dimensions' SuperFlex
RAIDPRO disk storage products are designed and engineered to incorporate leading
edge features and capabilities relative to the storage products offered by
computer and server manufacturers, to minimize system downtime and to support
easy integration with a broad range of server platforms and operating systems.
While Storage Dimensions' products are generally developed for use with Windows
NT and NetWare operating systems, certain of Storage Dimensions' products are
also compatible with other operating systems, including Sun Solaris, IBM AIX and
IBM OS/2 operating systems.
To complement its disk products, Storage Dimensions has engineered a family
of high-speed, high-reliability MEGAFLEX tape backup systems that are designed
to address the challenges of backing up increasing amounts of data in
ever-shortening time periods. These tape products are developed and tested to be
easily integrated and fully compatible with Storage Dimensions' disk storage
systems. In addition, Storage Dimensions offers tape backup products as
stand-alone products to back up data maintained on other manufacturers' disk
storage systems. To facilitate easy network administration, Storage Dimensions
has developed VantagePoint, a network storage management software program that
allows remote monitoring and
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oversight of multiple storage systems on the network from a single central
console. Storage Dimensions believes that its products are differentiated from
competitive products based on functionality, performance, ease of use and lower
life-cycle cost of ownership.
Current Products. The following table summarizes Storage Dimensions'
current product offerings:
<TABLE>
<CAPTION>
TYPICAL
OPERATING DATE OF CAPACITY END USER
SYSTEMS DATE OF LATEST RANGE LIST
PRODUCT DESCRIPTION SUPPORTED INTRODUCTION GENERATION (GIGABYTES) PRICE(1)
------- ----------- --------------- ------------- ------------- ----------- -----------------
DISK PRODUCTS
<S> <C> <C> <C> <C> <C> <C>
SuperFlex Host-based RAID with NetWare, NT, May 1996 July 1997 6-378 $8,523 - 78,394
3000 Dynamic Growth and OS/2
with DGR Disk Reconfiguration
Array
SuperFlex RAID applications NetWare, NT, September April 1997 6-256 $9,662 - 54,315
4000 using embedded bridge OS/2, Solaris, 1994
Disk Array controller AIX
SuperFlex Dual redundant RAID NetWare, NT, October 1996 November 1996 6-126 $14,427 - 34,706
5000 controllers OS/2, Solaris
Disk Array (embedded)
RAIDPRO VL, Entry level RAID NetWare, NT May 1997 October 1997 6-108 $4,741 - 25,745
XL
TAPE PRODUCTS
SuperFlex DAT 7 DAT Tape Drives NetWare, NT, September February 1997 24-168 $8,016 - 18,845
TapeArray with parallel data Solaris, AIX 1994
streaming
MegaFlex DLT 4 DLT Tape Drives NetWare, NT, May 1995 April 1997 30-140 $11,125 - 44,628
TapeArray with parallel Solaris, AIX
streaming and data
redundancy
4700 DLT Tape Single drive, seven NetWare, NT, December 1995 N/A 280 $11,788
Library cartridge tape Solaris, AIX
library
DLT Tape Stand-alone DLT Tape NetWare, NT, October 1995 June 1996 15-35 $3,315 - 9,385
Backup Subsystem Solaris, AIX
ATL Library High end DLT Tape NetWare, NT, December 1997 N/A 40-140 $25,640 - 67,724
Library Solaris, AIX
OTHER
VantagePoint Network Storage NetWare, NT December 1995 July 1996 N/A $1,057 - 21,484
Management Software
XStor Tape For document input to SCO UNIX August 1992 N/A 5 N/A
Storage Xerox Docutech
System Printing System
(OEM product)
</TABLE>
- ---------------
(1) The list prices set forth above represent the per unit list prices to
corporate customers for volume purchases. Actual prices paid by customers
vary depending on the source and the volume of units purchased.
(2) Larger systems can be readily constructed by integrating multiple units into
a single system.
Storage Dimensions has developed, and will continue to enhance, its
existing extensive proprietary objectoriented software library. This library
enables Storage Dimensions to quickly integrate new hardware technologies to
bring new products to market in a rapid and cost-effective manner. Storage
Dimensions' software library supports a range of operating systems with a
minimum of additional software investment. For example, the advanced SuperFlex
4000 and 5000 products incorporate Storage Dimensions' proprietary RAIDFlex disk
array management software, which was specifically engineered to facilitate
cross-platform support and to require only a minimal portion of the underlying
code to be rewritten to adapt it to a new operating system. Similarly, Storage
Dimensions can adapt RAIDFlex software to manage a new generation RAID
controller by modifying only the section of the code that deals with
controller-specific algorithms and instruction sets. Storage Dimensions has a
U.S. patent application pending associated with the object-oriented, layered
architecture of its RAIDFlex array management software.
Storage Dimensions' products utilize its proprietary software to
incorporate leading edge hardware features and capabilities relative to the
storage products offered by computer and server manufacturers, with design
features specifically engineered to minimize system downtime and to support easy
integration and
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<PAGE> 96
administration. For example, in May 1996, Storage Dimensions introduced the
SuperFlex 3000 with DGR. The DGR feature provides the ability to both expand and
reconfigure a RAID array without taking the system off-line, therefore
significantly reducing the time, effort and cost of managing RAID storage in
typical corporate network environments. SuperFlex with DGR won LAN Times' "Best
of LAN Times" (1997) and PC Week's "Analyst's Choice" (1996) awards. In
addition, Storage Dimensions became one of the first suppliers of network
storage systems to incorporate the new generation 9 gigabyte disk drives in
their products when it began shipping the first of such products in September
1996.
Storage Dimensions' products have won numerous other awards, including:
INFOWorld's "Hot Products" (1997); LAN Times' "Best of LAN Times" (1996);
Computer Technology Review's "Editor's Choice" (1995); LAN Magazine's "Disk
Array Product of the Year" (1995); and Networld+Interop's "Best of Show" (1995).
PRODUCTS UNDER DEVELOPMENT
Storage Dimensions intends to continue to design its mainstream products to
be compatible with both Windows NT and NetWare and selected products to be
compatible with Sun Solaris, IBM AIX and IBM OS/2 operating systems. In
particular, Storage Dimensions has focused, and expects to continue to focus,
its product development efforts on providing an easy, seamless transition to
Windows NT, without the need to obsolete or retire its prior investments in
Storage Dimensions' disk storage systems. As a result of Storage Dimensions'
efforts, most of Storage Dimensions' current disk and tape systems can be, and
Storage Dimensions intends that its future products will be able to be, migrated
between NetWare and Windows NT by simply installing Storage Dimensions' software
upgrade. This greatly simplifies the purchasing decision for customers in the
process of migrating to Windows NT and for those considering such a change in
the future.
Storage Dimensions is currently completing the development of a clustered
storage system (SuperFlex 5500) that is expected to provide shared storage for a
cluster of network servers using a common operating system, with support for
automatic server failover and integrated tape backup. Storage Dimensions
believes that this clustering technology will be the basis for most storage
system architectures in the future and may provide significant differentiation
of Storage Dimensions in the market. Storage Dimensions is in Beta test with
several customers and expects to release this product in the second quarter of
1998. Storage Dimensions is also in Beta test on RAIDScape, its latest storage
management software program. RAIDScape will add new features and functionality
to the company's hardware products and provide customers an easy to use
graphical interface for managing their data storage devices. RAIDScape software
is a second generation software design based on over three years of development
and is written in a new "JAVA" based programming language. RAIDScape software
will be one of the key differentiating features for most of future Storage
Dimensions products.
If Storage Dimensions is unable, for technological or other reasons, to
develop and introduce new products, in particular those for use with Windows NT,
in a timely manner in response to changing market conditions or customer
requirements, Storage Dimensions' business, operating results and financial
condition will be materially and adversely affected. In addition, there can also
be no assurance that Storage Dimensions will be successful in developing and
marketing any other products that respond to technological changes or evolving
industry standards, that Storage Dimensions will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of new products, or that its new products will adequately meet the
requirements of the marketplace and achieve market acceptance. See "-- Research
and Development."
CUSTOMERS AND APPLICATIONS
Storage Dimensions markets its products primarily to large corporations,
institutions and government agencies for use in business-critical network server
applications that require high-reliability and non-stop operation. Storage
Dimensions has successfully placed major installations in a broad cross-section
of enterprises, encompassing a range of mainstream computing applications. In
1997, the Sun Financial Group accounted for approximately 10% of net sales. In
1996, Xerox Corporation accounted for approximately 13%
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<PAGE> 97
of total net sales. In 1995, Xerox accounted for approximately 11% of net sales
and TechData accounted for approximately 15% of net sales.
SALES AND MARKETING
Storage Dimensions has implemented both a direct sales force and reseller
distribution channels in order to provide broad market penetration for its
products. Historically, Storage Dimensions marketed its products to end-users
through indirect reseller channels, including distributors, national computer
dealers, system integrators and VARs. In 1994, Storage Dimensions recruited and
deployed a direct field sales organization in order to more effectively pursue
large corporate and institutional sales opportunities in the United States. As
of December 31, 1997, the U.S. field sales organization consisted of 33 sales
professionals located in 15 geographical markets, including Boston, New York,
Washington D.C., Atlanta, Detroit, Chicago, Minneapolis, Dallas, Los Angeles,
Seattle, Tampa and the San Francisco Bay Area. Storage Dimensions utilizes its
direct sales force to penetrate major new accounts, to create demand for its
products and to secure repeat business from existing customers.
Storage Dimensions also maintains indirect reseller channels to facilitate
procurement of Storage Dimensions' products by small and medium-sized end-users,
producing incremental revenues from its marketing, sales, and promotional
efforts that would otherwise be lost. In addition, certain large customers
prefer to source through the reseller channels as part of their overall network
equipment sourcing and integration strategy. Storage Dimensions has developed
pricing structures and field sales commission plans that are designed to
minimize sales channel conflicts and, as a result, is able to benefit from
significantly higher revenues than if only a direct sales model were deployed.
Storage Dimensions believes that this two-pronged sales strategy provides
meaningful competitive advantage over competitors who only provide products
directly to end-user customers. In a recent survey by LAN Magazine of the
largest 100 LAN resellers in the United States, Storage Dimensions was the
independent storage systems supplier mentioned most often as the preferred
provider of both disk array and tape backup products.
With its domestic field sales organization and reseller distribution
channels in place, Storage Dimensions plans to generate additional sales at a
lower incremental cost by systematically expanding its field sales operation in
terms of both staffing and geographical presence. Internationally, Storage
Dimensions relies primarily on local distributors and maintains a sales and
service office in London, England to support its European distributors.
To support its field sales organization, in 1995 Storage Dimensions
established a telemarketing department located in its Milpitas headquarters
location for processing new leads, qualifying new prospects, identifying active
projects and initiating appointments for field sales personnel to visit new
customers. Specifically, the telemarketing department focuses on identifying
large new sales opportunities and on facilitating a smooth hand-off of these
opportunities to the field sales personnel. The telemarketing department also
works closely with the marketing communications department to identify lead
sources and develop promotional programs that are most effective in developing
target opportunities.
In 1995, Storage Dimensions implemented a trade-in program called
FlexCredit, which provides a significant trade-in credit on used disk and tape
drives, from both Storage Dimensions and other selected manufacturers, toward
the purchase of new products from Storage Dimensions. FlexCredit is another
example of Storage Dimensions' strategy to lower the cost of ownership of
network storage, and Storage Dimensions believes the program has been
instrumental in both retaining existing customers and capturing new ones.
Storage Dimensions maintains an active presence in the used storage equipment
market such that FlexCredit trade-ins can be recycled at nominal economic cost
to Storage Dimensions.
After expanding its field sales force throughout 1997, Storage Dimensions
reevaluated the effectiveness of its field sales force strategy in early 1998.
As a result, five single-person sales offices in smaller geographic markets were
closed in order to focus resources in the major metropolitan areas where larger
sales offices are already established, and certain management positions in the
sales organization were eliminated. Storage Dimensions intends to use its
independent resellers to more efficiently serve the smaller geographic markets.
Storage Dimensions believes that this new structure will allow for future sales
growth while helping to control
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<PAGE> 98
costs. Storage Dimensions intends to support and expand as appropriate its
direct sales force in key markets while seeking to expand its reach into smaller
markets through enhanced reseller arrangements. Storage Dimensions believes it
can continue to generate additional sales at lower incremental selling costs.
Storage Dimensions is prepared to expand its field sales operations in these
major areas to further leverage its current investment.
CUSTOMER SERVICE AND SUPPORT
Storage Dimensions believes that its ability to provide comprehensive,
proactive and responsive support is an important element in penetrating new
customer accounts and in securing repeat business from existing customers.
Storage Dimensions is committed to providing superior customer service and
support aimed at simplifying installation, reducing field failures, minimizing
system downtime and streamlining administration. For example, beginning in 1992,
Storage Dimensions undertook a major investment in an "artificial intelligence"
knowledge base, called TechConnect, to facilitate the timely and accurate
diagnosis of customer field problems and to enable Storage Dimensions to
recommend solutions with the highest probability of success, with reporting
capabilities to provide feedback on the most common problems experienced by end-
users of Storage Dimensions' products. Although accessed primarily by Storage
Dimensions technical support personnel, the TechConnect system is also
accessible by Storage Dimensions' customers 24 hours a day, through the
Internet, in the event any customer wishes to access solution documents
directly.
Historically, service revenues have not comprised a significant portion of
Storage Dimensions' sales. In 1996, Storage Dimensions began an aggressive
program to develop value-added service contracts designed to achieve a lower
lifecycle cost of ownership for its customers. The following represent Storage
Dimensions' primary service programs currently available:
7x24 Priority Service and Parts. For an annual site fee, Storage Dimensions
provides priority access to technical support personnel during business hours
and access within 20 minutes via a pager after hours. In addition, Storage
Dimensions provides replacement of failed parts 24 hours-a-day by
counter-to-counter air freight with courier delivery.
Tape Maintenance. For an annual fee per tape drive, Storage Dimensions will
provide for overnight shipment of a replacement unit for drives that fail and
are not covered by Storage Dimensions' or manufacturer's standard warranty.
TechAssist Emergency Off-Hours Support. For a one-time fee, Storage
Dimensions provides access to technical support personnel after hours to
customers who need emergency help, but have not contracted for the 7x24 Priority
Service.
FlexGuard Premium Site Support. FlexGuard bundles optional services into
comprehensive site service and support arrangements to meet the special needs of
large organizations.
In addition to the above services, Storage Dimensions provides telephone
support during business hours free of charge.
Storage Dimensions supports and administers the pass-through of standard
warranties from its OEM component vendors which run from one to five years. In
addition, Storage Dimensions provides a three year warranty on the system as a
whole. A customer may also contract for an extended warranty from Storage
Dimensions on components whose factory warranty has expired. In the United
States, defective components are replaced overnight, in advance of the receipt
of the failed part, as a standard practice. Although to date Storage Dimensions'
suppliers of hardware components have covered the warranty costs associated with
such components, there can be no assurance that such manufacturers will continue
to be willing or able to cover such costs, and their failure to do so would
result in such costs being borne by Storage Dimensions. There can be no
assurance that warranty costs to Storage Dimensions will not be significant in
the future, which could have a material adverse effect on Storage Dimensions'
business, operating results or financial condition.
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<PAGE> 99
RESEARCH AND DEVELOPMENT
To date, Storage Dimensions has made substantial investments in research
and development, particularly in the areas of fault-tolerant RAID systems
integration and storage management software. Storage Dimensions' solution
combines its proprietary software and industry-standard hardware to produce
integrated RAID fault-tolerant storage solutions, with companion
high-performance tape backup. Storage Dimensions has developed an extensive,
object-oriented software library which it uses to quickly integrate new hardware
products into its storage systems. Storage Dimensions' strategy is to continue
to expand its software library by adding new features and functionality in an
incremental manner, building on its earlier investments, and to leverage this
library to bring new products and features to market quickly.
Storage Dimensions' engineering design teams work cross-functionally with
marketing managers, applications engineers and customers to develop products and
product enhancements. Computer input/output standards are maintained and an
extensive disk drive and controller board qualification program monitors
industry-standard components to ensure the quality and performance when
integrated into Storage Dimensions' storage system products. Storage Dimensions
also strives to develop and maintain close relationships with key suppliers of
storage system components and technologies, such as American Megatrends, Western
Digital, Fujitu, ATL, Exabyte, Cheyenne, Mylex, Seagate, Qualix and Quantum,
which Storage Dimensions believes enables it to quickly introduce new products
that incorporate the latest technological advances.
Storage Dimensions' expenses for research and development for fiscal years
1995, 1996 and 1997 were $5.4 million, $5.9 million and $6.3 million,
respectively. As of December 31, 1997, Storage Dimensions had 37 regular
full-time employees engaged in research and development activities, of which 16
were specifically focused on software development, test and qualification.
The network storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities and the emergence of new industry standards could
render Storage Dimensions' existing products obsolete and unmarketable. Storage
Dimensions' future success will depend upon its ability to develop and to
introduce new products with increasing storage capabilities (including new
software releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that Storage Dimensions will be successful in developing and marketing any new
products that respond to technological changes or evolving industry standards,
that Storage Dimensions will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products,
or that its new products will adequately meet the requirements of the
marketplace and achieve market acceptance. In addition, network storage system
products like those offered by Storage Dimensions may contain undetected
software errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by Storage Dimensions
and by current and potential customers, errors will not be found in new products
after commencement of commercial shipments, resulting in a loss of or delay in
market acceptance, which could have a material adverse effect on Storage
Dimensions' business, operating results or financial condition.
MANUFACTURING
Storage Dimensions' manufacturing operations, located in Milpitas,
California, consist primarily of assembly and integration of Storage Dimensions'
proprietary software and enclosures with industry-standard components, such as
disk drives, tape drives, and RAID controllers, from its suppliers. The
assembled units are then subjected to a systems-level test to ensure performance
to specification in the anticipated end-user computing environment. Storage
Dimensions' manufacturing operations have been ISO 9002 certified, an
international quality standard. Storage Dimensions strives to develop close
relationships with its suppliers, exchanging critical information and
implementing joint corrective action programs to maximize the quality of its
components, to reduce costs and inventory investments and to create flexibility
for rapid capacity expansion when required. Storage Dimensions believes that its
current facilities and capital equipment will be adequate to meet its
manufacturing needs in the foreseeable future.
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<PAGE> 100
Storage Dimensions relies upon a limited number of suppliers of several key
components utilized in the assembly of Storage Dimensions' products. For
example, Storage Dimensions purchases disk drives primarily from Seagate, DLT
tape drives exclusively from Quantum and DGR RAID controllers exclusively from
American Megatrends. Storage Dimensions' reliance on its suppliers involves
several risks, including: an inadequate supply of required components; price
increases; late deliveries; and poor component quality. These risks are
particularly significant with respect to suppliers of disk drives because, in
order to meet product performance requirements, Storage Dimensions must obtain
disk drives with extremely high quality and capacity. In addition, there is
currently a significant market demand for disk drives, tape drives and RAID
controllers, and from time to time Storage Dimensions may experience component
shortages, selective supply allocations and increased prices of such components.
Although to date Storage Dimensions has been able to purchase its requirements
of such components, there can be no assurance that Storage Dimensions will be
able to obtain its full requirements of such components in the future or that
prices of such components will not increase. In addition, there can be no
assurance that problems with respect to yield and quality of such components and
timeliness of deliveries will not occur. Disruption or termination of the supply
of these components could delay shipments of Storage Dimensions' products and
could have a material adverse effect on Storage Dimensions' business, operating
results or financial condition. Such delays could also damage relationships with
current and prospective customers. In addition, in the past, due to Storage
Dimensions' quality requirements, Storage Dimensions has experienced delays in
the shipments of its new products principally due to an inability to qualify
component parts from disk drive manufacturers and other suppliers, resulting in
delay or loss of product sales. Storage Dimensions has currently qualified disk
drives manufactured by Seagate, tape drives from Quantum, and RAID controllers
from Mylex and American Megatrends. Although these delays in the past have not
had a material adverse effect upon Storage Dimensions' business, operating
results or financial condition, there can be no assurance that in the future any
such delays would not have such a material adverse effect.
COMPETITION
The network storage system market is intensely competitive. Storage
Dimensions competes primarily in the PC-LAN storage systems market and
experiences the greatest competition from traditional suppliers of PC-LAN
network servers, such as Compaq, Hewlett-Packard and IBM, who market storage
systems as part of their complete computer systems. Storage Dimensions also
competes against independent storage system suppliers to the PC-LAN server
market, including DEC Storage Works, MTI Technology, Procom Technology, Inc. and
StreamLogic Corporation. In addition, providers of storage for the mainframe or
UNIX-based markets, such as Auspex Systems, Inc., Data General Corporation, EMC
Corporation, Network Appliance, Inc., Storage Computer, Inc. and Symbios Logic,
Inc. could develop and market products that address the PC-LAN storage systems
market, and in particular Windows NT applications. Many of Storage Dimensions'
current and potential competitors have significantly greater financial,
technical, marketing, purchasing and other resources than Storage Dimensions,
and as a result, may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, to devote greater resources
to the development, promotion and sale of products than can Storage Dimensions,
or to deliver competitive products at a lower end-user price. Storage Dimensions
also expects that competition will increase as a result of industry
consolidations. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the needs of Storage
Dimensions' prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on Storage Dimensions' business, operating
results or financial condition.
Storage Dimensions believes that the principal competitive factors
affecting its market include: fault-tolerant reliability, performance, ease of
use, scalability, configurability, price and customer service and support. There
can be no assurance that Storage Dimensions will be able to successfully
incorporate these factors into its products and to compete against current or
future competitors or that competitive pressures faced by Storage Dimensions
will not materially and adversely affect its business, operating results or
financial condition.
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<PAGE> 101
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Storage Dimensions' success depends significantly upon its proprietary
technology. Storage Dimensions currently relies on a combination of copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. Storage Dimensions seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Storage
Dimensions has registered its Storage Dimensions and LANStor trademarks and will
continue to evaluate the registration of additional trademarks as appropriate.
Storage Dimensions generally enters into confidentiality agreements with its
employees and with key vendors and suppliers. Storage Dimensions currently has
one U.S. patent application pending associated with the object-oriented layered
architecture of its RAIDFlex array management software. There can be no
assurance that this patent will eventually be issued, that Storage Dimensions
will develop proprietary products or technologies that are patentable, that any
patent issued in the future will provide Storage Dimensions with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have a material adverse effect on Storage Dimensions' ability to
do business. Storage Dimensions believes that the rapidly changing technology in
the computer storage industry makes Storage Dimensions' success dependent more
on the technical competence and creative skills of its personnel than on any
patents it may be able to obtain.
There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect Storage Dimensions' proprietary technology. Storage Dimensions has from
time to time received claims that it is infringing third parties' intellectual
property rights, and there can be no assurance that third parties will not in
the future claim infringement by Storage Dimensions with respect to current or
future products, trademarks or other proprietary rights. Storage Dimensions
expects that companies in the storage system market will increasingly be subject
to infringement claims as the number of products and competitors in Storage
Dimensions' target markets grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require Storage
Dimensions to redesign its products or require Storage Dimensions to enter into
royalty or licensing agreements, any of which could have a material adverse
effect on Storage Dimensions' business, operating results or financial
condition. Despite Storage Dimensions' efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of Storage Dimensions'
products or to obtain and use information that Storage Dimensions regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that Storage Dimensions' means of protecting its
proprietary rights will be adequate or that Storage Dimensions' competitors will
not independently develop similar technology, duplicate Storage Dimensions'
products or design around patents issued to Storage Dimensions or other
intellectual property rights of Storage Dimensions.
EMPLOYEES
As of December 31, 1997, Storage Dimensions had a total of 219 regular
full-time employees, of which 37 were engaged in engineering, research and
development; 102 in marketing, sales, and customer support; 51 in manufacturing;
and 29 in general management and administration. In addition, Storage Dimensions
had a total of 5 part-time and 12 temporary employees as of December 31, 1997.
None of Storage Dimensions' employees is represented by a labor union.
Storage Dimensions' future performance depends in significant part upon the
continued service of its key technical and senior management personnel. Storage
Dimensions provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of Storage
Dimensions' officers or other key employees could have a material adverse effect
on Storage Dimensions' business, operating results or financial condition.
Storage Dimensions' future success also depends on its continuing ability to
attract and retain highly qualified technical and management personnel.
Competition for such personnel is intense, and there can be no assurance that
Storage Dimensions can retain its key technical and management employees or that
it can attract, assimilate or retain other highly qualified technical and
management personnel in the future.
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FACILITIES
Storage Dimensions' principal administrative, sales, marketing,
manufacturing and research and development facility is located in approximately
80,000 square feet of space in Milpitas, California. This facility is leased
through December 6, 1998. Storage Dimensions leases other sales offices
throughout the U.S., as well as a European operations site in London, U.K.
Storage Dimensions believes that its existing facilities are adequate for its
current needs.
LEGAL PROCEEDINGS
Storage Dimensions is not a party to any material legal proceedings.
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<PAGE> 103
STORAGE DIMENSIONS EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to Storage Dimensions in all capacities during the
year ended December 31, 1997 for the (i) current Chief Executive Officer of
Storage Dimensions and (ii) the four most highly compensated Storage Dimensions
executive officers whose salary, bonus and other compensation for such year
exceeded $100,000 (the "Storage Dimensions Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David A. Eeg..................... 1997 $291,303 $44,793 $ 8,923 100,000
President and Chief 1996 282,068 16,753 8,315 --
Executive Officer
Gene Bowles, Jr. ................ 1997 242,662 34,818 8,693 100,000
former Senior Vice President 1996 220,237 13,615 7,398 --
Robert E. Bylin.................. 1997 164,690 33,871 4,961 50,000
Senior Vice President 1996 156,132 13,360 3,872 --
and Chief Financial Officer
Ralph Ciarlanti III.............. 1997 133,278 11,165 1,470 50,000
Vice President, Quality 1996 112,853 9,387 3,737 12,500
Kenneth Epstein.................. 1997 132,623 114,138 5,289 50,000
former Vice President, 1996 92,292 68,000 4,050 9,375
North American Sales
</TABLE>
- ---------------
(1) Includes car allowances, group life insurance and long-term disability
insurance.
SEVERANCE AGREEMENTS
In connection with the Merger, Storage Dimensions and each of David Eeg,
President and Chief Executive Officer, and Robert Bylin, Chief Financial Officer
of Storage Dimensions, amended the employment agreements of such persons to
provide certain severance benefits upon termination of their relationship with
Storage Dimensions. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF
STORAGE DIMENSIONS -- Severance Agreements."
OPTION GRANTS DURING 1997
The following table sets forth for each of the Storage Dimensions Named
Executive Officers certain information concerning stock options granted during
the year ended December 31, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(1) 1997 PER SHARE DATE(2)
---- ---------- ---------------- --------- ----------
<S> <C> <C> <C> <C>
David A. Eeg................................. 100,000 9.9% $7.00 3/3/07
Gene Bowles, Jr. ............................ 100,000 9.9% 7.00 3/3/07
Robert E. Bylin.............................. 50,000 4.9% 7.00 3/3/07
Ralph Ciarlanti III.......................... 50,000 4.9% 7.00 3/3/07
Kenneth Epstein.............................. 50,000 4.9% 7.00 3/3/07
</TABLE>
- ---------------
(1) Options generally have a ten year term, and vest at the rate of 1/8 of the
shares six months from the vesting start date and the balance monthly over
the succeeding 42 months.
(2) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability prior to such date.
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AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Storage Dimensions Named
Executive Officers certain information concerning options exercised during 1997
and the number of shares subject to both exercisable and unexercisable stock
options as of December 31, 1997. The following table also sets forth the value
of unexercised "in-the-money" options held at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF
VALUE REALIZED SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF (MARKET PRICE AT UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES EXERCISE LESS DECEMBER 31, 1997 DECEMBER 31, 1997($)(1)
ACQUIRED ON EXERCISE --------------------------- ---------------------------
NAME EXERCISE PRICE)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Eeg............ -- -- 81,250 81,250 $221,875 --
Gene Bowles, Jr. ....... -- -- 81,250 81,250 221,875 --
Robert E. Bylin......... -- -- 17,292 42,865 28,105 $ 7,952
Ralph Ciarlanti III..... 9,791 $53,230 10,155 50,054 2,436 28,139
Kenneth Epstein......... -- -- 14,819 -- 16,784 --
</TABLE>
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(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 and the exercise
price of such person's option.
(2) The value realized represents the estimated value of shares of Storage
Dimensions Common Stock determined as of the date of exercise by reference
to an independent appraisal of Storage Dimensions Common Stock, less the
option exercise price.
EMPLOYEE STOCK PLANS
1993 STOCK OPTION PLAN
Storage Dimensions' 1993 Stock Option Plan (the "1993 Option Plan"), which
provides for the grant of 555,555 shares of Storage Dimensions Common Stock, was
approved by the Storage Dimensions Board and stockholders on June 11, 1993. As
of December 31, 1997, options to purchase 360,580 shares were outstanding under
the 1993 Option Plan and 71,188 shares of Storage Dimensions Common Stock
remained available for issuance under the 1993 Option Plan. The terms of the
1993 Option Plan are substantially similar to those of the 1996 Stock Option
Plan described below. Effective January 1998, the 1993 Option Plan was amended
to provide that all outstanding options granted under the 1993 Option Plan (but
not any options granted in the future) will become fully vested and exercisable
upon completion of the Merger.
1996 STOCK OPTION PLAN
Storage Dimensions' 1996 Stock Option Plan (the "1996 Option Plan")
provides for the granting to employees and consultants of nonstatutory stock
options. The 1996 Option Plan was approved by the Board of Directors in December
1996 and by the stockholders in January 1997. A total of 1,000,000 shares of
Storage Dimensions Common Stock was originally reserved for issuance pursuant to
the 1996 Option Plan. As of December 31, 1997, options to purchase 805,831
shares of Storage Dimensions Common Stock were outstanding under the 1996 Option
Plan and 194,169 shares of Storage Dimensions Common Stock remained available
for issuance under the 1996 Option Plan. At the Storage Dimensions Special
Meeting, Storage Dimensions stockholders are being asked to approve an amendment
to the 1996 Option Plan in order to increase the number of shares issuable
thereunder to 3,000,000. See "ADDITIONAL MATTERS FOR CONSIDERATION FOR STORAGE
DIMENSIONS STOCKHOLDERS -- Amendment to 1996 Stock Option Plan."
1996 EMPLOYEE STOCK PURCHASE PLAN
Storage Dimensions' 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was approved by the Storage Dimensions Board in December 1996 and by the
stockholders in January 1997. A total of 200,000 shares of Storage Dimensions
Common Stock was originally reserved for issuance under the Purchase
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Plan. As of December 31, 1997, 47,253 shares of Storage Dimensions Common Stock
had been purchased under the Purchase Plan and 152,747 shares of Storage
Dimensions Common Stock remained available for purchase under the Purchase Plan.
At the Storage Dimensions Special Meeting, Storage Dimensions stockholders will
be asked to consider and approve an amendment to the Purchase Plan to increase
the number of shares of Storage Dimensions Common Stock issuable thereunder to
400,000. See "ADDITIONAL MATTERS FOR CONSIDERATION BY STORAGE DIMENSIONS'
STOCKHOLDERS -- Approval of Amendment to 1996 Employee Stock Purchase Plan."
401(k) PLAN
Storage Dimensions has a 401(k) Plan, pursuant to which eligible employees
may elect to reduce their current salary by up to the statutorily prescribed
annual limit ($10,000 in 1998) and have the amount of such reduction contributed
to the 401(k) Plan. Storage Dimensions matches employee contributions to the
401(k) Plan at the rate of 50% of the employee's contribution up to a specified
limit. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by participants to the 401(k) Plan, and income earned on plan
contributions, are not taxable to participants until withdrawn from the 401(k)
Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Storage Dimensions' directors
and executive officers, and persons who own more than ten percent of a
registered class of Storage Dimensions' equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Storage
Dimensions Common Stock and other equity securities of Storage Dimensions.
Officers, directors and greater than ten percent stockholders are required by
the SEC regulation to furnish Storage Dimensions with copies of all Section
16(a) forms they file.
To Storage Dimensions' knowledge, based solely on a review of the copies of
such reports furnished to Storage Dimensions and written representations that no
other reports were required, during the year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF STORAGE DIMENSIONS
Maxtor Promissory Note. In connection with the Storage Acquisition, Storage
Dimensions issued to Maxtor Corporation ("Maxtor") a promissory note in the
original principal amount of $4 million (the "Maxtor Note"). The Maxtor Note
bears interest at the rate of 8% per annum during the first year, 10% per annum
during the second year and 12% per annum for the remaining term. The Maxtor Note
was originally due on December 26, 1995 but the due date was subsequently
extended to the earlier to occur of the completion of Storage Dimensions'
initial public offering or May 10, 1997. During 1994, 1995 and 1996, Storage
Dimensions paid to Maxtor $400,000, $482,042 and $469,377, respectively, in
interest payments under the Maxtor Note. Storage Dimensions also paid $400,000
of principal in the third quarter of 1996 under the Maxtor Note. Storage
Dimensions paid the remaining outstanding principal together with unpaid
interest with a portion of the proceeds of its initial public offering. In
addition, during 1994 and 1995, Storage Dimensions purchased goods (principally
rigid magnetic and optical disk drives) from Maxtor and its affiliates totaling
$1.4 million and $69,000, respectively. Storage Dimensions did not purchase any
goods from Maxtor during 1996 or 1997.
Capital Partners Agreements. In connection with the Storage Acquisition in
December 1992, Storage Dimensions entered into a certain advisory agreement with
Capital Partners. Capital Partners, together with its affiliates, is the holder
of a majority of Storage Dimensions' outstanding voting stock. Messrs.
Fitzgerald and Gebauer, current directors of Storage Dimensions, are also
officers of Capital Partners. During 1994, 1995 and 1996, Storage Dimensions
paid to Capital Partners $362,000, $360,000 and $729,000, respectively, pursuant
to such advisory agreement. The 1996 amount includes a one-time payment of
$360,000 paid by Storage Dimensions in connection with termination of the
advisory agreement by mutual agreement in December 1996.
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In addition, in connection with the proposed Merger Capital Partners has
entered into a standstill agreement with Storage Dimensions pursuant to which it
has agreed not to purchase additional shares of Storage Dimensions Common Stock,
with certain exceptions, until the earlier of five years from the closing of the
Merger or such time as Capital Partners no longer holds 5% of the outstanding
Storage Dimensions Common Stock. See "OTHER AGREEMENTS -- Standstill Agreement."
Executive Officer Loans. In 1996, Storage Dimensions loaned David Bultman,
its Senior Vice President of Engineering at the time, amounts totaling $90,000.
Mr. Bultman is no longer employed with Storage Dimensions. The remaining balance
of Mr. Bultman's loan was $21,284 at December 31, 1997.
Severance Agreements. In connection with the Merger, Storage Dimensions and
each of David Eeg, President and Chief Executive Officer, and Robert Bylin,
Chief Financial Officer of Storage Dimensions, amended the employment agreements
of such persons to provide certain severance benefits upon termination of their
relationship with Storage Dimensions.
With respect to Mr. Eeg, upon termination of his status as a full time
employee or consultant of Storage Dimensions at either his option or that of
Storage Dimensions, Mr. Eeg shall receive severance payments equal to 66 weeks
of his regular salary, which shall be paid over such period. In addition, Mr.
Eeg's stock options granted under Storage Dimensions stock option plans have
been amended to provide that such options may be exercised for a period of two
years from the date of termination of his status as a full-time employee or
consultant of Storage Dimensions.
With respect to Mr. Bylin, upon termination of his status as a full time
employee or consultant of Storage Dimensions at either his option or the option
of Storage Dimensions, Mr. Bylin shall receive severance payments equal to 47
weeks of his regular salary, which shall be paid over such period. In addition,
Mr. Bylin's stock options granted under Storage Dimensions stock option plans
have been amended to provide that such stock options may be exercised for a
period of one year from the date of termination of his status as a full-time
employee or consultant of Storage Dimensions under certain circumstances.
In addition, both of such employment agreements, as amended, provide that
neither Mr. Eeg nor Mr. Bylin will compete with Storage Dimensions for the
remaining period of service by Messrs. Eeg and Bylin and during the time
severance payments are being made to them by Storage Dimensions.
All future transactions, including loans, between Storage Dimensions and
its officers, directors and principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors of the Board of Directors, and will be
on terms no less favorable to Storage Dimensions than could be obtained from
unaffiliated third parties.
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ARTECON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Artecon's and the Combined Company's actual results
could differ materially from those discussed below. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors," and "Artecon's Business," as well as
those discussed elsewhere in this Joint Proxy Statement/Prospectus.
OVERVIEW
Artecon designs, manufactures, markets and supports a broad range of
scalable, fully integrated data storage products for the open-systems computing
environment. Artecon has established itself as a leader in the design,
manufacture and sale of third-party mass storage and enhancement products in the
Sun Microsystems ("Sun") and UNIX markets, offering both host-attached and
network-attached storage solutions for a broad range of customers. Artecon's
enterprise storage product line includes scalable RAID systems which allow users
to grow modularly from a single mass storage device to over ten terabytes
("10TB") of rack-mounted, fault-tolerant mass storage, thereby meeting the
capacity and performance needs of a wide range of customers while protecting and
maintaining customer investment. Artecon's telecommunications infrastructure
storage products represent what Artecon believes is the industry's only fully
NEBS-certified, multi-terabyte solution for high-end, application-specific needs
of telecommunications and government customers using commercial off-the-shelf
("COTS") workstation technology. Artecon also markets rack-mount solutions for
COTS workstations and servers and provides systems integration and a variety of
other service and support programs.
Artecon was founded in 1984 in Carlsbad California as a supplier and
systems integrator of value added computer products. In 1990, Artecon began
research and development to design and manufacture its own proprietary data
storage products. In 1992, Artecon introduced its Lynx product line of storage
solutions and in 1994 Artecon introduced its Sphinx product line. Responding to
the need for cost-efficient, high quality mass storage solutions in the
telecommunications industry, in 1996, Artecon formed its TeleCom Division to
design, manufacture market and support fully integrated telecommunications
storage products, services and solutions.
In August 1997, Artecon acquired Falcon Systems, Inc. ("Falcon"), a
network-attached storage server integrator and storage peripherals reseller (the
"Falcon Acquisition"). The Falcon Acquisition enabled Artecon to achieve several
important strategic objectives, including the acquisition of Artecon's
AerREAL(TM) real-time specialized file server software and other complementary
products to better serve Artecon's existing customers, the expansion of
Artecon's customer base in the UNIX, Windows NT and Windows 95 markets and a
significant expansion of Artecon's revenue base. The acquisition was accounted
for as a purchase and accordingly, the results of operations of Falcon from the
closing date of the acquisition forward have been included in Artecon's
consolidated financial statements dated December 31, 1997 and for the nine-month
period then ended.
Artecon markets and distributes its products services through its direct
sales force employed in 11 domestic sales and support offices and 6 overseas
sales offices located in Japan, France, England and the Netherlands. In
addition, Artecon utilizes an extensive domestic and foreign reseller
distribution channel to market and distribute its products and services. Artecon
believes that such a diverse channel strategy results in the greatest
penetration of the market and enables it to effectively and efficiently
penetrate major accounts while at the same time leveraging its distribution
network into vertical markets. Artecon believes that the direct customer contact
resulting from the use of its own internal sales force provides it with
invaluable market feedback and the ability to tailor its products and
high-quality technical support services to enhance customer satisfaction and
loyalty. Artecon generates revenue from the sales of products and services.
Revenue from product sales is recognized upon shipment. Revenue generated from
service contracts is recognized ratably over the term of the contract. Operating
expenses consist primarily of rent, payroll, commissions, other selling and
administrative expenses and research and development costs and are recognized in
the period incurred.
Artecon currently expects its revenues for the fiscal quarter ending March
31, 1998 to be significantly less than its results of operations for the quarter
ended December 31, 1997. Artecon attributes the decline
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primarily to post-holiday seasonal sales declines and uncertainty in the
marketplace resulting from the announcement of the Merger in late 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1996
Net Revenues. Net revenues reflect the invoiced amounts for products
shipped less reserves for estimated returns. Net revenues for the nine months
ended December 31, 1997 were $52.6 million compared to $42.4 million for the
nine months ended December 31, 1996, an increase of approximately 24.1%. Such
increase in net revenues was primarily attributable to the Falcon Acquisition in
August 1997. Net revenues attributable to sales of Falcon products by Artecon
from August 21, 1997, the date of the Falcon Acquisition, to December 31, 1997
were approximately $12.6 million. Net revenues for the nine months ended
December 31, 1997 attributable to sales of Artecon products were $40.0 million,
compared to $42.4 million for the nine month period ended December 31, 1996. The
decrease in net revenues from sales of Artecon products for the nine months
ended December 31, 1997 compared to the same period for 1996 was the result of
decreased sales to a single customer in 1997. Sales to such customer amounted to
approximately $0.3 million and $12.8 million during the nine months ended
December 31, 1997 and December 31, 1996, respectively. Sales to this customer
prior to 1996 were not significant. Future sales to this customer are not
expected to be significant.
Gross Margin. Gross margin for the nine months ended December 31, 1997 was
$14.9 million, or 28.3% of net revenues, compared to $9.2 million for the nine
months ended December 31, 1996, or 21.7% of net revenues. The increase in gross
margin as a percent of net revenues for the nine months ended December 31, 1997
compared to the nine months ended December 31, 1996 was due primarily to an
increase in sales of Artecon's higher margin LynxRAID and Sphinx product lines,
as well as a reduction in product costs resulting, in part, from increased
efficiencies in product design. The gross margin derived from sales of Falcon
products during the nine months ended December 31, 1997 was approximately $3.3
million, or 26.2% of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses are comprised primarily of salaries, and commissions,
marketing costs and overhead costs associated with Artecon's finance and support
staff. Selling, general and administrative expenses increased to $10.4 million,
or 19.8% of net revenues for the nine months ended December 31, 1997, from $6.9
million, or 16.3% of net revenues, for the nine months ended December 31, 1996.
The increase in selling, general and administrative expenses during the nine
months ended December 31, 1997 was attributable primarily to the increase in
Artecon's sales and marketing force resulting from the Falcon Acquisition.
Research and Development Expenses. Research and development expenses are
comprised primarily of prototype expenses, salaries for employees directly
engaged in research and other costs associated with product development.
Research and development expenses for the nine months ended December 31, 1997
increased to $2.3 million, or 4.4% of net revenues, from $1.5 million, or 3.5%
of net revenues during the nine months ended December 31, 1996. The increase in
research and development expenses is attributable to Artecon's continued
development of new products.
Total Other Expense. Total other expense is comprised of interest, taxes
and other expenses, if any, relating to such periods presented. Total other
expense for the nine months ended December 31, 1997 was $727,000 compared to
total other expense of $209,000 for the nine months ended December 31, 1996. The
increase in total other expense was attributable primarily to interest payments
made on the promissory note issued by Artecon in connection with the Falcon
Acquisition and on increased borrowings under Artecon's credit line.
YEAR ENDED MARCH 29, 1997 COMPARED TO YEAR ENDED MARCH 30, 1996
Net Revenues. Artecon's net revenues for the year ended March 29, 1997 ("FY
1997") were $55.3 million compared to $47.2 million for the year ended March 30,
1996 ("FY 1996"). The increase in net revenues of approximately 17.2% was
primarily due to increased sales made to one significant customer. Although net
revenues increased from FY 1996 to FY 1997, net revenues generated from sales of
products
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overseas decreased from $11.9 million during FY 1996 to $7.7 million during FY
1997. The decrease in net revenues generated from overseas sales was due, in
part, to Artecon's decision to shift its overseas market focus from a strategy
of selling to a significant number of countries worldwide, to focusing on a
limited number of key target markets, specifically Europe (primarily the United
Kingdom, France and the Netherlands) and Japan, regions where Artecon's
management believes there is greater potential for growth in market share.
Management expects to continue this focus in the future, emphasizing higher
margin, more sophisticated products sold increasingly through Company owned or
controlled overseas operating units.
Gross Margin. Gross margin for FY 1997 was $12.5 million, or 22.6% of net
revenues compared to a gross margin of $12.5 million, or 26.5% of net revenues
for FY 1996. The decrease in gross margin from FY 1996 to FY 1997 was primarily
attributable to a combination of foreign currency translations on Artecon's
sales of products overseas and the decrease in overseas sales of products, which
typically have a higher profit margin than domestic sales of products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.0 million, or 16.3% of net revenues, for
FY 1997 from $8.9 million, or 18.9% of net revenues, for FY 1996. The increase
in selling, general and administrative expenses of approximately $100,000 for FY
1997 compared to FY 1996 was due to increased sales of Artecon's products,
primarily attributable to an increase in the number of Artecon's sales
personnel.
Research and Development Expenses. Research and development expenses
increased to $2.3 million, or 4.2% of net revenues for FY 1997, compared to $1.4
million, or 3% of net revenues for FY 1996. The increase of approximately
$900,000, or 64.3%, in research and development expenses was due to Artecon's
continued development of new products.
Total Other Expense. Total other expense decreased from $898,000 for FY
1996 to $247,000 for FY 1997. The decrease in total other expense of
approximately 72.5% was due in large part to a loss during FY 1996 of $336,000
related to foreign currency transactions. In addition, during FY 1996, Artecon
terminated a significant portion of the operations of its French-based
subsidiary, resulting in an unusual charge of $256,000. Artecon is exposed to
foreign currency exchange risk in each of its key overseas markets. Exposure
relates primarily to exchange rate fluctuations between the U.S. Dollar and the
Japanese Yen, British Pound, French Franc and Dutch Guilder. Overseas
operations' sales are made and operating expenses incurred in the local
currency. Product purchases are made in U.S. Dollars. The Company has
historically not actively managed its foreign currency exchange risk, except as
it relates to Japan. The Japanese operation has obtained local currency
financing and, from time to time, takes out forward contracts related to
anticipated purchases of U.S. product.
YEAR ENDED MARCH 30, 1996 COMPARED TO YEAR ENDED MARCH 25, 1995
Net Revenues. Net revenues remained essentially the same for FY 1996 and
for the year ended March 25, 1995 ("FY 1995"), totaling $47.2 million for FY
1996 and $47.8 million for FY 1995. During FY 1996, Artecon chose not to
continue sales of HP workstations. The decrease in net revenues resulting from
Artecon's decision to discontinue selling HP workstations was partially offset
by an increase in sales of its Lynx and Sphinx product lines.
Gross Margin. Gross margin for FY 1996 was $12.5 million, or 26.5% of net
revenues, compared to a gross margin of $9.5 million, or 19.9% of net revenues,
for FY 1995. The increase in gross margin from FY 1995 to FY 1996 was primarily
attributable to increased sales of Artecon's Lynx family of products, which
typically generate higher margins than sales of third party products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for FY 1996 were $8.9 million, or 18.9% of net revenues
compared to $7.9 million, or 16.5% of net revenues for FY 1995. The increase in
selling, general and administrative expenses in FY 1996 was due in part to
increased sales, the opening of two new European sales offices and an increase
in Artecon's sales force.
Research and Development Expenses. Research and development expenses for FY
1996 were $1.4 million, or 3% of net revenues compared to $1.1 million, or 2.3%
of net revenues, for FY 1995. The increase in
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research and development expenses of approximately $300,000 from FY 1995 to FY
1996 was attributable primarily to Artecon's continued development of new
products.
Total Other Expense. Total other expense increased to $898,000 for FY 1996
from $64,000 for FY 1995. The increase was due primarily to a combination of a
one-time charge of $256,000 associated with the termination of a significant
portion of the operations of Artecon's French-based subsidiary and to losses on
foreign currency transactions.
INCOME TAXES
Artecon accounts for income taxes in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns of Artecon. Under SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using the enacted tax rates in effect for the year in
which the differences are expected to reverse.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Artecon has financed its operations primarily through a
combination of cash generated from operations and bank borrowings and through
sales of its capital stock. Artecon had approximately $12.5 million of accounts
receivable as of December 31, 1997.
Artecon has a credit facility with a United States bank which permits
borrowings of up to $12,500,000 based upon a percentage of accounts receivable
and inventory. Artecon may choose between borrowing at the bank's prime rate, as
it may vary from time to time, or it may choose a rate that is fixed for an
agreed-upon period of from 30 to 180 days with interest due quarterly at the
LIBOR rate in effect at the commencement of the agreed-upon fixed period, plus
2.0%. The line of credit requires that Artecon comply with certain covenants,
including minimum tangible net worth requirements. Certain minimum amounts apply
to advances under the line of credit and such amounts must be borrowed for a
minimum of 30 days. The line of credit is secured by all of the assets of
Artecon. The revolving credit facility expires on September 1, 1999. Interest is
payable monthly. Principal is payable at the end of the term. The total
outstanding balance under the line of credit as of December 31, 1997 was $9.7
million. Artecon was not in compliance with the cash flow coverage ratio and
financial performance covenants associated with its line of credit for the
quarter ended December 31, 1997. The noncompliance for the quarter was primarily
the result of severance costs at Falcon. Artecon obtained a waiver from the bank
as of and for the quarter ended December 31, 1997. Artecon does not anticipate
that future liquidity will be impacted by the bank's covenant requirements,
since management anticipates that all covenants will be met, and that the bank
financing agreements will be amended or replaced after consummation of the
Merger.
Artecon's Japanese subsidiary has three lines of credit with a Japanese
bank for borrowings of up to an aggregate of 75 million Yen (approximately
US$580,000 at December 31, 1997) at interest rates ranging from 1.62% to 2.4%.
Interest is due monthly with principal due and payable on various dates through
February 27, 1999. Borrowings are secured by the inventories of the Japanese
subsidiary. As of December 31, 1997, the total amount outstanding under the
three credit lines was 60 million Yen (approximately US$460,000).
Artecon also has a long-term equipment loan secured by certain computers
used in its operations. As of December 31, 1997, the total amount outstanding on
the equipment loan was $219,000.
On August 21, 1997, Artecon acquired substantially all of the assets and
liabilities of Falcon (the "Falcon Acquisition"), other than certain technology
assets (the "Falcon Technology"), in exchange for $1,000,000 in cash and a
promissory note in the original principal amount of $1,250,000 (the "Artecon
Note"). Subsequent to the issuance of the Artecon Note, Artecon and Falcon
amended the Artecon Note to decrease the principal amount due thereunder to
$750,000. Concurrently with the Falcon Acquisition, Falcon transferred the
Falcon Technology to Founding Partners, a California general partnership
("Founding Partners"), in exchange for a promissory note in the principal amount
of $1,750,000 (the "Founding Partners Note"). Dana Kammersgard, James Lambert
and W.R. Sauey, each of whom is an executive officer and/or director of Artecon,
are the general partners of Founding Partners. Founding Partners is considered
to be a Special Purpose Entity and,
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accordingly, has been consolidated with Artecon for financial reporting
purposes. The purchase price was allocated among the acquired assets to
$10,232,000 for other assets acquired, $638,000 to goodwill and other intangible
assets, $14,138,000 for liabilities assumed and to in-process research and
development expenses of $3,700,000, which had no future alternative use, based
on management assumptions. Under the terms of the Artecon Note, as adjusted, and
the Founding Partners Note (collectively, the "Notes"), Artecon and Founding
Partners, respectively, are required to make monthly payments to Falcon of
$15,935 and $37,182, respectively, through August 2002. Each of the Notes bears
interest at the rate of 10% per annum. As of December 31, 1997, the total amount
of principal and interest outstanding under the Artecon Note was $710,722, and
the total amount of principal and interest outstanding under the Founding
Partners Note was $1,658,468.
In connection with the Falcon Acquisition and the transfer of the Falcon
Technology, Artecon and Founding Partners entered into a Technology License
Agreement, dated August 21, 1997, pursuant to which Founding Partners granted to
Artecon an exclusive, perpetual license of the Falcon Technology in exchange for
monthly payments of $39,000 payable through August 2002.
As of December 31, 1997, Artecon's future commitments under its operating
leases totaled approximately $2.2 million.
Capital spending for FY 1997 and for the nine months ended December 31,
1997 were $260,000 and $440,000, respectively. Artecon anticipates capital
expenditures of $600,000 for the year ending March 31, 1998. This is a
forward-looking statement reflecting current beliefs and expectations. Actual
capital expenditures may vary from those anticipated and will be affected by a
number of factors, including those set forth below.
Artecon's sales and operating results have in the past fluctuated from
quarter to quarter and may vary in the future depending on a number of factors,
including: the size and timing of significant purchase orders; the timing of
hardware shipments by third-party vendors necessary to recognize revenues; the
ability of Artecon to continue to design, develop and market new products and
services; market acceptance of new products; Artecon's success in increasing its
domestic and foreign sales force; the size and number of new accounts;
technological changes in the storage systems market; the growth of the
telecommunications and Internet/ intranet industry; reduction in demand for
Artecon's products as a result of new product introductions by competitors;
levels of expenditure on research and development; the amount of additional
capital needed by Artecon and the timing of such need; product quality problems;
fluctuations in foreign currency exchange rates; and general economic trends and
other factors. Sales and operating results for past periods are not necessarily
indicative of future periods and a period-to-period comparison of its sales or
results of operations are not necessarily meaningful and should not be relied
upon as an indicator of future performance.
Artecon's management believes that its cash, resources from operations and
amounts available under its line of credit are sufficient to meet its current
capital commitments and operating requirements of its existing business for a
period of at least twelve months. However, there can be no assurance that
Artecon will not need to obtain additional capital before such time. The actual
amount and timing of working capital and capital equipment expenditures that
Artecon may incur in future periods may vary significantly and will depend upon
numerous factors, including the amount and timing of the receipt of resources
from continued operations, the increase in manufacturing capabilities, the
timing and extent of the introduction of new products and services, and growth
in personnel and operations.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. There can be no assurance that the
impact of the Year 2000 issue will not have a material adverse effect on
Artecon's internal operations or on sales of its software products.
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CHANGE IN ACCOUNTANTS OF ARTECON
In March 1997, Ernst & Young LLP ("Ernst & Young") resigned as independent
auditors of Artecon.
None of Ernst & Young's reports on Artecon's financial statements for the
fiscal years ended March 30, 1996 and March 25, 1995 contained an adverse
opinion or disclaimer of opinion, nor were their opinions qualified or modified
as to audit scope or accounting principles. During the fiscal years ended March
30, 1996 and March 25, 1995 and the subsequent interim period through Ernst &
Young's resignation, there were no disagreements with Ernst & Young on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to Ernst & Young's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their reports, nor were there any reportable
events of the type requiring disclosure under Item 304(a)(1)(v) of Regulation
S-K.
At a meeting held on March 7, 1997, the Board of Directors of Artecon
approved the selection of Deloitte & Touche LLP as Artecon's independent
auditors for the fiscal year ended March 29, 1997. During the fiscal year ended
March 29, 1997, Artecon has not consulted with Deloitte & Touche LLP regarding
the application of accounting principles or type of audit opinion that might be
rendered nor any matter that was either the subject of a disagreement, as that
term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event of the type
requiring disclosure under Item 304(a)(1)(v) of Regulation S-K.
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ARTECON BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Artecon's and the combined entity's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Artecon Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as those
discussed elsewhere in this Prospectus/Joint Proxy Statement.
Artecon designs, manufactures, markets and supports a broad range of
scalable, fully integrated data storage products for the open-systems computing
environment. Artecon has established itself as a leader in the design,
manufacture and sale of third-party mass storage and enhancement products in the
Sun Microsystems ("Sun") and UNIX markets, offering both host-attached and
network-attached storage solutions for a broad range of customers. Artecon's
enterprise storage product line includes scalable RAID systems which allow users
to grow modularly from a single mass storage device to over ten terabytes
("10TB") of rack-mounted, fault-tolerant mass storage, thereby meeting the
capacity and performance needs of a wide range of customers while protecting and
maintaining customer investment. Artecon's telecommunications infrastructure
storage products represent what Artecon believes is the industry's only fully
NEBS-certified, multi-terabyte solution for high-end, application-specific needs
of telecommunications and government customers using commercial off-the-shelf
("COTS") workstation technology. Artecon also markets rack-mount solutions for
COTS workstations and servers and provides systems integration and a variety of
other service and support programs.
In August 1997, Artecon acquired substantially all of the assets and
liabilities of Falcon, a network-attached storage server integrator and storage
peripherals reseller, in a transaction accounted for as a purchase. The Falcon
acquisition enabled Artecon to achieve several important strategic objectives,
including the acquisition of Artecon's AerREAL(TM) real-time specialized file
server software and other complementary products to better serve Artecon's
existing customers, the expansion of Artecon's customer base in the UNIX,
Windows NT and Windows 95 markets and a significant expansion of Artecon's
revenue base.
INDUSTRY BACKGROUND
The rapid proliferation of new data-intensive applications, such as video,
the Internet, intranets, multimedia, data warehousing and data mining, and the
migration of mission-critical applications away from mainframe computers have
fueled the demand for open-systems data storage. Disk storage systems, tape
backup systems and software-based management tools designed to operate on
multiple platforms are becoming a strategic part of the MIS environment. MIS
purchase decisions are becoming increasingly focused on data storage and,
increasingly, capital expenditures for storage systems are equal to or greater
than those made on computer processing hardware. Storage architectures based on
protocols such as UltraSCSI and Fibre Channel Arbitrated Loop ("FC-AL") and
topologies such as Storage Area Network ("SAN") are driving a much greater focus
on data center purchasing towards storage. Currently, the industry is split into
solutions based on host-attached storage and solutions based on network-attached
storage.
UNIX and Windows NT. Open-systems platforms today employ either UNIX
variants such as Solaris (Sun), HPUX (HP), AIX (IBM), IRIX (SGI) or Windows NT
from Microsoft. Together, these operating systems are installed on the vast
majority of computers used in the enterprise. UNIX platforms currently have the
largest installed user base in terms of numbers of units, with the Windows NT
user base expanding. International Data Corporation ("IDC"), an independent
market research firm, estimates that the worldwide market for RAID storage
systems in UNIX environments will grow at a compounded annual growth rate of
19.3%, increasing from $6.3 billion in 1996 to $12.9 billion in 2000. In
addition, IDC estimates that the worldwide market for RAID storage systems in
Windows NT environments will grow at a compounded annual growth rate of 34.1%,
increasing from $1.3 billion in 1996 to $4.3 billion in 2000.
Many companies use a combination of both types of systems, often employing
Windows NT-based Intel machines for front office work (e.g., accounting, office
support, administration) and UNIX-based RISC workstations for back office
functions such as engineering and manufacturing. More recently, Windows NT
workstations have been developed by companies such as Compaq and HP, among
others, to challenge the dominance of UNIX workstations in the engineering,
scientific and other technical arenas. This has resulted in a gradual but steady
transition from the UNIX-installed base towards Windows NT, further exacerbating
the
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need for open-systems storage solutions that support both operating systems on
platforms from a variety of vendors.
Host-Attached Storage. The open-systems market's current host-attached
storage options include disk arrays, RAID storage systems and tape backup
systems. Each of these is generally attached to the host by the Small Computer
Systems Interface ("SCSI"). UltraSCSI has been the dominant commercially
available interface currently used in most disk array and RAID storage systems.
Fibre Channel, an emerging high-speed serial interface that has recently become
commercially available, is regarded by many industry participants as the storage
industry's next-generation interface. Fibre Channel enables the transfer of data
between computers and peripherals at substantially increased rates, over greatly
increased cabling lengths and among a greater number of host/device connections.
A number of industry leaders, including Microsoft Corporation, Seagate, Quantum,
IBM, Sun, Adaptec, Inc. and Emulex Corporation, have indicated support for Fibre
Channel technology and have announced that they are producing or plan to produce
products that incorporate it.
Network-Attached Storage. The requirements of the data-intensive network
environment have contributed to the growing importance of the network file
service function, which involves reading and writing files to and from shared
data storage over the network. Until recently, the file service function had
been performed exclusively by larger, generalpurpose computer systems which also
executed other tasks such as print serving, application processing and
communications functions. As networks evolved, network managers increasingly
dedicated general-purpose systems specifically to the file service task in order
to enhance performance, simplify administration and reduce vulnerability to
other applicationrelated failures. These dedicated systems became known as "file
servers."
Systems vendors have offered a variety of specially configured and add-on
solutions for general-purpose systems deployed as file servers. Selected vendors
have also introduced highly specialized, hardware-intensive systems designed to
exclusively perform the file service task. These approaches, such as the use of
hardware accelerators and the introduction of specialized hardware
architectures, have been optimized for throughput. However, they are generally
not designed to address the specific problem of response time, which is critical
in data-intensive network environments. In addition, because these approaches
lack the flexibility to easily integrate additional network, file system and/or
disk interfaces or protocols associated with today's heterogeneous networks
(such as mixed UNIX and NT networks), these approaches do not directly address
the reliability and access issues associated with data storage on a network.
Consequently, network-attached storage systems have lacked cost-effective,
flexible solutions to address data-access performance, data administration and
data availability and reliability issues in the data-intensive network
environment.
The Internet and the World Wide Web (WWW). The virtual explosion of the
Internet and subsequently corporatewide intranets has had a profound impact on
the computer industry in general and on the demand for storage solutions in
particular. The Internet and intranet environments involve intensive processing
or computation of, and frequent user access to, large volumes of data and
consequently require a mission critical level of high-availability mass storage.
Moreover, the data intensity of these environments is expected to continue to
increase substantially due to the development of new applications and services
and the more prevalent use of stored digital graphics, voice and video,
requiring dramatically more data capacity and performance than equivalent
alphanumeric information.
Telecommunications Industry. The enactment by Congress of the
Telecommunications Deregulation Act in 1996, the opening up of additional radio
frequency spectrum for wireless communications by the Federal Communications
Commission ("FCC") and other significant recent developments have spurred
dramatic changes in the worldwide telecommunications industry. The development
and build-out of expanded markets and new modes of communication that have been
enabled by these changes, including digital cellular systems, personal
communications systems ("PCS"), satellite-based communications systems, Internet
and cable systems, will require enormous capital expenditures for new
infrastructure. Artecon believes that a significant element of the required
infrastructure will consist of high performance mass storage systems that must
be specially adapted and certified for use in the telecommunications industry.
Telecommunications companies are seeking COTS-based solutions that can be
adapted and deployed in their embedded architectures due to ever-increasing cost
pressures and time-to-market constraints. These solutions are typically based on
UNIX and/or Windows NT systems and employ highly redundant RAID storage systems.
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THE ARTECON SOLUTION
Artecon develops and markets a comprehensive range of scalable, fully
integrated data storage products and services for the open-systems computing
environment. Artecon's products are both host attached and network attached,
based on a common architecture allowing scalability from the first desktop mass
storage unit purchased to multi-terabyte data center installations. Artecon's
family of products and services is intended to provide users with the following
benefits:
- High Performance with Mission-Critical High Availability. Recognizing the
increased demand for faster response times, greater capacities, higher
availability of data and minimum system downtime, Artecon has focused on
developing high-end, high-performance storage products using SCSI, Ultra
SCSI and Fibre Channel interfaces. Redundant system components such as
dual power inlets and multiple fans are intended to virtually eliminate
any single point of failure to ensure maximum system uptime.
- Scalability. Artecon's products are designed using a flexible, modular
architecture allowing Artecon to size and configure storage systems to
the application-specific requirements of individual customers. In
addition, this architecture allows Artecon to resize and reconfigure
these systems to adapt to the changing needs of customers, while allowing
them to retain capital value in their underlying systems. By allowing
users to grow modularly from a single mass storage device to over 10
terabytes of rack-mounted, fault-tolerant RAID mass storage, Artecon's
Lynx hot-plug removable mass storage subsystems address the capacity and
performance needs of customers while protecting customer investment.
- Multi-Platform Support. As an independent provider of storage products,
Artecon is well positioned to provide storage systems specifically
designed to be compatible with a variety of UNIX and Windows NT
platforms. This cross-platform capability allows end users to standardize
on a single storage system that can readily be reconfigured and
redeployed at minimal cost as operating systems or other open-system
components change.
- High-Performance Backup. To satisfy market demand for reliable,
high-quality backup products and systems, Artecon offers a broad variety
of backup products, including tape library systems, backup software,
training and documentation. Artecon has specialized expertise in the
design and implementation of effective, well-integrated backup solutions
designed to satisfy customers' individual needs, from departmental server
systems to enterprise network systems.
- All-Encompassing Solutions. Artecon delivers all-encompassing solutions
including design consulting, systems integration, installation, training,
comprehensive service and technical support and software-based management
tools. Artecon employs a full staff of direct sales personnel and
applications engineers to assist customers in making appropriate and
effective storage system purchases and in addressing, analyzing and
solving complex, pre-deployment storage problems. This value-added
capability fosters customer loyalty and allows Artecon to identify
emerging customer requirements for future data storage products.
ARTECON'S STRATEGY
Artecon's objective is to continue its growth and enhance its position as a
leading independent provider of host-attached and network-attached storage
solutions to the open-systems marketplace. To achieve this objective, Artecon
plans to build upon its record of successfully introducing and commercializing
new products and technologies that address the evolving data storage needs of
its broad customer base. Key elements of this strategy are:
- Complement Major Platform Vendors. Artecon intends to continue to pursue
its strategy of complementing the major platform vendors, including Sun,
Hewlett Packard ("HP"), Silicon Graphics ("SGI"), IBM and others, by
engineering, manufacturing and marketing value-added products that
address a broad spectrum of customer needs while enhancing and extending
the platform vendor's own product lines. For example, through Artecon's
Telecommunications Products Division, Artecon has extended Sun and other
COTS workstation products into the -48VDC telecommunications market.
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- Provide Complete Solutions and Product Migration Path. Artecon's products
are designed to address a wide range of customer needs. By utilizing
common core technology throughout its product line, Artecon enables
customers to migrate from product to product to address the changing
needs of growing companies. By providing comprehensive solutions, Artecon
is able to work more closely with customers, offer additional modules or
products and provide additional services as an ongoing course of
business.
- Continued Emphasis on Sun Microsystems Market. Artecon intends to
maintain its status as a leading third-party provider of mass storage and
enhancement products for use in conjunction with Sun (or SGI) computer
systems, both by continuing its focus on the primary Sun distribution
network and by continuing its active participation as a strategic
telecommunications partner of Sun. Artecon's Sun distribution channels
include SunExpress, Merisel, Access Graphics, Ingram Micro, GTSI, Sun
Federal and C. Itoh.
- Expanded Market Penetration. Artecon intends to diversify its market
penetration beyond products used in conjunction with Sun (or SGI)
computer systems into other UNIX and the Windows NT markets. Artecon has
recently begun to extend its resale channels into the SGI market. Artecon
believes that Windows NT will, within the next few years, eclipse UNIX as
the primary enterprise server operating environment. As a consequence,
Artecon believes that Windows NT users will require the same large-scale,
highavailability mass storage as current UNIX users require.
- Focus on Specialized Storage Needs of Data-Intensive Markets. Artecon
intends to continue to target users of UNIX and Windows NT computing
environments who require high-performance, high-availability and
fault-tolerant storage solutions, such as end users in data-intensive
industries, particularly the telecommunications and Internet/intranet,
financial services and multimedia markets. Artecon, as an independent
provider of storage systems, believes that it is well positioned to
address the multi-platform, multi-protocol computing requirements of
these targeted high-end users.
- Continue to Leverage Direct Sales Capabilities While Maintaining and
Expanding Reseller Channels. Artecon believes that a properly managed,
diverse distribution channel strategy should result in the greatest
penetration of the market. Accordingly, Artecon utilizes both a direct
sales force and extensive reseller distribution channels to penetrate
major accounts while leveraging the reseller channel into vertical
markets. Direct customer contact provides Artecon with invaluable market
feedback and the ability to provide high-quality technical support and
enhance customer loyalty. At the same time, however, Artecon recognizes
that its success to date has been due in part to its strong relationships
with its resale partners, both domestically and overseas, and believes
that maintaining and expanding these distribution channels will provide
Artecon with a significant competitive advantage.
PRODUCTS AND SERVICES
Artecon's products and services are offered through two operating
divisions: the Enterprise Storage Division and the TeleCom Division. In order to
address the unique and highly specialized needs of the telecommunications and
Internet/intranet marketplace, Artecon formed its Telecom Division in June 1996.
Artecon's Enterprise Storage Division is responsible for the other markets
targeted by Artecon, including finance (for example, commodities brokers and
trading analysts), multimedia (such as entertainment providers, cable companies,
news services and the companies building infrastructure to serve them),
government, advanced-technology and industrial markets. Within these two
divisions of the company, Artecon's data storage solutions fall into four
general categories: enterprise storage, workstation and server rack solutions,
telecommunications infrastructure enabling technologies and systems integration
capability.
ENTERPRISE STORAGE DIVISION
Artecon provides enterprise storage solutions to its customers through its
Lynx product line. By allowing users to grow modularly from a single mass
storage device to over 10 terabytes of rack-mounted, fault-tolerant RAID mass
storage, Artecon's Lynx hot-swap removable mass storage subsystems address the
capacity and performance needs of customers while maintaining and protecting
customer investment. The Lynx unit is the fundamental building block of all
Artecon storage solutions and has several unique and differentiating features,
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including interlocking stackability, cableless design, ruggedized hot-swap drive
sleds, front-removable power supplies and auto termination. To date, over 70,000
Lynx storage units have been installed.
The Lynx line of storage solutions include LynxNSS network-attached storage
servers designed to meet the file storage and access needs of networked
environments and LynxArray and LynxStak RAID systems which offer host-attached
RAID protection and performance enhancement for creating highly available,
mission-critical storage systems. Artecon believes that the performance,
flexibility, true scalability, hot-swap removable components and compact form
factor provide significant benefits to its customers. Major customers for the
Lynx include GTE Government Systems, Salomon Brothers/Smith Barney, Swiss Bank,
PSINet, and the US Army, Marines and Navy.
Artecon's LynxStak(TM) product is an interlocking modular desktop RAID
solution that easily scales from 4GB to 126GB as required. A single LynxStak
unit may be expanded with up to 14 drives, one at a time in the field by the end
user customer. A single LynxStak RAID controller may be joined with a second in
the field as requirements grow more demanding to ensure
no-single-point-of-failure operation. The LynxStak system uses the same
high-performing hot-swap drives and RAID controller as Artecon's LynxArray,
giving the customer a high degree of investment protection. The LynxStak RAID
system supports any 3.5" or half-height 5.25" devices. Hot-plug removable
options for controllers, drives, and power supplies are available. Major
customers for LynxStak include Geoquest/Schlumberger, Nike, Sharp Electronics,
and Philips.
Artecon's LynxArray(TM) family of products provides a tower or rackmount
RAID solution. The LynxArray family (LR3000, LR-5000, LR-7000) uses the same
architecture as capacity scales from 27GB to over 10TB so that customer
investment is protected. LynxArray uses an Intel-based RAID controller that
operates at a speed of 4600 I/Os per second. UltraWide SCSI channels from host
computer through controllers to drives allow 40MB per second burst and 33MB per
second sustained transfer rates. LynxArray is also available with Fibre Channel
host interfaces that greater flexibility and enhanced performance. The LynxArray
supports up 162GB of hot-swappable disk capacity and two hot-swap failover RAID
controllers in only 7" (4u EIA) of vertical space to optimize precious rack
space. Inline support for tape drives makes backup possible within the RAID
subsystem. Hot swap removable options for failover controllers, any 3.5" or
half-height 5.25" devices, redundant power supplies and fans are all available
for more fail-safe, potentially nonstop operation. Major customers for LynxArray
include WorldCom/UUNet, Philips, ING Group, Digital Sound Corporation, U.S.
Navy, NTT (Japan), Lockheed Martin, Qualcomm, EDS and the British MOD.
The LynxNSS(TM) is a family of specialized network-attached storage servers
dedicated to providing rapid file access for networks requiring 27 gigabytes
(27GB) to over 2 terabytes of storage. LynxNSS supports multiple file transfer
protocols to facilitate file sharing in heterogeneous computer environments
while network connectivity is furnished by a variety of network interfaces
including 10/100BASE-T Ethernet, FDDI, CDDI and quarter- and full-speed Fibre
Channel. Artecon believes that LynxNSS, which features multi-processor hardware,
specialized file server software, high-speed network technologies and
hardware-based RAID, offers better price/performance ratios than both
general-purpose servers and other specialized servers.
LynxNSS also employs Artecon's AerREAL(TM) real-time specialized file
server software and multi-processor architecture to enhance performance, while
AerREAL's Journaling Automation System helps ensure data integrity and hotswap
components permit replacement without interrupting file service. The LynxNSS
allows mixed RAID levels so that different RAID levels can be chosen for each
application for best performance. Fully redundant failover configurations are
available for continuous mission-critical operation. Major customers of LynxNSS
include Lockheed Martin, California Department of Water, Oracle, and AT&T.
WORKSTATION AND SERVER RACK SOLUTIONS
Artecon's Sphinx(TM) workstation and server rack solutions enable users to
rackmount COTS desktop workstations from Sun and SGI into powerful,
application-specific servers. Sphinx products protect against shock and
vibration events, maintain the thermal integrity of the workstation/server,
enhance system physical security while providing a very compact expansion
capability. Artecon believes it offers a superior solution than the typical rack
shelf used for rackmounting workstations and servers. Sphinx also allows hot
swap removable devices to be added so that a variety of powerful and expandable
configurations can be constructed,
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including high-end clustered compute servers, highavailability failover servers,
network servers and database servers.
The Sphinx has a patented design intended to ensure that the workstation or
server remains unmodified so manufacturer's warranty, service, upgradability and
pricing are left intact. Other features include locking side rails with mounting
brackets, patented tuck-away, side-mounted lug handles, a locking front panel
for extra security, and flexibility to add up to an additional four hot swap
removable disks or CD, MO, and tape devices with a high degree of space
efficiency. Single or dual SCSI I/O connections provide fast, redundant access
to all devices. Power on/off, serial and keyboard ports are located on the front
of the chassis, and users have unobstructed access to the backplane of the
workstation or server for easy service.
Artecon's Sphinx customers range from manufacturing floor and computer
center applications, to government agencies with requirements for shipboard,
aircraft and ground vehicle deployment of desktop workstations. Major customers
for Artecon's Sphinx include Sun Microsystems, Oracle, Adobe, the U.S. Air
Force, Navy and Army, Westinghouse and JPL.
TELECOM DIVISION
Artecon's TeleCom Division designs, manufactures, markets and supports
fully integrated, industry-compliant storage products, services and solutions
for the telecommunications ("telco") and Internet/intranet markets by utilizing
commercially available workstation, server and other application-specific
products for enhanced price/performance characteristics and reduced time to
market. Most of the products and services manufactured and marketed by Artecon's
Enterprise Storage Division can be utilized by telecommunications and Internet
service providers.
Requirements unique to the telecommunications industry include -48VDC power
(native to the Central Office environment) and compliance with Bellcore's
Network Equipment-Building System ("NEBS") areas of standardization, which
include electromagnetic compatibility, thermal robustness, fire resistance,
earthquake and office vibration resistance, transportation and handling,
acoustics and illumination and airborne contaminants. Telco embedded
infrastructure projects are exceptionally demanding in terms of high
availability and redundancy due to the uptime requirements of the world's
telephone and communications support equipment. NEBS testing requires a
certified unit to be able to withstand an earthquake, a lightning strike, a
fire, severe airborne particulate contamination, extreme temperature ranges and
other catastrophic events. To date, Artecon is the only open-systems storage
company whose RAID products are fully certified to Bellcore NEBS standards. In
addition, Artecon's commercial enterprise storage products are built to the same
demanding standards, yielding very reliable systems for the commercial market.
Telco Storage Solutions. Most of Artecon's enterprise storage products,
including LynxArray and LynxNSS, can be utilized by telecommunications and
Internet service providers. Artecon believes that it is currently the only RAID
vendor whose products have passed full NEBS certification, and Artecon's
LynxArray EXTREME products are already in use by telecommunications and ISP
providers such as Motorola, Qualcomm, AT&T, Lucent Technologies, MCI, Sprint,
Southwestern Bell, WorldCom/UUNet, Digital Sound Corporation, Intervoice, and
Intellivoice.
Workstation and Server Rack Solutions. Artecon's Sphinx EXTREME product
line is fully NEBS-certified and has been instrumental in bringing Sun and SGI
workstation products into the telecommunications and typical Internet service
provider deployed (rack-mount) environment. Artecon's TeleCom Division Sphinx
customers include a wide range of telecommunications infrastructure and
Internet/intranet service providers building new Internet, wireless and PCS
services based on COTS workstations, including AT&T, Sprint, MCI, Qualcomm,
Motorola, Bell Atlantic/Nynex, and WorldCom/UUNet.
Power Products. Artecon believes that its PowerSphinx(TM) EXTREME is the
industry's first 1.75" DC/DC power converter which allows unmodified COTS
workstations and other products to run in the
- -48VDC environment of the telecommunications Central Office. PowerSphinx EXTREME
enables workstation and networking products typically used in 110-240VAC
environments to run unmodified in the -48VDC context. Artecon believes this
feature may significantly accelerate its customers' time to market for new
infrastructure while reducing costs due to the ability to employ standard (as
opposed to custom) workstation, networking and other products.
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PowerSphinx EXTREME is designed for use with 110-240VAC devices such as
workstations, switches, routers and hubs so that they may operate in the -48VDC
telecommunications environment, thereby expanding the limits of available
product choices to engineers and integrators building telecommunications
systems. Artecon believes that the compact 1.75" EIA rack height is an improved
and preferable alternative to typically large (often as much as 21" or 12u EIA)
power inverters. PowerSphinx EXTREME has two hot-swappable, load-sharing power
modules to assure uninterrupted operation, combined with dual -48VDC inlet power
connections to help virtually eliminate any single point of failure. Other
features include 1600 watts of total power output, hot-plug removable power
trays and fans, alarm system and dual LED displays. The PowerSphinx EXTREME is
fully certified to Bellcore NEBS standards and is in use by such telco customers
as Qualcomm, MCI, Korea Telecom, Dutch PTT, Motorola, GTE, and Sprint.
Telecommunications Services. Most of the regional Bell operating companies
("RBOCs"), InterExchange servers ("IXSs"), long-distance haulers ("LDHs") and
switch manufacturers lack the resources, time, expertise and inclination to
invest in internal integration of open systems and therefore look to a supplier
who can not only provide product but also single-source solutions. As a
consequence, Artecon believes that its systems integration services are
well-suited to the telecommunications market. Artecon has established product
and integration contracts with Motorola, Qualcomm and MCI.
Artecon's systems integration services produce expandable systems with
maximum capabilities and space efficiency to suit each client's unique
situation. Artecon utilizes commercially available workstation, server,
networking and other application-specific products along with its own EXTREME
product line to produce highly customized solutions. By leveraging its unique
products, Artecon believes it can often create the most cost-efficient and in
many cases, the only viable solution for a telco or Internet customer's unique
requirements. Artecon's open-systems, COTS approach can accelerate customers'
time to market and provide customers with superior price/performance. Unlike
most systems integrators, Artecon does not require customers to purchase
computer systems from Artecon, and because the workstations or servers stay
unmodified, all manufacturer warranties and support agreements remain in effect.
With Artecon's extensive experience as systems integrator, innovative
engineering, excellence in manufacturing and comprehensive support, Artecon
believes it can provide its customers with powerful storage solutions.
PRODUCTS IN DEVELOPMENT
Artecon has several products in development including next-generation RAID
systems designed to increase the performance and density of current product
offerings. These systems are being designed to provide both UltraSCSI and FC-AL
interfaces as well as direct network attachment, and support capacities in
excess of 1.5 terabyte on a single controller set. In addition, Artecon is
developing significant enhancements to its AerREAL file server software,
including enhanced high-availability support, symmetric multiprocessing support,
higher-speed backup, and remote replication services. Artecon is also
engineering Sphinx products to support the latest offerings from workstation
vendors such as Sun Microsystems.
CUSTOMERS
Artecon targets both the horizontal markets defined by the primary
workstation vendors, such as Sun, SGI, HP and IBM, and, increasingly, the
vertical markets of the data-intensive telecommunications, finance and
multimedia industries. Artecon's customers include OEMs, systems integrators,
value added resellers (VARs), distributors and end users and span market
segments ranging from computer manufacturers to government agencies. The
following customers of Artecon accounted for approximately that percentage of
Artecon's total revenues set forth below during the periods indicated: UUNET
Technologies (13.5%) and GTE Government Systems (11.9%) for the nine-months
ended December 31, 1997; Tracor Enterprise Solution (26.6%) for the fiscal year
ended March 31, 1997; and GTE Government Systems (10.0%) for the fiscal year
ended March 31, 1996. No other customer accounted for more than 10% of Artecon's
total revenues during the nine-month period ended December 31, 1997, or during
the fiscal years ended March 31, 1997, 1996 or 1995.
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The following table lists end users of Artecon's products and/or services,
by industry, that Artecon believes (based on direct sales data and data supplied
by independent resellers and distributors) to have purchased at least $500,000
of Artecon's products:
<TABLE>
<S> <C> <C>
TELECOMMUNICATIONS/ISP
Qualcomm WorldCom/UUNet Sprint
AOL MCI Nortel
Motorola PSINet NTT (Japan)
FINANCE
Swiss Bank ING Group
Salomon Brothers
MULTIMEDIA
DSC
GOVERNMENT
Lockheed Martin U.S. Navy TRW
U.S. Army Rockwell JPL
Hughes GTSI U.S. Air Force
Northup Grumman EDS French Army
GTE Government Systems British MOD
MANUFACTURING
Eastman Kodak Boeing
Schlumberger
HIGH TECHNOLOGY
Oracle SGI
Sun Microsystems Unisys
Intel Hotmail
</TABLE>
SALES AND MARKETING
Artecon utilizes both a direct sales force and reseller distribution
channels in the U.S. in order to provide broad market penetration for its
products. As of January 9, 1998, Artecon's U.S. field sales organization
consisted of 40 sales professionals located in 11 geographical markets,
including San Diego, Silicon Valley and Sacramento, California; Denver,
Colorado; Chicago, Illinois; Boston, Massachusetts; New York and Rochester, New
York; St. Louis, Missouri; Columbia, Maryland; and Herndon, Virginia. Artecon's
international marketing strategy has similarly been to utilize both a direct
sales force and reseller distribution channels for sales outside of the United
States. The Company's sales to customers located outside the United States
represented approximately 12.5%, 14.0%, 25.2% and 18.6% of Artecon's net
revenues for the nine months ended December 31, 1997 and for the fiscal years
ended March 31, 1997, 1996 and 1995, respectively. Direct sales organizations of
Artecon's subsidiaries in Japan (Tokyo, Osaka, Nagoya), the Netherlands
(Encschede), France (Paris) and the United Kingdom (London) consisted of 7 sales
professionals.
Artecon also employs a leveraged sales model that utilizes distribution
channels tailored to the needs of each user type. Artecon has developed pricing
structures and field sales commission plans that are designed to minimize sales
channel conflicts. Artecon believes that this two-pronged sales strategy
provides a meaningful competitive advantage over competitors who only provide
products directly to end-user customers.
CUSTOMER SERVICE AND SUPPORT
Artecon believes that its ability to provide comprehensive and responsive
support is an important element in penetrating new customer accounts and in
securing repeat business from existing customers. Artecon is committed to
providing superior customer service and support aimed at simplifying
installation, reducing field failures, minimizing system downtime and
streamlining administration.
Service revenues have not comprised a significant portion of Artecon's
revenues. In certain geographical regions, and for an annual or quarterly fee,
Artecon maintains a staff of on-call technical personnel who are available to
visit the customer's site within a few hours. In other geographical regions,
Artecon indirectly
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<PAGE> 121
provides the same level of support by using third-party service companies. In
all cases, Artecon technical support engineers are available by phone on a seven
day, 24 hour basis.
Artecon provides standard warranties with all products sold which are set
forth in various documents and agreements which are delivered to customers with
each product. As a general policy, Artecon ships replacement hardware components
to customers in advance of receiving returns of defective components under a
standard warranty, which generally runs three years. Artecon occasionally issues
credit in lieu of replacing a piece of equipment. A customer may also contract
for an extended warranty or on site maintenance support from Artecon on all
products.
RESEARCH AND DEVELOPMENT
To date, Artecon has made substantial investments in research and
development, particularly in the areas of RAID, robotic backup, FC-AL, GUI
software development, and specialized file server software. Artecon's
engineering design team employs electrical engineering, mechanical engineering,
systems engineers and computer science professionals and places great importance
on the exchange of information with Artecon's sales and marketing and customer
support departments and with its distributors to develop new products and
product enhancements that anticipate and address technological changes and
evolving industry standards and customer needs.
Artecon generally designs its products to have a modular architecture that
can be readily modified to respond to technological developments and paradigm
shifts in the open systems computing environment. This flexibility allows
Artecon to focus research and development resources on specific product
innovations and advancements. The modular architecture of the products meets
customer needs with solutions tailored to their applications and products that
can be adapted to changes in technology and in their computing environments.
Artecon's engineering design teams work cross-functionally with marketing
managers, applications, technical and production engineers and customers to
develop products and product enhancements. Artecon employs a full staff of
applications engineers to assist customers in making appropriate and effective
storage system purchases and in addressing, analyzing and solving complex
pre-deployment storage problems. Artecon's technical support engineering team
and production engineering team also contribute to the quality,
manufacturability and usability of products from design to deployment. This
value-added capability fosters customer loyalty and allows Artecon to identify
emerging customer requirements for future data storage products.
Artecon's expenses for research and development for fiscal years 1995, 1996
and 1997 were $1.1 million, $1.4 million and $2.3 million, respectively. As of
December 31, 1997, Artecon had 15 regular full-time and seven contract employees
engaged in research and development activities, of which four were specifically
focused on research and development of products and services directed at the
telecommunications and Internet/intranet markets.
The data storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities and the emergence of new industry standards could
render Artecon's existing products obsolete and unmarketable. Artecon's future
success will depend upon its ability to develop and introduce new products with
increasing storage capabilities on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that Artecon will be successful in developing and marketing any new products
that respond to technological changes or evolving industry standards, that
Artecon will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that its
new products will adequately meet the requirements of the marketplace and
achieve market acceptance. In addition, storage system products like those
offered by Artecon may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by Artecon and by current and potential customers, errors will
not be found in new products after commencement of commercial shipments,
resulting in a loss or delay in market acceptance, which could have a material
adverse effect on Artecon's business, operating results or financial condition.
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<PAGE> 122
MANUFACTURING
Artecon operates 43,000 square feet of manufacturing space consisting of 30
separate product lines at its Carlsbad, California facilities. Artecon's
products are manufactured according to ECO specification in an assembly-line
production process. State-of-the-art equipment and software include MRP,
Just-In-Time ordering, TQM and in-house FedEx tracking. Artecon strives to
develop close relationships with its suppliers, exchanging critical information
and implementing joint corrective action programs to maximize the quality of its
components, to reduce costs and inventory investments and to create flexibility
for rapid capacity expansion when required. Artecon believes that its current
facilities and capital equipment will be adequate to meet its manufacturing
needs in the foreseeable future.
Artecon subcontracts some of its manufacturing, such as plastic molding,
metal bending, PCB fabrication and assembly, to qualified partners in the U.S.
and Asia. Artecon owns the design and tools/molds associated with the
manufacture of these parts. Artecon has designed and owns over 50 tools used to
produce various components of its Lynx, LynxStak, and LynxArray products. In
addition, Artecon relies upon a limited number of suppliers of several key
components utilized in the assembly of Artecon's products, including Seagate,
IBM, Quantum, Infortrend, Intel, CMD, Mylex and Sony. Artecon's reliance on its
manufacturing subcontractors and suppliers involves several risks, including: an
inadequate supply of required components; price increases; late deliveries; and
poor component quality. Although to date Artecon has been able to obtain its
requirements of components, there can be no assurance that Artecon will be able
to obtain its full requirements of such components in the future or that prices
of such components will not increase. In addition, there can be no assurance
that problems with respect to yield and quality of such components and
timeliness of deliveries will not occur. Disruption or termination of the supply
of these components could delay shipments of Artecon's products and could have a
material adverse effect on Artecon's business, operating results or financial
condition. Such delays could also damage relationships with current and
prospective customers. Artecon has experienced delays in the shipments of its
products in the past, principally due to an inability of vendors to deliver an
adequate supply of components, resulting in delay or loss of product sales.
Although these delays in the past have not had a material adverse effect upon
Artecon's business, operating results or financial condition, there can be no
assurance that in the future any such delays would not have such a material
adverse effect.
COMPETITION
The market for Artecon's products is extremely competitive. Artecon has a
number of competitors in various markets, including HP, Sun, IBM, SGI, Compaq,
DEC, DG Clariion, MTI, and EMC Corporation, many of which have substantially
greater name recognition, engineering, manufacturing and marketing capabilities,
and greater financial and personnel resources than Artecon. In particular, a
number of Artecon's customers are also competitors, including Sun and SGI.
Artecon expects to experience increased competition from established and
emerging computer storage hardware and management software companies,
particularly HP, Sun, IBM, Compaq, DEC, and EMC Corporation.
In addition, increased competitive pressure could lead to intensified
price-based competition, which could have a material adverse effect on Artecon's
results of operations. There also has been, and may continue to be, a
willingness on the part of certain large competitors to reduce prices in order
to preserve or gain market share. Artecon believes that pricing pressures are
likely to continue as competitors develop more competitive product offerings.
The principal elements of competition in Artecon's markets include rapid
introduction of new technology, product quality and reliability, price and
performance characteristics, service and support and responsiveness to
customers. Artecon believes that, in general, it competes favorably with respect
to these factors. However, there can be no assurance that Artecon will be able
to compete successfully or that competition will not have a material adverse
effect on Artecon's business, results of operations or financial condition.
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INTELLECTUAL PROPERTY
Artecon's success depends significantly upon its proprietary technology.
Artecon relies on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and technical measures
to protect its proprietary rights in its products.
As of December 31, 1997, Artecon had been awarded a total of seven U.S.
patents covering certain elements of its products. There can be no assurance
that any additional patents will be issued, that Artecon will develop
proprietary products or technologies that are patentable, that any patent issued
in the future will provide Artecon with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have a
material adverse effect on Artecon's ability to do business. Artecon seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Artecon has
registered numerous trademarks and will continue to evaluate the registration of
additional trademarks as appropriate. Artecon generally enters into
confidentiality agreements with its employees and consultants and with key
vendors and suppliers. All released documentation of products, including
drawings, requirements specifications, source code, BOMs, costs and other
materials, are kept in a secure, centralized document control area.
Artecon expects that companies in the storage system market will
increasingly be subject to infringement claims as the number of products and
competitors in Artecon's target markets grows. Although Artecon believes that
its products and trade designations do not infringe on the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against Artecon in the future. If such a claim is made,
Artecon will evaluate the claim as it relates to its products and, if
appropriate, may seek a license to use the protected technology. There can be no
assurance that Artecon would be able to obtain a license to use such technology
or that such a license could be obtained on terms that would not have a material
adverse effect on Artecon. If Artecon or its suppliers are unable to license
protected technology, Artecon could be prohibited from incorporating or
marketing products incorporating that technology. Artecon could also incur
substantial costs to redesign its products or to defend any legal action taken
against it. Should Artecon's products be found to infringe protected technology,
Artecon could be required to pay damages to the infringed party or be enjoined
from manufacturing and selling such products.
Despite Artecon's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Artecon's products or to obtain and use
information that Artecon regards as proprietary. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. There can be no assurance that Artecon's means of
protecting its proprietary rights will be adequate or that Artecon's competitors
will not independently develop similar technology, duplicate Artecon's products
or design around patents issued to Artecon or other intellectual property rights
of Artecon.
EMPLOYEES
As of January 9, 1998, Artecon had approximately 190 full-time employees
worldwide, including 95 in marketing, sales and service support, 56 in
manufacturing and quality assurance, 17 in engineering and research and
development and 22 in general administration and finance.
None of Artecon's employees is represented by a labor union. Artecon has
experienced no work stoppages and considers its relations with its employees to
be good.
Artecon's future performance depends in significant part upon the continued
service of its key technical and senior management personnel. Artecon provides
incentives such as salary and benefits to attract and retain qualified
employees. The loss of the services of one or more of Artecon's officers or
other key employees could have a material adverse effect on Artecon's business,
operating results or financial condition. Artecon's future success also depends
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that Artecon can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future.
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FACILITIES
Artecon's principal administrative, sales, marketing, manufacturing and
research and development facility is located in approximately 70,000 square feet
of space in Carlsbad, California, including approximately 43,000 square feet of
manufacturing space. This facility is leased through 1999. Artecon leases other
sales offices through the U.S., as well as operations sites in Japan, France,
England and the Netherlands. Artecon believes that its existing facilities are
adequate for its current needs.
LEGAL PROCEEDINGS
On February 3, 1998, Artecon filed a civil complaint in Santa Clara County
Superior Court including, without limitation, claims of breach of contract,
misappropriation of trade secrets and unfair competition against StorNet, Inc.
and certain individuals (Civil Case No. CV 771742). The Court issued a temporary
restraining order on February 3, 1998 against the defendants enjoining certain
actions. The Court further set for hearing on March 5, 1998 an Order to Show
Cause Why Preliminary Injunction should not issue against the defendants. On
March 5, 1998, a hearing was initiated. The Court provided the parties until
March 12, 1998 to file supplemental briefs and continued the remainder of the
hearing to March 16, 1998.
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ARTECON EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
awarded to, earned by, or paid for services rendered to Artecon in all
capacities during the fiscal year ended March 31, 1997 to (i) Artecon's Chief
Executive Officer and (ii) Artecon's next most highly compensated other
executive officers who will continue to be an executive officer of Storage
Dimensions following the Merger and whose salary and bonus for such year
exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
--------------------- COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1)
--------------------------- ------ --------- -------- ------------
<S> <C> <C> <C> <C>
James L. Lambert.................................. 1997 $103,708 $6,959 $906
President, Chief Executive Officer and Director
Dana W. Kammersgard............................... 1997 102,307 10,315
Vice President, Sales and Marketing
Tesfaye Hailemichael.............................. 1997 96,923 7,059 --
Chief Financial Officer, Vice President, Finance
</TABLE>
- ---------------
(1) Represents $906 for term life insurance premiums paid by Artecon on behalf
of Mr. Lambert.
OPTION GRANTS AND AGGREGATE OPTION EXERCISES IN 1997; YEAR-END OPTION VALUES.
No Artecon executive officer or director who will serve as an executive
officer of Storage Dimensions after the Merger holds any stock options nor were
any stock options exercised by any such person during the fiscal year ended
March 31, 1997.
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<PAGE> 126
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ARTECON
On August 21, 1997, Artecon acquired substantially all of the assets and
liabilities of Falcon (the "Falcon Acquisition"), other than certain technology
assets (the "Falcon Technology"), in exchange for $1,000,000 in cash and a
promissory note in the original principal amount of $1,250,000 (the "Artecon
Note"). Subsequent to the issuance of the Artecon Note, Artecon and Falcon
amended the Artecon Note to decrease the principal amount due thereunder to
$750,000. Concurrently with the Falcon Acquisition, Falcon transferred the
Falcon Technology to Founding Partners, a California general partnership
("Founding Partners"), in exchange for a promissory note in the principal amount
of $1,750,000 (the "Founding Partners Note"). Dana Kammersgard, James Lambert
and W.R. Sauey, each of whom is an executive officer and/or director of Artecon,
are the general partners of Founding Partners. Founding Partners is considered
to be a Special Purpose Entity and, accordingly, has been consolidated with
Artecon for financial reporting purposes. The purchase price was allocated among
the acquired assets to $10,232,000 for other assets acquired, $638,000 to
goodwill and other intangible assets, $14,138,000 for liabilities assumed and to
in-process research and development expenses of $3,700,000, which had no future
alternative use, based on management assumptions. Under the terms of the Artecon
Note, as adjusted, and the Founding Partners Note (collectively, the "Notes"),
Artecon and Founding Partners, respectively, are required to make monthly
payments to Falcon of $15,935 and $37,182, respectively, through August 2002.
Each of the Notes bears interest at the rate of 10% per annum. As of December
31, 1997, the total amount of principal and interest outstanding under the
Artecon Note was $712,746, and the total amount of principal and interest
outstanding under the Founding Partners Note was $1,663,075.
In connection with the Falcon Acquisition and the transfer of the Falcon
Technology, Artecon and Founding Partners entered into a Technology License
Agreement, dated August 21, 1997, pursuant to which Founding Partners granted to
Artecon an exclusive, perpetual license of the Falcon Technology in exchange for
monthly payments of $39,000 payable through August 2002.
On December 27, 1997, Founding Partners and Artecon amended the Technology
License Agreement to provide for, among other things, the transfer of the Falcon
Technology from Founding Partners to Artecon upon the satisfaction in full of
Founding Partners obligations under the Founding Partners Note.
Pursuant to certain commitments between Artecon and the Nordic Group, in
which W.R. Sauey holds a controlling interest, Artecon is obligated to pay fees
to the Nordic Group for certain software maintenance services provided by and
overhead costs incurred by the Nordic Group. Such fees total approximately
$9,000 to $11,000 per month and represent Artecon's portion of overhead costs
paid by the Nordic Group on its behalf. Such payments will terminate effective
upon the closing of the Merger. Artecon will evaluate whether to continue using
such services after the consummation of the Merger. In addition, Artecon leases
certain real property from W.R. Sauey at a monthly rental fee of approximately
$1,125 under a month-to-month lease between the parties, which lease will
continue in effect after the Merger.
Since January 1997, Artecon has made a series of short-term loans to
Flambeau Corp., a company in which W.R. Sauey is the principal shareholder, in
the aggregate principal amount of $6,145,000. Such loans were made pursuant to
the terms of a promissory note dated January 16, 1997 which bore interest at a
rate of 7.25% per annum and which was due and payable on demand. The aggregate
principal amount (including $14,506 in total interest payments) was paid in full
by Flambeau Corp. in August 1997.
Between 1994 and 1997, Artecon issued to Tesfaye Hailemichael, Artecon's
Chief Financial Officer and Vice President, Finance, an aggregate of 55,000
Performance Appreciation Plan Participation Units ("PPUs") under Artecon's
Participative Performance Appreciation Plan. On June 30, 1997, Mr. Hailemichael
and Artecon entered into an agreement whereby each PPU held by Mr. Hailemichael
was converted into one share of Artecon Common Stock.
During the fiscal years ended March 31, 1995, 1996, 1997 and the nine
months ended December 31, 1997, Artecon made payments to certain entities
affiliated with W.R. Sauey (the "Nordic Group Companies") in the aggregate
amounts of $802,855, $162,105, $73,734 and $120,807, respectively, for the
purchase of certain products and services from the Nordic Group Companies. In
addition, during the fiscal years ended March 31, 1995, 1996, 1997 and the nine
months ended December 31, 1997, Artecon received payments for
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<PAGE> 127
the sale of certain products and services from certain of the Nordic Group
Companies in the aggregate amounts of $226,549, $97,674, $84,644 and $62,064,
respectively. As of December 31, 1997, Artecon had accounts receivable from
certain Nordic Group Companies in the aggregate amount of $46,773 and accounts
payable of zero.
Since March 31, 1994, Artecon has made payments to W.R. Sauey and certain
of his affiliates in the aggregate amount of $585,700 in connection with the
repurchase of shares of Preferred and Preferred B of Artecon pursuant to an
Agreement for Repurchase of Preferred Shares of Stock at Artecon, Inc. dated
December 22, 1994 among Artecon, Flambeau Corp., Flambeau Products Corp., Seats,
Inc. and W.R. Sauey (the "Artecon Repurchase Agreement"). On December 23, 1997
the parties to the Artecon Repurchase Agreement amended such agreement to
provide for its termination upon consummation of the Merger.
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<PAGE> 128
BENEFICIAL SECURITY OWNERSHIP OF
CERTAIN OWNERS AND MANAGEMENT OF STORAGE DIMENSIONS
The following table sets forth certain information regarding the ownership
of Storage Dimensions Common Stock as of February 23, 1998 by: (i) each person
or entity who is known by Storage Dimensions to beneficially own five percent or
more of the outstanding Storage Dimensions Common Stock, (ii) each director of
Storage Dimensions; (iii) the Storage Dimensions Named Executive Officers; and
(iv) all directors and executive officers of Storage Dimensions set forth below
as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF COMMON
NAME AND ADDRESS SHARES(1) STOCK OWNED(1)(2)
---------------- --------- ------------------
<S> <C> <C>
5% STOCKHOLDERS
Capital Partners Group(3)................................. 2,900,623 36.1%
Maxtor Corporation........................................ 1,600,000 19.9
OFFICERS & DIRECTORS
David A. Eeg(4)........................................... 301,982 3.7
Gene Bowles, Jr.(5)....................................... 301,982 3.7
Robert E. Bylin(6)........................................ 131,638 1.6
James M. Canter(7)........................................ 79,748 *
Ted Chen(8)............................................... 76,375 *
Ralph Ciarlanti III(9).................................... 70,734 *
Kenneth Epstein........................................... 17,805 *
Clarissa Gould Marshall(10)............................... 41,212 *
Brian D. Fitzgerald(3)(11)................................ 2,920,623 36.3
A. George Gebauer(3)(11).................................. 20,000 *
Chong Sup Park(11)(12).................................... 1,620,000 20.1
All executive officers and directors as a group (11
persons)(13)........................................... 5,582,099 64.1%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, Storage Dimensions believes that
each of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
Applicable percentages are based on 8,022,430 shares outstanding on
February 23, 1998, adjusted as required by rules promulgated by the
Commission.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Storage Dimensions Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
February 23, 1998 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of
each other person. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in
the table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name.
(3) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
shares held by CP Acquisition, L.P. No. 4B, 3,612 shares held by Capital
Partners, Inc., and 293,781 shares held by FGS, Inc. The following
affiliated entities are included in "Capital Partners Group"; (a) CP
Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
the sole stockholder, an officer and a director and A. George Gebauer is an
officer; and (d) FGS, Inc., a Delaware corporation, of which Mr. Fitzgerald
is the controlling stockholder, an officer and a director and Mr. Gebauer
is an officer and a director. Mr. Fitzgerald may be deemed to beneficially
own the shares held by the entities comprising the Capital Partners Group.
Mr. Gebauer disclaims beneficial ownership of shares held by the entities
comprising the Capital Partners Group.
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<PAGE> 129
(4) Includes options to purchase 162,500 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(5) Includes options to purchase 162,500 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(6) Includes options to purchase 60,157 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(7) Includes options to purchase 75,000 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(8) Includes options to purchase 70,000 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(9) Includes options to purchase 60,209 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(10) Includes options to purchase 40,000 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(11) Includes options to purchase 20,000 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of February 23, 1998.
(12) Represents shares held by Maxtor Corporation. Dr. Park is President of
Hyundai Electronics America, the parent of Maxtor Corporation and Vice
Chairman of the Board of Maxtor Corporation.
(13) Includes shares held by the Capital Partners Group and Maxtor Corporation,
as well as options to purchase an aggregate of 690,366 shares of Storage
Dimensions Common Stock at or within 60 days of February 23, 1998. See
notes 3 through 12 above.
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<PAGE> 130
BENEFICIAL SECURITY OWNERSHIP OF
CERTAIN OWNERS AND MANAGEMENT OF ARTECON
The following table sets forth certain information with respect to the
beneficial ownership of outstanding Artecon Common Stock and Artecon Preferred
Stock outstanding as of February 23, 1998, by: (i) each person who beneficially
owns five percent or more of the outstanding shares of Artecon's Common Stock
and shares of Artecon Preferred Stock; (ii) each of Artecon's directors, (iii)
each of Artecon's executive officers, and (iv) all executive officers and
directors of Artecon as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF SHARES OF PERCENT OF
ARTECON ARTECON ARTECON ARTECON
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS(1) OWNED(2) OWNED(3) OWNED(2) OWNED(3)
------------------- ------------ -------------- --------------- ------------------
<S> <C> <C> <C> <C>
W.R. Sauey..................... 2,417,265(4) 39.9% 2,494,159(5) 99.1%
James L. Lambert............... 1,595,000(6) 26.4% 2,500 *
Pamela L. Lambert.............. 1,595,000(7) 26.4% 2,500 *
Dana W. Kammersgard............ 632,031 10.5% -- --
Flambeau Corp.(8).............. 407,760 6.7% 1,038,604 41.3%
801 Lynn Avenue
Baraboo, WI 53913
Craig L. Sauey................. 368,000 6.1% 1,500 *
Jason C. Sauey................. 165,000 2.7% -- --
Tesfaye Hailemichael........... 80,000 1.3% -- --
All officers and directors as a
group (6 persons)(9)......... 4,889,296 80.9% 2,500,659 99.3%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Unless otherwise indicated above, the address for each person shall be the
address of Artecon at 6305 El Camino Real, Carlsbad, CA 92009-1606.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes generally sole voting and investment power with
respect to securities. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Artecon Common Stock and Artecon Preferred Stock shown beneficially owned by
them.
(3) Percentage of beneficial ownership is based on 6,043,990 shares of Artecon
Common Stock outstanding as of February 23, 1998. Percentage of beneficial
ownership of Artecon Preferred Stock is based on 2,517,159 shares of Artecon
Preferred Stock (consisting of 1,088,951 shares of Artecon Preferred and
1,405,208 shares of Artecon Preferred B) outstanding as of February 23,
1998.
(4) Includes (i) 407,760 shares of Common Stock held by Flambeau Corp., (ii)
107,760 shares of Common Stock held by Flambeau Products Corp., (iii) 17,540
shares of Common Stock held by Seats, Inc. and (iv) 475,000 shares of Common
Stock held by the W.R. & Floy A. Sauey Grandparents Trust established for
the benefit of certain grandchildren of W.R. Sauey. Mr. Sauey is Chairman of
the Board and the principal shareholder in each of Flambeau Corp., Flambeau
Products Corp. and Seats, Inc. (collectively, the "Sauey Affiliates"). Mr.
Sauey disclaims beneficial ownership of all the above-listed shares, except
to the extent of his pecuniary or pro rata interest in such shares.
(5) Includes (i) 336,000 shares of Preferred and 702,604 shares of Preferred B
held by Flambeau Corp., (ii) 336,000 shares of Preferred and 702,604 shares
of Preferred B held by Flambeau Products Corp. and (iii) 169,074 shares of
Preferred held by Seats, Inc. Each share of Preferred and Preferred B held
by Mr. Sauey and the Sauey Affiliates will be converted into one share of
Series A Preferred Stock of Storage Dimensions. See "THE MERGER -- Merger
Consideration." Mr. Sauey disclaims beneficial ownership of all the
above-listed shares, except to the extent of his pecuniary or pro rata
interest in such shares.
(6) Includes 145,000 shares of Artecon Common Stock held by Pamela Lambert, the
spouse of Mr. Lambert.
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(7) Includes 1,453,125 shares of Common Stock held by James Lambert, the spouse
of Ms. Lambert.
(8) Consists of 336,000 shares of Artecon Preferred and 702,604 shares of
Artecon Preferred B held by Flambeau Corp.
(9) Includes 407,760 shares of Artecon Common Stock held by Flambeau Corp.,
107,760 shares of Artecon Common Stock held by Flambeau Products Corp.,
17,540 shares of Artecon Common Stock held by Seats, Inc. and 475,000 shares
of Artecon Common Stock held by W.R. & Floy A. Sauey Grandparents Trust.
Also includes 336,000 shares of Artecon Preferred and 702,604 shares of
Artecon Preferred B held by Flambeau Corp., 336,000 shares of Artecon
Preferred and 702,604 shares of Artecon Preferred B held by Flambeau
Products Corp. and 169,074 shares of Artecon Preferred held by Seats, Inc.
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MANAGEMENT OF STORAGE DIMENSIONS AFTER THE MERGER
The executive officers and directors of Storage Dimensions after the
Merger, and their ages as of December 31, 1997, will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W.R. Sauey............... 70 Chairman of the Board
James L. Lambert......... 44 President, Chief Executive Officer and Director
Tesfaye Hailemichael..... 48 Chief Financial Officer and Treasurer
Dana W. Kammersgard...... 42 Secretary, Senior Vice President, Sales and
Marketing
Brian D. Fitzgerald...... 53 Director
Dr. Chong Sup Park....... 49 Director
Jason C. Sauey........... 36 Director
</TABLE>
W.R. Sauey, a founder of Artecon, has served as Chairman of the Board of
Artecon since its inception in 1984. From 1984 to 1997, Mr. Sauey also served as
Treasurer of Artecon. Mr. Sauey founded and serves as Chairman of the Board for
a number of manufacturing companies in the Nordic Group of Companies, a group of
privately-held independent companies for which Mr. Sauey is the principal
shareholder (the "Nordic Group"). Mr. Sauey is a director of Work Recovery,
Inc., a publicly traded workmen's compensation products manufacturer, is an
advisory board member of Liberty Mutual Insurance Company, a publicly traded
insurance company, and also serves as a Trustee to the State of Wisconsin
Investment Board. Mr. Sauey holds a M.B.A. from the University of Chicago.
James L. Lambert, a founder of Artecon, has served as President, Chief
Executive Officer and a director of Artecon since its inception in 1984. Prior
to co-founding Artecon, from 1979 to 1984, Mr. Lambert served in various
positions at CALMA, a division of General Electric Company, a publicly traded
company, most recently, from 1981 to 1984, as Vice President of Research and
Development. Mr. Lambert currently serves as a director of Snow Valley, Inc., a
privately-held resort enterprise affiliated with the Nordic Group. Mr. Lambert
holds a B.S. and a M.S. in Civil Environmental Engineering from the University
of Wisconsin, Madison.
Tesfaye Hailemichael joined Artecon in 1990 as its Corporate Controller,
served as Artecon's Vice President, Finance of Artecon since 1992 and has served
as Chief Financial Officer of Artecon since July 1997. Prior to joining Artecon,
from 1987 to 1990, Mr. Hailemichael was Vice President and Chief Financial
Officer of Omnitec Medical Corporation, a privately-held medical device company.
Mr. Hailemichael is currently a member of the Institute of Management
Accountants and the Chief Financial Officer Roundtable. Mr. Hailemichael holds a
B.S. in Accounting from Bowie State College and a M.A. in Accounting from
Catholic University of America.
Dana W. Kammersgard, a founder of Artecon, has served as a director since
Artecon's inception in 1984 and as Vice President, Sales and Marketing since
March 1997. At various times, Mr. Kammersgard has held various other top
positions at Artecon in Engineering and Customer Support. Prior to co-founding
Artecon, Mr. Kammersgard was the Director of Software Development at CALMA, a
division of General Electric Company, a publicly traded utility company. Mr.
Kammersgard holds a B.A. in Chemistry from the University of California, San
Diego.
Brian D. Fitzgerald has served as Chairman of the Board of Storage
Dimensions since its inception in 1992. In 1982, Mr. Fitzgerald formed Capital
Partners and Capital Partners I, L.P. and has since served as President of
Capital Partners and a General Partner to Capital Partners I, L.P. Capital
Partners acts as a diversified investment holding and operating company. Mr.
Fitzgerald co-formed Capital Partners II, L.P. in 1990. Capital Partners I,
Capital Partners II and related entities hold majority ownership positions and
various officer and director positions in seven other businesses in diversified
industries. From 1977 to 1982, Mr. Fitzgerald was a General Partner of
Industrial Capital Group, a diversified investment holding and operating
company, and from 1974 to 1977 served as strategic planning manager and
corporate staff consultant at General Electric Company, a publicly traded
company. Mr. Fitzgerald was formerly a Director of Bryant Universal Roofing,
Inc., a private corporation which filed for bankruptcy in 1996 under Chapter 11
of the U.S. Bankruptcy Code. Mr. Fitzgerald is also the Chairman of the Board of
Security Capital Corporation, a public
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company, a position he has held since 1990, and is a director of a number of
privately-held companies. Mr. Fitzgerald holds an A.B. degree from Princeton
University and a M.B.A. from the Harvard Graduate School of Business.
Chong Sup Park has served as a Director of Storage Dimensions since 1996.
Since 1996, Dr. Park has also served as the President of Hyundai Electronics
America, an electronics company and the Vice Chairman of Maxtor Corporation, a
disk drive manufacturer. Dr. Park was the President of Maxtor Corporation from
1995 to 1996, the President of Axil Computer Inc., a workstation manufacturing
company, from 1993 to 1995, the Executive Vice President at Ernst & Young
Consulting, Inc., a public accounting firm, from 1992 to 1993, and the Senior
Vice President of Hyundai Electronics Company Limited from 1990 to 1992. Dr.
Park holds a B.A. in Management from Yonsei University, a M.A. in Management
from Seoul National University, a M.B.A. from the University of Chicago and a
Doctorate in Management from Nova Southwestern University.
Jason C. Sauey has served as a director of Artecon since 1988. Since 1992,
Jason Sauey has served as President of Flambeau Products Corporation and since
1994 has served as President of Flambeau Airmold Corporation, both
privately-held plastics manufacturing companies affiliated with the Nordic
Group. Jason Sauey holds a B.B.A. from the University of Wisconsin, Madison and
a M.B.A. from the University of Chicago.
In addition, the Storage Dimensions Board and the Artecon Board together
will appoint two additional directors, either before the Merger or shortly
thereafter, who will not be employees of either company. Under the terms of the
Certificate of Amendment, following the Merger, the Storage Dimensions Board
will be divided into three classes, serving staggered terms of three years, and
any vacancies in the Storage Dimensions Board which occur during the year may be
filled by the Storage Dimensions Board for the remainder of the full term. Such
additional two directors, chosen by the Storage Dimensions Board and the Artecon
Board, shall serve as Class I directors, whose term will expire at the first
Annual Meeting following the Merger. Jason Sauey and Chong Sup Park shall serve
as Class II directors, whose term will expire at the second Annual Meeting
following the Merger. W.R. Sauey, James Lambert and Brian Fitzgerald shall serve
as Class III directors, whose term will expire at the third Annual Meeting
following the Merger. Officers serve at the discretion of Storage Dimensions'
Board of Directors. There are no family relationships between any of the
directors or executive officers of Storage Dimensions following the Merger,
except that W.R. Sauey, who will be Chairman of the Board of Directors of
Storage Dimensions after the Merger, is (i) the father-in-law of James Lambert,
the President, Chief Executive Officer and a director of Storage Dimensions
after the Merger and (ii) the father of Jason Sauey, a director of Storage
Dimensions after the Merger.
BOARD COMMITTEES
Following the Merger, Storage Dimensions will have an Audit Committee and a
Compensation Committee. The Audit Committee will consist of directors Brian
Fitzgerald and W.R. Sauey. The Audit Committee recommends to the Board of
Directors the engagement of Storage Dimensions' independent accountants, reviews
with such accountants the plan, scope and results of their examination of the
consolidated financial statements and determines the independence of such
accountants. Following the Merger, the Compensation Committee will consist of
directors Brian Fitzgerald and W.R. Sauey. The Compensation Committee reviews
and makes recommendations to the Board of Directors regarding all forms of
compensation to be provided to the executive officers, directors and consultants
to Storage Dimensions and also administers Storage Dimensions' equity-based
employee benefits plans.
DIRECTOR COMPENSATION
Nonemployee members of the Storage Dimensions Board will receive an annual
fee of $16,000 plus $1,000 for each board meeting attended in person for their
services as directors. Storage Dimensions' 1996 Stock Option Plan provides that
options may be granted to nonemployee directors of Storage Dimensions. See
"EXECUTIVE COMPENSATION OF STORAGE DIMENSIONS -- Employee Stock Plans -- 1996
Stock Option Plan."
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Storage Dimensions Board or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Storage Dimensions' Certificate of Incorporation, as amended and restated,
limits the liability of directors to the maximum extent permitted by the
Delaware General Corporation Law (the "DGCL"). The DGCL provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors except for liability arising out of (i) a
breach of their duty of loyalty to the corporation or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) any
transaction from which the director derived an improper personal benefit.
Storage Dimensions' charter documents provide that Storage Dimensions shall
indemnify its officers, directors and agents to the fullest extent permitted by
law, including those circumstances where indemnification would otherwise be
discretionary. Storage Dimensions believes that indemnification under its
charter documents covers at least negligence or gross negligence on the part of
indemnified parties. Storage Dimensions has entered into indemnification
agreements with each of its directors and officers which may, in some cases, be
broader than the specific indemnification provisions contained in the DGCL. The
indemnification agreements may require Storage Dimensions, among other things,
to indemnify each director and officer against certain liabilities that may
arise by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
such persons' expenses incurred as a result of any proceeding against him or her
as to which such person could be indemnified. Pursuant to the Reorganization
Agreement, Storage Dimensions has agreed that, from and after the consummation
of the Merger, Storage Dimensions will fulfill and honor in all material
respects the obligations of Storage Dimensions and Artecon pursuant to (i) each
indemnification agreement in effect at such time between Storage Dimensions and
each person who is or was a director or officer of Storage Dimensions and
Artecon at or prior to the Effective Time and (ii) any indemnification
provisions under Storage Dimensions' and Artecon's Certificate of Incorporation
or Articles of Incorporation, as the case may be, or Bylaws, as each is in
effect on the date of the Reorganization Agreement. The Certificate of
Incorporation or Articles of Incorporation, as the case may be, and the Bylaws
of Storage Dimensions and Artecon shall continue to contain the provisions with
respect to indemnification and exculpation from liability set forth in such
documents as of the date of the Reorganization Agreement and such provisions
shall not be amended, repealed or otherwise modified for a period of six years
after the Effective Time in any manner that would adversely affect the rights
thereunder of any Indemnified Party.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of Storage Dimensions in which
indemnification would be required or permitted. Storage Dimensions is not aware
of any threatened litigation or proceeding that could result in a claim for such
indemnification.
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STOCK OWNERSHIP OF STORAGE DIMENSIONS FOLLOWING THE MERGER
The following table sets forth certain information with respect to the
beneficial ownership of Storage Dimensions Common Stock and Storage Dimensions
Preferred Stock outstanding as of the Storage Dimensions Record Date, giving
effect to the issuance of shares of Storage Dimensions Common Stock and Storage
Dimensions Preferred Stock in the Merger, by: (i) each person who will
beneficially own five percent or more of the outstanding shares of Storage
Dimensions Common Stock and shares of Storage Dimensions Preferred Stock
following the Merger; (ii) each person who will serve as a director of Storage
Dimensions following the Merger; (iii) each person who will serve as an
executive officer of Storage Dimensions following the Merger; and (iv) all
persons who will serve as executive offices or directors of Storage Dimensions
following the Merger as a group.
<TABLE>
<CAPTION>
SHARES OF
STORAGE PERCENT OF STORAGE SHARES OF STORAGE PERCENT OF STORAGE
DIMENSIONS DIMENSIONS DIMENSIONS DIMENSIONS
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED(1)(2) OWNED(3) OWNED(2) OWNED(3)
---------------- ------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
W.R. Sauey................... 5,221,292(4) 24.7% 2,494,159(5) 100%
Capital Partners Group....... 2,900,623(6) 13.7% -- --
James L. Lambert............. 3,445,200(7) 16.3% -- --
Dana W. Kammergard........... 1,365,187 6.5% -- --
Tesfaye Hailemichael......... 172,800 * -- --
Jason C. Sauey............... 356,400 1.7% -- --
Dr. Chong Sup Park........... 1,620,000(8) 7.7% -- --
Brian D. Fitzgerald.......... 2,920,623(9) 13.8% -- --
All officers and directors as
a group (7 persons)(10).... 15,101,502 71.3% 2,494,159 100%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) The number of shares of Storage Dimensions Common Stock held by each person
who was previously an executive officer, director of 5% shareholder of
Artecon has been calculated assuming an exchange ratio of 2.16. The actual
exchange ratio is subject to change based upon the number of shares of
Storage Dimensions Common Stock outstanding at the closing.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes generally sole voting and investment power with
respect to securities. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Storage Dimensions Common Stock and Storage Dimensions Preferred Stock
shown as beneficially owned by them.
(3) Percentage of beneficial ownership is based on 8,022,430 shares of Storage
Dimensions Common Stock outstanding as of the Storage Dimensions Record
Date, giving effect to the issuance of 13,120,107 shares of Storage
Dimensions Common Stock in the Merger. Percentage of beneficial ownership
of Storage Dimensions Preferred Stock is based on 2,494,159 shares of
Storage Dimensions Preferred Stock that will be outstanding following the
Merger.
(4) Includes (i) 880,761 shares of Storage Dimensions Common Stock held by
Flambeau Corp., (ii) 232,761 shares of Storage Dimensions Common Stock held
by Flambeau Products Corp., (iii) 37,886 shares of Storage Dimensions
Common Stock held by Seats, Inc. and (iv) 1,026,000 shares of Storage
Dimensions Common Stock held by the W.R. & Floy A. Sauey Grandparents Trust
established for the benefit of certain grandchildren of W.R. Sauey. Mr.
Sauey is Chairman of the Board and the principal shareholder in each of
Flambeau Corp., Flambeau Products Corp. and Seats, Inc. (collectively, the
"Sauey Affiliates"). Mr. Sauey disclaims beneficial ownership of all the
above-listed shares, except to the extent of his pecuniary of pro rata
interest in such shares.
(5) Includes (i) 1,038,604 shares of Storage Dimensions Preferred Stock held by
Flambeau Corp., (ii) 1,038,604 shares of Storage Dimensions Preferred Stock
held by Flambeau Corp. and (iii) 169,074 shares of Storage Dimensions
Preferred Stock held by Seats, Inc. Mr. Sauey disclaims beneficial
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ownership of all the above-listed shares, except to the extent of his
pecuniary or pro rata interest in such shares.
(6) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
shares held by CP Acquisition, L.P. No. 4B, 3.612 shares held by Capital
Partners, Inc., and 293,781 shares held by FGS, Inc. The following
affiliated entities are included in "Capital Partners Group"; (a) CP
Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
the sole stockholder, an officer and a director, and (d) FGS, Inc., a
Delaware corporation, of which Mr. Fitzgerald is the controlling
stockholder, an officer and a director. Mr. Fitzgerald may be deemed to
beneficially own the shares held by the entities comprising the Capital
Partners Group.
(7) Includes 313,271 shares of Storage Dimensions Common Stock held by Pamela
Lambert, the spouse of Mr. Lambert.
(8) Represents shares held by Maxtor Corporation. Dr. Park is President of
Hyundai Electronics America, the parent of Maxtor Corporation and Vice
Chairman of the Board of Maxtor Corporation. Includes options to purchase
up to 40,000 shares of Storage Dimensions Common Stock exercisable at or
within 60 days of the Storage Dimensions Record Date.
(9) Includes options to purchase 20,000 shares of Storage Dimensions Common
Stock exercisable at or within 60 days of the Storage Dimension Record
Date.
(10) Includes 2,177,408 shares of Storage Dimensions Common Stock held by the
Sauey Affiliates and options to purchase up to 40,000 shares of Storage
Dimensions Common Stock exercisable at or within 60 days of the Storage
Dimensions Record Date.
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DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF STORAGE DIMENSIONS CAPITAL STOCK
The authorized capital stock of Storage Dimensions consists of 40,000,000
shares of Storage Dimensions Common Stock and 10,000,000 shares of Storage
Dimensions Preferred Stock. As of the Storage Dimensions Record Date, there were
8,022,430 shares of Storage Dimensions Common Stock outstanding held of record
by approximately 70 stockholders and no shares of Storage Dimensions Preferred
Stock outstanding. Storage Dimensions Common Stock is listed on the Nasdaq
National Market under the symbol "STDM."
Storage Dimensions Common Stock. Holders of Common Stock are entitled to
one vote per share on all matters to be voted upon by the stockholders. Subject
to preferences that may be applicable to any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Storage Dimensions, the holders of Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior liquidation rights of Preferred Stock, if any, then outstanding. The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be outstanding upon
consummation of the Merger will be fully paid and non-assessable.
Storage Dimensions Preferred Stock. Storage Dimensions has 10,000,000
shares of Storage Dimensions Preferred Stock authorized. The Storage Dimensions
Board has the authority to issue the shares of Storage Dimensions Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed on any unissued and undesignated shares of
Storage Dimensions Preferred Stock and to fix the number of shares constituting
a series and the designations of such series, without any further vote or action
by the stockholders. Storage Dimensions is soliciting Storage Dimensions
stockholder approval of the Certificate of Amendment that would, among other
things, authorize a Series A Preferred Stock consisting of 2,494,159 shares for
issuance in the Merger. Although it presently has no intention to authorize or
issue any other series of Preferred Stock, the Storage Dimensions Board, without
stockholder approval, can issue up to the remaining 7,505,841 shares of Storage
Dimensions Preferred Stock with voting and conversion rights which could
adversely affect the voting power or other rights of the holders of Storage
Dimensions Common Stock. The issuance of Storage Dimensions Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of
Storage Dimensions. For a description of the rights, preferences and privileges
of the Storage Dimensions Series A Preferred Stock, see "OTHER
AGREEMENTS -- Amendment to Storage Dimensions Certificate of Incorporation."
Registration Rights. Pursuant to an agreement between Storage Dimensions
and a number of holders (or their permitted transferees) ("Holders") of Storage
Dimensions Common Stock, the Holders are entitled to certain rights with respect
to the registration of the shares held by them under the Securities Act. If
Storage Dimensions proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders, the Holders are entitled to notice of the registration and are entitled
to include, at Storage Dimensions' expense, such shares therein, provided, among
other conditions, that the underwriters have the right to limit the number of
such shares included in the registration. In addition, certain of the Holders
may require Storage Dimensions at its expense on not more than two occasions, to
file a registration statement under the Securities Act with respect to their
shares of Storage Dimensions Common Stock, and Storage Dimensions is required to
use its best efforts to effect the registration, subject to certain restrictions
and limitations. Further, certain of the Holders may require Storage Dimensions,
at its expense, to register their shares on Form S-3 when such form becomes
available to Storage Dimensions, subject to certain conditions and limitations.
Effect of Certain Terms of Charter Documents and Delaware Anti-Takeover
Law. Certain provisions of Storage Dimensions' Certificate of Incorporation, as
amended, and Bylaws, as amended, the DGCL and Storage Dimensions'
indemnification agreements with certain officers and directors of Storage
Dimensions may be deemed to have an anti-takeover effect. Such provisions may
delay, defer or prevent a tender offer or
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takeover attempt that a stockholder might consider to be in that stockholder's
best interests, including attempts that might result in a premium over the
market price for the shares held by such stockholder.
The Storage Dimensions Board may issue additional shares of Storage
Dimensions Common Stock or designate and issue one or more classes or series of
Storage Dimensions Preferred Stock, having the number of shares (up to
10,000,000), designations, relative voting rights, dividend rates, liquidation
and other rights, preferences and limitations as determined by the Storage
Dimensions Board without stockholder approval. Storage Dimensions' Certificate
of Incorporation, as amended, and Bylaws, as amended, contain a number of
provisions that could impede a takeover or change in control of Storage
Dimensions, including but not limited to the elimination of stockholders'
ability to take action by written consent and a fair price requirement. In
addition, upon approval of the Certificate of Amendment by the Storage
Dimensions stockholders, the Storage Dimensions Certificate of Incorporation
will provide for a classified Board of Directors and provide that a director may
not be removed from office without cause except, until the third annual meeting
of Storage Dimensions following the Merger, by the affirmative vote of at least
80% of the outstanding voting stock of Storage Dimensions and by the affirmative
vote of at least 66 2/3 of the outstanding voting stock of Storage Dimensions
thereafter.
In addition, Storage Dimensions is subject to the anti-takeover provisions
of Section 203 of the DGCL. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The term "business
combination" includes mergers, asset sales or other transactions resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's voting stock. Section 203 could have the
effect of delaying, deferring or preventing a change in control of Storage
Dimensions. For a more detailed description of Section 203, see "COMPARISON OF
RIGHTS OF STORAGE DIMENSIONS STOCKHOLDERS AND ARTECON
SHAREHOLDERS -- Stockholder Approval of Certain Business Combinations."
Each of the foregoing provisions gives the Storage Dimensions Board, acting
without stockholder approval, the ability to prevent, or render more difficult
or costly, the completion of a takeover transaction that stockholders might view
as being in their best interests.
Storage Dimensions Transfer Agent and Registrar. The transfer agent and
registrar for the Storage Dimensions Common Stock is Boston Equiserve Limited
Partnership.
DESCRIPTION OF ARTECON CAPITAL STOCK
The authorized capital stock of Artecon consists of 20,000,000 shares of
Common Stock, 10,000,000 shares of Preferred and 10,000,000 shares of Preferred
B (the Preferred and Preferred B are collectively referred to herein as the
"Artecon Preferred Stock"). As of the Artecon Record Date, there were 6,043,990
shares of Common Stock outstanding held of record by 55 shareholders, 1,111,951
shares of Preferred outstanding held of record by 13 shareholders and 1,405,208
shares of Preferred B outstanding held of record by two shareholders.
Artecon Common Stock. Holders of Artecon Common Stock are entitled to one
vote per share on all matters to be voted upon by the shareholders. Shareholders
entitled to vote at any election of directors of Artecon may, subject to giving
notice at or prior to the meeting at which such vote will take place, cumulate
such shareholder's vote and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which his
shares are entitled, or distribute his votes on the same principle among as many
candidates as such shareholder deems fit. Subject to preferences that may be
applicable to any outstanding shares of Artecon Preferred Stock, the holders of
Artecon Common Stock are entitled to receive ratably such dividends, if any, as
may be declared from time to time by the Artecon Board out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
Artecon, the holders of Artecon Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior liquidation
rights of shares of Artecon Preferred Stock, if any, then outstanding. The
Artecon Common Stock has no preemptive or conversion rights or other
subscription rights. There are no
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redemption or sinking fund provisions applicable to the Artecon Common Stock.
All outstanding shares of Artecon Common Stock are fully paid and
non-assessable.
Artecon Preferred Stock. Holders of Artecon Preferred Stock are not
entitled to vote on any matters to be voted upon by the shareholders, except for
matters to which holders of Artecon Preferred Stock are entitled to vote on
under the CGCL, including the Merger.
Holders of Artecon Preferred Stock are not entitled to receive dividends.
Upon liquidation of Artecon, holders of shares of Preferred are entitled to a
$0.01 per share liquidation preference over all other classes of Artecon capital
stock, while holders of shares of Preferred B are entitled to a liquidation
preference of $2.00 per share over all other classes of Artecon capital stock,
except for shares of Preferred.
Each share of Artecon Preferred Stock is convertible into 1.25 shares of
Common Stock at the option of the holders: (i) upon a public offering of any
shares of Artecon capital stock, (ii) upon the sale of any material portion of
Artecon's assets or shares of Common Stock, or (iii) at any time after three (3)
years from the date of issuance of such Artecon Preferred Stock (each a
"Conversion Event"). Each share of Preferred B may be redeemed by Artecon at any
time prior to receipt of a written election to convert by the holder subsequent
to a Conversion Event. Such redemption by Artecon must be accompanied by an
offer to pay the holder of Preferred B an amount equal to $2.00 per share plus
12 percent interest per year or partial year held to date of redemption.
Pursuant to the Artecon Repurchase Agreement, certain holders of Artecon
Preferred Stock are subject to the optional repurchase by Artecon of certain of
their shares of Artecon Preferred Stock through the fiscal year ending March 31,
1999. The Artecon Repurchase Agreement will be terminated effective upon the
consummation of the Merger.
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COMPARISON OF RIGHTS OF STORAGE DIMENSIONS STOCKHOLDERS AND
ARTECON SHAREHOLDERS
The rights of Storage Dimensions stockholders are governed by Storage
Dimensions' Certificate of Incorporation, as amended (the "Storage Dimensions
Certificate"), its Bylaws (the "Storage Dimensions Bylaws") and the DGCL. The
rights of Artecon shareholders are currently governed by Artecon's Articles of
Incorporation, as amended (the "Artecon Articles"), its Bylaws (the "Artecon
Bylaws") and the CGCL. In connection with the Merger, Storage Dimensions will
amend the Storage Dimensions Certificate pursuant to the Certificate of
Amendment. Upon consummation of the Merger, and given the requisite approval of
the Certificate of Amendment, Artecon shareholders will become stockholders of
Storage Dimensions with their rights as stockholders governed by the DGCL, the
Certificate of Amendment and the Storage Dimensions Bylaws.
The following is a summary of certain similarities and differences between
the rights of Storage Dimensions stockholders and Artecon shareholders under the
foregoing governing documents and applicable law. This summary does not purport
to be a complete statement of such similarities and differences. The
identification of specific similarities and differences is not meant to indicate
that other equally or more significant similarities and differences do not
exist. Such similarities and differences can be examined in full by reference to
the DGCL, the CGCL and the respective corporate documents of Storage Dimensions
and Artecon.
Capital Stock. The authorized capital stock of Storage Dimensions consists
of 40,000,000 shares of Storage Dimensions Common Stock, $0.005 par value, of
which 8,022,430 shares were issued and outstanding on the Storage Dimensions
Record Date, and 10,000,000 shares of Preferred Stock, issuable in such series
and with such rights, powers and privileges as the Storage Dimensions Board
shall determine. Storage Dimensions currently has no shares of Preferred Stock
outstanding. However, pursuant to the Certificate of Amendment, Storage
Dimensions will designate 2,494,159 shares of Series A Preferred Stock to be
issued to current holders of shares of Artecon Preferred and Preferred B in
exchange for such shares upon consummation of the Merger. The authorized capital
stock of Artecon consists of 20,000,000 shares of Common Stock, no par value, of
which 6,043,990 shares were issued and outstanding on the Artecon Record Date
and 10,000,000 shares of Preferred, no par value, of which 1,111,951 shares were
issued and outstanding on the Artecon Record Date, and 10,000,000 shares of
Preferred B, no par value, of which 1,405,208 shares were issued and outstanding
on the Artecon Record Date. See "DESCRIPTION OF ARTECON CAPITAL STOCK."
Amendment of Bylaws. Under the DGCL, bylaws may be amended by stockholders
entitled to vote; however, a corporation may confer the power to amend bylaws
upon the directors. The fact that such power has been so conferred upon the
directors does not divest the stockholders of their power to amend the bylaws.
The Storage Dimensions Certificate states that the Storage Dimensions Bylaws may
be amended by the affirmative vote of at least a majority of the outstanding
stock entitled to vote thereon or by the Storage Dimensions Board. Under the
CGCL and the Artecon Bylaws, the Artecon Bylaws may be amended or repealed
either by the Artecon Board or by the holders of a majority in interest of the
outstanding shares of Artecon, except that a change in the authorized number of
directors may only be effected by a vote of the majority of the outstanding
stock entitled to vote thereon; however, under the CGCL, an amendment reducing
the minimum number of directors to less than five cannot be adopted if votes
cast against its adoption are equal to or more than 16 2/3% of the outstanding
shares entitled to vote thereon.
Amendment of Storage Dimensions Certificate and Artecon Articles. The DGCL
provides that approval of a majority of the outstanding stock entitled to vote
thereon is required to amend a certificate of incorporation. The Storage
Dimensions Certificate provides that an amendment of certain provisions must be
approved by the affirmative vote of at least 66 2/3% of all of the outstanding
stock entitled to vote thereon. Under the CGCL, a corporation's articles of
incorporation may be amended by the approval of a majority of the outstanding
shares.
Special Meetings of Stockholders and Shareholders. Under the DGCL, a
special meeting of stockholders may be called by the board of directors or by
any other person authorized to do so in the certificate of incorporation or the
bylaws. The Storage Dimensions Certificate permits a special meeting to be
called for any
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purpose or purposes by (i) the Chairman or Vice-Chairman of the Storage
Dimensions Board, (ii) the President, (iii) the Storage Dimensions Board
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Storage
Dimensions Board for adoption) or (iv) by the holders of the shares entitled to
cast not less than 10% of the votes at the meeting.
Under the CGCL and the Artecon Bylaws, a special meeting of shareholders
may be called by the board of directors, the chairman of the board of directors,
the president, a vice president, the secretary or by one or more of the holders
of shares entitled to cast not less than 10% of the votes of such meetings.
Actions by Written Consent of Stockholders or Shareholders. Under the DGCL,
unless otherwise provided in the Storage Dimensions Certificate, any action
which may be taken at a meeting of stockholders may be taken without a meeting
and without prior notice if written consents setting forth the action so taken
are signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all stock entitled to vote thereon were present and voted.
However, the Storage Dimensions Certificate provides that no action shall be
taken by the stockholders by written consent.
Under the CGCL, shareholders may execute an action by written consent in
lieu of a shareholder meeting. The Artecon Bylaws provide that any action which
may be taken at a meeting of shareholders may be taken without a meeting and
without prior notice if written consents setting forth the action so taken are
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted. The
Artecon Bylaws provide further that directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors; provided, however, that any vacancy on the Artecon
Board may be filled by written consent of a majority of the outstanding shares
entitled to vote for the election of directors.
Size of the Board of Directors. The DGCL provides that the board of
directors of a Delaware corporation shall consist of one or more members. The
number of directors may be fixed by, or in the manner provided in, the
corporation's bylaws unless the certificate of incorporation fixes the number of
directors. The Storage Dimensions Certificate requires that the number of
directors shall be fixed by a resolution approved by the Board of Directors or
by the affirmative vote of holders of not less than 66 2/3% of all the
outstanding stock entitled to vote thereon. The number of directors of Storage
Dimensions is currently fixed at five.
The CGCL allows the number of persons constituting the board of directors
to be fixed by the bylaws or the articles of incorporation, or permits the
bylaws to provide that the number of directors may vary within a specified
range, the exact number to be determined by the board of directors. The CGCL
further provides that, in the case of a variable board, the maximum number of
directors may not exceed two times the minimum number minus one. The Artecon
Bylaws currently provide that the number of directors authorized is five.
Classification of Board of Directors. The DGCL permits, but does not
require, a classified board of directors, divided into as many as three classes
with staggered terms under which one-half or one-third of the directors are
elected for terms of two or three years, respectively. The CGCL generally
requires that directors be elected annually but does permit a "classified" board
of directors if the corporation is "listed." A listed corporation is defined
under the CGCL as one which (i) is listed on the NYSE or American Stock Exchange
or (ii) with a class of securities designated as a national market system
security on and by the National Association of Securities Dealers Automatic
Quotation System (or any successor national market system) if the corporation
has at least 800 holders of its equity securities. If eligible for the classes,
the CGCL permits corporations to provide for a board of directors divided into
as many as three classes by adopting an amendment to their articles of
incorporation or bylaws, which amendment must be approved by the shareholders.
The size of the classes must be as even as possible, and any change in number of
classes must be approved by the shareholders. Neither the Storage Dimensions
Bylaws nor the Artecon Bylaws provide for a classified board. However, the
Certificate of Amendment provides for a classified board of directors whereby
the directors will be separated into three classes with members of each class
serving for a three year term.
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Cumulative Voting. Under the DGCL, cumulative voting in the election of
directors is not available unless specifically provided for in the certificate
of incorporation. There is no provision for cumulative voting in the Storage
Dimensions Certificate or in the Certificate of Amendment. Under the CGCL,
cumulative voting in the election of directors is mandatory upon notice given by
a shareholder at a shareholders' meeting at which directors are to be elected.
To cumulate votes, a shareholder must give notice at the meeting, prior to the
voting, of the shareholder's intention to vote cumulatively. If any one
shareholder gives such a notice, all shareholders may cumulate their votes. The
CGCL permits a company, by amending its articles of incorporation or bylaws, to
eliminate cumulative voting when such company is "listed" (as defined above in
the section entitled "Classification of Board of Directors"). The Artecon Bylaws
permit any person entitled to vote at an election for directors to cumulate the
votes to which such person is entitled; provided, however, that no shareholder
shall be entitled to cumulate such shareholder's votes unless the candidates for
which such shareholder is voting have been placed in nomination prior to the
voting and a shareholder has given notice at the meeting, prior to the vote, of
an intention to cumulate votes.
Removal of Directors. Under the DGCL, a director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. A director of a corporation
that does not have a classified board of directors or cumulative voting may be
removed with the approval of a majority of the outstanding shares entitled to
vote with or without cause. The Storage Dimensions Bylaws provide that any
director may be removed from office, with or without cause, at any special
meeting (the notice of which shall state that it is called for that purpose) by
the affirmative vote of the holders of the majority of the voting power of all
the outstanding stock entitled to vote thereon. However, the Amended Storage
Dimensions Certificate provides that a director may not be removed from office
without cause, except until the third annual meeting of Storage Dimensions
following the Merger by the affirmative vote of at least 80% of the outstanding
voting stock of Storage Dimensions and by the affirmative vote of at least
66 2/3% of the outstanding voting stock of Storage Dimensions thereafter.
Under the CGCL, a director may be removed with or without cause by the
affirmative vote of a majority of the outstanding shares, provided that the
shares voted against removal would not be sufficient to elect the director by
cumulative voting. In addition, when, by the provisions of the articles of
incorporation, the holders of shares of a class or series, voting as a class or
series, are entitled to elect one or more directors, any director so elected may
be removed only by the applicable vote of holders of shares of that class or
series.
Filling Vacancies in the Board of Directors. Under the DGCL, vacancies may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or bylaws.
The DGCL further provides that if, at the time of filling any vacancy, the
directors then in office constitute less than a majority of the board (as
constituted immediately prior of any such increase), the Delaware Court of
Chancery may, upon application of any holder or holders of at least ten percent
of the total number of the outstanding stock having the right to vote for
directors, summarily order a special election be held to fill any such vacancy
or to replace directors chosen by the board to fill such vacancies. The Storage
Dimensions Bylaws provide that any vacancies on the Storage Dimensions Board
resulting from death, resignation, disqualification, removal or other causes and
any newly created directorships resulting from any increase in the number of
directors, shall be filled by the affirmative vote of the majority of the
directors then in office, even though less than a quorum of the Board of
Directors.
Under the CGCL, any vacancy on the board of directors other than one
created by removal of a director may be filled by the board. If the number of
directors in office is less than a quorum, a vacancy may be filled by the
unanimous written consent of the directors then in office, by the affirmative
vote of a majority of the directors at a properly noticed meeting or by a sole
remaining director. A vacancy created by removal of a director may be filled by
the board only if so authorized by a corporation's articles of incorporation or
by a bylaw approved by a corporation's shareholders. Furthermore, if, after the
filling of any vacancy by the directors of a corporation, the directors then in
office who have been elected by the corporation's shareholders constitute less
than a majority of the directors then in office, then: (i) any holder of more
than 5% of the corporation's voting stock may call a special meeting of
shareholders, or (ii) the superior court of the appropriate county may order a
special meeting of the shareholders to elect the entire board of directors of
the corporation. The Artecon Bylaws provide that the shareholders may elect a
director at any time to fill any
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vacancy not filled by the directors. Any such election by written consent, other
than to fill a vacancy created by removal, requires the consent of a majority of
the outstanding shares entitled to vote. Any such election by written consent to
fill a vacancy created by removal requires the consent of all of the outstanding
shares entitled to vote.
Payment of Dividends. The DGCL permits a corporation to declare and pay
dividends out of statutory surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared and/or for the
preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of capital represented by the issued and outstanding stock of
all classes having a preference upon the distribution of assets. In addition,
the DGCL generally provides that a corporation may redeem or repurchase its
shares only if such redemption or repurchase would not impair the capital of the
corporation. The Storage Dimensions Bylaws provide for the declaration and
payment of dividends in accordance with the DGCL. Under the CGCL, any dividends
or other distributions to shareholders, such as redemptions, are limited to the
greater of (i) retained earnings or (ii) an amount which would leave the
corporation with assets (excluding certain intangible assets) equal to at least
125% of its liabilities (excluding certain deferred items) and current assets
equal to at least 100% (or, in certain circumstances, 125%) of its current
liabilities.
Appraisal Rights. Under both the DGCL and the CGCL, a shareholder of a
corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal (or dissenters') rights pursuant
to which such shareholder may receive cash in the amount of the fair market
value of his or her shares in lieu of the consideration he or she would
otherwise receive in the transaction. Under the DGCL, such rights are not
available (a) with respect to the sale, lease or exchange of all or
substantially all of the assets of a corporation, (b) with respect to a merger
or consolidation by a corporation, the shares of which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or are held of record by more than 2,000 holders if such
stockholders receive only shares of the surviving corporation or shares of any
other corporation which are either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders, plus cash in lieu of fractional shares, or (c) to
stockholders of a corporation surviving a merger if no vote of the stockholders
of the surviving corporation is required to approve the merger because the
merger agreement does not amend the existing certificate of incorporation, each
share of the surviving corporation outstanding prior to the merger is an
identical outstanding or treasury share after the merger, and the number of
shares to be issued in the merger does not exceed 20% of the shares of the
surviving corporation outstanding immediately prior to the merger and if certain
other conditions are met.
In connection with the Merger, holders of Artecon Common Stock and Artecon
Preferred Stock may, by complying with Chapter 13 of the CGCL, be entitled to
dissenters' rights as set forth therein, and the shares of Artecon Common Stock
and/or Artecon Preferred Stock held by such persons will be deemed to be
dissenting shares. A copy of Chapter 13 of the CGCL is attached as Annex D to
this Joint Proxy Statement/Prospectus. For a more complete description of such
rights, see "THE MERGER -- Appraisal and Dissenters' Rights."
Inspection of Books and Records. Under the DGCL, any stockholder may
inspect, for any proper purpose, a company's stock ledger, a list of its
stockholders and any other books and records. Under the CGCL, a shareholder or
shareholders holding at least 5% in aggregate of the outstanding voting shares
of a corporation or who hold at least 1% of those voting shares and have filed a
Schedule 14A with the Exchange Commission, shall have the absolute right to do
either or both of the following: (i) inspect and copy the record of
shareholders' names and addresses and shareholdings during usual business hours
upon five days' prior written demand upon the corporation, or (ii) obtain from
the transfer agent for the corporation, upon written demand and upon tender of
its usual charges for such a list, a list of shareholders' names and addresses,
who are entitled to vote for election of directors and their shareholdings, as
of the most recent record date for which it has been compiled or as of a date
specified by the shareholder subsequent to the date of demand.
Limitation of Liability of Directors. The laws of both Delaware and
California permit corporations to adopt a provision in their certificate of
incorporation or articles of incorporation, respectively, eliminating, with
certain exceptions, the personal liability of a director to the corporation or
its shareholders for monetary
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damages for breach of the director's fiduciary duty as a director. Under the
DGCL, Storage Dimensions may not eliminate or limit director monetary liability
for (a) breaches of the director's duty of loyalty to the corporation or its
stockholders; (b) acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; (c) unlawful dividends, stock
repurchases or redemptions; or (d) transactions from which the director received
an improper personal benefit. Such limitation of liability provision also may
not limit a director's liability for violation of, or otherwise relieve
directors from the necessity of complying with federal or state securities laws,
or affect the availability of nonmonetary remedies such as injunctive relief or
rescission. The Storage Dimensions Certificate eliminates the liability of the
Storage Dimensions Board to the fullest extent permissible under the DGCL.
The CGCL does not permit the elimination of monetary liability where such
liability is based on: (a) intentional misconduct or knowing and culpable
violation of law; (b) acts or omissions that a director believes to be contrary
to the best interests of the corporation or its shareholders, or that involve
the absence of good faith on the part of the director; (c) receipt of any
improper personal benefit; (d) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should have
been aware of a risk of serious injury to the corporation or its shareholders;
(e) acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (f) interested transactions between the corporation and a
director, in which a director has a material financial interest; or (g)
liability for improper distributions, loans or guarantees.
Indemnification. The DGCL generally permits indemnification of expenses
incurred in the defense or settlement of a derivative or third-party action,
provided there is a determination by a disinterested quorum of the directors, by
independent legal counsel or by the stockholders, that the person seeking
indemnification acted in good faith and in a manner reasonably believed to be in
or (in contrast to the CGCL) not opposed to the best interests of the
corporation and, with respect to a criminal proceeding, which such person had no
reasonable cause to believe his or her conduct was unlawful. Without court
approval, however, no indemnification may be made in respect of any derivative
action in which such person is adjudged liable to the corporation. The DGCL
requires indemnification of expenses when the individual being indemnified has
successfully defended the action on the merits or otherwise. The Storage
Dimensions Bylaws provide that Storage Dimensions will indemnify its directors
and executive officers and may indemnify other offices to the fullest extent
permitted by law. Under the Storage Dimensions Bylaws, indemnified parties are
entitled to indemnification of negligence, gross negligence and otherwise to the
fullest extent permitted by law. The Storage Dimensions Bylaws also require
Storage Dimensions to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the indemnified
party to repay such advances if it is ultimately determined that the indemnified
party is not entitled to indemnification. Storage Dimensions also has
indemnification agreements with its executive officers and directors.
In addition, under the Reorganization Agreement, Storage Dimensions has
agreed that, from and after the consummation of the Merger, it will fulfill and
honor in all material respects the obligations of Storage Dimensions and Artecon
pursuant to (i) each indemnification agreement in effect at such time between
Storage Dimensions and each person who is or was a director or officer of
Storage Dimensions and Artecon at or prior to the Effective Time and (ii) any
indemnification provisions under Storage Dimensions' Certificate of
Incorporation or Artecon's Articles of Incorporation or either company's Bylaws,
as each was in effect on the date of the Reorganization Agreement. Pursuant to
the Reorganization Agreement, Storage Dimensions has also agreed that the
companies' respective charter documents will continue to contain the provisions
with respect to indemnification and exculpation from liability set forth in such
documents as of the date of the Reorganization Agreement and such provisions
will not be amended, repealed or otherwise modified for a period of six years
after the Effective Time in any manner that would adversely affect the rights
thereunder of any Indemnified Party.
The CGCL permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (a) no
indemnification may be made when a person is adjudged liable to the corporation
in the performance of that person's duty to the corporation and its
shareholders, unless a court determines such person is entitled to indemnity for
expenses, and then such indemnification may be made only
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to the extent that such court shall determine, and (b) no indemnification may be
made without court approval in respect of amounts paid in settling or otherwise
disposing of an action or expenses incurred in defending an action which is
settled or otherwise disposed of without court approval.
Indemnification is permitted by the CGCL only for acts taken by the person
seeking indemnification in good faith and believed to be in the best interests
of the corporation and its shareholders and with respect to a criminal
proceeding, which such person had no reasonable cause to believe his conduct was
unlawful, as determined by a majority vote of a quorum of disinterested
directors, independent legal counsel (if a quorum of disinterested directors is
not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action. The
CGCL requires indemnification when the individual has successfully defended the
action on the merits. California corporations may include in their articles of
incorporation a provision which extends the scope of indemnification through
agreements, bylaws or other corporate actions beyond that specifically
authorized by law. The Artecon Bylaws include a provision that provides Artecon
with the authority to indemnify its agents to the fullest extent permitted by
the CGCL.
Stockholder Approval of Certain Business Combinations. Section 203 of the
DGCL prohibits a corporation from engaging in a "business combination" with an
"interested stockholder" for three years following the date that such person
becomes an interested stockholder. With certain exceptions, an interested
stockholder is a person or entity who or which owns 15% or more of the
corporation's outstanding voting stock (including any rights to acquire stock
pursuant to an option, warrant, agreement, arrangement or understanding, or upon
the exercise of conversion or exchange rights, and stock with respect to which
the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner of 15% or more of such voting stock at any time
within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers of the corporation or a subsidiary with or caused by
the interested stockholder; sales or other dispositions of the interested
stockholder (except proportionately with the corporation's other stockholders)
of assets of the corporation or a subsidiary equal to ten percent or more of the
aggregate market value of the corporation's consolidated assets or its
outstanding stock; the issuance or transfer by the corporation or a subsidiary
of stock of the corporation or such subsidiary to the interested stockholder
(except for certain transfers in a conversion or exchange or a pro rata
distribution or certain other transactions, none of which increase the
interested stockholder's proportionate ownership of any class or series of the
corporation's or such subsidiary's stock); or receipt by the interested
stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the number of shares
outstanding those shares owned by directors who are also officers of the target
corporation and shares held by employee stock plans which do not permit
employees to decide confidentially whether to accept a tender or exchange
offer); or (iii) on or after the date such person becomes an interested
stockholder, the board approves the business combination and it is also approved
at a stockholder meeting by 66 2/3% of the voting stock not owned by the
interested stockholder. Section 203 does not apply if the business combination
is proposed prior to the consummation or abandonment of and subsequent to the
earlier of the public announcement or a 20-day notice required under Section 203
of the proposed transaction which (i) constitutes certain (a) mergers or
consolidations, (b) sales or other transfers of assets having an aggregate
market value equal to 50% or more of the aggregate market value of all of the
assets of the corporation determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the corporation, or (c) proposed
tender or exchange offer for 50% or more of the corporation's outstanding voting
stock; (ii) is with or by a person who was either not an interested stockholder
during the last three years or who became an interestedstockholder with the
approval of the corporation's board of directors; and (iii) is approved or not
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opposed by a majority of the board members elected prior to any person becoming
an interested stockholder during the previous three years (or their chosen
successors).
Under California law, there is no equivalent provision to Section 203 of
the DGCL. Under Section 1203 of the CGCL, certain business combinations with
certain interested shareholders are subject to specified conditions, including a
requirement that a fairness opinion must be obtained and delivered to the
corporation's shareholders. The CGCL requires that holders of a California
corporation's common stock receive nonredeemable common stock in a merger of the
corporation with the holder (or an affiliate of the holder) of more than 50% but
less than 90% of its common stock, unless all of the holders of its common stock
consent to the transaction.
Stockholder Voting on Mergers and Similar Transactions. The laws of both
California and Delaware generally require that a majority of the stockholders of
both acquiring and target corporations approve statutory mergers. The DGCL does
not require a stockholder vote of the surviving corporation in a merger (unless
the corporation provides otherwise in its certificate of incorporation) if (a)
the merger agreement does not amend the existing certificate of incorporation,
(b) each share of stock of the surviving corporation outstanding before the
merger is an identical outstanding or treasury share after the merger, and (c)
the number of shares to be issued by the surviving corporation in the merger
does not exceed 20% of the shares outstanding immediately prior to the merger.
The CGCL contains a similar exception to its voting requirements for
reorganization where shareholders or the corporation itself, or both,
immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting of more than five-sixths of the
voting power (assuming the conversion of convertible equity securities) of the
surviving or acquiring corporation or its parent entity.
The laws of both California and Delaware also generally require that a sale
of all or substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring such assets.
With certain exceptions, the CGCL also requires that mergers,
reorganizations, and similar transactions be approved by a majority vote of each
class of shares outstanding. In contrast, the DGCL generally does not require
class voting, except for amendments to the certificate of incorporation that
change the number of authorized shares or the par value of shares of a specific
class or that adversely affect such class of shares.
Loans to Directors, Officers and Employees. The DGCL permits Storage
Dimensions to make loans to, guarantee the obligations of, or otherwise assists
its officers or other employees when such action, in the judgment of the
directors, may reasonably be expected to benefit Storage Dimensions. Under the
CGCL, any loan to or guaranty for the benefit of a director or officer,
including pursuant to an employee benefit plan, of the corporation requires
approval of holders of a majority of the outstanding shares of the corporation.
However, the CGCL provides that if Artecon has 100 or more shareholders of
record and has adopted a bylaw allowing the Artecon Board to do so, the Artecon
Board alone may approve loans to or guaranties on behalf of an officer (whether
or not such officer is a director) or adopt an employee benefit plan authorizing
such loans or guarantees, by a vote sufficient without counting the vote of any
interested director or directors, if the Artecon Board determines that any such
loan, guaranty or plan may reasonably be expected to benefit the corporation.
Interested Director Transactions. Under the laws of both California and
Delaware, contracts or transactions between a corporation and one or more of its
directors or between a corporation and any other entity in which one or more of
its directors are directors or have a financial interest, are not void or
voidable because of such interest or because such director is present at a
meeting of the board which authorizes or approves the contract or transaction,
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under the CGCL and the DGCL.
Under the CGCL and the DGCL, either (a) the shareholders or the board of
directors must approve any such contract or transaction in good faith after full
disclosure of the material facts (and, in the case of board approval other than
for a common directorship, the CGCL requires that the contract or transaction
must also be "just and reasonable" to the corporation), or (b) the contract or
transaction must have been "fair" (in Delaware) or, in the case of a common
directorship (in California), "just and reasonable" as to the corporation at the
time it was approved. The CGCL explicitly
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places the burden of proof of the just and reasonable nature of the contract or
transaction on the interested director.
Under the DGCL, if board approval is sought, the contract or transaction
must be approved by a majority of the disinterested directors (even though less
than a majority of a quorum). Under the CGCL, if shareholder approval is sought,
the interested director is not entitled to vote his or her shares at a
shareholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for purposes of establishing a quorum).
Stockholder Derivative Suit. Under the DGCL, a person may only bring a
derivative action on behalf of the corporation if the person was a stockholder
of the corporation at the time of the transaction in question or his or her
stock thereafter devolved upon him or her by operation of law. The CGCL provides
that a shareholder bringing a derivative action on behalf of a corporation need
not have been a shareholder at the time of the transaction in question, provided
that certain criteria are met. The CGCL also provides that the corporation or
the defendant in a derivative suit may, under certain circumstances, make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond. Delaware does not have a similar bonding requirement.
Dissolution. Under the DGCL, if the dissolution is initiated by the board
of directors it may be approved by the holders of a majority of the
corporation's shares. If the board of directors does not approve the proposal to
dissolve, it must be consented to in writing by all stockholders entitled to
vote thereon. Under the CGCL, shareholders holding fifty percent (50%) or more
of the total voting power may authorize a corporation's dissolution, with or
without the approval of the corporation's board of directors. The board may
cause the corporation to dissolve if (a) an order for relief under Chapter 7 of
the Federal bankruptcy law has been entered, (b) no shares have been issued or
(c) the corporation has disposed of all of its assets and has not conducted any
business for a period of five years preceding the adopting of a resolution to
dissolve.
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ADDITIONAL MATTERS FOR CONSIDERATION BY
STORAGE DIMENSIONS STOCKHOLDERS
THE CERTIFICATE OF INCORPORATION AMENDMENTS
GENERAL
On December 22, 1997, the Storage Dimensions Board unanimously adopted,
subject to stockholder approval, the Certificate of Amendment to Storage
Dimensions' Amended and Restated Certificate of Incorporation set forth in Annex
B, which includes two amendments to Storage Dimensions' Amended and Restated
Certificate of Incorporation: (i) an amendment to provide for a classified Board
of Directors whereby the directors will be separated into three classes with
members of each class serving for a three year term and (ii) an amendment to
provide that a director may not be removed from office without cause except,
until the third annual meeting of Storage Dimensions following the Merger, by
the affirmative vote of at least 80% of the outstanding voting stock of Storage
Dimensions and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock of Storage Dimensions thereafter. Both amendments were adopted as
part of the terms of the Merger approved by the Storage Dimensions Board at the
time the Merger was approved.
The purpose of the proposed amendments is to give Storage Dimensions
adequate time to negotiate with potential acquirors which make unsolicited
offers to buy Storage Dimensions. Storage Dimensions believes that acquisition
proposals that the Storage Dimensions Board cannot effectively evaluate can
seriously disrupt the business and management of Storage Dimensions and
generally present to stockholders the risk of terms which may be less than
favorable to all of the stockholders than would be available in a Board-approved
transaction. In particular, Board-approved transactions may be carefully planned
and undertaken at an opportune time in order to obtain maximum value for Storage
Dimensions and all of its stockholders with due consideration to matters such as
the recognition or postponement of gain or loss for tax purposes, the management
and business of the acquiring entity and maximum strategic deployment of
corporate assets. Since the effect of the Certificate of Incorporation
Amendments is to make management more difficult to remove involuntarily, the
Certificate of Incorporation Amendments may force those seeking to assume
control of Storage Dimensions to negotiate with management which may lead to a
more favorable price for stockholders in any transaction to assume control.
However, the overall effect of the Certificate of Incorporation Amendments
is to make more difficult the acquisition of Storage Dimensions without the
support of its Board. The effect of making removal of management more difficult
may be the continuation of management tenure even if the removal of management
is desired by more than a majority of the stockholders and would be beneficial
to the stockholders.
The Storage Dimensions Board has considered the potential disadvantages and
has unanimously concluded that the potential benefits of the proposed
Certificate of Incorporation Amendments outweigh the possible disadvantages. The
Certificate of Incorporation Amendments are part of a plan by the Storage
Dimensions Board of Directors to ensure that Storage Dimensions, its management
and the stockholders are protected to the maximum extent possible from the
negative effects of an unapproved change in control of Storage Dimensions.
The Certificate of Incorporation Amendments are discussed more fully in
Proposal 2 and Proposal 3 below and are set forth in the Certificate of
Amendment attached as Annex B to this Joint Proxy Statement/Prospectus.
PROPOSAL 2 AND PROPOSAL 3 ARE MUTUALLY DEPENDENT. THAT IS, A VOTE AGAINST
PROPOSAL 2 WILL CONSTITUTE A VOTE AGAINST PROPOSAL 3 AND A VOTE AGAINST PROPOSAL
3 WILL CONSTITUTE A VOTE AGAINST PROPOSAL 2. FURTHERMORE, A VOTE AGAINST THE
BUSINESS COMBINATION PROPOSAL BY THE STORAGE DIMENSIONS' STOCKHOLDERS WILL
CONSTITUTE A VOTE AGAINST BOTH PROPOSAL 2 AND PROPOSAL 3. IN THE EVENT THE
STORAGE DIMENSIONS STOCKHOLDERS DO NOT APPROVE PROPOSAL 2 AND PROPOSAL 3, THE
PROPOSED CERTIFICATE OF AMENDMENT WILL BE REVISED TO DELETE THE PROVISIONS
RELATED TO PROPOSAL 2 AND PROPOSAL 3.
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PROPOSAL 2
APPROVAL OF AMENDMENT TO STORAGE DIMENSIONS'
CERTIFICATE OF INCORPORATION TO PROVIDE FOR A
CLASSIFIED BOARD OF DIRECTORS
Stockholders are requested in this Proposal 2 to specifically approve the
amendment to the Storage Dimensions Certificate of Incorporation to add Section
2 to Article VII of Storage Dimensions' Certificate of Incorporation, which
amendment provides for a classified Board of Directors whereby the directors
will be separated into three classes with members of each class serving for a
three-year term.
Currently, each elected director of Storage Dimensions holds office until
the next annual meeting of stockholders and until his or her successor is duly
elected and qualified. The proposed amendment to add Section 2 to Article VII of
the Storage Dimensions' Certificate of Incorporation provides for a classified
Board of Directors with staggered three-year terms. Directors will be assigned
to one of three classes designated as Class I, Class II and Class III,
respectively, by resolution of the Board of Directors. The Board of Directors
will have the authority to reallocate directors among classes from time to time,
and to appoint new directors to any class, so long as the total number of
directors in each class remains equal as nearly as practicable. The term of
office of Class I directors will expire on the first annual meeting of
stockholders of Storage Dimensions following the adoption of the Certificate of
Amendment, while the terms of Class II and Class III directors expire on the
second and third annual meetings, respectively, following adoption of the
Certificate of Amendment. If adopted, the provision would be applicable to every
subsequent election of directors and have the effect of requiring at least two
annual meetings to gain control of the Board of Directors versus only one annual
meeting under the current system.
Approval of Proposal 2 will require the affirmative vote of the holders of
a majority of the outstanding voting stock of Storage Dimensions. Accordingly,
abstentions and broker non-votes are equivalent to negative votes for purposes
of approving Proposal 2. A vote against this Proposal 2 will constitute a vote
against Proposal 3.
THE STORAGE DIMENSIONS BOARD BELIEVES THAT APPROVAL OF THIS PROPOSAL 2 IS
IN THE BEST INTERESTS OF STORAGE DIMENSIONS AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE STORAGE DIMENSIONS STOCKHOLDERS VOTE IN FAVOR OF PROPOSAL 2.
PROPOSAL 3
APPROVAL OF AMENDMENT TO STORAGE
DIMENSIONS' CERTIFICATE OF INCORPORATION
REGARDING REMOVAL OF DIRECTORS
Stockholders are requested in this Proposal 3 to specifically approve the
amendment to add Section 3 to Article VII of Storage Dimensions' Certificate of
Incorporation, which amendment provides that a director may not be removed from
office without cause except, until the third annual meeting of Storage
Dimensions following the Merger, by the affirmative vote of at least 80% of the
outstanding voting stock of Storage Dimensions and by the affirmative vote of at
least 66 2/3% of the outstanding voting stock of Storage Dimensions thereafter.
Under Delaware law and the current Storage Dimensions Certificate of
Incorporation, any director or the entire Board of Directors of a non-classified
board (i.e., a Board of Directors such as Storage Dimensions' which is not split
into multiple classes) may be removed from office with or without cause by the
affirmative vote of the holders of a majority of the outstanding voting stock of
the company. However, under Delaware law, unless provided in the company's
certificate of incorporation, a director of a classified board (i.e., a Board of
Directors split into three classes as set forth in Proposal 2) may be removed
only for cause by the affirmative vote of the holders of a majority of the
outstanding voting stock of the company. The proposed amendment to add Section 3
to Article VII of the Storage Dimensions Certificate of Incorporation will
permit the removal of a director (i) with cause only upon the affirmative vote
of the holders of a majority of the outstanding voting stock of Storage
Dimensions or (ii) without cause by (A) until the third annual meeting of
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Storage Dimensions following the Merger, the affirmative vote of at least 80% of
the outstanding voting stock of Storage Dimensions and (B) after the third
annual meeting of Storage Dimensions following the Merger, the affirmative vote
of at least 66 2/3% of the outstanding voting stock of Storage Dimensions.
Approval of Proposal 3 will require the affirmative vote of the holders of
a majority of the outstanding voting stock of Storage Dimensions. Accordingly,
abstentions and broker non-votes are equivalent to negative votes for purposes
of approving Proposal 3. A vote against this Proposal 3 will constitute a vote
against Proposal 2.
THE STORAGE DIMENSIONS' BOARD BELIEVES THAT APPROVAL OF THIS PROPOSAL 3 IS
IN THE BEST INTERESTS OF STORAGE DIMENSIONS AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE STORAGE DIMENSIONS STOCKHOLDERS VOTE IN FAVOR OF PROPOSAL 3.
PROPOSAL 4
APPROVAL OF AMENDMENT
TO 1996 STOCK OPTION PLAN
Storage Dimensions stockholders are also being asked to approve at the
Storage Dimensions Special Meeting an amendment to the Storage Dimensions 1996
Stock Option Plan (the "1996 Option Plan") to increase the number of shares
which may be issued under the 1996 Option Plan from 1,000,000 to 3,000,000. As
of December 31, 1997, there were options outstanding to purchase 805,831 shares
of Storage Dimensions Common Stock and 194,169 shares remained available for
future grant under the 1996 Option Plan. The Storage Dimensions Board approved
the amendment in January 1998 in order to ensure that following the Merger,
Storage Dimensions has an option pool sufficient to attract and retain qualified
personnel.
DESCRIPTION OF THE 1996 OPTION PLAN
The material features of the 1996 Option Plan are outlined below.
GENERAL
The 1996 Option Plan provides for the grant of nonqualified stock options
only, which are not intended to qualify as "incentive stock options" under the
Code. See "-- Federal Income Tax Information" for a discussion of the tax
treatment of nonqualified stock options.
PURPOSE
The 1996 Option Plan was adopted to provide a means for selected officers
and employees of and consultants to Storage Dimensions and its affiliates to be
given an opportunity to purchase stock in Storage Dimensions, to assist in
retaining the services of employees holding key positions, to secure and retain
the services of persons capable of filling such positions, and to provide
incentives for such persons to exert maximum efforts for the success of Storage
Dimensions.
ADMINISTRATION
The 1996 Option Plan provides that it will be administered by the Storage
Dimensions Board and authorizes the Board to delegate such administration to a
committee of two or more directors, each of whom shall be disinterested within
the meaning of Rule 16b-3 under the Exchange Act. As used herein with respect to
the 1996 Option Plan, the "Storage Dimensions Board" refers to the Compensation
Committee as well as the Storage Dimensions Board itself. The Storage Dimensions
Board has the power to construe and interpret the 1996 Option Plan and, subject
to the provisions of the 1996 Option Plan, to determine the persons to whom and
the dates on which options will be granted, the number of shares to be subject
to each option, the time or times during the term of each option within which
all or a portion of such option may be exercised, the exercise price, the type
of consideration, and other terms of the option. The Storage Dimensions Board
has delegated such administration to the Compensation Committee.
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ELIGIBILITY
Nonqualified stock options may be granted under the 1996 Option Plan only
to employees (including officers) and directors of, or consultants to, Storage
Dimensions or its affiliates.
STOCK SUBJECT TO THE 1996 OPTION PLAN
If options granted under the 1996 Option Plan expire or otherwise terminate
without being exercised, the Storage Dimensions Common Stock not purchased
pursuant to such options again becomes available for issuance under the 1996
Option Plan. The current number of shares authorized for issuance under the 1996
Option Plan is 1,000,000 shares. Under this proposal, the 1996 Option Plan would
be amended to increase the number of shares authorized for issuance to
3,000,000.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under
the 1996 Option Plan. Individual option grants may be more restrictive as to any
or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of nonqualified options under
the 1996 Option Plan may not be less than 85% of the fair market value of the
Storage Dimensions Common Stock subject to the option on the date of the option
grant. In the event of a decline in the value of Storage Dimensions Common
Stock, the Storage Dimensions Board has the authority to offer employees the
opportunity to replace outstanding higher-priced options, whether incentive or
nonqualified, with new lower-priced options.
The exercise price of options granted under the 1996 Option Plan must be
paid either: (i) in cash at the time the option is exercised; or (ii) at the
discretion of the Storage Dimensions Board, (a) by delivery of other Storage
Dimensions Common Stock, (b) pursuant to a deferred payment arrangement, or (c)
in any other form of legal consideration acceptable to the Storage Dimensions
Board.
Option Exercise. Options granted under the 1996 Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Storage
Dimensions Board. Shares covered by options may be subject to different vesting
terms. The Storage Dimensions Board has the power to accelerate the time during
which an option may be exercised. In addition, options granted under the 1996
Option Plan may permit exercise prior to vesting, but in such event the optionee
may be required to enter into an early exercise stock purchase agreement that
allows Storage Dimensions to repurchase shares not yet vested should the
optionee leave the employ of Storage Dimensions before vesting.
Term. The maximum term of options under the 1996 Option Plan is ten years.
Options under the 1996 Option Plan terminate three months after the end of
optionee's status as an employee or consultant of Storage Dimensions, or twelve
months after such optionee's termination by death or disability, but in no event
later than the expiration of the option's term. Individual options by their
terms may provide for exercise within a longer or shorter period of time
following termination of employment or the consulting relationship.
Transferability. Options granted under the 1996 Option Plan are not
generally transferable by the optionee, and each option is generally exercisable
during the lifetime of the optionee only by such optionee.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the 1996 Option Plan or
subject to any option granted under the 1996 Option Plan (through consolidation,
reorganization, recapitalization, stock dividend, stock split, combination of
shares, or otherwise), the 1996 Option Plan and options outstanding thereunder
will be appropriately adjusted as to the class and the maximum number of shares
subject to the 1996 Option Plan and the class, number of shares, and price per
share of stock subject to such outstanding options.
As to options currently outstanding under the 1996 Option Plan, the 1996
Option Plan provides that, in the event of a change in control in which the
current stockholders of Storage Dimensions own less than 50% of the surviving
company or a sale of all or substantially all of Storage Dimensions' assets,
each optionee will have the right to exercise the option as to all of the
optioned stock, including shares as to which the option would not otherwise be
exercisable. If an option becomes exercisable in full in the event of a merger
or sale of assets, Storage Dimensions will notify the optionee that the option
will be fully exercisable for a specified
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period from the date of such notice, and the option will terminate upon the
expiration of such period. As to all options granted after December 22, 1997
under the 1996 Option Plan, such options shall be assumed or substituted by the
successor company and if not so assumed or substituted, shall terminate upon
such change of control.
DURATION, AMENDMENT AND TERMINATION
The 1996 Option Plan shall continue for a term of ten years from the
effective date of the 1996 Option Plan. The Board may suspend or terminate the
1996 Option Plan without stockholder approval or ratification at any time or
from time to time.
The Board may also amend the 1996 Option Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of Storage Dimensions within twelve months before or after its
adoption by the board if the amendment would increase the number of shares
reserved for issuance under the 1996 Option Plan.
PARTICIPATION IN 1996 OPTION PLAN
The grant of options under the 1996 Option Plan to employees, including the
Storage Dimensions Named Executive Officers, is subject to the discretion of the
Storage Dimensions Board or its committee. As of the date of this Joint Proxy
Statement/Prospectus, there has been no determination by the Storage Dimensions
Board or its committee with respect to future awards under the 1996 Option Plan.
Accordingly, future awards are not determinable. The following table sets forth
information with respect to the grant of options to the Storage Dimensions Named
Executive Officers, to all current executive officers as a group and to all
other employees as a group during the year ended December 31, 1997.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL NUMBER OF DOLLAR
OR IDENTITY OF GROUP AND POSITION OPTIONS GRANTED(#) VALUE($)(1)
--------------------------------- ------------------ -----------
<S> <C> <C>
David A. Eeg.................................. 100,000 $7.00
Gene Bowles, Jr............................... 100,000 $7.00
Robert E. Bylin............................... 50,000 $7.00
Ralph Ciarlanti III........................... 50,000 $7.00
Kenneth Epstein............................... 50,000 $7.00
All current executive officers as a group (8
persons).................................... 480,000 $6.93
All other employees as a group................ 498,016 $6.22
</TABLE>
- ---------------
(1) Represents weighted average per share exercise price.
FEDERAL INCOME TAX INFORMATION
Nonqualified stock options granted under the 1996 Option Plan generally
have the following federal income tax consequences:
There are no tax consequences to the optionee or Storage Dimensions by
reason of the grant of a nonqualified stock option. Upon exercise of a
nonqualified stock option, the optionee normally will recognize taxable ordinary
income equal to the excess of the stock's fair market value on the date of
exercise over the option exercise price. Generally, with respect to employees,
Storage Dimensions is required to withhold from regular wages or supplemental
wage payments an amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, the provisions of Section 162(m) of the Code and
the satisfaction of any withholding obligation, Storage Dimensions will
generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the optionee. Pursuant to Section 162(m) of the
Code, Storage Dimensions' business expense deduction will be limited to $1
million for certain executive employees if such an employee's recognition of
ordinary income, combined with all other compensation paid to the employee
during the year of such recognition, exceeds $1 million. Upon disposition of the
stock, the optionee will recognize a capital gain or loss equal to the
difference between the selling price and the sum of the amount paid for such
stock plus any amount recognized as ordinary income upon exercise of the option.
Such gain or loss will be long- or short-term depending on whether the stock was
held for more than one year. Slightly
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different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
THE STORAGE DIMENSIONS BOARD OF DIRECTORS HAS UNANIMOUSLY RECOMMENDED A
VOTE FOR APPROVAL OF THE AMENDMENT TO STORAGE DIMENSIONS' 1996 STOCK OPTION
PLAN.
PROPOSAL 5
APPROVAL OF AMENDMENT
TO 1996 EMPLOYEE STOCK PURCHASE PLAN
The Storage Dimensions stockholders are also being asked to approve an
amendment of Storage Dimensions' 1996 Employee Stock Purchase Plan (the
"Purchase Plan") to increase the number of shares which may be issued under the
Purchase Plan from 200,000 to 400,000. As of December 31, 1997, 47,253 shares of
Storage Dimensions Common Stock had been purchased under the Purchase Plan and
152,747 shares of Storage Dimensions Common Stock remained available for
purchase under the Purchase Plan. The Storage Dimensions Board adopted this
amendment in January 1998 in order to ensure that following the Merger, Storage
Dimensions has sufficient shares authorized under its Purchase Plan to attract
and retain qualified personnel.
DESCRIPTION OF THE PURCHASE PLAN
The material features of the Purchase Plan are outlined below.
GENERAL
The Purchase Plan provides for the opportunity to purchase Storage
Dimensions Common Stock through accumulated payroll deductions. The Purchase
Plan is intended to qualify as an "Employee Stock Purchase Plan" under Section
423 of the Code.
The Purchase Plan was adopted to provide a means for employees of Storage
Dimensions to be given an opportunity to purchase stock in Storage Dimensions,
to assist in retaining the services of employees, to secure and retain services
of persons capable of filling such positions, and to provide incentives for such
persons to exert maximum efforts for the success of Storage Dimensions.
ADMINISTRATION
The Purchase Plan provides that it is to be administered by the Storage
Dimensions Board and authorizes the Board to delegate such administration to a
committee of two or more directors, each of whom shall be disinterested within
the meaning of Rule 16b-3 under the Exchange Act. As used herein with respect to
the Purchase Plan, the "Storage Dimensions Board" refers to the Compensation
Committee as well as the Storage Dimensions Board itself. The Storage Dimensions
Board has the power to construe and interpret the Purchase Plan. The Storage
Dimensions Board has delegated such administration to the Storage Dimensions
Compensation Committee.
ELIGIBILITY
Storage Dimensions employees are eligible to participate in the Purchase
Plan if they are customarily employed by Storage Dimensions or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year.
OFFERING PERIODS
The Purchase Plan has two six-month offering periods each year beginning on
the first trading day on or after August 15 and February 15, respectively, of
each year.
PARTICIPATION IN PURCHASE PLAN
An eligible employee may participate in the Purchase Plan by completing a
subscription agreement authorizing payroll deductions, in an amount not
exceeding fifteen percent of such employee's compensation up to a maximum of
$7,500 during the offering period. Participation in the Purchase Plan is
voluntary and is
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dependent on each eligible employee's election to participate and his or her
respective determination as to the level of payroll deductions. Accordingly,
future purchases under the Purchase Plan are not determinable. The following
table sets forth, as to the Storage Dimensions Named Executive Officers, all
current executive officers as a group and all other employees who participated
in the Purchase Plan: (i) the number of shares of Storage Dimensions Common
Stock purchased under the Purchase Plan during the last fiscal year; and (ii)
the dollar value of the benefit:
<TABLE>
<CAPTION>
NUMBER OF DOLLAR
NAME OF INDIVIDUAL OR SHARES VALUE
IDENTITY OF GROUP AND POSITION PURCHASED(#) ($)(1)
------------------------------ ------------ ---------
<S> <C> <C>
David A. Eeg................................................ 1,357 1,323
Gene Bowles, Jr............................................. 1,357 1,323
Robert E. Bylin............................................. 1,216 1,186
Ralph Ciarlanti III......................................... 409 399
Kenneth Epstein............................................. 986 961
All current executive officers as a group (8 persons)....... 7,035 6,860
All other employees as a group.............................. 40,218 39,213
</TABLE>
- ---------------
(1) Market value of shares on date of purchase, minus the purchase price under
the Purchase Plan.
PURCHASE PRICE
The purchase price under the Purchase Plan shall be an amount equal to 85%
of the fair market value of a share of Common Stock on the enrollment date or
the exercise date, whichever is lower (subject to any limit imposed by the
Code).
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Purchase Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
otherwise), will be appropriately adjusted as to the class and the maximum
number of shares subject to such plan and the class, number of shares, and price
per share of stock subject to such outstanding options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Purchase Plan provides that in the event of a proposed sale of all or
substantially all of the assets of Storage Dimensions, or a merger of Storage
Dimensions with or into another corporation, the offering period then in effect
shall be shortened by setting a new exercise date, which shall be before the
date of Storage Dimensions' proposed sale or merger. The offering period in
effect at the Effective Time will be terminated immediately prior to the
Effective Time and shares of Storage Dimensions Common Stock will be issued
thereunder. Subsequently, a new offering period will commence five days after
the Effective Time and will end at the time provided for in the Purchase Plan.
DURATION, AMENDMENT AND TERMINATION
The term of the Purchase Plan shall continue in effect until 2006. The
Storage Dimensions Board may suspend or terminate the Purchase Plan without
stockholder approval or ratification at any time or from time to time. The Board
may also amend the Purchase Plan at any time or from time to time.
TRANSFERABILITY
Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution or as
otherwise provided under the Purchase Plan.
TAX INFORMATION
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a participant
at the time of grant of the option or purchase of shares. Upon disposition of
the shares, the participant will generally be subject to tax and the amount of
the tax will depend upon the holding period.
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If the shares have been held by the participant for more than two years
after the date of option grant and for more than one year after the date of
purchase, the lesser of (a) the excess of the fair market value of the shares at
the time of such disposition over the purchase price or (b) the excess of the
fair market value of the shares at the date of commencement of the offering
period over the exercise price, will be treated as ordinary income. Any further
gain or loss will be taxed as a long-term gain or loss. If the shares are sold
and the sale price is less than the purchase price, there is no ordinary income
and the participant has a capital loss for the difference. If the shares are
disposed of before the expiration of these holding periods, the excess of the
fair market value of the shares on the purchase date over the purchase price
will be treated as ordinary income, and any further gain or loss on such
disposition will be long-term or short-term capital gain or loss, depending on
the holding period.
Different rules may apply with respect to participants subject to Section
16 of the Exchange Act.
Storage Dimensions is not entitled to a deduction for amounts taxed as
ordinary income or capital gain to a participant except to the extent of
ordinary income recognized by participants upon dispositions of shares prior to
the expiration of the holding periods described above.
The foregoing is only a brief summary of the effect of federal income
taxation upon the participant and Storage Dimensions with respect to the shares
purchased under the Purchase Plan, does not purport to be complete, and does not
discuss the tax consequences of a participant's death or the income tax laws of
any municipality, state or foreign country in which a participant may reside.
THE STORAGE DIMENSIONS BOARD HAS UNANIMOUSLY RECOMMENDED A VOTE FOR
APPROVAL OF THE AMENDMENT TO STORAGE DIMENSIONS' 1996 EMPLOYEE STOCK PURCHASE
PLAN.
LEGAL MATTERS
The validity of the shares of Storage Dimensions Common Stock and Storage
Dimensions Preferred Stock to be issued in connection with the Merger will be
passed upon for Storage Dimensions by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain corporate and tax
matters related to the Merger will be passed upon for Artecon by Cooley Godward
LLP, San Diego, California.
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS
Representatives of Price Waterhouse LLP and Deloitte & Touche LLP expect to
be present at the Storage Dimensions Special Meeting and the Artecon Special
Meeting, respectively, and, while such representatives have stated that they do
not plan to make a statement at such meetings, they will be available to respond
to appropriate questions from stockholders in attendance.
STOCKHOLDER PROPOSALS
Storage Dimensions stockholders who wish to submit proposals for Storage
Dimensions' 1999 Annual Meeting of Stockholders must have submitted the proposal
to Storage Dimensions, 1656 McCarthy Boulevard, Milpitas, CA 95035, Attention:
Secretary, in advance of November 1, 1998, for inclusion, if appropriate, in
Storage Dimensions' proxy statement and form of proxy relating to its 1999
Annual Meeting.
EXPERTS
The consolidated financial statements of Storage Dimensions, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 included in this Joint Proxy Statement/Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Artecon, Inc. as of March 29, 1997
and December 31, 1997 and for the year ended March 29, 1997 and the period from
March 30, 1997 to December 31, 1997 included in this Joint Proxy
Statement/Prospectus and elsewhere in the Registration Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the Registration Statement, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
140
<PAGE> 156
The consolidated financial statements of Artecon, Inc. at March 25, 1995
and March 30, 1996 and for the years then ended appearing in this Joint Proxy
Statement/Prospectus and elsewhere in the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Falcon Systems, Inc. as of December 31, 1995,
December 31, 1996 and August 20, 1997 and for the periods then ended included in
this Joint Proxy Statement/Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
141
<PAGE> 157
INDEX TO FINANCIAL STATEMENTS
STORAGE DIMENSIONS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statement of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997.................... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
ARTECON, INC.
Independent Accountants' Report............................. F-16
Consolidated Balance Sheets as of March 29, 1997 and
December 31, 1997......................................... F-17
Consolidated Statements of Operations for the year ended
March 29, 1997, the period from March 31, 1996 to December
31, 1996 (unaudited) and the period from March 30, 1997 to
December 31, 1997......................................... F-18
Consolidated Statements of Shareholders' Equity for the year
ended March 29, 1997, the period from March 31, 1996 to
December 31, 1996 and the period from March 30, 1997 to
December 31, 1997......................................... F-19
Consolidated Statements of Cash Flows for the year ended
March 29, 1997, the period from March 31, 1996 to December
31, 1996 and the period from March 30, 1997 to December
31, 1997.................................................. F-20
Notes to Consolidated Financial Statements.................. F-21
Report of Independent Auditors.............................. F-30
Consolidated Balance Sheets as of March 25, 1995 and March
30, 1996.................................................. F-31
Consolidated Statements of Income for the years ended March
25, 1995 and March 30, 1996............................... F-32
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 25, 1995 and March 30, 1996..... F-33
Consolidated Statements of Cash Flows for the years ended
March 25, 1995 and March 30, 1996......................... F-34
Notes to Consolidated Financial Statements.................. F-35
FALCON SYSTEMS, INC.
Report of Independent Accountants........................... F-40
Balance Sheets as of December 31, 1995, 1996 and August 20,
1997...................................................... F-41
Statement of Operations for the years ended December 31,
1995, 1996 and the period ended August 20, 1997........... F-42
Statement of Stockholders' (Deficit) Equity for the years
ended December 31, 1995, 1996 and the period ended August
20, 1997.................................................. F-43
Statement of Cash Flows for the years ended December 31,
1995, 1996 and the period ended August 20, 1997........... F-44
Notes to Financial Statements............................... F-45
</TABLE>
F-1
<PAGE> 158
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Storage Dimensions, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Storage
Dimensions, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 16, 1998
F-2
<PAGE> 159
STORAGE DIMENSIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,682 $ 7,094
Accounts receivable, net.................................. 11,939 12,178
Inventories............................................... 6,304 5,606
Prepaid expenses and other assets......................... 858 732
------- -------
Total current assets.............................. 20,783 25,610
Property and equipment, net................................. 2,115 1,822
------- -------
Total assets...................................... $22,898 $27,432
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,061 $ 4,016
Accrued liabilities....................................... 3,580 4,211
Short-term borrowings..................................... 6,029 86
Short-term debt from stockholder.......................... 3,600 --
------- -------
Total current liabilities......................... 18,270 8,313
------- -------
Commitments (Note 10)
Stockholders' equity:
Series A Convertible Preferred Stock, $0.005 par value,
13,850 and 10,000 shares authorized; 13,850 and no
shares issued and outstanding.......................... 69 --
Common Stock, $0.005 par value, 40,000 shares authorized;
1,674 and 7,933 shares issued and outstanding.......... 8 40
Additional paid-in capital................................ 10,442 27,396
Deferred stock compensation............................... (486) (351)
Accumulated deficit....................................... (5,405) (7,966)
------- -------
Total stockholders' equity........................ 4,628 19,119
------- -------
Total liabilities and stockholders' equity........ $22,898 $27,432
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 160
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales:
Enterprise and OEM........................................ $52,475 $69,873 $70,966
Desktop................................................... 7,683 2,437 366
------- ------- -------
60,158 72,310 71,332
Cost of goods sold.......................................... 37,170 45,327 45,723
------- ------- -------
Gross profit................................................ 22,988 26,983 25,609
------- ------- -------
Operating expenses:
Sales and marketing....................................... 13,344 14,081 17,491
Research and development.................................. 5,377 5,872 6,250
General and administrative................................ 3,390 3,819 4,231
Advisory fee payable to related party..................... 360 729 --
------- ------- -------
22,471 24,501 27,972
------- ------- -------
Income (loss) from operations............................... 517 2,482 (2,363)
Interest expense............................................ (641) (686) (255)
Related party interest expense.............................. (482) (469) (90)
Interest income............................................. -- -- 277
------- ------- -------
Income (loss) before provision for income taxes............. (606) 1,327 (2,431)
Provision for income taxes.................................. 30 132 130
------- ------- -------
Net income (loss)........................................... $ (636) $ 1,195 $(2,561)
======= ======= =======
Basic net income (loss) per share........................... $ (0.40) $ 0.73 $ (0.39)
======= ======= =======
Weighted average shares used to calculate basic net
income (loss) per share................................... 1,604 1,641 6,651
======= ======= =======
Diluted net income (loss) per share......................... $ (0.40) $ 0.22 $ (0.39)
======= ======= =======
Weighted average shares used to calculate diluted net
income (loss) per share................................... 1,604 5,529 6,651
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 161
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TOTAL
----------------- ---------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT EQUITY
------- ------- ------ ------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994........................ 13,453 $ 67 1,600 $ 8 $ 9,220 $ -- $(5,964) $ 3,331
Issuance of Series A
Convertible Preferred Stock
to employees................ 341 2 -- -- 199 -- -- 201
Redemption of Series A
Convertible Preferred....... (60) -- -- -- (35) -- -- (35)
Stock Common Stock options
exercised................... -- -- 8 -- 1 -- -- 1
Net loss...................... -- -- -- -- -- -- (636) (636)
------- ---- ----- --- ------- ----- ------- -------
Balance at December 31,
1995........................ 13,734 69 1,608 8 9,385 -- (6,600) 2,862
Issuance of Series A
Convertible Preferred Stock
to employees................ 383 2 -- -- 490 -- -- 492
Redemption of Series A
Convertible Preferred
Stock....................... (267) (2) -- -- (155) -- -- (157)
Common Stock options
exercised, net.............. -- -- 66 -- 7 -- -- 7
Equity related to issuance of
Common Stock options........ -- -- -- -- 715 (540) -- 175
Amortization of deferred stock
compensation................ -- -- -- -- -- 54 -- 54
Net income.................... -- -- -- -- -- -- 1,195 1,195
------- ---- ----- --- ------- ----- ------- -------
Balance at December 31,
1996........................ 13,850 69 1,674 8 10,442 (486) (5,405) 4,628
Preferred Stock converted into
common shares............... (13,850) (69) 3,462 18 51 -- -- --
Common Stock issued pursuant
to initial public offering,
net of expenses............. -- -- 2,700 14 16,615 -- -- 16,629
Common Stock issued under
employee stock purchase
plan........................ -- -- 47 -- 260 -- -- 260
Common Stock options
exercised, net.............. -- -- 50 -- 28 -- -- 28
Amortization of deferred stock
compensation................ -- -- -- -- -- 135 -- 135
Net loss...................... -- -- -- -- -- -- (2,561) (2,561)
------- ---- ----- --- ------- ----- ------- -------
Balance at December 31,
1997........................ -- $ -- 7,933 $40 $27,396 $(351) $$(7,966) $19,119
======= ==== ===== === ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 162
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (636) $ 1,195 $(2,561)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.......................... 2,495 1,147 1,238
Compensation expense from stock and stock options...... -- 434 135
Changes in assets and liabilities:
Accounts receivable.................................. (1,141) (2,293) (239)
Inventory............................................ (2,106) 611 698
Prepaid expenses and other assets.................... 258 (350) 126
Accounts payable..................................... 2,158 (1,180) (1,045)
Accrued liabilities.................................. (118) 769 631
------- ------- -------
Net cash provided by (used in) operating
activities...................................... 910 333 (1,017)
------- ------- -------
Cash flows from investing activities:
Acquisition of property and equipment..................... (1,363) (943) (945)
------- ------- -------
Cash flows from financing activities:
Proceeds from initial public offering, net................ -- -- 16,629
Proceeds from sale of Series A Convertible Preferred Stock
to employees........................................... 201 287 --
Payments to repurchase Series A Convertible Preferred
Stock.................................................. (35) (157) --
Proceeds from exercise of Common Stock options, net....... 1 7 28
Proceeds from employee stock purchase plan................ -- -- 260
Proceeds from (repayments of) from short-term
borrowings............................................. 179 1,792 (9,543)
------- ------- -------
Net cash provided by financing activities......... 346 1,929 7,374
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (107) 1,319 5,412
Cash and cash equivalents at beginning of year.............. 470 363 1,682
------- ------- -------
Cash and cash equivalents at end of year.................... $ 363 $ 1,682 $ 7,094
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 929 $ 1,066 $ 104
======= ======= =======
Cash paid during the year for income taxes................ $ 14 $ 25 $ 451
======= ======= =======
Supplemental schedule of noncash financing activities:
Refinancing of short-term borrowings...................... $ -- $ 5,289 $ --
======= ======= =======
Issuance of Common Stock upon conversion of Preferred
Stock.................................................. $ -- $ -- $ 69
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 163
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Storage Dimensions, Inc. (the "Company") was incorporated in Delaware in
November 1992. The Company designs, manufactures, markets and supports high
performance data storage systems for open systems network applications.
The Company was formed in order to effect a majority interest
management-led buy-out (the "MBO") of Storage Dimensions, Inc. (a wholly owned
subsidiary of Maxtor Corporation ("Maxtor") on December 26, 1992 by an investor
group comprised of members of management and Capital Partners, Inc.
On December 22, 1997 the Company entered into an agreement and Plan of
Merger and Reorganization with Artecon, Inc. ("Artecon") setting forth the terms
of a merger between the Company and Artecon (the "Merger"). Under the terms of
the Merger, each share of Artecon Common Stock would be converted into the right
to receive approximately 2.16 shares of Storage Dimensions Common Stock and each
share of Artecon Preferred Stock would be converted into the right to receive
one share of Storage Dimensions Preferred Stock, and Artecon would become a
wholly owned subsidiary of Storage Dimensions. For accounting purposes, the
Merger would be treated as a purchase of Storage Dimensions by Artecon since
former holders of Artecon equity securities would hold and have voting power
with respect to approximately 62.5% of the total issued and outstanding voting
capital stock of the combined company, giving effect to the conversion of the
Storage Dimensions Preferred Stock to be issued in the Merger and the exercise
of outstanding Storage Dimensions stock with an exercise price of less than
$3.9375 per share.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investment instruments
with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining lease term.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue from product sales is recognized upon shipment.
Certain sales are made to distributors who have limited rights to return
products or obtain credits for pricing changes. The Company accrues for the
estimated costs of sales returns and allowances in the period the related
revenue is recognized.
F-7
<PAGE> 164
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also, the Company provides product warranties, generally for periods of
either three or five years from the date of product sale. The Company provides
for the estimated cost to repair or replace products under warranty arrangements
in the period the related revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
To date, the period between achieving technological feasibility and
completion of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred in accordance with
AICPA Statement of Position 93-7, "Reporting on Advertising Costs."
FISCAL YEAR
The Company operates and reports financial results on a
fifty-two/fifty-three week fiscal year cycle ending on the Saturday nearest
December 31. The Company also follows a five-four-four week quarterly cycle. For
convenience, the Company presents its fiscal year as ending on December 31.
Fiscal 1995, 1996 and 1997 each contained 52 weeks.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
NET INCOME (LOSS) PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("FAS 128"), "Earnings per Share." All historical earnings per
share information has been restated as required by FAS 128.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented and also gives
retroactive effect to the one-for-four reverse split of all shares of Common
Stock as described in Note 6.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares of the Company's Series A
Convertible Preferred Stock into Common Stock. Per share amounts also give
retroactive effect to the one-for-four reverse split of all shares of Common
Stock (and an adjustment to the conversion price of the Series A Convertible
Preferred Stock) as described in Note 6.
F-8
<PAGE> 165
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation between the components of the basic and
diluted net income (loss) per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ -------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic income (loss) per
share....................
Income available to
Common stockholders... $(636) 1,604 $(0.40) $1,195 1,641 $0.73 $(2,561) 6,651 $(0.39)
Effect of dilutive
securities Options....... -- -- -- 464 -- --
Preferred stock.......... -- -- -- 3,424 -- --
----- ----- ------ ----- ------- -----
Diluted net income (loss)
per share................
Income available to
common stockholders
plus assumed
conversions........... $(636) 1,604 $(0.40) $1,195 5,529 $0.22 $(2,561) 6,651 $(0.39)
===== ===== ====== ===== ======= =====
</TABLE>
2. RELATED PARTY TRANSACTIONS:
PURCHASES AND SALES
During 1995, the Company purchased goods (principally rigid magnetic and
optical disk drives) from Maxtor Corporation and its affiliates totaling
$69,000. The Company did not purchase any goods from Maxtor during 1996 or 1997.
SUBORDINATED NOTE PAYABLE
In December 1992, in conjunction with the MBO, the Company issued a
subordinated promissory note of $4 million to Maxtor (the "Maxtor Note").
Interest at 12% per annum was paid quarterly. During 1996, in accordance with
the terms of the Maxtor Note and in addition to interest payments, the Company
repaid $400,000 in principal. In 1997, the remaining principal balance of
$3,600,000 was repaid in March 1997 after the Company effected its initial
public offering.
ADVISORY FEE
During 1995 and 1996, the Company paid advisory fees of $360,000 and
$729,000, respectively, to one of its investors in accordance with an Investment
Advisory Services Agreement (the "Advisory Agreement"). The Advisory Agreement
was terminated in December 1996.
F-9
<PAGE> 166
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accounts receivable:
Gross receivables...................................... $12,478 $12,861
Less allowance for doubtful accounts................... (539) (683)
------- -------
$11,939 $12,178
======= =======
Inventory:
Raw material and purchased components.................. $ 3,140 $ 3,145
Work in progress....................................... 1,639 1,683
Finished goods......................................... 2,156 1,763
------- -------
$ 6,935 $ 6,591
------- -------
(631) (985)
------- -------
$ 6,304 $ 5,606
======= =======
Property and equipment:
Machinery and equipment................................ $ 6,992 $ 6,773
Furniture and fixtures................................. 620 656
Leasehold improvements................................. 539 548
------- -------
8,151 7,977
Less accumulated depreciation and amortization......... (6,036) (6,155)
------- -------
$ 2,115 $ 1,822
======= =======
Accrued liabilities:
Accrued employee compensation.......................... $ 1,865 $ 2,078
Accrued warranty expense............................... 404 652
Deferred revenue....................................... 252 617
Accrued sales tax...................................... 431 356
Other.................................................. 628 508
------- -------
$ 3,580 $ 4,211
======= =======
</TABLE>
4. SHORT-TERM BORROWINGS:
On May 17, 1996, the Company entered into a Loan and Security Agreement
(the "Agreement") with Congress Financial Corporation, which expires May 16,
1998. Under the revolving line of credit provisions of the Agreement, the
Company may borrow up to $11 million based upon eligible accounts receivable and
inventory. Under the terms of the Agreement, deposits from collections of
accounts receivable are restricted. The Agreement also allows the Company to
borrow up to $1 million for purchases of property and equipment under its
capital expenditure facility and up to $400,000 under its term loan provisions.
Such borrowings reduce the available borrowings under the revolving line of
credit. Borrowings bear interest at the rate of prime plus .75% (9.25% as of
December 31, 1997) and are secured by all of the Company's assets. Borrowings
outstanding under the line at December 31, 1996 and 1997 include $267,000 and
$67,000, respectively, representing borrowings under the term loan provisions.
F-10
<PAGE> 167
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ 34 $ --
State..................................................... 6 40 66
Foreign................................................... 24 58 64
---- ---- ----
$ 30 $132 $130
==== ==== ====
</TABLE>
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Depreciation and amortization............................... $ 358 $ 324
Reserves and accruals....................................... 889 1,121
Net operating loss carryforward............................. 50 479
Research and development credits............................ 233 344
Other....................................................... 165 269
------- -------
Gross deferred tax assets................................... 1,695 2,537
Deferred tax asset valuation allowance...................... (1,695) (2,537)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence including the prior history
of losses, that some or all of the deferred tax assets will not be realized.
At December 31, 1997 the Company had federal net operating loss
carryforwards of approximately $1,410,000 available to reduce future federal and
state taxable income. Its net operating loss carryforwards expire from 2009 to
2012. The tax benefit of the net operating loss and credit carryforwards may be
limited due to the impact of the Tax Reform Act of 1986. Events which may cause
the tax benefit to be limited include, but are not limited to, a cumulative
stock ownership change of more than 50%, as defined, over a three-year period
and the timing of utilization of various tax benefits carried forward. The
Company's net operating loss and credit carryforwards may be subject to such
limitations.
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate to income (loss) before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Tax provision (benefit) at the U.S. federal statutory rate
of 34%................................................... $(206) $ 451 $(827)
State income taxes, net of federal tax benefit............. 6 40 66
Change in valuation allowance.............................. 184 (564) 842
Other, net................................................. 46 205 49
----- ----- -----
$ 30 $ 132 $ 130
===== ===== =====
Effective tax rate......................................... (5)% 10% (5)%
===== ===== =====
</TABLE>
6. SHAREHOLDERS' EQUITY:
On March 11, 1997 the Company effected its initial public offering of
2,700,000 shares of Common Stock at an offering price of $7.00 per share (the
"Offering"). The net proceeds from the Offering were $16,629,000
F-11
<PAGE> 168
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
after payment of underwriting discounts and Offering expenses. Net proceeds were
used to pay down the Company's short-term line of credit and pay off the
Company's subordinated promissory note to Maxtor Corporation, a stockholder.
In conjunction with the Offering, the Company effected a one-for-four
reverse stock split of all outstanding Common Stock and increased the authorized
Common Stock to 40,000,000 shares, par value $0.005. In addition, all
outstanding Preferred Stock were converted to Common Stock, and the Company
increased the authorized Preferred Stock to 10,000,000 shares of undesignated
Preferred Stock, par value $0.005. As of December 31, 1997, the Company had
7,933,451 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding .
7. EMPLOYEE STOCK PLANS:
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and by the stockholders in
January 1997. A total of 200,000 shares of Storage Dimensions Common Stock was
originally reserved for issuance under the Purchase Plan. As of December 31,
1997, 47,253 shares of Common Stock had been purchased under the Purchase Plan
and 152,747 shares of Common Stock remained available for purchase under the
Purchase Plan.
1993 Stock Option Plan
The 1993 Stock Option Plan (the "1993 Plan") provides for the granting of
nonstatutory stock options for the purchase of up to an aggregate of 555,555
shares of the Company's common stock by officers, employees, consultants and
directors of the Company. The Board of Directors is responsible for
administration of the 1993 Stock Option Plan. The Board of Directors determines
the term of each option, option exercise price, number of shares for which each
option is granted and the rate at which each option is exercisable. Options
granted under the 1993 Stock Option Plan generally vest over a four-year period.
1996 Stock Option Plan
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting to
employees and consultants of nonstatutory stock options. The 1996 Plan was
approved by the Board of Directors in December 1996 and was effective March 11,
1997, the date the initial public offering (see Note 6) of the Company's Common
stock was consummated. A total of 1,000,000 shares of Common Stock are currently
reserved for issuance pursuant to the 1996 Plan. As of December 31, 1996 and
1997, no and 978,016 options, respectively, have been granted under the 1996
Plan.
Nonstatutory stock options may be granted at an exercise price per share of
not less than 100% of the fair value per common share on the date of the grant
(not less than 110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Options granted under the 1993 and 1996 Stock
Option Plans generally expire ten years from the date of the grant.
F-12
<PAGE> 169
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions under the 1993 and 1996 Stock Option Plans are summarized as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period........... 451 $0.20 457 $0.20 457 $0.57
Granted.................................... 167 0.20 185 1.12 1,038 6.41
Exercised.................................. (8) 0.20 (70) 0.20 (50) 0.57
Canceled................................... (153) 0.20 (115) 0.21 (254) 5.09
---- ----- ------
Outstanding at period end.................... 457 0.20 457 0.57 1,191 4.70
==== ===== ======
Options exercisable at period end............ 233 0.20 224 0.21 475 3.07
==== ===== ======
Weighted average grant date fair value of
options granted during the year............ $3.48 $ 6.51
===== ======
Weighted average grant date fair value of
options granted during the year at exercise
prices below market prices................. $3.48 $ 7.00
===== ======
</TABLE>
During the year ended December 31, 1996, the Company granted options to
purchase 185,125 shares of Common Stock to employees at exercise prices ranging
from $0.20 to $3.00 per share. Management is amortizing $540,000 of compensation
expense over the vesting period relating to these options, of which $54,000 and
$135,000 have been recorded during the years ended December 31, 1996 and 1997,
respectively.
Upon consummation of the IPO, in accordance with a previous commitment, the
Company granted a nonqualified option to purchase 25,000 shares of Common Stock
at an exercise price of $0.20 per share in exchange for financial planning and
management services. The option became exercisable upon consummation of the
initial public offering of the Company's Stock (see Note 6). The Company
recorded $175,000 in estimated compensation expense in 1996 in connection with
this option.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, LIFE EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 (YEARS) PRICE 1997 PRICE
--------------------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.20 - $0.20 279 6.4 $0.20 246 $0.20
1.00 - 5.88 206 9.3 3.58 31 1.54
6.00 - 6.75 219 9.4 6.35 40 6.38
7.00 - 7.69 487 9.2 7.01 158 7.00
----- ---
1,191 8.6 4.70 475 3.07
===== ===
</TABLE>
Fair value disclosures
Had compensation cost for options granted in 1996 and 1997 under the
Company's option plan been determined based on the fair value at the grant
dates, as prescribed in FAS 123, the Company's net income
F-13
<PAGE> 170
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(loss) and pro forma net income (loss) per share would have been as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
Net income (loss):
As reported......................................... $1,195 $(2,561)
Pro forma........................................... 1,186 (3,300)
Basic net income (loss) per share:
As reported......................................... $ 0.73 $ (.39)
Pro forma........................................... 0.72 (.50)
Diluted net income (loss) per share:
As reported......................................... $ 0.22 $ (.39)
Pro forma........................................... 0.21 (.50)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.36% to 6.60% for options granted during the year ended
December 31, 1996 and 5.80% to 6.76% for options granted during the year ended
December 31, 1997; no volatility factor was used due to the nonpublic entity
status for the year ended December 31, 1996 and an 0.80 volatility factor was
used for the year ended December 31, 1997; and a weighted average expected
option term of 5 years for both periods.
Because the determination of the fair value of all options granted after
the Company became a public entity includes an expected volatility factor and
because additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of pro forma effects of reported
net income for future years.
8. EMPLOYEE BENEFIT PLANS:
Profit sharing
Employees of the Company are entitled to receive compensation under a
profit sharing agreement that is based upon attaining specific profit goals.
Profit sharing expense totaled $20,000, $231,000 and $0 in 1995, 1996 and 1997,
respectively.
401(k) Plan
The Company maintains a 401(k) Tax Deferred Savings Plan (the Plan) which
covers all full-time employees of the Company who are at least 21 years of age.
Under the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. The Company matches contributions under the Plan at
the rate of 50% of the employee's contributions up to a specified maximum. The
Company's contributions to the Plan were $75,000, $94,000 and $82,000 for 1995,
1996 and 1997, respectively.
9. EXPORT SALES AND CONCENTRATIONS OF CREDIT RISK:
The Company markets its products both domestically and internationally.
Export sales are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Europe....................................... $4,597 $4,676 $3,322
Other........................................ 1,010 543 478
------ ------ ------
$5,607 $5,219 $3,800
====== ====== ======
</TABLE>
F-14
<PAGE> 171
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. Substantially all of the Company's cash is invested in high credit
quality financial institutions. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains an allowance for
uncollectible accounts receivable based upon expected write-offs. At December
31, 1997, one customer accounted for 11% gross accounts receivable. Revenues
from significant customers which represented 10% or more of total revenues for
the respective periods were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Customer A.................................... 11% 13% 6%
Customer B.................................... 15% 8% 5%
</TABLE>
10. COMMITMENTS:
The Company leases its offices and operating facilities under various
noncancelable renewable operating leases. The Company's future minimum
commitments at December 31, 1997 under all operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $1,049
1999........................................................ 178
2000........................................................ 14
------
$1,241
======
</TABLE>
Rental expense under noncancelable operating leases totaled $862,000,
$904,000, and $1,190,000 in 1995, 1996 and 1997, respectively.
F-15
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Artecon, Inc.
We have audited the accompanying consolidated balance sheet of Artecon,
Inc. and its subsidiaries (the Company) as of March 29, 1997 and December 31,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended March 29, 1997 and the period from
March 30, 1997 to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Artecon, Inc. and
its subsidiaries at March 29, 1997 and December 31, 1997 and the consolidated
results of their operations and their cash flows for the year ended March 29,
1997 and the period from March 30, 1997 to December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 27, 1998
F-16
<PAGE> 173
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 29, 1997 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 746 $ --
Accounts receivable, less allowance for doubtful accounts
and sales returns of $170 at March 29, 1997 and $482 at
December 31, 1997....................................... 5,895 12,490
Inventories, net.......................................... 6,372 10,832
Deferred income taxes..................................... 48 1,271
Prepaid expenses and other................................ 749 727
------- -------
Total current assets............................... 13,810 25,320
Property and equipment:
Machinery and equipment................................... 1,538 3,231
Tooling molds............................................. 912 1,033
Furniture and fixtures.................................... 77 89
Computer software......................................... 54 83
------- -------
2,581 4,436
Less accumulated depreciation............................. (1,558) (2,109)
------- -------
Property and equipment, net........................ 1,023 2,327
Other assets................................................ 4 75
Goodwill, net............................................... 121
Other intangible assets, net................................ 433
Deferred income taxes....................................... 357 1,067
------- -------
$15,194 $29,343
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,243 $ 7,959
Accrued compensation...................................... 371 1,004
Other accrued liabilities................................. 1,132 1,593
Income taxes payable...................................... 138 706
Current portion of long-term debt......................... 116 743
------- -------
Total current liabilities.......................... 7,000 12,005
Long-term liabilities....................................... 104
Borrowings under lines of credit............................ 2,732 10,170
Long-term debt.............................................. 189 2,778
Minority interest........................................... 72 60
Commitments (Notes 5 and 9)
Shareholders' equity:
Convertible preferred shares, no par value; 10,000 shares
authorized; 1,112 shares issued and outstanding at March
29, 1997 and December 31, 1997; liquidation preference of
$22 at March 29, 1997 and December 31, 1997............... 2,219 2,162
Convertible preferred B shares, no par value; 10,000 shares
authorized; 1,405 shares issued and outstanding at March
29, 1997 and December 31, 1997; liquidation preference $28
at March 29, 1997 and December 31, 1997................... 2,810 2,742
Common shares, no par value; 20,000 shares authorized; 5,193
and 6,044 shares issued and outstanding at March 29, 1997
and December 31, 1997, respectively....................... 601 1,418
Foreign currency translation adjustment..................... (330) (175)
Accumulated deficit......................................... (203) (1,817)
------- -------
Total shareholders' equity......................... 5,097 4,330
------- -------
$15,194 $29,343
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 174
ARTECON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR PERIOD FROM PERIOD FROM
ENDED MARCH 31, 1996 MARCH 30, 1997
MARCH 29, TO DECEMBER 31, TO DECEMBER 31,
1997 1996 1997
--------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues.......................................... $55,317 $42,438 $52,601
Cost of sales......................................... 42,782 33,253 37,658
------- ------- -------
Gross margin.......................................... 12,535 9,185 14,943
Operating expenses:
Selling, general and administrative................. 8,990 6,866 10,366
Research and development............................ 2,317 1,539 2,337
Acquired in-process research and development
costs............................................ 3,700
------- ------- -------
Total operating expenses.................... 11,307 8,405 16,403
------- ------- -------
Operating income (loss)............................... 1,228 780 (1,460)
Other expense:
Other income (expense), net......................... (10) 16 (77)
Gain (loss) on foreign currency transactions, net... 45 (36) (185)
Interest, net....................................... (282) (189) (465)
------- ------- -------
Total other expense......................... (247) (209) (727)
------- ------- -------
Income (loss) before income tax provision............. 981 571 (2,187)
Income tax provision (benefit)........................ 340 72 (573)
------- ------- -------
Net income (loss)..................................... $ 641 $ 499 $(1,614)
======= ======= =======
Basic net income (loss) per share..................... $ 0.12 $ 0.10 $ (0.29)
======= ======= =======
Weighted average shares used to calculate basic net
income (loss) per share............................. 5,202 5,202 5,619
======= ======= =======
Diluted net income (loss) per share................... $ 0.08 $ 0.06 $ (0.29)
======= ======= =======
Weighted average shares used to calculate diluted net
income (loss) per share............................. 8,410 8,410 5,619
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 175
ARTECON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 29, 1997 AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER
31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
CONVERTIBLE PREFERRED B FOREIGN
PREFERRED SHARES SHARES COMMON SHARES CURRENCY
----------------- ----------------- ----------------- TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ADJUSTMENT DEFICIT
------- ------- ------- ------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
March 30, 1996................ 1,212 $2,419 1,405 $2,810 5,210 $ 601 $(312) $ (798)
Repurchase of common and
preferred shares.............. (100) (200) (17) (46)
Foreign currency translation
adjustment.................... (18)
Net income...................... 641
----- ------ ----- ------ ----- ------ ----- -------
BALANCE, March 29, 1997......... 1,112 2,219 1,405 2,810 5,193 601 (330) (203)
Issuance of common shares....... (57) (68) 851 817
Foreign currency translation
adjustment.................... 155
Net loss........................ (1,614)
----- ------ ----- ------ ----- ------ ----- -------
BALANCE, December 31, 1997...... 1,112 $2,162 1,405 $2,742 6,044 $1,418 $(175) $(1,817)
===== ====== ===== ====== ===== ====== ===== =======
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE,
March 30, 1996................ $4,720
Repurchase of common and
preferred shares.............. (246)
Foreign currency translation
adjustment.................... (18)
Net income...................... 641
------
BALANCE, March 29, 1997......... 5,097
Issuance of common shares....... 692
Foreign currency translation
adjustment.................... 155
Net loss........................ (1,614)
------
BALANCE, December 31, 1997...... $4,330
======
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 176
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1996 PERIOD FROM
YEAR ENDED TO DECEMBER 31, 1996 MARCH 30, 1997
MARCH 29, 1997 (UNAUDITED) TO DECEMBER 31, 1997
-------------- -------------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 641 $ 499 $ (1,614)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities net of effect
of acquisition:
Depreciation and amortization............................. 664 516 635
Compensation expense related to stock issuances........... 699
Acquired in-process research and development costs........ 3,700
Provision for doubtful accounts and sales returns......... 10 7 (457)
Deferred income taxes..................................... (18) (3) (1,933)
Loss on termination of subsidiary operations.............. 32
Minority interest......................................... (18) (10) (12)
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable..................................... 226 (5,066) (1,913)
Inventories............................................. (980) (2,184) 67
Prepaid expenses and other assets....................... (175) 107 36
Accounts payable........................................ 240 4,249 (2,051)
Accrued compensation.................................... (327) (126) 280
Other accrued liabilities............................... 374 (47) (584)
Income taxes payable.................................... 105 (33) 568
Long-term liabilities................................... (13) (117) (104)
------- -------- --------
Net cash provided by (used in) operating activities... 761 (2,208) (2,683)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (260) (139) (440)
Cash paid for acquisition, net of cash acquired............. 137 (432)
------- -------- --------
Net cash used in investing activities................. (260) (139) (872)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings............................... 23,116 16,447 24,208
Payments on bank borrowings................................. (23,381) (13,565) (21,571)
Note payable to related party............................... (19) (19)
Issuance of common shares................................... 17
Repurchase of preferred shares.............................. (230) (200)
Repurchase of common shares................................. (16) (16)
------- -------- --------
Net cash (used in) provided by financing activities... (530) 2,647 2,654
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (18) 17 155
------- -------- --------
NET DECREASE IN CASH........................................ (47) 317 (746)
CASH, beginning of period................................... 793 793 746
------- -------- --------
CASH, end of period......................................... $ 746 $ 1,110 $ --
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash
paid during the year for:
Interest.................................................. $ 307 $ 230 $ 400
======= ======== ========
Income taxes.............................................. $ 289 $ 105 $ 761
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES --
Additions of property and equipment for note payable...... $ 360 $ 360
======= ========
Issuance of common shares for accrued liability........... $ 122
========
Issuance of common shares for preferred share repurchase
agreement............................................... $ 125
========
DETAIL OF BUSINESS ACQUIRED IN PURCHASE BUSINESS
COMBINATION --
On August 21, 1997, the Company acquired certain net
assets of Falcon Systems, Inc.
A summary of the transaction is as follows:
Fair value of other assets acquired..................... $ 10,232
Acquired in-process research and development costs...... 3,700
Other intangible assets................................. 420
Goodwill................................................ 127
Acquired developed technology........................... 91
Cash paid for acquisition, net of cash acquired......... (432)
--------
Liabilities assumed..................................... $ 14,138
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 177
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS ACTIVITIES
Description of Business -- Artecon, Inc. (the Parent Company) and its
wholly- and majority-owned subsidiaries, Artecon Canada, Inc., Artecon Japan,
Ltd. and Artecon B.V., (collectively the Company or Artecon), are manufacturers
and suppliers of value-added computer products and services in the open systems
workstation and server markets. The subsidiaries purchase finished product from
the parent and resell it in their respective locations. The Company's principal
markets include Canada, Japan, United States and Europe. The Company sells its
products through reseller channels, worldwide government agencies and Fortune
1000 companies.
On August 21, 1997, the Company acquired certain net assets of Falcon
Systems, Inc. (Falcon), a manufacturer and distributor of computer peripheral
equipment. The purchase price of $3,500 included $1,000 in cash and $2,500 of
promissory notes (Note 6). The acquisition was recorded as a purchase and the
results of operations for the period from August 21, 1997 to December 31, 1997
are included in the accompanying consolidated financial statements. The purchase
price was allocated $10,232 to assets acquired (consisting primarily of
inventories, accounts receivable, property and equipment and other current
assets), $638 to goodwill and other intangible assets, $14,138 to liabilities
assumed, and to in-process research and development expenses of $3,700, which
had no future alternative use, based on management assumptions. In connection
with the acquisition, a partnership was created to purchase certain assets from
Falcon. The partners are majority shareholders of the Company. The partnership
is considered to be a Special Purpose Entity and, accordingly, the accompanying
consolidated financial statements include the accounts of the partnership and
all intercompany transactions have been eliminated.
Unaudited pro forma results of operations of the Company for the year ended
March 29, 1997 and the period from March 30, 1997 to December 31, 1997 are
included below. Such pro forma presentation has been prepared assuming that the
acquisition had occurred as of April 1, 1996 for the Company:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 30, 1997 TO
MARCH 29, 1997 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Net revenues..................................... $110,988 $67,819
Net loss......................................... (3,330) (424)
Pro forma basic and diluted net loss per share... $ (0.64) $ (0.08)
Weighted average shares used to calculate pro
forma basic and diluted net loss per share..... 5,202 5,619
</TABLE>
The pro forma results include the historical accounts of the Company and of
Falcon and pro forma adjustments, as may be required, including the in-process
research and development expense, the amortization of goodwill and other
intangible assets, and the interest expense related to the promissory notes
issued to Falcon's previous shareholder. The in process research and development
expense has been included as if recorded on April 1, 1996 and been excluded from
the period from March 30, 1997 to December 31, 1997. The pro forma results of
operations are not necessarily indicative of actual results which may have
occurred had the operations of Falcon been combined in prior years.
On December 22, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization with Storage Dimensions, Inc. (Storage), setting forth
the terms of a merger between the Company and Storage (the Merger). Under the
terms of the Merger, each share of the Company's common stock would be converted
into the right to receive approximately 2.16 shares of Storage common stock and
each share of the Company's preferred stock would be converted into the right to
receive one share of Storage preferred stock,
F-21
<PAGE> 178
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and the Company would become a wholly-owned subsidiary of Storage. For
accounting purposes, the Merger would be treated as a purchase of Storage by the
Company because former holders of the Company's equity securities would hold and
have voting power with respect to approximately 62.5% of the total issued and
outstanding voting capital stock of the combined company, giving effect to the
conversion of the Storage preferred stock to be issued in the Merger and the
exercise of outstanding Storage stock options with an exercise price of less
than $3.9375 per share.
The Company's fiscal year was previously on a 52-53-week basis that ended
on the Saturday nearest to March 31. The fiscal year ended March 29, 1997
contained 52 weeks. For convenience, effective December 31, 1997, the Company
will present its fiscal year as ending on March 31 and its fiscal quarters as
ending on June 30, September 30 and December 31, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Artecon and its subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Credit Risk -- The Company performs ongoing credit evaluations of its
customers and requires no collateral. The Company maintains reserves for
potential credit losses.
Inventories -- Inventories are comprised of purchased parts and assemblies,
which include direct labor and overhead, and are valued at the lower of cost
(first-in, first-out) or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets (ranging from three to five years).
Depreciation expense was $664 and $551 for the year ended March 29, 1997 and the
period from March 30, 1997 to December 31, 1997, respectively.
Foreign Currency -- The accounts of foreign subsidiaries consolidated
herein have been translated from their respective functional currencies at
appropriate exchange rates in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 52.
Cumulative translation adjustments are included as a separate component of
shareholders' equity. Gains and losses on short-term intercompany foreign
currency transactions are recognized as incurred (Note 10).
Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed
whenever events or changes in circumstances indicate that their carrying value
may not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred.
Goodwill and Other Intangible Assets -- Goodwill related to acquisitions is
being amortized on a straight-line basis over a period of seven years.
Accumulated amortization was $89 and $6 at March 29, 1997 and December 31, 1997,
respectively. Other intangible assets related to acquisitions is being amortized
on a straight line basis over two to four years. Accumulated amortization was
$78 at December 31, 1997. Goodwill and other intangible assets are periodically
reviewed for events or changes whenever circumstances which indicate that their
carrying value may not be recoverable. The Company periodically reviews the
carrying value of goodwill to determine whether or not an impairment to such
values has occurred.
F-22
<PAGE> 179
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue Recognition -- The Company recognizes revenue from product sales
upon shipment, including products sold under a stock rotation program which
entitles the buyer the right to return products under certain conditions. The
Company provides allowances for estimated returns. Revenue from service
contracts is recognized ratably over the term of the contract.
Revenues derived from various U.S. government agencies were approximately
$1,400 and $754 for the year ended March 29, 1997 and the period from March 30,
1997 to December 31, 1997, respectively. Export sales to international customers
amounted to approximately $7,700 and $5,388 for the year ended March 29, 1997
and the period from March 30, 1997 to December 31, 1997, respectively.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income Taxes -- The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this statement, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse.
Concentrations -- The Company currently utilizes a limited number of
suppliers for certain devices used in its products but has no long-term supply
contracts with them. Due to the cyclical nature of the industry and competitive
conditions, there can be no assurance that the Company will not experience
difficulties in meeting its supply requirements in the future.
For the year ended March 29, 1997 sales to two customers accounted for
approximately 35% of net revenues. For the period from March 30, 1997 to
December 31, 1997 sales to two customers accounted for approximately 20% of net
revenues. The loss of, or a reduction in sales to, any such customers would have
a material adverse effect on the Company's business, operating results, and
financial condition.
Recent Accounting Pronouncements -- For fiscal years beginning after
December 15, 1997, the Company will adopt SFAS No. 130, Reporting Comprehensive
Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information. The Company is reviewing the impact of such statements on
its financial statements.
Reclassifications -- Certain prior year balances have been reclassified to
conform with the current year presentation.
F-23
<PAGE> 180
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Purchased parts and materials.................... $ 4,084 $ 7,516
Work-in-process.................................. 211 877
Finished goods................................... 2,077 2,439
---------- ----------
$ 6,372 $ 10,832
========== ==========
</TABLE>
4. ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Revenues from sales to affiliated companies for the year ended March 29,
1997 and the period from March 30, 1997 to December 31, 1997 were approximately
$74 and $121, respectively. Accounts receivable from affiliated companies were
approximately $7 and $35 at March 29, 1997 and December 31, 1997, respectively,
and are included in accounts receivable in the accompanying consolidated balance
sheets.
The Company purchases certain goods from affiliates and also is subject to
a management fee of approximately $4 per month from an affiliate. Purchases from
affiliated companies for the year ended March 29, 1997 and the period from March
30, 1997 to December 31, 1997 were approximately $85 and $76, respectively.
Certain of these expenses are subject to termination upon the Merger.
5. BORROWINGS UNDER LINE OF CREDIT
The Parent Company has a line of credit agreement with a United States
bank. The agreement, which expires on September 1, 1999, provides for maximum
borrowings of up to $12,500 and is collateralized by substantially all of the
assets of the Company. The Company may choose between borrowing at the bank's
prime rate, as it may vary from time to time, or it may choose a rate that is
fixed for an agreed-upon period of from 30 to 180 days with interest due
quarterly at the LIBOR rate in effect at the commencement of the agreed-upon
fixed period, plus 2.0%. This line of credit agreement requires that the Company
comply with certain covenants, including minimum tangible net worth
requirements. The Company was not in compliance with the cash flow coverage
ratio and financial performance covenants associated with the $9,700 outstanding
under its U.S. bank line for the quarter ended December 31, 1997. The
noncompliance for the quarter was primarily the result of severance costs at
Falcon. The Company obtained a waiver from the bank as of and for the quarter
ended December 31, 1997.
The Japanese subsidiary has three lines of credit with a Japanese bank for
borrowings up to an aggregate 75 million Yen at rates ranging from 1.62% to
2.4%. At December 31, 1997, 60 million Yen (approximately US$460) was
outstanding. Interest is due monthly with the principal due one year from the
commencement of the agreement. Borrowings are collateralized by inventories of
the Japanese subsidiary.
At December 31, 1997, the Company's borrowings under lines of credit were
as follows:
<TABLE>
<S> <C>
U.S. bank line variable interest at prime (8.5% at December
31, 1997)................................................. $ 1,710
U.S. bank line, interest ranging from 7.75% to 7.91%........ 8,000
Japan bank lines, interest ranging from 1.62% to 2.4%....... 460
-------
$10,170
=======
</TABLE>
F-24
<PAGE> 181
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During the year ended March 29, 1997 and the period from March 30, 1997 to
December 31, 1997, the Company made short-term loans to an affiliate totalling
$1,850 and $4,295, respectively. The loans bore interest at 7.25% per annum and
interest income related to these loans was immaterial. No amounts were
outstanding at March 29, 1997 and December 31, 1997 related to the loans.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Term loan payable to bank, bearing interest at 7.72% per
annum, collateralized by property and equipment and monies
in possession of the bank, monthly installments of
principal and interest of $11 through October 1999........ $ 305 $ 219
Term loan payable to bank, bearing interest at 8.5% per
annum, collateralized by substantially all the assets of
the Company, monthly installments of principal of $17 and
monthly interest through September 2002................... 933
Promissory notes payable to former shareholder of Falcon
(Note 1), bearing interest at 10% per annum, monthly
installments of principal and interest of $53 through
August 2002............................................... 2,369
--------- ---------
305 3,521
Less current portion........................................ (116) (743)
--------- ---------
$ 189 $ 2,778
========= =========
</TABLE>
Long-term debt at December 31, 1997 matures as follows:
<TABLE>
<S> <C>
Period ending March 31, 1998.............................. $ 181
Fiscal year ending:
1999.................................................... 755
2000.................................................... 738
2001.................................................... 725
2002.................................................... 780
2003.................................................... 342
--------
$ 3,521
========
</TABLE>
The Company has the option for the term loan payable through 2002 to elect
an interest rate equal to the bank's cost of funds rate plus 2.25% or the banks
LIBOR rate plus 2.25% at various monthly or quarterly periods as defined in the
agreement.
Interest expense related to long-term debt was $13 and $70 for the year
ended March 29, 1997 and the period from March 30, 1997 to December 31, 1997,
respectively.
7. SHAREHOLDERS' EQUITY
There are two classes of preferred shares: the "Preferred" shares and the
"Preferred B" shares. There are 10,000 shares of each preferred class
authorized. All preferred shares are nonvoting, do not provide for dividends,
and have a liquidation preference over common shares. The shares are convertible
into common shares, at the option of the holder, at the earlier of three years
after issuance or upon the occurrence of certain
F-25
<PAGE> 182
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
other events, at the conversion rate of one common share for each 0.8 preferred
share. The liquidation preference for the Preferred is $.01 per share and for
the Preferred B is $2.00 per share.
In December 1994, the Company entered into a repurchase agreement with
certain shareholders who were holders of the Company's outstanding preferred
shares. The agreement required the Company to redeem 100 shares of the
outstanding preferred shares and grants the Company the option to repurchase the
remaining shares at any time during the five-year period ending December 22,
1999 at prices ranging from $2.00 to $2.50 per share. During the year ended
March 29, 1997, the Company repurchased 100 Preferred shares under the agreement
at $2.30 per share.
As consideration for the option to repurchase the preferred shares, in the
period ended December 31, 1997, the Company issued 276 common shares to the
holders of preferred shares at the ratio of approximately one share of common
stock for each ten shares of preferred stock which were valued at $0.50 per
common share. The value ascribed to the common stock outstanding at the date of
issuance has been shown as a reduction in the carrying value of the preferred
stock.
In June and October 1997, the Company issued a total of 95 shares of common
stock to certain employees in exchange for stock participation rights previously
granted. The common stock was issued at prices of $1.20 and $2.00 per share. No
stock participation rights or other options to purchase common stock were
outstanding at December 31, 1997. Management has recorded $73 in compensation
expense in the period from March 30, 1997 to December 31, 1997 as a result of
these issuances.
In July 1997, the Company issued 475 shares of common stock to certain
officers of the Company
at a price of $0.035 per share. Management has recorded $553 in compensation
expense in the period from
March 30, 1997 to December 31, 1997 as a result of these issuances.
In December 1997, the Company adopted SFAS No. 128, "Earnings per Share."
SFAS No. 128 redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary net income per share is replaced by
basic net income per share and fully diluted net income per share is replaced by
diluted net income per share. All historical earnings per share information has
been restated as required by SFAS No. 128.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares of the Company's Convertible
preferred stock into common stock. Common equivalent shares have not been
included where inclusion would be antidilutive.
F-26
<PAGE> 183
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation between the components of the basic and
diluted net income per share calculations (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
YEAR ENDED MARCH 29, 1997 MARCH 30 TO DECEMBER 31, 1997
--------------------------------- -------------------------------
WEIGHTED PER SHARE WEIGHTED PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share
Net income (loss)................... $641 5,202 $ 0.12 $(1,614) 5,619 $(0.29)
Effect of dilutive securities
preferred stock..................... 3,208
---- ----- ------- -----
Diluted net income (loss) per share
Net income (loss) plus assumed
conversions...................... $641 8,410 $ 0.08 $(1,614) 5,619 $(0.29)
==== ===== ======= =====
</TABLE>
8. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Current:
Federal............................................ $ 245 $1,001
State.............................................. 145 304
Foreign............................................ 9 14
-------- ------
399 1,319
Deferred:
Federal............................................ 53 (1,392)
State.............................................. (66) (446)
Foreign............................................ (46) (54)
-------- ------
(59) (1,892)
-------- ------
$ 340 $ (573)
======== ======
</TABLE>
F-27
<PAGE> 184
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Deferred tax assets:
Uniform capitalization............................. $ 43 $ 106
Accrued vacation................................... 52 104
Allowance for bad debts............................ 74 144
Warranty reserve................................... 69 114
Tax credit carryforwards........................... 267
Amortization of intangibles........................ 1,580
Inventory reserve.................................. 227 692
Book over tax depreciation......................... 92
Other reserves..................................... 63 80
-------- ------
Total deferred tax assets....................... 887 2,820
Deferred tax liabilities:
Import reserve..................................... 428 375
Tax over book depreciation......................... 18
State taxes........................................ 13 89
-------- ------
Total deferred tax liabilities.................. 441 482
-------- ------
Net deferred tax assets............................ $ 446 $2,338
======== ======
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
YEAR PERIOD FROM
ENDED MARCH 30, 1997
MARCH 29, TO DECEMBER 31,
1997 1997
--------- ---------------
<S> <C> <C>
Statutory federal rate............................. 35% (35%)
State taxes, net of federal benefit................ 5 (4)
General business credits........................... 9
Foreign tax provision (benefit).................... (6) 3
Other.............................................. 1 1
--- ---
35% (26%)
=== ===
</TABLE>
9. COMMITMENTS
The Company leases office and testing equipment under noncancellable
operating leases. Lease terms range from three to five years. The Company's
United States headquarters is leased under an operating lease that has been
extended to December 1999. The lease provides for rent escalation between a
minimum of 3% and a maximum of 4% on January 1, 1998 and 1999 based on the
consumer price index during the prior year.
F-28
<PAGE> 185
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Future minimum lease commitments for all operating leases are as follows:
<TABLE>
<S> <C>
Period ending March 31, 1998.............................. $ 248
Fiscal year ending:
1999.................................................... 943
2000.................................................... 751
2001.................................................... 219
2002.................................................... 60
--------
$ 2,221
========
</TABLE>
Total rent expense for the year ended March 29, 1997 and the period from
March 30, 1997 to December 31, 1997 was approximately $698 and $675,
respectively.
10. HEDGING ACTIVITIES
The Company's Japanese subsidiary enters into derivative financial
instruments, primarily foreign currency forward exchange contracts, to manage
foreign exchange risk on foreign currency transactions and does not use the
contracts for trading purposes. These financial instruments are used to protect
the Company from the risk that the eventual net cash inflows from the foreign
currency transactions will be adversely affected by changes in exchange rates.
Gains and losses related to hedges of firmly committed transactions are deferred
and recognized when the hedged transaction occurs.
The following table summarizes the notional amount, which approximates fair
market value, of the Company's outstanding foreign exchange contracts at
December 31, 1997.
<TABLE>
<CAPTION>
U.S. DOLLAR
EQUIVALENT MATURITY
------------ --------------
<S> <C> <C>
U.S. Dollars $100 January 1998
U.S. Dollars 100 February 1998
U.S. Dollars 100 March 1998
----
$300
====
</TABLE>
The counterparties to these instruments are major financial institutions.
The Company is exposed to credit losses in the event of non performance by
counterparties to its forward exchange contracts but has no off-balance sheet
credit risk of accounting loss. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
the forward exchange contracts subject to credit risk but monitors the credit
standing of the counterparties.
F-29
<PAGE> 186
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED MARCH 29, 1997
AND THE PERIOD FROM MARCH 30, 1997 TO DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. GEOGRAPHICAL INFORMATION
Revenue, income (loss) before income taxes and identifiable assets are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MARCH 30, 1997
MARCH 29, TO DECEMBER 31,
1997 1997
---------- ---------------
<S> <C> <C>
Revenue:
North America.................................... $48,169 $46,592
Europe........................................... 3,176 3,194
Japan............................................ 3,972 2,815
------- -------
$55,317 $52,601
======= =======
Income (loss) before taxes:
North America.................................... $ 545 $(1,607)
Europe........................................... 94 31
Japan............................................ 2 (38)
------- -------
$ 641 $(1,614)
======= =======
Assets:
North America.................................... $14,057 $28,099
Europe........................................... 579 237
Japan............................................ 1,967 1,676
Eliminations..................................... (1,409) (669)
------- -------
$15,194 $29,343
======= =======
</TABLE>
F-30
<PAGE> 187
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Artecon, Inc.
We have audited the accompanying consolidated balance sheets of Artecon,
Inc. at March 30, 1996 and March 25, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Artecon, Inc.
at March 30, 1996 and March 25, 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
June 12, 1996
F-31
<PAGE> 188
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 793,454 $ 298,897
Accounts receivable, less allowance for doubtful accounts
of $180,465 and $112,725 at March 30, 1996 and March
25, 1995, respectively................................. 6,130,073 8,128,112
Inventories, net.......................................... 4,592,821 3,652,789
Deferred income taxes..................................... 390,448 53,261
Prepaid expenses and other................................ 576,028 581,281
----------- -----------
Total current assets................................... 12,482,824 12,714,340
Property and equipment:
Machinery and equipment................................... 1,050,627 781,514
Tooling molds............................................. 863,485 617,485
Furniture and fixtures.................................... 69,243 120,274
----------- -----------
1,983,355 1,519,273
Less accumulated depreciation............................. (916,232) (625,527)
----------- -----------
1,067,123 893,746
Other assets................................................ 33,250 376,273
----------- -----------
Total assets...................................... $13,583,197 $13,984,359
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,251,522 $ 6,001,465
Accrued liabilities....................................... 2,377,826 1,674,430
Note payable to related party............................. 18,642 17,486
Other current liabilities................................. 30,317 40,550
Income taxes payable...................................... 32,889 45,000
----------- -----------
Total current liabilities.............................. 5,711,196 7,778,931
Long-term liabilities....................................... 116,821 152,765
Borrowings under lines of credit............................ 2,941,498 2,500,000
Minority interest........................................... 90,965 --
Deferred income taxes....................................... 2,932 --
Commitments
Shareholders' equity:
Convertible preferred shares, no par value; 10,000,000
shares authorized, 1,211,949 and 1,280,449 shares
issued and outstanding at March 30, 1996 and March 25,
1995, respectively, liquidation preference $12,120 .... 2,418,900 2,555,900
Convertible preferred B shares, no par value; 10,000,000
shares authorized, 1,405,208 shares issued and outstanding
at March 30, 1996 and March 25, 1995, liquidation
preference $2,810,414..................................... 2,810,414 2,810,414
Common shares, no par value; 20,000,000 shares authorized,
5,210,225 and 5,225,225 shares issued and outstanding
at March 30, 1996 and March 25,1995, respectively...... 585,961 601,203
Foreign currency translation adjustment................... (311,914) (40,818)
Accumulated deficit....................................... (783,576) (2,374,036)
----------- -----------
Total shareholders' equity............................. 4,719,785 3,552,663
----------- -----------
Total liabilities and shareholders' equity........ $13,583,197 $13,984,359
=========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE> 189
ARTECON, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
MARCH 30, MARCH 25,
1996 1995
----------- -----------
<S> <C> <C>
Net revenues................................................ $47,171,827 $47,773,787
Cost of sales............................................... 34,716,899 38,296,376
----------- -----------
Gross margin................................................ 12,454,928 9,477,411
Operating expenses:
Selling, general and administrative....................... 8,924,260 7,886,557
Research and development.................................. 1,405,373 1,134,395
Other income.............................................. (122,755) (131,225)
----------- -----------
Total operating expenses.................................... 10,206,878 8,889,727
Operating income............................................ 2,248,050 587,684
Other (expense) income:
Interest, net............................................. (228,274) (215,969)
(Loss) gain on foreign currency transactions, net......... (335,633) 162,684
Minority interest in earnings of subsidiary............... (77,552) (10,287)
Loss on termination of subsidiary operations.............. (256,397) --
----------- -----------
(897,856) (63,572)
Income before income taxes.................................. 1,350,194 524,112
Provision (benefit) for income taxes........................ (240,266) 70,736
----------- -----------
Net income.................................................. $ 1,590,460 $ 453,376
=========== ===========
</TABLE>
See accompanying notes.
F-33
<PAGE> 190
ARTECON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE FOREIGN
PREFERRED SHARES PREFERRED B SHARES COMMON SHARES CURRENCY
----------------------- ----------------------- --------------------- TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ADJUSTMENT
---------- ---------- ---------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 26, 1994..... 1,380,449 $2,760,900 1,405,208 $2,810,414 5,225,225 $601,203 $ (43,130)
Repurchase of preferred
shares.................... (100,000) (205,000) -- -- -- -- --
Foreign currency translation
adjustment................ -- -- -- -- -- -- 2,312
Net income.................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- ---------
Balance at March 25, 1995..... 1,280,449 2,555,900 1,405,208 2,810,414 5,225,225 601,203 (40,818)
Repurchase of common and
preferred shares.......... (68,500) (137,000) -- -- (15,000) (15,242) --
Foreign currency translation
adjustment................ -- -- -- -- -- -- (271,096)
Net income.................. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- ---------
Balance at March 30, 1996..... 1,211,949 $2,418,900 1,405,208 $2,810,414 5,210,225 $585,961 $(311,914)
========== ========== ========== ========== ========== ======== =========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance at March 26, 1994..... $(2,827,412) $3,301,975
Repurchase of preferred
shares.................... -- (205,000)
Foreign currency translation
adjustment................ -- 2,312
Net income.................. 453,376 453,376
----------- ----------
Balance at March 25, 1995..... (2,374,036) 3,552,663
Repurchase of common and
preferred shares.......... -- (152,242)
Foreign currency translation
adjustment................ -- (271,096)
Net income.................. 1,590,460 1,590,460
----------- ----------
Balance at March 30, 1996..... $ (783,576) $4,719,785
=========== ==========
</TABLE>
See accompanying notes.
F-34
<PAGE> 191
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------
MARCH 30, MARCH 25,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,590,460 $ 453,376
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 557,482 494,033
Deferred income taxes.................................. (334,255) --
Loss on termination of subsidiary operations........... 256,397 --
Minority interest...................................... 90,965 --
Changes in operating assets and liabilities:
Accounts receivable.................................. 1,998,039 (2,727,050)
Inventories.......................................... (940,032) 2,711
Prepaid expenses and other........................... 5,253 (115,416)
Accounts payable..................................... (2,749,943) 2,084,299
Accrued liabilities.................................. 703,396 416,929
Other current liabilities............................ (10,233) 3,204
Income taxes payable................................. (12,111) --
Long-term liabilities................................ (35,944) 57,309
------------ ------------
Net cash provided by operating activities................... 1,119,474 669,395
INVESTING ACTIVITIES
Purchases of property and equipment......................... (644,233) (295,148)
------------ ------------
Net cash used in investing activities....................... (644,233) (295,148)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................... 18,575,498 21,440,365
Payments on bank borrowings................................. (18,134,000) (21,348,365)
Note payable to related party............................... 1,156 (3,275)
Repurchase of preferred shares.............................. (137,000) (205,000)
Repurchase of common shares................................. (15,242) --
------------ ------------
Net cash provided by (used in) financing activities......... 290,412 (116,275)
Effect of exchange rate changes on cash..................... (271,096) 2,312
------------ ------------
Net increase in cash........................................ 494,557 260,284
Cash at beginning of year................................... 298,897 38,613
------------ ------------
Cash at end of year......................................... $ 793,454 $ 298,897
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest.................................................. $ 218,396 $ 178,329
============ ============
Income taxes.............................................. $ 103,598 $ 69,009
============ ============
</TABLE>
See accompanying notes.
F-35
<PAGE> 192
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Artecon, Inc. and its wholly and majority-owned subsidiaries, Artecon
Canada, Inc., Artecon Japan, Ltd., Artecon S.A., and Artecon B.V., (together the
"Company" or "Artecon") are manufacturers and suppliers of value-added computer
products and services in the open systems workstation and server markets. The
Company's subsidiaries purchase finished product from the parent and resell it
in their respective locations. The Company's principal markets include Canada,
Japan, United States and Europe and sells its products through reseller channels
worldwide.
The Company's fiscal year is on a 52-53 week basis and ends on the Saturday
nearest to March 31. The fiscal years ended March 30, 1996 and March 25, 1995
contained 53 and 52 weeks, respectively.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Artecon and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers and
requires no collateral. The Company maintains reserves for potential credit
losses. To date such losses have been within management's expectations.
INVENTORIES
Inventories are comprised of purchased parts and assemblies which include
direct labor and overhead and are valued at the lower of cost (first-in,
first-out) or market. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
---------- ----------
<S> <C> <C>
Purchased parts and materials....................... $3,505,444 $2,519,814
Finished goods...................................... 1,087,377 1,132,975
---------- ----------
$4,592,821 $3,652,789
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives (three
to five years) of the assets. Depreciation expense was $470,856 and $407,328 in
1996 and 1995, respectively.
FOREIGN CURRENCY
The accounts of foreign subsidiaries consolidated herein have been
translated from their respective functional currencies at appropriate exchange
rates. Cumulative translation adjustments are included as a separate component
of shareholders' equity.
F-36
<PAGE> 193
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
OTHER ASSETS AND ASSET IMPAIRMENTS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Goodwill, net.......................................... $33,250 $357,063
Capitalized software, net.............................. -- 8,042
Other.................................................. -- 11,168
------- --------
$33,250 $376,273
======= ========
</TABLE>
Goodwill relates to acquisitions and is being amortized on a straight-line
basis over a period of seven years. Accumulated amortization was $59,850 and
$114,845 at March 30, 1996 and March 25, 1995, respectively. Effective December
31, 1995, the Company terminated the operations of its French subsidiary,
Artecon S.A. and wrote off the remaining $256,397 unamortized balance of
goodwill.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Artecon
plans to adopt Statement No. 121 during fiscal 1997. The financial impact of
adopting Statement No. 121 has not yet been determined.
REVENUES
The Company recognizes revenue upon shipment, including products sold under
a stock rotation program which entitles the buyer the right to return products
under certain conditions. The Company provides allowances for estimated returns.
Service contract revenues are recorded as the applicable services are performed
and totaled $450,000 and $375,000 in 1996 and 1995, respectively.
Revenues derived from various U.S. government agencies were approximately
$4.6 million and $1.2 million in 1996 and 1995, respectively. Export sales to
international customers amounted to approximately $11.9 million and $8.9 million
in 1996 and 1995, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Revenues from sales to affiliated companies during 1996 and 1995 were
approximately $162,000 and $764,000, respectively. Accounts receivable from
affiliated companies were approximately $50,000 and $72,000 at March 30, 1996
and March 25, 1995, respectively and are included in accounts receivable in the
accompanying consolidated balance sheets.
F-37
<PAGE> 194
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
The Company purchases certain goods from affiliates and also is subject to
a management fee from an affiliate of approximately $4,000 per month. Purchases
from affiliated companies during 1996 and 1995 were approximately $98,000 and
$227,000, respectively. At March 25, 1995 accounts payable to affiliated
companies totaled $26,000 (none in 1996) and are included in accounts payable in
the accompanying consolidated balance sheets.
3. BORROWINGS UNDER LINE OF CREDIT
The Company has a line of credit agreement with a U.S. bank that expires on
September 1, 1997. The agreement provides for maximum borrowings of $4,500,000
and is collateralized by substantially all of the assets of the Company. The
Company may choose between borrowing at the bank's prime rate, as it may vary
from time to time, or it may choose a rate that is fixed for an agreed upon
period of from 30 to 180 days with interest due quarterly at the Eurodollar rate
in effect at the commencement of the agreed upon fixed period, plus 1.5%. This
line of credit agreement requires that the Company maintain certain financial
statement ratios.
The Company's Japanese subsidiary has four lines of credit with a Japanese
bank for borrowings up to an aggregate 70 million Yen ($652,498 at March 30,
1996) at rates ranging from 1.23% to 2.5%. Interest is due monthly with the
balance due six months from the date of the agreement. Borrowings are
collateralized by accounts receivable of the Japanese subsidiary.
At March 30, 1996, the Company's borrowings were as follows:
<TABLE>
<S> <C>
U.S. bank lines:
Variable interest at prime (8.25% at March 30, 1996)...... $ 289,000
Interest fixed at 7.06% through May 10, 1996.............. 2,000,000
Japan bank lines, interest ranging from 1.23% to 2.5%....... 652,498
----------
$2,941,498
==========
</TABLE>
4. SHAREHOLDERS' EQUITY
There are two classes of preferred shares, the "Preferred" shares and the
"Preferred B" shares. There are 10,000,000 shares of each preferred class
authorized. The preferred shares are non-voting, do not provide for dividends,
and have a liquidation preference over common shares. The shares are convertible
into common shares, at the option of the holder, at the earlier of three years
after issuance or upon the occurrence of certain other events, at the conversion
rate of one common share for each 0.8 preferred share. The liquidation
preference for the Preferred is $.01 per share, and the Preferred B is $2.00 per
share.
In December 1994, the Company entered into a repurchase agreement with
certain shareholders who were holders of the Company's outstanding preferred
shares. The agreement required the Company to redeem 100,000 shares of the
outstanding preferred shares and grants the Company the option to repurchase the
remaining shares at any time during the five year period ending December 22,
1999 at the prices ranging from $2.00-$2.50 per share. During fiscal 1996 and
1995, the Company repurchased 68,500 and 100,000 preferred shares under the
agreement at $2.20 and $2.00-$2.10 per share, respectively.
As consideration for granting the Company the option to repurchase the
preferred shares, the Company agreed to issue common shares to the holders of
preferred shares at their request at the ratio of one share of common for each
ten shares of preferred stock held prior to any repurchase by the Company at a
price to be determined by the Board of Directors but not less than the fair
value of such shares at the time of repurchase. These common shares are subject
to Company's first right-of-refusal to repurchase any or all of these shares. At
March 30, 1996, no common shares were issued under this agreement.
F-38
<PAGE> 195
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
5. INCOME TAXES
In accordance with Statement of Financial Accounting Standard No. 109
Accounting for Income Taxes, the Company has reversed its valuation allowance
for deferred tax assets of $845,505 at March 25, 1995 during fiscal year 1996 as
it is deemed to be more likely than not that the Company will be able to realize
such amounts as they become due. Primarily as a result of the reversal of the
valuation allowance, the Company has a net tax benefit of $240,266 during 1996.
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Current:
Federal............................................. $ -- $14,858
State............................................... 93,989 45,000
Foreign............................................. -- 10,878
--------- -------
93,989 70,736
--------- -------
Deferred:
Federal............................................. (755,152) --
State............................................... (53,031) --
Foreign 473,928 --
--------- -------
(334,255) --
--------- -------
$(240,266) $70,736
========= =======
</TABLE>
Significant components of the Company's net deferred tax assets are as
follows:
<TABLE>
<CAPTION>
MARCH 30, MARCH 25,
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Tax credit carryforwards............................ $326,984 $ 326,080
Net operating losses................................ 144,012 205,356
Various reserves and other.......................... 241,879 186,111
Inventory reserve................................... 160,000 221,776
-------- ---------
Total deferred tax assets............................. 872,875 939,323
Valuation allowance for deferred tax assets........... -- (845,505)
-------- ---------
Net deferred tax assets............................... 872,875 93,818
-------- ---------
Deferred tax liabilities:
Import reserve...................................... 473,928 --
Tax over book depreciation.......................... 11,431 40,557
-------- ---------
Total deferred tax liabilities........................ 485,359 40,557
-------- ---------
Net deferred tax assets............................... $387,516 $ 53,261
======== =========
</TABLE>
At March 30, 1996, the Company had federal net operating loss carryforwards
of approximately $424,000. The federal loss carryforwards will begin expiring in
2001, unless previously utilized. At March 30, 1996 the Company also has federal
tax credit carryforwards of approximately $327,000. The federal tax credit
carryforwards will begin expiring in 1999, unless previously utilized.
F-39
<PAGE> 196
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1996
Pursuant to Internal Revenue Code Section 382, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within a three year period.
6. COMMITMENTS
The Company leases office and testing equipment under non-cancellable
operating leases. Lease terms range from three to five years. The Company's U.S.
headquarters is leased under an operating lease that has been extended to
December 1999. The lease provides for rent escalation between a minimum of 3%
and a maximum of 4% on January 1, 1998 and 1999 based on the consumer price
index during the prior year.
Future minimum lease commitments for all operating leases are as follows:
<TABLE>
<S> <C>
Fiscal year ending:
1997................................................... $ 525,000
1998................................................... 479,000
1999................................................... 459,000
2000................................................... 314,000
----------
$1,777,000
==========
</TABLE>
Total rent expense for the years ended March 30, 1996 and March 25, 1995
was approximately $519,000 and $593,000, respectively.
F-40
<PAGE> 197
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Falcon Systems, Inc.:
We have audited the accompanying balance sheets of FALCON SYSTEMS, INC. (a
California corporation) as of August 20, 1997, December 31, 1996 and December
31, 1995, and the related statements of operations, stockholder's (deficit)
equity and cash flows for the periods then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Falcon Systems, Inc. as of
August 20, 1997, December 31, 1996 and December 31, 1995, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Sacramento, California
December 12, 1997
F-41
<PAGE> 198
FALCON SYSTEMS, INC.
BALANCE SHEETS
AS OF AUGUST 20, 1997,
DECEMBER 31, 1996 AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
AUGUST 20, DECEMBER 31, DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................. $ 568,338 $ 170,648 $ 438,946
Accounts receivable, net of allowance for doubtful
accounts of $136,230, $44,967 and $41,752,
respectively................................... 4,353,184 11,643,643 6,004,938
Inventories....................................... 4,555,942 7,888,075 3,735,863
----------- ----------- -----------
Total current assets...................... 9,477,464 19,702,366 10,179,747
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Equipment......................................... 2,044,232 1,623,374 1,091,745
Leasehold improvements............................ 232,089 211,601 101,988
----------- ----------- -----------
2,276,321 1,834,975 1,193,733
Less -- Accumulated depreciation and
amortization............................ 911,436 689,145 467,304
----------- ----------- -----------
1,364,885 1,145,830 726,429
----------- ----------- -----------
PREPAID EXPENSES.................................... 110,971 91,235 75,257
----------- ----------- -----------
$10,953,320 $20,939,431 $10,981,433
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
CURRENT LIABILITIES:
Line of credit.................................... $ 5,181,756 $ 7,500,000 $ 4,800,000
Current portion of long-term debt................. 114,739 88,323 28,034
Accounts payable.................................. 4,878,268 11,438,987 3,939,856
Accrued liabilities............................... 940,205 679,097 526,942
Customer deposits................................. 170,778 97,744 75,242
----------- ----------- -----------
Total current liabilities................. 11,285,746 19,804,151 9,370,074
----------- ----------- -----------
LONG-TERM DEBT, net of current portion.............. 219,917 200,988 27,165
----------- ----------- -----------
COMMITMENTS (NOTE 3)
STOCKHOLDER'S (DEFICIT) EQUITY:
Common stock, no par value 100,000 shares
authorized, 2,000 shares outstanding........... 555,473 82,225 82,225
Retained (deficit) earnings....................... (1,107,816) 852,067 1,501,969
----------- ----------- -----------
(552,343) 934,292 1,584,194
----------- ----------- -----------
$10,953,320 $20,939,431 $10,981,433
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE> 199
FALCON SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED AUGUST 20, 1997
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
AUGUST 20,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES........................................... $28,924,209 $55,671,290 $43,039,960
COST OF SALES....................................... 22,707,632 45,229,449 33,534,668
----------- ----------- -----------
GROSS PROFIT........................................ 6,216,577 10,441,841 9,505,292
OPERATING EXPENSES:
Selling........................................... 4,100,945 5,198,859 4,328,787
General and administrative........................ 3,665,589 4,677,557 3,594,509
----------- ----------- -----------
OPERATING (LOSS) INCOME............................. (1,549,957) 565,425 1,581,996
INTEREST EXPENSE.................................... 409,926 448,493 327,436
----------- ----------- -----------
NET (LOSS) INCOME................................... $(1,959,883) $ 116,932 $ 1,254,560
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE> 200
FALCON SYSTEMS, INC.
STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
FOR THE PERIOD ENDED AUGUST 20, 1997
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............................ $ 82,225 $ 1,386,398 $ 1,468,623
Net income.......................................... 0 1,254,560 1,254,560
Dividends........................................... 0 (1,138,989) (1,138,989)
-------- ----------- -----------
BALANCE, DECEMBER 31, 1995............................ 82,225 1,501,969 1,584,194
Net income.......................................... 0 116,932 116,932
Dividends........................................... 0 (766,834) (766,834)
-------- ----------- -----------
BALANCE, DECEMBER 31, 1996............................ 82,225 852,067 934,292
Net loss............................................ 0 (1,959,883) (1,959,883)
Capital contribution................................ 473,248 0 473,248
-------- ----------- -----------
BALANCE, AUGUST 20, 1997.............................. $555,473 $(1,107,816) $ (552,343)
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE> 201
FALCON SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED AUGUST 20, 1997
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
AUGUST 20, 1997 1996 1995
--------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................ $(1,959,883) $ 116,932 $ 1,254,560
Adjustments to reconcile net (loss) income to net
cash Provided by (used for) operating
activities
Depreciation and amortization................. 222,291 238,380 139,528
Provision for bad debt........................ 91,263 3,215 465
Change in operating assets and liabilities:
Accounts receivable......................... 7,199,196 (5,641,920) 674,801
Inventories................................. 3,332,133 (4,152,212) (1,117,863)
Prepaid expenses............................ (19,736) (15,978) (56,818)
Accounts payable............................ (6,560,719) 7,499,131 (712,538)
Accrued liabilities......................... 261,108 152,155 (127,524)
Customer deposits........................... 73,034 22,502 (12,480)
----------- ----------- -----------
Net cash provided by (used for) operating
activities............................. 2,638,687 (1,777,795) 42,131
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment............................ (441,346) (657,781) (501,113)
----------- ----------- -----------
Net cash used for investing activities... (441,346) (657,781) (501,113)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments of) proceeds from line of credit..... (2,318,244) 2,700,000 1,800,000
Proceeds from debt............................... 134,871 280,307 71,000
Repayments of debt............................... (89,526) (46,195) (95,941)
Contributions made by (dividends paid to)
stockholder................................... 473,248 (766,834) (1,138,989)
----------- ----------- -----------
Net cash (used for) provided by financing
activities............................. (1,799,651) 2,167,278 636,070
----------- ----------- -----------
Net increase (decrease) in cash.......... 397,690 (268,298) 177,088
CASH, beginning of year............................ 170,648 438,946 261,858
----------- ----------- -----------
CASH, end of year.................................. $ 568,338 $ 170,648 $ 438,946
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ 374,841 $ 419,928 $ 327,436
Cash paid for income taxes....................... 0 13,100 23,845
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE> 202
FALCON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Falcon Systems, Inc. (the Company) is a California corporation engaged in
the sale and distribution of computer equipment throughout the United States.
Effective August 21, 1997, the Company entered into an asset purchase agreement
with Artecon, Inc. Under the terms of the agreement, nearly all of the Company's
assets and liabilities were sold for $3,500,000 in cash and notes. These
financial statements represent the Company's financial position on the closing
date of the transaction and do not necessarily reflect the values that the buyer
may ultimately assign to these purchased assets and liabilities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are carried at the lower of moving average cost or market. Cost
elements included in inventory are materials, labor and overhead. Inventory is
mainly comprised of raw material components for all periods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method with estimated useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the improvement or the remaining lease term.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally developed software costs upon the
establishment of technological feasibility which occurs upon the completion of a
working model. Annual maintenance costs are expensed as incurred unless they
represent substantial improvements. Capitalized software development costs are
included in property and equipment in the accompanying balance sheets and were
$221,071, $197,464 and $50,000 for the period ending August 20, 1997 and the
years ended December 31, 1996 and December 31, 1995, respectively.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income. Instead, the stockholder
is liable for federal income taxes on the Company's taxable income. The State of
California levies a corporate tax at the rate of 1 1/2% of taxable income. This
tax has been provided for in the general and administrative caption of the
accompanying statements of operations.
REVENUE RECOGNITION
Sales of computer equipment are recorded upon shipment, net of an allowance
for estimated returns. The Company maintains a warranty accrual for the
estimated future warranty obligations.
F-46
<PAGE> 203
FALCON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
In accordance with Statement of Financial Accounting Standards (SFAS) No.
2, the Company expenses software research and development costs as they are
incurred. Total research and development costs charged to expense for the year
ended December 31, 1996 were $93,800. For the period ended August 20, 1997 and
the year ended December 31, 1995 research and development costs were immaterial.
CONCENTRATION OF CREDIT RISK
Credit is extended for all customers based on financial condition and,
generally, collateral is not required. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base and dispersion across many different
industries and geography. During the year ended December 31, 1996, sales to a
single customer amounted to $6,064,890. During the period ended August 20, 1997
and the year ended December 31, 1995, there were no sales to a single customer
that amount to more than 10% of total revenue.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 balances to
conform to the 1997 presentation.
2. LINE OF CREDIT AND LONG-TERM DEBT
The Company has an $8,000,000 revolving line of credit with a financial
institution with a scheduled expiration of October 2, 1997. This line of credit
is secured by accounts receivable and inventory and bears interest at the bank's
reference rate (8.50% at August 20, 1997) plus .75%. The weighted average
interest rate on the line of credit at August 20, 1997 was 9.15%. At August 20,
1997, the amount outstanding on this line of credit totaled $5,181,756. This
line of credit and the term debt below are guaranteed by the stockholder.
This debt was subject to certain restrictive covenants including
maintaining an acceptable debt to equity ratio, an acceptable current ratio, a
minimum working capital amount, and a minimum tangible net worth. The Company
was in violation of certain restrictive covenants as of August 20, 1997,
December 31, 1996, and December 31, 1995. The debt was paid in full subsequent
to August 20, 1997 and the line of credit was canceled.
Long-term debt consists of:
<TABLE>
<CAPTION>
AUGUST 20,
1997 1996 1995
---------- -------- -------
<S> <C> <C> <C>
Term note due in monthly installments of principal and
interest totaling $33,937 at the bank's reference rate
(8.50% at August 20, 1997) plus 1.25% through July 2000.
The note is collaterized by equipment and subject to
certain restrictive covenants............................. $334,656 $289,311 $49,288
Note payable collateralized by vehicle; due in monthly
installments totaling $5,672 per year, including interest
at 10.8%.................................................. 0 0 5,911
-------- -------- -------
334,656 289,311 55,199
Less -- Current portion..................................... 114,739 88,323 28,034
-------- -------- -------
$219,917 $200,988 $27,165
======== ======== =======
</TABLE>
F-47
<PAGE> 204
FALCON SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long-term debt maturities are:
<TABLE>
<CAPTION>
PERIOD ENDING
AUGUST 20,
-------------
<S> <C>
1998.................................... $114,739
1999.................................... 114,739
2000.................................... 105,178
--------
$334,656
========
</TABLE>
3. COMMITMENTS
The Company has entered into noncancellable operating leases for warehouse
and office space which expire through 2002. The future minimum payments required
under these leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
AUGUST 20,
-------------
<S> <C>
1998.................................... $312,033
1999.................................... 270,312
2000.................................... 98,652
2001.................................... 67,743
2002.................................... 41,670
--------
$790,410
========
</TABLE>
Rental expense for the period ended August 20, 1997 and the years ended
December 31, 1996 and December 31, 1995 was $169,818, $318,323 and $184,906,
respectively.
4. EMPLOYEE BENEFIT PLAN
The Company established a 401(k) employee benefit and profit sharing plan
(the Plan). The Plan is a defined contribution plan which covers all employees
who meet the minimum participation standards as defined in the Plan document.
The Company recorded no plan expenses in 1997 and 1996 and $20,000 for 1995.
On August 31, 1997 the Plan was terminated. The Plan assets will be
distributed according to the instructions received from each Plan participant.
F-48
<PAGE> 205
ANNEX A
================================================================================
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AMONG:
STORAGE DIMENSIONS, INC.,
A DELAWARE CORPORATION;
STORAGE ACQUISITION CORP.,
A CALIFORNIA CORPORATION;
AND
ARTECON, INC.,
A CALIFORNIA CORPORATION;
------------------------
DATED AS OF DECEMBER 22, 1997
------------------------
================================================================================
<PAGE> 206
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 1. Description of Transaction.................................. 1
1.1 Merger of Merger Sub into the Company....................... 1
1.2 Effect of the Merger........................................ 1
1.3 Closing; Effective Time..................................... 1
1.4 Articles of Incorporation and Bylaws; Directors and
Officers.................................................... 1
1.5 Conversion of Shares........................................ 2
1.6 Closing of the Company's Transfer Books..................... 3
1.7 Exchange of Certificates.................................... 3
1.8 Dissenting Shares........................................... 4
1.9 Tax Consequences............................................ 4
1.10 Accounting Treatment........................................ 4
1.11 Further Action.............................................. 4
SECTION 2. Representations and Warranties of the Company............... 5
2.1 Due Organization; No Subsidiaries; Etc...................... 5
2.2 Articles of Incorporation and Bylaws; Records............... 5
2.3 Capitalization.............................................. 5
2.4 Financial Statements........................................ 6
2.5 Absence of Changes.......................................... 6
2.6 Title to Assets............................................. 7
2.7 Accounts Receivable; Loans and Advances..................... 8
2.8 Equipment; Leasehold........................................ 8
2.9 Proprietary Assets.......................................... 8
2.10 Contracts................................................... 9
2.11 No Undisclosed Liabilities.................................. 10
2.12 Compliance with Legal Requirements.......................... 10
2.13 Governmental Authorizations................................. 10
2.14 Tax Matters................................................. 10
2.15 Employee and Labor Matters; Benefit Plans................... 11
2.16 Environmental Matters....................................... 12
2.17 Insurance................................................... 13
2.18 Related Party Transactions.................................. 13
2.19 Legal Proceedings; Orders................................... 13
2.20 Authority; Binding Nature of Agreement...................... 14
2.21 Non-Contravention; Consents................................. 14
2.22 Vote Required............................................... 14
2.23 Company Action.............................................. 14
2.24 Full Disclosure............................................. 15
2.25 Finder's Fee................................................ 15
SECTION 3. Representations and Warranties of Parent and Merger sub..... 15
3.1 Due Organization, Etc....................................... 15
</TABLE>
<PAGE> 207
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.2 Certificate of Incorporation and Bylaws; Records............ 15
3.3 Capitalization, Etc......................................... 16
3.4 SEC Filings; Financial Statements........................... 16
3.5 Absence of Changes.......................................... 17
3.6 Title to Assets............................................. 18
3.7 Accounts Receivable; Loans and Advances..................... 18
3.8 Equipment; Leasehold........................................ 18
3.9 Proprietary Assets.......................................... 19
3.10 Contracts................................................... 19
3.11 No Undisclosed Liabilities.................................. 21
3.12 Compliance with Legal Requirements.......................... 21
3.13 Governmental Authorizations................................. 21
3.14 Tax Matters................................................. 21
3.15 Employee and Labor Matters; Benefit Plans................... 21
3.16 Environmental Matters....................................... 23
3.17 Insurance................................................... 23
3.18 Related Party Transactions.................................. 23
3.19 Legal Proceedings; Orders................................... 23
3.20 Authority; Binding Nature of Agreement...................... 24
3.21 Non-Contravention; Consents................................. 24
3.22 Vote Required............................................... 24
3.23 Parent Action............................................... 25
3.24 Full Disclosure............................................. 25
3.25 Finder's Fee................................................ 25
3.26 Opinion of Financial Advisor to Parent...................... 25
SECTION 4. Certain Covenants of the Company............................ 25
4.1 Access and Investigation.................................... 25
4.2 Operation of the Company's Business......................... 26
4.3 Notification; Updates to Company Disclosure Schedule........ 27
4.4 No Solicitation............................................. 27
4.5 Company Shareholders' Meeting............................... 28
4.6. Tax Representation Letters; Continuity of Interest
Certificates................................................ 29
4.7 Affiliate Agreements........................................ 29
SECTION 5. Certain Covenants of Parent................................. 29
5.1 Access and Investigation.................................... 29
5.2 Operation of Parent's Business.............................. 29
5.3 Notification; Updates to Parent Disclosure Schedule......... 30
5.4 No Solicitation............................................. 31
5.5 Parent Stockholders' Meeting................................ 31
5.6 Tax Representation Letters.................................. 32
</TABLE>
<PAGE> 208
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.7 Merger Sub Activities....................................... 32
SECTION 6. Additional Covenants of the Parties......................... 32
6.1 Filings and Consents........................................ 32
6.2 Public Announcements........................................ 32
6.3 Reasonable Efforts.......................................... 33
6.4 Registration Statement...................................... 33
6.5 Additional Agreements....................................... 34
6.6 Regulatory Approvals........................................ 34
6.7 Indemnification............................................. 34
SECTION 7. Conditions Precedent to Obligations of Parent and Merger
Sub......................................................... 35
7.1 Accuracy of Representations................................. 35
7.2 Performance of Covenants.................................... 35
7.3 Effectiveness of Registration Statement..................... 35
7.4 Compliance Certificate...................................... 35
7.5 Stockholder Approval........................................ 35
7.6 Consents.................................................... 35
7.7 Legal Opinion............................................... 35
7.8 Tax Opinion................................................. 35
7.9 No Restraints............................................... 35
7.10 HSR Act..................................................... 35
7.11 Termination of Repurchase Agreement......................... 35
SECTION 8. Conditions Precedent to Obligations of the Company.......... 36
8.1 Accuracy of Representations................................. 36
8.2 Performance of Covenants.................................... 36
8.3 Effectiveness of Registration Statement..................... 36
8.4 Nasdaq National Market...................................... 36
8.5 Compliance Certificate...................................... 36
8.6 Stockholder Approval........................................ 36
8.7 Consents.................................................... 36
8.8 Legal Opinion............................................... 36
8.9 Tax Opinion................................................. 36
8.10 No Restraints............................................... 36
8.11 HSR Act..................................................... 36
8.12 Resignations of Certain Directors........................... 36
SECTION 9. Termination................................................. 36
9.1 Termination................................................. 36
9.2 Effect of Termination....................................... 37
9.3 Fees and Expenses; Termination Fees......................... 37
SECTION 10. Miscellaneous Provisions.................................... 38
10.1 No Survival of Representations and Warranties............... 38
10.2 Further Assurances.......................................... 38
</TABLE>
<PAGE> 209
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
10.3 Attorneys' Fees............................................. 38
10.4 Notices..................................................... 38
10.5 Time of the Essence......................................... 39
10.6 Governing Law; Venue........................................ 39
10.7 Successors and Assigns...................................... 39
10.8 Remedies Cumulative; Specific Performance................... 39
10.9 Waiver...................................................... 39
10.10 Amendments.................................................. 39
10.11 Severability................................................ 39
10.12 Parties in Interest......................................... 40
10.13 Disclosure Schedules........................................ 40
10.14 Entire Agreement............................................ 40
10.15 Construction................................................ 40
10.16 Headings.................................................... 40
10.17 Counterparts................................................ 40
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
EXHIBIT A -- Certain Definitions......................................... A-1
EXHIBIT B -- Certificate of Amendment.................................... B-1
EXHIBIT C -- Directors and Officers of Parent............................ C-1
EXHIBIT D -- Directors and Officers of the Surviving Corporation......... D-1
EXHIBIT E -- Certain Company Shareholders................................ E-1
EXHIBIT F -- Certain Parent Stockholders................................. F-1
EXHIBIT G -- Company Tax Representation Letter........................... 1
EXHIBIT H -- Company Continuity of Interest Certificate.................. H-1
EXHIBIT I -- Form of Affiliate Agreement................................. I-1
EXHIBIT J -- Parent Tax Representation Letter............................ J-1
EXHIBIT K -- Capital Partners Standstill Agreement....................... K-1
EXHIBIT L -- Form of Cooley Godward LLP Legal Opinion.................... L-1
EXHIBIT M -- Form of Cooley Godward LLP Tax Opinion...................... M-1
EXHIBIT N -- Form of Wilson Sonsini Goodrich & Rosati Legal Opinion...... N-1
EXHIBIT O -- Form of Wilson Sonsini Goodrich & Rosati Tax Opinion........ O-1
EXHIBIT P -- Resignations of Certain Directors........................... P-1
</TABLE>
<PAGE> 210
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of December 22, 1997, by and among STORAGE DIMENSIONS, INC.,
a Delaware corporation ("Parent"), STORAGE ACQUISITION CORP., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and ARTECON,
INC., a California corporation (the "Company"). Certain capitalized terms used
in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of Merger
Sub into the Company (the "Merger") in accordance with this Agreement and the
California General Corporation Law (the "CGCL"). Upon consummation of the
Merger, Merger Sub will cease to exist, and the Company will become a wholly
owned subsidiary of Parent.
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a purchase.
C. This Agreement has been adopted and approved by the respective boards of
directors of Parent, Merger Sub and the Company.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. Description of Transaction
1.1 Merger of Merger Sub into the Company. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the CGCL.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92101 at a time and on a date which shall be promptly (but not more than two (2)
days following) the satisfaction or waiver of the conditions set forth in
Sections 7 and 8 (the "Closing Date"). Contemporaneously with or as promptly as
practicable after the Closing, a properly executed agreement or certificate of
merger conforming to the requirements of the CGCL (the "Certificate of Merger")
shall be filed with the Secretary of State of the State of California. The
Merger shall take effect at the time the Certificate of Merger is filed with and
accepted by the Secretary of State of the State of California (the "Effective
Time").
1.4 Articles of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by the Company prior to the Effective Time:
(a) effective on or promptly following the Effective Time, by the
filing of a Certificate of Amendment of Certificate of Incorporation with
the Secretary of State of the State of Delaware or as otherwise permitted
by the Delaware General Corporation Law ("DGCL"), Parent shall (i) amend
its Certificate of Incorporation to change its name from "Storage
Dimensions, Inc." to "Artecon, Inc." and (ii) amend its Certificate of
Incorporation and Bylaws to (A) provide for a classified Board of Directors
whereby the directors shall be separated into three classes, with the
members of each class serving for a three year term, (B) provide that a
director may not be removed from office without cause, except by the
<PAGE> 211
affirmative vote of 66 2/3% of the outstanding voting stock of Parent, and
(C) provide for a new series of Preferred Stock with certain rights,
preferences and privileges (the "Parent Preferred Stock") all as set forth
in the Certificate of Amendment of Certificate of Incorporation attached
hereto as Exhibit B (the "Certificate of Amendment");
(b) the directors and officers of Parent immediately after the
Effective Time shall be the individuals identified on Exhibit C;
(c) the Articles of Incorporation of the Surviving Corporation shall
be the Articles of Incorporation of Merger Sub; provided, however, that the
name of Merger Sub shall be changed effective on or promptly following the
Effective Time by filing a Certificate of Amendment of the Articles of
Incorporation with the Secretary of State of the State of California or as
otherwise permitted by the CGCL, from "Storage Acquisition Corp." to
"Artecon California;"
(d) the Bylaws of the Surviving Corporation shall be the Bylaws of
Merger Sub; and
(e) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the individuals identified on
Exhibit D.
1.5 Conversion of Shares.
(a) Subject to Section 1.7(b) and Section 1.8, at the Effective Time,
by virtue of the Merger and without any further action on the part of
Parent, Merger Sub, the Company or any shareholder of the Company:
(i) each share of Company Common Stock outstanding immediately
prior to the Effective Time shall be converted into the Applicable
Multiple (as defined below) of fully paid and non-assessable shares of
Parent Common Stock (the "Shares");
(ii) each share of Preferred Stock of the Company outstanding
immediately prior to the Effective Time shall be converted into one
fully paid and non-assessable share of Parent Preferred Stock; and
(iii) each share of the Common Stock, $0.001 par value, of Merger
Sub outstanding immediately prior to the Effective Time shall be
converted into one share of common stock of the Surviving Corporation.
(b) For purposes of this Agreement:
(i) the term "Applicable Multiple" shall mean a fraction the
numerator of which is the number of Merger Shares and the denominator of
which is the number of Company Shares;
(ii) the term "Company Shares" shall mean (A) the number of shares
of Company Common Stock outstanding immediately prior to the Effective
Time plus (B) the maximum number of shares of Company Common Stock
underlying instruments convertible into or exchangeable for Company
Common Stock (without regard to vesting or similar restrictions)
outstanding immediately prior to the Effective Time, including shares of
Company Preferred Stock other than 2,494,159 shares of Company Preferred
Stock held by the Sauey Affiliates (defined in Section 2.3) immediately
prior to Closing; and
(iii) the term "Merger Shares" shall mean the shares of Parent
Common Stock to be issued to the Company Shareholders in the Merger and
shall be equal to the product of (A) 1.5641 and (B) the sum of (x) the
number of shares of Parent Common Stock outstanding immediately prior to
the Effective Time plus (y) the maximum number of shares of Parent
Common Stock issuable upon exercise, in accordance with their terms but
without regard to any vesting or similar restrictions, of any and all
options outstanding as of the date hereof and that are also outstanding
immediately prior to the Effective Time to purchase Parent Common Stock
with option exercise prices less than the Applicable Price (defined in
Section 1.10).
2
<PAGE> 212
(c) At the Effective Time, all rights with respect to Company Common
Stock under Company Options and Company Warrants that are then outstanding,
if any, shall be converted into and become rights with respect to Parent
Common Stock, and Parent shall assume each Company Option and Company
Warrant, if any, in accordance with the terms (as in effect as of the date
hereof) of the stock option plan or other agreement, as the case may be,
under which it was issued and the stock option agreement or warrant
agreement, as the case may be, by which it is evidenced. From and after the
Effective Time, (i) each Company Option and Company Warrant assumed by
Parent may be exercised solely for shares of Parent Common Stock, (ii) the
number of shares of Parent Common Stock subject to each Company Option and
Company Warrant shall be equal to the number of shares of Company Common
Stock subject to such Company Option and Company Warrant immediately prior
to the Effective Time multiplied by the Applicable Multiple, rounding down
to the nearest whole share, (iii) the per share exercise price under each
such Company Option and Company Warrant shall be adjusted by dividing the
per share exercise price under each such Company Option and Company Warrant
by the Applicable Multiple and rounding up to the nearest cent and (iv) any
restriction on the exercise of any Company Option or Company Warrant shall
continue in full force and effect and the term, exercisability, vesting
schedule and other provisions of such Company Option and Company Warrant
shall otherwise remain unchanged; provided, however, that each such Company
Option and Company Warrant shall, in accordance with its terms, be subject
to further adjustment as appropriate to reflect any stock split, stock
dividend, subdivision, reclassification, reorganization, stock split,
combination or similar transaction subsequent to the Effective Time. The
Company shall take all action that may be necessary (under the stock option
plan or other agreements pursuant to which Company Options and Company
Warrants are outstanding) to effectuate the provisions of this Section
1.5(c) and to ensure that, from and after the Effective Time, holders of
Company Options and Company Warrants have no rights with respect thereto
other than those specifically provided herein. Parent shall file with the
Securities and Exchange Commission ("SEC"), no later than five (5) business
days after Effective Time, a registration statement on Form S-8 relating to
the shares of Parent Common Stock issuable with respect to the Company
Options assumed by Parent in accordance with this Section 1.5(c). This
Section 1.5(c) will survive the consummation of the Merger and the
Effective Time, is intended to benefit and may be enforced by each of the
persons who hold Company Options and/or Company Warrants and will be
binding on all successors and assigns of Parent and the Surviving
Corporation.
(d) If any shares of Company Common Stock outstanding immediately
prior to the Effective Time are unvested or are subject to a repurchase
option, risk of forfeiture or other condition under any applicable
restricted stock purchase agreement or other agreement with the Company,
then (unless such condition terminates by virtue of the Merger pursuant to
the express terms of such agreement) the shares of Parent Common Stock
issued in exchange for such shares of Company Common Stock will also be
unvested and subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such shares of Parent
Common Stock may accordingly be marked with appropriate legends. The
Company shall take all action that may be necessary to ensure that, from
and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock
purchase agreement or other agreement.
1.6 Closing of the Company's Transfer Books. At the Effective Time, (a)
all certificates representing shares of Company Common Stock outstanding
immediately prior to the Effective Time shall automatically be canceled and
retired and shall cease to exist, and all holders of certificates representing
shares of Company Common Stock that were outstanding immediately prior to the
Effective Time shall cease to have any rights as shareholders of the Company,
and (b) the stock transfer books of the Company shall be closed with respect to
all shares of such Company Common Stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Company Common Stock
shall be made on such stock transfer books after the Effective Time. If, after
the Effective Time, a valid certificate previously representing any of such
shares of Company Common Stock (a "Company Stock Certificate") is presented to
the Surviving Corporation or Parent, such Company Stock Certificate shall be
canceled and shall be exchanged as provided in Section 1.7.
3
<PAGE> 213
1.7 Exchange of Certificates.
(a) Exchange Procedures. At or as soon as practicable after the Closing,
the holders of Company Common Stock and Preferred Stock shall surrender their
Company Stock Certificates in exchange for certificates representing Parent
Common Stock or Parent Preferred Stock, as the case may be, pursuant to this
Agreement. Subject to Section 1.7(b), upon such surrender of a Company Stock
Certificate for exchange, (1) the holder of such Company Stock Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of shares of Parent Common Stock that such holder has the right to
receive pursuant to Section 1.5(a)(i), and (2) the Company Stock Certificate so
surrendered shall be canceled. Until surrendered as contemplated by this Section
1.7(a), each Company Stock Certificate shall be deemed, from and after the
Effective Time, to represent only the right to receive shares of Parent Common
Stock or Parent Preferred Stock, as the case may be (and cash in lieu of any
fractional share of Parent Common Stock or Parent Preferred Stock as
contemplated by Section 1.7(b)), pursuant to this Agreement. If any Company
Stock Certificate shall have been lost, stolen or destroyed, Parent shall issue
a certificate representing Parent Common Stock or Parent Preferred Stock, as the
case may be, with respect to such lost, stolen or destroyed Company Stock
Certificate in accordance with this Agreement upon delivery by the owner of such
lost, stolen or destroyed Company Stock Certificate to Parent of an appropriate
affidavit as indemnity against any claim that may be made against Parent or the
Surviving Corporation with respect to such Company Stock Certificate.
(b) Fractional Shares. No fractional shares of Parent Common Stock or
Parent Preferred Stock shall be issued in connection with the Merger, and no
certificates for any such fractional shares shall be issued. In lieu of such
fractional shares, any holder of Company Common Stock or Company Preferred Stock
who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock or Parent Preferred Stock (after aggregating all fractional shares
of Parent Common Stock and Parent Preferred Stock, respectively, issuable to
such holder) shall, upon surrender of such holder's Company Stock
Certificate(s), be paid in cash the dollar amount (rounded to the nearest whole
cent), without interest, determined by multiplying such fraction by the
Designated Parent Stock Price. The "Designated Parent Stock Price" shall be the
closing sales price of one share of Parent Common Stock as reported on the
Nasdaq National Market on the Closing Date.
(c) No Liability. Neither Parent nor the Surviving Corporation shall be
liable to any holder or former holder of Company Common Stock for any shares of
Parent Common Stock or Parent Preferred Stock (or dividends or distributions
with respect thereto), or for any cash amounts, delivered to any public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 Dissenting Shares. Notwithstanding anything to the contrary contained
in this Agreement, any shares of Company Common Stock or Company Preferred Stock
outstanding immediately prior to the Effective Time that were not voted in favor
of the Merger and are held by shareholders who have complied with the applicable
provisions of Chapter 13 of the CGCL (the "Dissenting Shares") shall not be
converted into or represent the right to receive Parent Common Stock or Parent
Preferred Stock in accordance with Sections 1.5(a)(i) and 1.5(a)(ii), as the
case may be (or cash in lieu of fractional shares in accordance with Section
1.7(b)), and each holder of Dissenting Shares shall be entitled only to such
rights as may be granted to such holder under Chapter 13 of the CGCL. From and
after the Effective Time, a holder of Dissenting Shares shall not have and shall
not be entitled to exercise any of the voting rights or other rights of a
shareholder of the Surviving Corporation. If any holder of Dissenting Shares
shall fail to assert or perfect, or shall waive, rescind, withdraw or otherwise
lose, such holder's right to dissent and obtain payment under Chapter 13 of the
CGCL, then such shares shall automatically be converted into and shall represent
only the right to receive (upon the surrender of Company Stock Certificate(s)
previously representing such shares) Parent Common Stock or Parent Preferred
Stock in accordance with Section 1.5(a)(i) (and cash in lieu of any fractional
share in accordance with Section 1.7(b)).
1.9 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368(a) of
the Code. The parties to this Agreement hereby adopt this Agreement as a "plan
of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of
the United States Treasury Regulations.
4
<PAGE> 214
1.10 Accounting Treatment. For accounting purposes, the Merger is intended
to be treated as a purchase. For purposes of determining the purchase price, the
measurement date shall be December 18, 1997 based on the average of the closing
bid and ask prices per share of Parent's Common Stock as traded on the Nasdaq
Stock Market on such date (the "Applicable Price").
1.11 Further Action. If, at any time after the Effective Time, any further
action is determined by Parent to be necessary to carry out the purposes of this
Agreement or to vest the Surviving Corporation or Parent with full right, title
and possession of and to all rights and property of Merger Sub and the Company,
the officers and directors of the Surviving Corporation and Parent shall be
fully authorized (in the name of Merger Sub, in the name of the Company and
otherwise) to take such action.
SECTION 2. Representations and Warranties of the Company
The Company represents and warrants to Parent and Merger Sub that, except
as set forth in the disclosure schedule prepared by the Company in accordance
with the requirements of Section 10.13 and that has been delivered by the
Company to Parent on the date of this Agreement (the "Company Disclosure
Schedule"):
2.1 Due Organization; No Subsidiaries; Etc.
(a) Each of the Company and each other subsidiary of the Company are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation with full corporate
power and authority: (i) to conduct its business in the manner in which it is
now being conducted (ii) to own and use its assets in the manner in which its
assets are currently owned and used and (iii) to perform its obligations under
all Contracts by which is its bound. The Company has no subsidiaries other than
the subsidiaries disclosed in Part 2.1 of the Company Disclosure Schedule
(collectively the "Company Subsidiaries").
(b) The Company and the Company Subsidiaries maintain facilities and/or
employees in each state listed in Part 2.1(b) of the Company Disclosure
Schedule. The Company and each Company Subsidiary is duly qualified to do
business as a foreign corporation, and is in good standing, under the laws of
all jurisdictions where the nature of its business requires such qualification
and where the failure to be so qualified would have a Material Adverse Effect on
the Company or on the ability of the Company to consummate the transactions
contemplated hereby.
2.2 Articles of Incorporation and Bylaws; Records. The Company has
delivered or made available to Parent accurate and complete copies of: (1) the
Company's articles of incorporation and bylaws as currently in effect, including
all amendments thereto; (2) the stock records of the Company; and (3) the
minutes and other records of the meetings and other proceedings (including any
actions taken by written consent or otherwise without a meeting) of the
shareholders of the Company, the Board of Directors of the Company and all
committees of the Board of Directors of the Company. The Company is not in
violation of any of the provisions of its articles of incorporation or bylaws.
The books of account, stock records, minute books and other records of the
Company are accurate and complete in all material respects, and have been
maintained in accordance with prudent business practices.
2.3 Capitalization. The authorized capital stock of the Company consists
of: (i) 20,000,000 shares of Company Common Stock, of which 6,043,990 shares
have been issued and are outstanding as of the date hereof; and (ii) 20,000,000
shares of Company Preferred Stock, no par value, of which (A) 10,000,000 shares
of which have been designated as "Preferred" shares, 1,111,951 shares of which
are issued and outstanding as of the date hereof, and (B) 10,000,000 shares of
which have been designated as "Preferred B" shares, 1,405,208 of which are
issued and outstanding as of the date hereof. As of the date hereof, 1,088,951
shares of Preferred and 1,405,208 shares of Preferred B are collectively held by
W.R. Sauey, Flambeau Corporation, Flambeau Products Corporation and Seats
Incorporated (such parties collectively referred to herein as the "Sauey
Affiliates"). The Company Preferred Stock is convertible into Company Common
Stock at the rate of one share of Company Common Stock for each 0.8 of a share
of Company Preferred Stock and such Preferred Stock has the rights, preferences
and privileges set forth in the Company's Articles of Incorporation, as
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amended. Part 2.3 of the Company Disclosure Schedule sets forth, as of the date
hereof, the names of the Company's shareholders and the number of shares of
Company Common Stock and Company Preferred Stock owned of record by each of such
shareholders. All of the outstanding shares of Company Common Stock and Company
Preferred Stock have been duly authorized and validly issued, and are fully paid
and non-assessable, and none of such shares is subject to any repurchase option
or restriction on transfer other than restrictions imposed by federal or state
securities laws and other than repurchase options exercisable by the Company
upon termination of employment. Part 2.3 of the Company Disclosure Schedule,
sets forth all outstanding subscriptions, options, calls, warrants or other
rights (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of the Company. All outstanding shares of
Company Common Stock and Company Preferred Stock have been issued in compliance
with all applicable securities laws and other applicable Legal Requirements.
Except for shares repurchased upon termination of employment, the Company has
never repurchased, redeemed or otherwise reacquired any shares of its capital
stock or other securities. Other than the irrevocable proxies set forth on Part
2.3 of the Company Disclosure Schedule, there are no preemptive or similar
rights with respect to the Company's capital stock. There is no Company Contract
(or, to the Company's knowledge, any other agreement or arrangement to which the
Company is not a party) relating to the voting or registration of, or
restricting any Person from purchasing, selling, pledging or otherwise disposing
of (or granting any option or similar right with respect to), any shares of
Company Common Stock. There is no shareholder rights plan (or similar plan
commonly referred to as a "poison pill") or Contract under which Company is or
may become obligated to sell or otherwise issue any shares of its capital stock
or any other securities.
2.4 Financial Statements.
(a) The Company has delivered to Parent the following financial statements
and notes (collectively, the "Company Financial Statements"):
(i) the audited balance sheets of the Company as of March 29, 1997,
March 30, 1996 and March 25, 1995, and the related audited statements of
income, statements of shareholders' equity and statements of cash flows of
the Company for the years then ended, together with the notes thereto and
the unqualified report of an independent auditor relating thereto; and
(ii) The unaudited balance sheet of the Company as of September 27,
1997, and the related unaudited statement of income of the Company for the
six-month period then ended, and the unaudited balance sheets of the
Company as of October 28, 1997 and the related unaudited statements of
income of the Company for the months then ended.
(b) The Company Financial Statements present fairly the financial position
of the Company as of the respective dates thereof and the results of operations
and cash flows of the Company for the periods covered thereby. The Company
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except that the financial statements referred to in Section 2.4(a)(ii)
do not contain footnotes and are subject to normal and recurring year-end audit
adjustments, which will not, individually or in the aggregate, be material in
magnitude).
2.5 Absence of Changes. Since September 27, 1997 through the date of this
Agreement:
(a) there has not been any material adverse change in the business,
condition, assets, liabilities, operations or financial performance of the
Company or any of the Company Subsidiaries, and, to the knowledge of the
Company, no event has occurred that could reasonably be expected to have a
Material Adverse Effect on the Company and its subsidiaries taken as a
whole;
(b) there has not been any loss, damage or destruction to any of the
Company's assets of the Company or any of the Company Subsidiaries (whether
or not covered by insurance) that could reasonably be expected to have a
Material Adverse Effect on the Company;
(c) neither the Company nor any Company Subsidiaries has declared,
accrued, set aside or paid any dividend stock split, combination or
reclassification or made any other distribution in respect of any
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shares of capital stock and has not repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities;
(d) neither the Company nor any Company Subsidiary has sold, issued or
authorized the issuance of (i) any capital stock or other security (except
for Company Common Stock issued upon the exercise of outstanding Company
Options), (ii) any option, call, warrant or right to acquire, or otherwise
relating to, any capital stock or any other security (except for Company
Options described in Part 2.3 of the Company Disclosure Schedule), or (iii)
any instrument convertible into or exchangeable for any capital stock or
other security;
(e) there has been no amendment to the articles of organization or
bylaws of the Company or any Company Subsidiary, and neither the Company
nor any Company Subsidiary has effected or been a party to any Company
Acquisition Transaction, recapitalization, reclassification of shares,
stock split, reverse stock split or similar transaction;
(f) neither the Company nor any Company Subsidiary has amended or
waived any of its rights under, or permitted the acceleration of vesting
under (i) any provision of any agreement evidencing any outstanding Company
Option or Company Warrant, or (ii) any restricted stock purchase agreement;
(g) neither the Company nor any Company Subsidiary has formed any
subsidiary or acquired any equity interest in any other Entity;
(h) neither the Company nor any Company Subsidiary has made any
capital expenditure which, when added to all other capital expenditures
made since September 27, 1997, exceeds $100,000 in the aggregate;
(i) neither the Company nor any Company Subsidiary has (i) entered
into any Material Company Contract (as defined in Section 2.10(a)), or (ii)
amended or prematurely terminated, or waived any material right or remedy
under, any Material Company Contract to which it is or was a party or under
which it has or had any material rights or obligations;
(j) neither the Company nor any Company Subsidiary has (i) acquired,
leased or licensed any right or other asset from any other Person, (ii)
sold or otherwise disposed of, or leased or licensed, any right or other
asset to any other Person, or (iii) waived or relinquished any right,
except for purchases of inventory and sales of products in the ordinary
course of business and except for immaterial rights or other immaterial
assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with the Company's past practices;
(k) neither the Company nor any Company Subsidiary has written off as
uncollectible, or established any extraordinary reserve with respect to,
any account receivable or other indebtedness in excess of $25,000
individually or $100,000 in the aggregate;
(l) neither the Company nor any Company Subsidiary has made any pledge
of any of its assets or otherwise permitted any of its assets to become
subject to any Encumbrance, except for pledges of assets valued at $100,000
or less, individually or in the aggregate, made in the ordinary course of
business and consistent with the Company's past practices;
(m) neither the Company nor any Company Subsidiary has (i) lent money
to any Person, or (ii) incurred or guaranteed any indebtedness for borrowed
money;
(n) neither the Company nor any Company Subsidiary has (i)
established, adopted or amended any Employee Benefit Plan, (ii) paid any
bonus or made any profit-sharing or similar payment to, or increased the
amount of the wages, salary, commissions, fringe benefits or other
compensation or remuneration payable to, any of its directors, officers or
employees, (iii) hired any new employee, in either case except in the
ordinary course of business and consistent with past practices or (iv)
entered into any severance or employment agreement with any person;
(o) neither the Company nor any Company Subsidiary has changed any of
its methods of accounting or accounting practices in any material respect;
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(p) neither the Company nor any Company Subsidiary has made any Tax
election;
(q) neither the Company nor any Company Subsidiary has commenced or
settled any Legal Proceeding;
(r) neither the Company nor any Company Subsidiary has entered into
any material transaction or taken any other material action outside the
ordinary course of business or inconsistent with its past practices;
(s) neither the Company nor any Company Subsidiary has made any
material write-down of inventory; and
(t) neither the Company nor any Company Subsidiary has agreed or
committed to take any of the actions referred to in clauses "(c)" through
"(s)" above.
2.6 Title to Assets.
(a) The Company and each Company Subsidiary owns, and has good and valid
title to all assets purported to be owned by it, including all of the assets
reflected in the Company Financial Statements and all other assets reflected in
the Company's books and records as being owned by the Company. All of said
assets are owned by the Company and each Company Subsidiary free and clear of
any liens or other Encumbrances, except for (i) any lien for current taxes not
yet due and payable, and (ii) minor liens that have arisen in the ordinary
course of business and that would not (in any case or in the aggregate) have a
Material Adverse Effect on the Company.
(b) Part 2.6(b) of the Company Disclosure Schedule identifies all assets
that are being leased or licensed to the Company and each Company Subsidiary
that involve obligations of the Company in excess of $100,000 on an individual
basis.
2.7 Accounts Receivable; Loans and Advances.
(a) All accounts receivable of the Company and each Company Subsidiary that
are reflected in the Company Financial Statements or in the accounting records
of the Company as of the date hereof (collectively, the "Company Accounts
Receivable") represent valid obligations arising from sales actually made or
services actually performed in the ordinary course of business. The Company
Accounts Receivable are current and collectible net of any respective reserves
shown in the Company Financial Statements or on the accounting records of the
Company as of the date hereof (which reserves are adequate and calculated
consistent with past practice). There is no contest, claim, or right of set-off,
other than returns in the ordinary course of business, under any Contract with
any obligor of any Company Accounts Receivable relating to the amount or
validity of such Company Accounts Receivable.
(b) Part 2.7(b) of Company Disclosure Schedule contains an accurate and
complete list of all loans and advances made by the Company or any Company
Subsidiary (and pursuant to which amounts are outstanding as of the date of this
Agreement) to any employee, director, consultant or independent contractor of
Company or any Company Subsidiary, other than routine travel advances made to
employees in the ordinary course of business.
2.8 Equipment; Leasehold. The real property leased by and other tangible
assets leased or owned by the Company and each Company Subsidiary are adequate
for the uses to which they are being put, are in good condition and repair
(ordinary wear and tear excepted) and are adequate for the conduct of the
Company's business in the manner in which such business is now being conducted.
(a) Neither the Company nor any Company Subsidiary owns any real property
or any material interest in real property. Part 2.8(b) of the Company Disclosure
Schedule describes all leases of real property held by the Company and each
Company Subsidiary.
2.9 Proprietary Assets.
(a) To the knowledge of the Company, the Company has good and valid title
to all Company Proprietary Assets free and clear of all liens and other
Encumbrances, and has a valid right to use all Proprietary Assets.
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Neither the Company nor any Company Subsidiary is obligated to make any payment
to any Person for the use of any Company Proprietary Asset. To the knowledge of
the Company, the Company and each Company Subsidiary is free to use, modify,
copy, distribute, sell, license or otherwise exploit each of the Company
Proprietary Assets on an exclusive basis. Part 2.9 of the Company Disclosure
Schedule lists all patents held by and patent applications filed by the Company.
The Company is the valid assignee of record and owner of each of such patents
and patent applications and all such patent applications are being actively
prosecuted and none of such patents or patent applications have been abandoned.
(b) The Company and each Company Subsidiary has taken reasonable measures
and precautions necessary to protect and maintain the confidentiality and
secrecy of all Company Proprietary Assets (except Company Proprietary Assets
whose value would be unimpaired by public disclosure) and otherwise to maintain
and protect the value of all Company Proprietary Assets. Neither the Company nor
any Company Subsidiary has disclosed or delivered or permitted to be disclosed
or delivered to any Person, and no Person (other than the Company) has access to
or has any rights with respect to any Company Proprietary Asset, in either case
except pursuant to a valid non-disclosure agreement.
(c) To the knowledge of the Company, none of the Company Proprietary Assets
infringes or conflicts with any Proprietary Asset owned or used by any other
Person. To the knowledge of the Company, the Company nor any Company Subsidiary
is infringing, misappropriating or making any unlawful use of, and the Company
has not at any time infringed, misappropriated or made any unlawful use of, or
received any notice or other communication of any actual, alleged, possible or
potential infringement, misappropriation or unlawful use of, any Proprietary
Asset owned or used by any other Person. To the knowledge of the Company, no
other Person is infringing, misappropriating or making any unlawful use of, and
no Proprietary Asset owned or used by any other Person infringes or conflicts
with, any Company Proprietary Asset.
(d) The Company Proprietary Assets constitute all the Proprietary Assets
necessary to enable the Company to conduct its business in the manner in which
such business has been conducted. Neither the Company nor any Company Subsidiary
has licensed any of the Company Proprietary Assets to any Person on an exclusive
basis, and neither the Company nor any Company Subsidiary has entered into any
covenant not to compete or Contract limiting its ability to exploit fully any of
its Proprietary Assets or to transact business in any market or geographical
area or with any Person.
(e) No shareholder, officer or director of the Company has title to any
Company Proprietary Asset which would be necessary to enable the Company to
conduct its business in the manner in which such business is currently being
conducted.
2.10 Contracts.
(a) Part 2.10(a) of the Company Disclosure Schedule identifies each Company
Contract that constitutes a "Material Company Contract." For purposes of this
Agreement, a "Material Company Contract" shall be deemed to be any Company
Contract:
(i) relating to the employment or engagement of, or the performance of
services by, any employee, consultant or independent contractor which
involves a potential commitment of the Company in excess of $60,000 per
year, including any Company Contract involving severance payments or
acceleration benefits upon a Company Acquisition Transaction;
(ii) relating to the acquisition, transfer, use, development, sharing
or license of any Company Proprietary Asset (except in the ordinary course
of business and except for any Company Proprietary Asset that is licensed
to the Company under any third party software license agreement generally
available to the public at a cost of less than $50,000);
(iii) imposing any material restriction on the Company's or any
Company Subsidiary's right or ability (A) to compete with any other Person,
(B) to acquire any product or other asset or any services from any other
Person, to sell any product or other asset to or perform any services for
any other Person or to transact business or deal in any other manner with
any other Person, or (C) to develop or distribute any Company Proprietary
Asset;
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(iv) creating or involving any agency relationship, distribution
arrangement or franchise relationship involving payments to or from the
Company or obligations in excess of $100,000 per year;
(v) relating to the acquisition, issuance or transfer of any
securities of the Company or any Company Subsidiary under which the Company
has any current rights or obligations;
(vi) creating or relating to the creation of any Encumbrance with
respect to any asset owned or used by the Company or any Company Subsidiary
having a value in excess of $100,000;
(vii) involving or incorporating any guaranty, any pledge, any
performance or completion bond, any indemnity, any right of contribution or
any surety arrangement in excess of $100,000 per year;
(viii) creating or relating to any partnership or joint venture or any
material sharing of revenues, profits, losses, costs or liabilities;
(ix) relating to the purchase or sale of any product or other asset by
or to, or the performance of any services by or for, any Related Party (as
defined in Section 2.18);
(x) entered into outside the ordinary course of business;
(xi) that may not be terminated by the Company or any Company
Subsidiary (without penalty) within 120 days after the delivery of a
termination notice by the Company or any Company Subsidiary and which
involves payments or commitments of $25,000 or more; and
(xii) contemplating or involving (A) the payment or delivery of cash
or other consideration in an amount or having a value in excess of $100,000
in the aggregate, or (B) the performance of services having a value in
excess of $100,000 in the aggregate.)
(b) The Company has delivered to Parent accurate and complete copies of all
Material Company Contracts identified in Part 2.10(a) of the Company Disclosure
Schedule, including all amendments thereto. Each Contract identified in Part
2.10(a) of the Company Disclosure Schedule is valid and in full force and
effect, and is enforceable by the Company in accordance with its terms, subject
to (i) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
(c) Neither the Company nor any Company Subsidiary nor, to the Company's
knowledge, any other party, has materially violated or breached, or committed
any material default under, any Material Company Contract;
(i) to the knowledge of the Company, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of
time) will, or could reasonably be expected to, (A) result in a violation
or breach of any of the provisions of any Material Company Contract, (B)
give any Person the right to declare a default or exercise any remedy under
any Material Company Contract, (C) give any Person the right to accelerate
the maturity or performance of any Material Company Contract, or (D) give
any Person the right to cancel, terminate or modify any Material Company
Contract;
(ii) since September 27, 1997, neither the Company nor any Company
Subsidiary has received any notice or other communication regarding (i) any
actual or possible violation or breach of, or default under, any Material
Company Contract, or (ii) any actual or possible termination of any
Material Company Contract; and
(iii) neither the Company nor any Company Subsidiary has waived any of
its material rights under any Material Company Contract.
2.11 No Undisclosed Liabilities. Except as set forth in the Company
Financial Statements and except for current liabilities incurred in the ordinary
course of business since October 28, 1997, neither the Company nor any Company
Subsidiary has accrued, contingent or other liabilities of any nature, either
matured or unmatured.
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2.12 Compliance With Legal Requirements. The Company and each Company
Subsidiary is, and has at all times been, in compliance with all applicable
Legal Requirements, except where the failure to comply with such Legal
Requirements has not had and will not have a Material Adverse Effect on the
Company. Neither the Company nor any Company Subsidiary has received any notice
or other communication from any Governmental Body regarding any actual or
possible violation of, or failure to comply with, any Legal Requirement;
provided, however, that this representation shall not apply to the matters
covered by the representations contained in Sections 2.14, 2.15 and 2.16.
2.13 Governmental Authorizations. The Company and each Company Subsidiary
has all Governmental Authorizations necessary to enable the Company and such
Company Subsidiary to conduct its business in the manner in which its business
is currently being conducted, except for Governmental Authorizations the failure
of which to obtain would not have a Material Adverse Effect on the Company. The
Company and each Company Subsidiary is, and at all times has been, in compliance
with the material terms and requirements of such Governmental Authorizations,
except for any noncompliance which would not have a Material Adverse Effect on
the Company. Neither the Company nor any Company Subsidiary has received any
notice or other communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification of
any Governmental Authorization.
2.14 Tax Matters.
(a) All Material Tax Returns required to be filed by or on behalf of the
Company with any Governmental Body with respect to any transaction occurring or
any taxable period ending on or before the date hereof (the "Company Returns")
(i) have been filed when due, and (ii) have been accurately and completely
prepared in compliance with all applicable Legal Requirements. The Company and
each Company Subsidiary has, within the time (including any extensions of
applicable due dates) and in the manner prescribed by law, paid all Taxes that
are due and payable, except Taxes that, individually and in the aggregate, are
not material. The Company Financial Statements fully accrue all actual and
contingent liabilities for Taxes with respect to all periods through the dates
thereof in accordance with generally accepted accounting principles.
(b) No claim or Legal Proceeding is pending or has been threatened against
or with respect to the Company or any Company Subsidiary in respect of any Tax.
There are no unsatisfied liabilities for Taxes (including liabilities for
interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by the Company
or any Company Subsidiary. There are no liens for Taxes upon any of the assets
of the Company or any Company Subsidiary, except liens for current Taxes not yet
due and payable.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Company Disclosure Schedule contains a list of all
salaried employees of the Company as of the date of this Agreement whose annual
salaries are greater than $60,000, and correctly reflects their salaries, any
other compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. Neither the Company nor any Company Subsidiary
is a party to any collective bargaining contract or other Contract with a labor
union involving any of its employees.
(b) Part 2.15(b) of the Company Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, health, insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement (individually referred to as a "Company Plan" and
collectively referred to as the "Company Plans") sponsored, maintained,
contributed to or required to be contributed to by the Company or any Company
Subsidiary for the benefit of any current or former employee of the Company or
any Company Subsidiary.
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(c) Neither the Company nor any Company Subsidiary maintains, sponsors or
contributes to, and, to the knowledge of the Company, neither the Company nor
any Company Subsidiary has at any time in the past maintained, sponsored or
contributed to, any employee pension benefit plan (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
subject to Title IV of ERISA for the benefit of employees or former employees of
the Company (a "Company Defined Benefit Plan").
(d) Neither the Company nor any Company Subsidiary maintains, sponsors or
contributes to any employee welfare benefit plan (as defined in Section 3(1) of
ERISA, whether or not excluded from coverage under specific Titles or Merger
Subtitles of ERISA) for the benefit of employees or former employees of the
Company or any Company Subsidiary.
(e) With respect to each Company Plan, the Company has made available to
Parent:
(i) an accurate and complete copy of such Company Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report (if required
under ERISA) with respect to such Company Plan for the three most recent
plan years;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each summary of material modifications
thereto (if required under ERISA) with respect to such Company Plan, and
(B) each material employee communication relating to such Company Plan;
(iv) if such Company Plan is funded through a trust or any third party
funding vehicle, an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and
complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Company Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and recordkeeping
agreements; and
(vi) an accurate and complete copy of the most recent determination,
notification, advisory and/or opinion letter received from the Internal
Revenue Service with respect to such Company Plan (if such Company Plan is
intended to be qualified under Section 401(a) of the Code).
(f) Neither the Company nor any Company Subsidiary is required to be, and,
to the best of the knowledge of the Company, the Company has never been required
to be, treated as a single employer with any other Person under Section
4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code. Neither the
Company nor any Company Subsidiary has ever been a member of an "affiliated
service group" within the meaning of Section 414(m) of the Code. To the of the
knowledge of the Company, neither the Company nor any Company Subsidiary has
ever made a complete or partial withdrawal from a "multiemployer plan" (as
defined in Section 3(37) of ERISA) resulting in "withdrawal liability" (as
defined in Section 4201 of ERISA), without regard to subsequent reduction or
waiver of such liability under either Section 4207 or 4208 of ERISA.
(g) Neither the Company nor any Company Subsidiary has any plan or
commitment to create any additional Company employee benefit plan within the
meaning of ERISA, or to modify or change any such plan (other than to comply
with applicable law).
(h) No Company Welfare Plan provides death, medical or health benefits
(whether or not insured) with respect to any current or former employee of the
Company after any such employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant to
Section 4980B of the Code, (ii) deferred compensation benefits accrued as
liabilities on the balance sheet as of September 27, 1997, or (iii) benefits the
full cost of which are borne by current or former employees of the Company or
any Company Subsidiary (or their beneficiaries)).
(i) With respect to each of the Company Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA")
have been complied with in all material respects.
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(j) Each of the Company Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements, including
ERISA and the Code.
(k) Each of the Company Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such determination
letter should be revoked.
(l) Neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any bonus payment, golden parachute payment,
severance payment or other payment to any current or former employee or director
of the Company or any Company Subsidiary (whether or not under any Company
Plan), or materially increase the benefits payable under any Company Plan, or
result in any acceleration of the time of payment or vesting of any such
benefits.
(m) The Company and each Company Subsidiary is in compliance in all
material respects with all applicable Legal Requirements and Contracts relating
to employment, employment practices, employee compensation, wages, bonuses and
terms and conditions of employment.
2.16 Environmental Matters. The Company and each Company Subsidiary is and
has at all times been in compliance, in all material respects, with all
applicable Environmental Laws. The Company and each Company Subsidiary possesses
all permits and other Governmental Authorizations required under applicable
Environmental Laws, and the Company and each Company Subsidiary is and has at
all times been in compliance with the terms and requirements of all such
Governmental Authorizations, except where the failure to possess such
Governmental Authorizations or failure to be in compliance would not have a
Material Adverse Effect on the Company. Neither the Company nor any Company
Subsidiary has received any notice or other communication (whether from a
Governmental Body, citizens group, employee or otherwise) that alleges that the
Company or any Company Subsidiary is not in compliance with any Environmental
Law. To the knowledge of the Company, no current or prior owner of any property
leased or owned by the Company or any Company Subsidiary has received any notice
or other communication (whether from a Governmental Body, citizens group,
employee or otherwise) that alleges that such current or prior owner or the
Company is not or was not in compliance with any Environmental Law. (For
purposes of this Section 2.16 and Section 3.16: (i) "Environmental Law" means
any federal, state, local or foreign Legal Requirement relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata), including any law or
regulation relating to emissions, discharges, releases or threatened releases of
Materials of Environmental Concern, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern; and (ii) "Materials of
Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now or in the future regulated by any Environmental Law or that is otherwise
a danger to health, reproduction or the environment.)
2.17 Insurance. The business and properties of the Company and each
Company Subsidiary are insured for the benefit of the Company and each Company
Subsidiary in amounts deemed adequate by the Company's management against risks
usually insured against by persons operating businesses similar to those of the
Company in the localities where such properties are located. The Company has
received no notice of cancellation or refusal of coverage and copies of all of
such insurance policies have been delivered to Parent.
2.18 Related Party Transactions. (a) No Related Party has, and no Related
Party has at any time since March 31, 1995 had, any direct or indirect interest
in any material asset used in or otherwise relating to the business of the
Company or any Company Subsidiary in a manner that would be required to be
disclosed under Item 404 of Regulation S-K promulgated by the SEC; (b) no
Related Party is, or has at any time since March 31, 1995 been, indebted to the
Company or any Company Subsidiary in a manner that would be required to be
disclosed under Item 404 of Regulation S-K promulgated by the SEC; (c) since
March 31, 1995, no Related Party has entered into, or has had any direct or
indirect financial interest in, any Material Company Contract, transaction or
business dealing involving the Company or any Company Subsidiary in a manner
that would be required to be disclosed under Item 404 of Regulation S-K
promulgated by the SEC;
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(d) no Related Party is competing, or has at any time since March 31, 1995
competed, directly or indirectly, with the Company; and (e) no Related Party has
any claim or right against the Company or any Company Subsidiary (other than
rights to receive compensation for services performed as an employee of the
Company or any Company Subsidiary). (For purposes of this Section 2.18, each of
the following shall be deemed to be a "Related Party": (i) each individual who
is, or who has at any time since March 31, 1995 been, an officer or director of
the Company or any Company Subsidiary; (ii) each individual who is, or who at
any time since March 31, 1995 been, a member of the immediate family of any of
the individuals referred to in clause "(i)" above; (iii) any shareholder of the
Company or any Company Subsidiary, provided, however, that with respect to
shareholders who hold less than 5% of the outstanding Common Stock of the
Company or any Company Subsidiary determined on a as-if-converted basis, such
representations are made only to the knowledge of the Company or any Company
Subsidiary, and (iv) any trust or other Entity (other than the Company or any
Company Subsidiary) in which any one of the individuals referred to in clauses
"(i)," "(ii)" and "(iii)" above holds (or in which more than one of such
individuals collectively hold), beneficially or otherwise, a material voting,
proprietary or equity interest.)
2.19 Legal Proceedings; Orders. There is no pending Legal Proceeding, and,
to the knowledge of the Company, no Person has threatened to commence any Legal
Proceeding that: (i) may have a Material Adverse Effect on the Company, any
Company Subsidiaries or their respective businesses; or (ii) challenges, or that
may have the effect of preventing, delaying, making illegal or otherwise
interfering with, the Merger or any of the other transactions contemplated by
this Agreement. To the knowledge of the Company, no event has occurred, and no
claim, dispute or other condition or circumstance exists that could reasonably
be expected to give rise to or serve as a basis for the commencement of any such
Legal Proceeding. There is no order, writ, injunction, judgment or decree to
which the Company or any Company Subsidiary, or any of the assets owned or used
by the Company or any Company Subsidiary, is subject. To the knowledge of the
Company, no officer or other employee of the Company or any Company Subsidiary
is subject to any order, writ, injunction, judgment or decree that prohibits
such officer or other employee from engaging in or continuing any conduct,
activity or practice relating to the Company's or such Company Subsidiary's
business. There is no action, suit, proceeding or investigation by the Company
currently pending or which the Company or any Company Subsidiary intends to
initiate.
2.20 Authority; Binding Nature of Agreement. The Company has full
corporate power and authority to enter into and to perform its obligations under
this Agreement; and the execution, delivery and performance by the Company of
this Agreement have been duly authorized by all necessary action on the part of
the Company, its Board of Directors and its shareholders. This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as enforcement thereof
may be limited by (i) laws of general application relating to bankruptcy,
insolvency, moratorium, reorganization or other similar laws, both state and
federal, affecting the enforcement of creditors' rights or remedies in general,
and (ii) rules of law governing specific performance, injunctive relief and
other equitable remedies.
2.21 Non-contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of the Company's or any Company Subsidiary's articles of
organization or bylaws;
(b) with respect to the Company or any Company Subsidiary, contravene,
conflict with or result in a violation of, or give any Governmental Body or
other Person the right to challenge any of the transactions contemplated by
this Agreement or to exercise any remedy or obtain any relief under, any
Legal Requirement or any order, writ, injunction, judgment or decree to
which the Company or any Company Subsidiary, or any of the assets owned or
used by the Company or any Company Subsidiary, is subject;
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(c) with respect to the Company or any Company Subsidiary, contravene,
conflict with or result in a violation of any of the terms or requirements
of, or give any Governmental Body the right to revoke, withdraw, suspend,
cancel, terminate or modify, any Governmental Authorization that is held by
the Company or any Company Subsidiary or that otherwise relates to the
Company's or any Company Subsidiary's business or to any of the assets
owned or used by the Company or any Company Subsidiary;
(d) contravene, conflict with or result in a violation or breach of,
or result in a default under, any provision of any Material Company
Contract, or give any Person the right to (i) declare a default or exercise
any remedy under any Material Company Contract, (ii) accelerate the
maturity or performance of any Material Company Contract, or (iii) cancel,
terminate or modify any Material Company Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
or any Company Subsidiary (except for minor liens that will not, in any
case or in the aggregate, materially detract from the value of the assets
subject thereto or would have a Material Adverse Effect on the Company).
Except as may be required by the CGCL and state securities or blue sky
laws, and except as set forth in Part 2.21 of the Company Disclosure Schedule,
the Company is not and will not be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with (x) the
execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, or (y) the consummation of the Merger
or any of the other transactions contemplated by this Agreement.
2.22 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Common Stock and Preferred Stock of the Company
outstanding as of the record date of the Company Shareholders' Meeting (as
defined below), voting as separate classes (the "Requisite Company Vote"), is
the only vote of the holders of any class or series of Company's capital stock
necessary to adopt and approve this Agreement, the Merger and the transactions
contemplated thereby.
2.23 Company Action. The Board of Directors of Company (at a meeting duly
called and held) has (a) unanimously determined that the Merger is advisable and
fair and in the best interests of Company and its shareholders, (b) unanimously
approved this Agreement and the Merger in accordance with the applicable
provisions of the CGCL, (c) unanimously recommended the adoption and approval of
this Agreement and the Merger by the holders of Company Common Stock and
Preferred Stock and directed that this Agreement and the Merger be submitted for
consideration by the Company's shareholders at the Company Shareholders'
Meeting, and (d) adopted a resolution having the effect of causing Company not
to be subject, to the extent permitted by applicable law, to any state takeover
law that may purport to be applicable to the Merger and the transactions
contemplated thereby. Prior to the execution of those certain Voting Agreements
of even date herewith between the Company and each of the individuals identified
on Exhibit E, the Board of Directors of the Company approved said Voting
Agreements and the transactions contemplated thereby.
2.24 Full Disclosure.
(a) To the Company's knowledge, all documents, contracts, instruments,
certificates, notices, consents, affidavits, letters, telegrams, telexes,
written statements, schedules (including the Company Disclosure Schedule),
exhibits (including the Exhibits to this Agreement) and any other papers
whatsoever (excluding in all cases drafts and interim versions marked as such or
apparent as such on their face) delivered to Parent by the Company in connection
with this Agreement and the transactions contemplated thereby, are true and
complete copies thereof. The representations and warranties of the Company
contained in this Agreement, as modified by the Company Disclosure Schedule,
contain no untrue statements of any material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not false or
misleading.
(b) The information supplied by the Company for inclusion in the Joint
Proxy Statement (including the Company Financial Statements) will not, as of the
date of the Joint Proxy Statement or as of the date of the Parent Stockholders'
Meeting (as defined in Section 5.5), and in each case, as of the date such
information is
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prepared or presented, contain any statement that is inaccurate or misleading
with respect to any material fact, or (ii) omit to state any material fact
necessary in order to make such information not false or misleading.
2.25 Finder's Fee. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the Merger
or any of the other transactions contemplated thereby based upon arrangements
made by or on behalf of the Company.
SECTION 3. Representations and Warranties of Parent and Merger Sub
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the disclosure schedule prepared by Parent in accordance with the
requirements of Section 10.13 and that has been delivered by Parent to the
Company on the date of this Agreement (the "Parent Disclosure Schedule"):
3.1 Due Organization, Etc.
(a) Each of Parent, Merger Sub and each other subsidiary of Parent are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation, and each of them have
full corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound. Parent has no
subsidiaries other than Merger Sub and the subsidiaries disclosed in Part 3.1 of
the Parent Disclosure Schedule (collectively, the "Parent Subsidiaries").
(b) Parent and the Parent Subsidiaries maintain facilities and/or employees
in each state listed in Part 3.1(b) of the Parent Disclosure Schedule. Each of
Parent, Merger Sub and each Parent Subsidiary is duly qualified to do business
and is in good standing in each jurisdiction in which the failure to be so
qualified would have a Material Adverse Effect on Parent or on the ability of
Parent or Merger Sub to consummate the transactions contemplated hereby.
3.2 Certificate of Incorporation and Bylaws; Records. Parent has delivered
or made available to Company accurate and complete copies of: (1) Parent's
certificate of incorporation and bylaws as currently in effect, including all
amendments thereto; (2) the stock records of Parent; and (3) the minutes and
other records of the meetings and other proceedings (including any actions taken
by written consent or otherwise without a meeting) of the stockholders of
Parent, the Board of Directors of Parent and all committees of the Board of
Directors of Parent. Parent is not in violation of any of the provisions of its
certificate of incorporation or bylaws. The books of account, stock records,
minute books and other records of Parent are accurate and complete in all
material respects, and have been maintained in accordance with prudent business
practices.
3.3 Capitalization, Etc. The authorized capital stock of Parent consists
of: (i) 40,000,000 shares of Common Stock, $0.005 par value per share, of which
7,932,951 shares have been issued and are outstanding as of the date hereof; and
(ii) 10,000,000 shares of preferred stock, $0.005 par value per share, none of
which are outstanding. All of the outstanding shares of Parent, Merger Sub and
each Parent Subsidiary capital stock have been duly authorized and validly
issued, and are fully paid and non-assessable, and none of such shares is
subject to any repurchase option or restriction on transfer other than
restrictions imposed by federal and state securities laws. All outstanding
shares of Parent, Merger Sub and Parent Subsidiaries capital stock have been
issued in compliance with all applicable securities laws and other applicable
Legal Requirements. Part 3.3 of the Parent Disclosure Schedule sets forth, as of
the date hereof, (i) the names of each holder of 5% or more of the outstanding
voting stock of Parent together with the number of shares held by each such
holder, and (ii) all outstanding subscriptions, options, calls, warrants or
other rights (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of Parent. All of the outstanding shares of
capital stock of Merger Sub and each Parent Subsidiary are owned beneficially
and of record by Parent, free and clear of any Encumbrances. The Shares, when
issued by Parent to the Company's shareholders will be duly authorized, validly
issued, fully paid and non-assessable, will be issued in compliance with
applicable federal and state securities laws and will be free and clear of all
Encumbrances as a result of any actions by Parent. Parent has never repurchased,
redeemed or otherwise reacquired any shares of its capital stock or other
securities. Other than the irrevocable proxies set forth on Part 3.3 of the
Parent Disclosure Schedule, there are
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no preemptive or similar rights with respect to the Parent's capital stock.
There is no Parent Contract (or, to Parent's knowledge, any other agreement or
arrangement to which Parent is not a party) relating to the voting or
registration of, or restricting any Person from purchasing, selling, pledging or
otherwise disposing of (or granting any option or similar right with respect
to), any shares of Parent Common Stock. There is no stockholder rights plan (or
similar plan commonly referred to as a "poison pill") or Contract under which
Parent is or may become obligated to sell or otherwise issue any shares of its
capital stock or any other securities.
3.4 SEC Filings; Financial Statements
(a) Parent has delivered to the Company accurate and complete copies
(including unredacted copies of all exhibits) of each report, schedule,
registration statement and definitive proxy statement filed by Parent with the
SEC since January 1, 1997 (the "Parent SEC Documents"), which are all the
reports and documents required to be filed by Parent with the SEC since January
1, 1997. Each of the Parent SEC Documents was timely filed by the Parent in
accordance with the rules and regulations of the SEC and the NASD. As of the
time it was filed with the SEC (or, if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing): (i) each of the
Parent SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may be); and
(ii) none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements (including, in each case, any
notes related thereto) contained in the Parent SEC Documents: (i) complied as to
form in all material respects with the published rules and regulations of the
SEC applicable thereto; (ii) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such financial statements
and, in the case of unaudited statements, as permitted by Form 10-Q of the SEC,
and except that unaudited financial statements may not contain footnotes and are
subject to year-end audit adjustments); and (iii) fairly present the
consolidated financial position of Parent and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of Parent
and its subsidiaries for the periods covered thereby.
(c) Parent has furnished to the Company a complete and accurate copy of any
amendments, supplements or modifications that have not yet been filed with the
SEC to agreements, documents or other instruments that have been previously
filed by Parent with the SEC pursuant to the Securities Act or the Exchange Act,
if any.
(d) Parent has furnished the Company the unaudited balance sheets of Parent
as of October 31, 1997 and the related unaudited statements of income of Parent
for the months then ended. Such financial statements fairly present the
financial position of Parent as of the respective dates thereof and the results
of operations and cash flows of Parent for the periods covered thereby. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except that they do not contain footnotes and are subject to normal and
recurring year-end adjustments, which will not, individually or in the aggregate
by material in magnitude). The financial statements referred to in subsection
(b) and this subsection (d) are hereinafter referred to as the "Parent Financial
Statements."
3.5 Absence of Changes. Since September 30, 1997 through the date of this
Agreement:
(a) there has not been any material adverse change in the business,
condition, assets, liabilities, operations or financial performance of
Parent or any of the Parent Subsidiaries, and, to the knowledge of Parent,
no event has occurred that could reasonably be expected to have a Material
Adverse Effect on Parent and its subsidiaries taken as a whole;
(b) there has not been any loss, damage or destruction to any of the
assets of Parent or any of the Parent Subsidiaries (whether or not covered
by insurance) that could reasonably be expected to have a Material Adverse
Effect on Parent;
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(c) neither Parent nor any Parent Subsidiary has declared, accrued,
set aside or paid any dividend, stock split, combination or
reclassification or made any other distribution in respect of any shares of
capital stock nor has repurchased, redeemed or otherwise reacquired any
shares of capital stock or other securities;
(d) neither Parent nor any Parent Subsidiary has sold, issued or
authorized the issuance of (i) any capital stock or other security (except
for Parent Common Stock issued upon the exercise of outstanding Parent
Options or Parent Warrants described in the Parent Disclosure Documents),
(ii) any option, call, warrant or right to acquire, or otherwise relating
to, any capital stock or any other security (except for Parent Options and
Parent Warrants described in the Parent Disclosure Documents), or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;
(e) there has been no amendment to the articles of organization or
bylaws of Parent or any Parent Subsidiary, and neither Parent nor any
Parent Subsidiary has effected or been a party to any Parent Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(f) neither Parent nor any Parent Subsidiary has amended or waived any
of its rights under, or permitted the acceleration of vesting under (i) any
provision of any agreement evidencing any outstanding Parent Option or
Parent Warrant, or (ii) any restricted stock purchase agreement;
(g) neither Parent nor any Parent Subsidiary has formed any subsidiary
or acquired any equity interest or other interest in any other Entity;
(h) neither Parent nor any Parent Subsidiary has made any capital
expenditure which, when added to all other capital expenditures made since
September 30, 1997, exceeds $100,000 in the aggregate;
(i) neither Parent nor any Parent Subsidiary has (i) entered into any
Material Parent Contract (as defined in Section 3.10(a)), or (ii) amended
or prematurely terminated, or waived any material right or remedy under,
any Material Parent Contract to which it is or was a party or under which
it has or had any material rights or obligations;
(j) neither Parent nor any Parent Subsidiary has (i) acquired, leased
or licensed any right or other asset from any other Person, (ii) sold or
otherwise disposed of, or leased or licensed, any right or other asset to
any other Person, or (iii) waived or relinquished any right, except for
purchases of inventory and sales of products in the ordinary course and
except for immaterial rights or other immaterial assets acquired, leased,
licensed or disposed of in the ordinary course of business and consistent
with past practices;
(k) neither Parent nor any Parent Subsidiary has written off as
uncollectible, or established any extraordinary reserve with respect to,
any account receivable or other indebtedness in excess of $25,000
individually or $100,000 in the aggregate;
(l) neither Parent nor any Parent Subsidiary has made any pledge of
any of its assets or otherwise permitted any of its assets to become
subject to any Encumbrance, except for pledges of assets valued at $100,000
or less, individually or in the aggregate, made in the ordinary course of
business and consistent with past practices;
(m) neither Parent nor any Parent Subsidiary has (i) lent money to any
Person, or (ii) incurred or guaranteed any indebtedness for borrowed money;
(n) neither Parent nor any Parent Subsidiary has (i) established,
adopted or amended any Employee Benefit Plan, (ii) paid any bonus or made
any profit-sharing or similar payment to, or increased the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, (iii)
hired any new employee, in either case except in the ordinary course of
business and consistent with past practices or (iv) entered into any
severance or employment agreement with any Person;
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(o) neither Parent nor any Parent Subsidiary has changed any of its
methods of accounting or accounting practices in any material respect;
(p) neither Parent nor any Parent Subsidiary has made any Tax
election;
(q) neither Parent nor any Parent Subsidiary has commenced or settled
any Legal Proceeding;
(r) neither Parent nor any Parent Subsidiary has not entered into any
material transaction or taken any other material action outside the
ordinary course of business or inconsistent with its past practices;
(s) neither Parent nor any Parent Subsidiary has made any material
write-down of inventory; and
(t) neither Parent nor any Parent Subsidiary has agreed or committed
to take any of the actions referred to in clauses "(c)" through "(s)"
above.
3.6 Title to Assets.
(a) Parent and each Parent Subsidiary owns, and has good and valid title
to, all assets purported to be owned by it, including all of the assets
reflected in the Parent SEC Documents and all other assets reflected in such
entity's books and records as being owned by Parent. All of said assets are
owned by Parent and each Parent Subsidiary free and clear of any Encumbrances,
except for (i) any lien for current taxes not yet due and payable and (ii) minor
liens that have arisen in the ordinary course of business and that would not (in
any case or in the aggregate) have a Material Adverse Effect on Parent.
(b) Part 3.6(b) of the Parent Disclosure Schedule identifies all assets
that are being leased or licensed to Parent and each Parent Subsidiary that
involve obligations in excess of $100,000 on an individual basis, that are not
otherwise disclosed in the Parent SEC Documents.
3.7 Accounts Receivable; Loans and Advances.
(a) All accounts receivable of Parent and each Parent Subsidiary that are
reflected in Parent SEC Documents or in the accounting records of Parent as of
the date hereof (collectively, the "Parent Accounts Receivable") represent valid
obligations arising from sales actually made or services actually performed in
the ordinary course of business. The Parent Accounts Receivable are current and
collectible net of any respective reserves shown in the Parent SEC Documents as
of the date hereof(which reserves are adequate and calculated consistent with
past practice). There is no contest, claim, or right of set-off, other than
returns in the ordinary course of business, under any Contract with any obligor
of any Parent Accounts Receivable relating to the amount or validity of such
Parent Accounts Receivable.
(b) Part 3.7(b) of Parent Disclosure Schedule contains an accurate and
complete list of all loans and advances made by Parent or any Parent Subsidiary
(and pursuant to which amounts are outstanding as of the date of this Agreement)
to any employee, director, consultant or independent contractor of Parent or any
Parent Subsidiary, other than routine travel advances made to employees in the
ordinary course of business.
3.8 Equipment; Leasehold.
(a) The real property leased by, and other tangible assets leased or owned
by Parent and each Parent Subsidiary are adequate for the uses to which they are
being put, are in good condition and repair (ordinary wear and tear excepted)
and are adequate for the conduct of such entity's business in the manner in
which such business is now being conducted.
(b) Neither Parent nor any Parent Subsidiary owns any real property or any
material interest in real property, except as described in the Parent SEC
Documents.
3.9 Proprietary Assets.
(a) To the knowledge of Parent, Parent and each Parent Subsidiary has good
and valid title to all Parent Proprietary Assets free and clear of all
Encumbrances, and has a valid right to use all Parent Proprietary Assets.
Neither Parent nor any Parent Subsidiary is obligated to make any payment to any
Person for the use of any Parent Proprietary Asset. To the best knowledge of
Parent, Parent and each Parent Subsidiary is free to use, modify, copy,
distribute, sell, license or otherwise exploit each of the Parent Proprietary
Assets on an
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exclusive basis. Part 3.9 of the Parent Disclosure Schedule lists all patents
held by and patent applications filed by Parent. Parent is the valid assignee or
record and owner of each of such patents and patent applications and all of such
patent applications are being actively prosecuted and none of such patents or
patent applications have been abandoned.
(b) Parent and each Parent Subsidiary has taken reasonable measures and
precautions necessary to protect and maintain the confidentiality and secrecy of
all Parent Proprietary Assets (except Parent Proprietary Assets whose value
would be unimpaired by public disclosure) and otherwise to maintain and protect
the value of all Parent Proprietary Assets. Neither Parent nor any Parent
Subsidiary has disclosed or delivered or permitted to be disclosed or delivered
to any Person, and no Person (other than Parent or a Parent Subsidiary) has
access to or has any rights with respect to any Parent Proprietary Asset, in
either case except pursuant to a valid non-disclosure agreement.
(c) To the knowledge of Parent, none of the Parent Proprietary Assets
infringes or conflicts with any Proprietary Asset owned or used by any other
Person. To the knowledge of Parent, neither Parent nor any Parent Subsidiary is
infringing, misappropriating or making any unlawful use of, and neither Parent
nor any Parent Subsidiary has at any time infringed, misappropriated or made any
unlawful use of, or received any notice or other communication of any actual,
alleged, possible or potential infringement, misappropriation or unlawful use
of, any Proprietary Asset owned or used by any other Person. To the knowledge of
Parent, no other Person is infringing, misappropriating or making any unlawful
use of, and no Proprietary Asset owned or used by any other Person infringes or
conflicts with, any Parent Proprietary Asset.
(d) Parent Proprietary Assets constitute all the Proprietary Assets
necessary to enable Parent and each Parent Subsidiary to conduct its business in
the manner in which such business has been conducted. Neither Parent nor any
Parent Subsidiary has licensed any of the Parent Proprietary Assets to any
Person on an exclusive basis, and neither Parent nor any Parent Subsidiary has
entered into any covenant not to compete or Contract limiting its ability to
exploit fully any of its Proprietary Assets or to transact business in any
market or geographical area or with any Person.
(e) No stockholder, officer or director of Parent has title to any Parent
Proprietary Asset which would be necessary to enable Parent to conduct its
business in the manner in which such business is currently being conducted.
3.10 Contracts.
(a) Part 3.10(a) of the Parent Disclosure Schedule identifies each Parent
Contract that constitutes a "Material Parent Contract." For purposes of this
Agreement, a "Material Parent Contract" shall be deemed to be any Parent
Contract:
(i) relating to the employment or engagement of, or the performance of
services by, any employee, consultant or independent contractor which
involves a potential commitment of Parent in excess of $60,000 per year,
including any Parent Contract involving severance payments or acceleration
benefits upon a Parent Acquisition Transaction;
(ii) relating to the acquisition, transfer, use, development, sharing
or license of any Parent Proprietary Asset (except in the ordinary course
of business and except for any Parent Proprietary Asset that is licensed to
the Parent or any Parent Subsidiary under any third party software license
agreement generally available to the public at a cost of less than
$50,000);
(iii) imposing any material restriction on Parent's or any Parent
Subsidiary's right or ability (A) to compete with any other Person, (B) to
acquire any product or other asset or any services from any other Person,
to sell any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any other
Person, or (C) to develop or distribute any Parent Proprietary Asset;
(iv) creating or involving any agency relationship, distribution
arrangement or franchise relationship involving payments to or from Parent
or obligations in excess of $100,000 per year;
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(v) relating to the acquisition, issuance or transfer of any
securities of Parent or any Parent Subsidiary;
(vi) creating or relating to the creation of any Encumbrance with
respect to any asset owned or used by Parent or any Parent Subsidiary
having a value in excess of $100,000;
(vii) involving or incorporating any guaranty, any pledge, any
performance or completion bond, any indemnity, any right of contribution or
any surety arrangement in excess of $100,000 per year;
(viii) creating or relating to any partnership or joint venture or any
material sharing of revenues, profits, losses, costs or liabilities;
(ix) relating to the purchase or sale of any product or other asset by
or to, or the performance of any services by or for, any Related Party (as
defined in Section 3.18);
(x) entered into outside the ordinary course of business;
(xi) that may not be terminated by Parent or such Parent Subsidiary
(without penalty) within 120 days after the delivery of a termination
notice by Parent or such Parent Subsidiary and which involves payments or
commitments of $25,000 or more; and
(xii) contemplating or involving (A) the payment or delivery of cash
or other consideration in an amount or having a value in excess of $100,000
in the aggregate, or (B) the performance of services having a value in
excess of $100,000 in the aggregate.)
(b) Parent has delivered to the Company accurate and complete copies of all
Parent Material Contracts identified in Part 3.10(a) of Parent Disclosure
Schedule, including all amendments thereto. Each Material Parent Contract
identified in Part 3.10(a) of the Parent Disclosure Schedule is valid and in
full force and effect, and is enforceable by Parent or such Parent Subsidiary in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
(i) neither Parent nor any Parent Subsidiary (nor, to Parent's
knowledge, any other party) has materially violated or breached, or
committed any material default under, any Parent Material Contract;
(ii) to the best of the knowledge of Parent, no event has occurred,
and no circumstance or condition exists, that (with or without notice or
lapse of time) will, or could reasonably be expected to, (A) result in a
violation or breach of any of the provisions of any Parent Material
Contract, (B) give any Person the right to declare a default or exercise
any remedy under any Parent Material Contract, (C) give any Person the
right to accelerate the maturity or performance of any Parent Material
Contract, or (D) give any Person the right to cancel, terminate or modify
any Parent Material Contract;
(iii) since September 30, 1997, neither Parent nor any Parent
Subsidiary has received any notice or other communication regarding (i) any
actual or possible violation or breach of, or default under, any Parent
Material Contract, or (ii) any actual or possible termination of any Parent
Material Contract; and
(iv) neither Parent nor any Parent Subsidiary has waived any of its
material rights under any Parent Material Contract.
3.11 No Undisclosed Liabilities. Except as set forth in the Parent SEC
Documents and except for current liabilities incurred in the ordinary course of
business since October 31, 1997, neither Parent nor any Parent Subsidiary has
accrued, contingent or other liabilities of any nature, either matured or
unmatured.
3.12 Compliance With Legal Requirements. Parent and each Parent Subsidiary
is, and has at all times been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on Parent and its
Subsidiaries taken as a whole. Neither Parent nor any Parent Subsidiary has
received any notice or other communication from any Governmental Body regarding
any actual or possible violation of, or failure to comply with, any Legal
Requirement; provided, however, that this representation shall not apply to the
matters covered by the representations contained in Sections 3.14, 3.15 and
3.16.
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3.13 Governmental Authorizations. Parent and each Parent Subsidiary has
all Governmental Authorizations necessary to enable Parent and such Parent
Subsidiary to conduct its business in the manner in which its business is
currently being conducted, except for Governmental Authorizations the failure of
which to obtain would not have a Material Adverse Effect on Parent. Parent and
each Parent Subsidiary is, and at all times has been, in compliance with the
material terms and requirements of such Governmental Authorizations, except for
any noncompliance which would not have a Material Adverse Effect on Parent.
Neither Parent nor any Parent Subsidiary has received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
3.14 Tax Matters.
(a) All Material Tax Returns required to be filed by or on behalf of Parent
with any Governmental Body with respect to any transaction occurring or any
taxable period ending on or before the date hereof (the "Parent Returns") (i)
have been filed when due, and (ii) have been accurately and completely prepared
in compliance with all applicable Legal Requirements. Parent and each Parent
Subsidiary has, within the time (including any extensions of applicable due
dates) and in the manner prescribed by law, paid all Taxes that are due and
payable, except Taxes that, individually and in the aggregate, are not material.
The consolidated financial statements of Parent contained in the Parent SEC
Documents fully accrue all actual and contingent liabilities for Taxes with
respect to all periods through the dates thereof in accordance with generally
accepted accounting principles.
(b) No claim or Legal Proceeding is pending or has been threatened against
or with respect to Parent or any Parent Subsidiary in respect of any Tax. There
are no unsatisfied liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with respect to any
notice of deficiency or similar document received by Parent or any Parent
Subsidiary. There are no liens for Taxes upon any of the assets of Parent or any
Parent Subsidiary, except liens for current Taxes not yet due and payable.
3.15 Employee and Labor Matters; Benefit Plans.
(a) Part 3.15(a) of the Parent Disclosure Schedule contains a list of all
salaried employees of Parent and each Parent Subsidiary as of the date of this
Agreement whose annual salaries are greater than $60,000, and correctly reflects
their salaries, any other compensation payable to them (including compensation
payable pursuant to bonus, deferred compensation or commission arrangements),
their dates of employment and their positions. Neither Parent nor any Parent
Subsidiary is a party to any collective bargaining contract or other Contract
with a labor union involving any of its employees.
(b) Part 3.15(b) of the Parent Disclosure Documents identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, health, insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement (individually referred to as a "Parent Plan" and
collectively referred to as the "Parent Plans") sponsored, maintained,
contributed to or required to be contributed to by Parent or any Parent
Subsidiary for the benefit of any current or former employee of Parent or any
Parent Subsidiary.
(c) Neither Parent nor any Parent Subsidiary maintains, sponsors or
contributes to, and, to the knowledge of Parent, neither Parent nor any Parent
Subsidiary has at any time in the past maintained, sponsored or contributed to,
any employee pension benefit plan (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), subject to Title
IV of ERISA for the benefit of employees or former employees of Parent (a
"Parent Defined Benefit Plan").
(d) Neither Parent or any Parent Subsidiary maintains, sponsors or
contributes to any employee welfare benefit plan (as defined in Section 3(1) of
ERISA, whether or not excluded from coverage under specific Titles or Merger
Subtitles of ERISA) for the benefit of employees or former employees of Parent
or any Parent Subsidiary.
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(e) With respect to each Parent Plan, Parent has made available to the
Company:
(i) an accurate and complete copy of such Parent Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report (if required
under ERISA) with respect to such Parent Plan for the three (3) most recent
plan years;
(iii) an accurate and complete copy of (A) the most recent summary
plan description, together with each summary of material modifications
thereto (if required under ERISA) with respect to such Parent Plan, and (B)
each material employee communication relating to such Parent Plan;
(iv) if such Parent Plan is funded through a trust or any third party
funding vehicle, an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and
complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Parent Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and recordkeeping
agreements; and
(vi) an accurate and complete copy of the most recent determination,
notification, advisory and/or opinion letter received from the Internal
Revenue Service with respect to such Parent Plan (if such Parent Plan is
intended to be qualified under Section 401(a) of the Code).
(f) Neither Parent nor any Parent Subsidiary is required to be, and, to the
knowledge of Parent, neither Parent nor any Parent Subsidiary has ever been
required to be, treated as a single employer with any other Person under Section
4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the Code. Neither
Parent nor any Parent Subsidiary has ever been a member of an "affiliated
service group" within the meaning of Section 414(m) of the Code. To the
knowledge of Parent, neither Parent nor any Parent Subsidiary has ever made a
complete or partial withdrawal from a "multiemployer plan" (as defined in
Section 3(37) of ERISA) resulting in "withdrawal liability" (as defined in
Section 4201 of ERISA), without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA.
(g) Neither Parent nor any Parent Subsidiary has any plan or commitment to
create any additional Parent employee benefit plan within the meaning of ERISA,
or to modify or change any such plan (other than to comply with applicable law).
(h) No Parent Welfare Plan provides death, medical or health benefits
(whether or not insured) with respect to any current or former employee of
Parent or any Parent Subsidiary after any such employee's termination of service
(other than (i) benefit coverage mandated by applicable law, including coverage
provided pursuant to Section 4980B of the Code, (ii) deferred compensation
benefits accrued as liabilities on the consolidated financial statements
included in the Parent SEC Documents, and (iii) benefits the full cost of which
are borne by current or former employees of Parent or any Parent Subsidiary (or
their beneficiaries)).
(i) With respect to each of Parent Welfare Plans constituting a group
health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA") have been complied with in all material respects.
(j) Each of the Parent Plans has been operated and administered in all
material respects in accordance with applicable Legal Requirements, including
ERISA and the Code.
(k) Each of the Parent Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and Parent is not aware of any reason why any such determination letter
should be revoked.
(l) Neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any bonus payment, golden parachute payment,
severance payment or other payment to any current or former employee or director
of Parent or any Parent Subsidiary (whether or not under any Parent Plan), or
materially increase the benefits
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payable under any Parent Plan, or result in any acceleration of the time of
payment or vesting of any such benefits.
(m) Parent and each Parent Subsidiary is in compliance in all material
respects with all applicable Legal Requirements and Contracts relating to
employment, employment practices, employee compensation, wages, bonuses and
terms and conditions of employment.
3.16 Environmental Matters. Parent and each Parent Subsidiary is and has
at all times been in compliance, in all material respects, with all applicable
Environmental Laws. Parent and each Parent Subsidiary possesses all permits and
other Governmental Authorizations required under applicable Environmental Laws,
and Parent and each Parent Subsidiary is and has at all times been in compliance
with the terms and requirements of all such Governmental Authorizations except
where the failure to possess such Governmental Authorizations or failure to be
in compliance would not have a Material Adverse Effect on Parent. Neither Parent
nor any Parent Subsidiary has received any notice or other communication
(whether from a Governmental Body, citizens group, employee or otherwise) that
alleges that Parent or any Parent Subsidiary is not in compliance with any
Environmental Law. To the knowledge of Parent, no current or prior owner of any
property leased or owned by Parent and/or such Parent Subsidiary has received
any notice or other communication (whether from a Governmental Body, citizens
group, employee or otherwise) that alleges that such current or prior owner or
Parent and/or such Parent Subsidiary is not or was not in compliance with any
Environmental Law.
3.17 Insurance. The business and properties of Parent and each Parent
Subsidiary are insured for the benefit of Parent and/or such Parent Subsidiary
in amounts deemed adequate by Parent's management against risks usually insured
against by persons operating businesses similar to those of Parent or such
Parent Subsidiary in the localities where such properties are located. Parent
has received no notice of cancellation or refusal of coverage and copies of all
of such insurance policies have been delivered to the Company.
3.18 Related Party Transactions. Except as set forth in the Parent SEC
Documents: (a) no Related Party has, and no Related Party has at any time since
December 31, 1994 had, any direct or indirect interest in any material asset
used in or otherwise relating to the business of Parent or any Parent
Subsidiary; (b) no Related Party is, or has at any time since December 31, 1994
been, indebted to Parent or any Parent Subsidiary; (c) since December 31, 1994,
no Related Party has entered into, or has had any direct or indirect financial
interest in, any Material Parent Contract, transaction or business dealing
involving Parent or any Parent Subsidiary; (d) no Related Party is competing, or
has at any time since December 31, 1994 competed, directly or indirectly, with
Parent or any Parent Subsidiary; and (e) no Related Party has any claim or right
against Parent or any Parent Subsidiary (other than rights to receive
compensation for services performed as an employee of Parent or any Parent
Subsidiary). (For purposes of this Section 3.18, each of the following shall be
deemed to be a "Related Party": (i) each individual who is, or who has at any
time since December 31, 1994 been, an officer or director of Parent or any
Parent Subsidiary; (ii) each individual who is, or who at any time since
December 31, 1994 been, a member of the immediate family of any of the
individuals referred to in clause "(i)" above; (iii) any 5% stockholder of the
Parent; and (iv) any trust or other Entity (other than Parent or a Parent
Subsidiary) in which any one of the individuals referred to in clauses "(i)"
"(ii)" and "(iii)" above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary or
equity interest.)
3.19 Legal Proceedings; Orders. There is no pending Legal Proceeding, and,
to the knowledge of Parent, no Person has threatened to commence any Legal
Proceeding that: (i) may have a Material Adverse Effect on Parent, any Parent
Subsidiary or their respective businesses; or (ii) challenges, or that may have
the effect of preventing, delaying, making illegal or otherwise interfering
with, the Merger or any of the other transactions contemplated by this
Agreement. To the knowledge of Parent, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that could reasonably be
expected to give rise to or serve as a basis for the commencement of any such
Legal Proceeding. There is no order, writ, injunction, judgment or decree to
which Parent or any Parent Subsidiary, or any of the assets owned or used by
Parent or any Parent Subsidiary, is subject. To the knowledge of Parent, no
officer or other employee of Parent or any Parent Subsidiary is subject to any
order, writ, injunction, judgment or decree that prohibits such officer or
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other employee from engaging in or continuing any conduct, activity or practice
relating to Parent's or such Parent Subsidiary's business. There is no action,
suit, proceeding or investigation by Parent or any Parent Subsidiary currently
pending or which Parent or any Parent Subsidiary intends to initiate.
3.20 Authority; Binding Nature of Agreement. Parent and Merger Sub have
the absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; the execution, delivery and performance by
Parent and Merger Sub of this Agreement have been duly authorized by all
necessary action on the part of Parent and Merger Sub and their respective
Boards of Directors, and the execution, delivery and performance of this
Agreement by Merger Sub have been duly authorized by all necessary action on the
part of Parent, as the sole shareholder of Merger Sub. This Agreement
constitutes the legal, valid and binding obligation of Parent and Merger Sub,
enforceable against them in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
3.21 Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of any of the
provisions of Parent's or any Parent Subsidiary's articles of organization,
certificate of incorporation or bylaws;
(b) with respect to Parent or any Parent Subsidiary, contravene,
conflict with or result in a violation of, or give any Governmental Body or
other Person the right to challenge any of the transactions contemplated by
this Agreement or to exercise any remedy or obtain any relief under, any
Legal Requirement or any order, writ, injunction, judgment or decree to
which Parent or any Parent Subsidiary, or any of the assets owned or used
by Parent or any Parent Subsidiary, is subject;
(c) with respect to Parent or any Parent Subsidiary, contravene,
conflict with or result in a violation of any of the terms or requirements
of, or give any Governmental Body the right to revoke, withdraw, any
Governmental Authorization that is held by Parent or any Parent Subsidiary
or that otherwise relates to Parent's or any Parent Subsidiary's business
or to any of the assets owned or used by Parent or any Parent Subsidiary;
(d) contravene, conflict with or result in a violation of breach of,
or result in a default under, any provision of any Material Parent
Contract, or give any Person the right to (i) declare a default or exercise
any remedy under any Material Parent Contract, (ii) accelerate the maturity
or performance of any Material Parent Contract, or (iii) cancel, terminate
or modify any Material Parent Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by Parent or
any Parent Subsidiary (except for minor liens that will not, in any case or
in the aggregate, materially detract from the value of the assets subject
thereto or would have a Material Adverse Effect on Parent).
Except as may be required by the Securities Act, the Exchange Act, state
securities or "blue sky" laws, the CGCL, and the NASD Bylaws (as they relate to
the Joint Proxy Statement), neither Parent nor any Parent Subsidiary is nor will
be required to make any filing with or give any notice to, or to obtain any
Consent from, any Person in connection with the execution and delivery of this
Agreement or the consummation of the Merger.
3.22 Vote Required. The affirmative vote of a majority of the shares of
Parent Common Stock (the "Requisite Parent Vote") present in person or by proxy
at the Parent Stockholders' Meeting at which a quorum is present is the only
vote of the holders of any class or series of Parent's capital stock necessary
to aprove the issuance of the Merger Shares and to adopt and approve this
Agreement, the Merger and the transactions contemplated thereby, including but
not limited to the Certificate of Amendment.
3.23 Parent Action. The Board of Directors of Parent (at a meeting duly
called and held) has (a) unanimously determined that the Merger is advisable and
fair and in the best interests of Parent and its
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stockholders, (b) unanimously approved this Agreement, the Merger and the
Certificate of Amendment in accordance with the applicable provisions of the
DGCL, (c) unanimously recommended the adoption and approval of this Agreement,
the Merger and the Certificate of Amendment by the holders of Parent Common
Stock and directed that this Agreement, the Merger and the Certificate of
Amendment be submitted for consideration by the Parent's stockholders at the
Parent Stockholders' Meeting, and (d) adopted a resolution having the effect of
causing Parent not to be subject, to the extent permitted by applicable law, to
any state takeover law that may purport to be applicable to the Merger and the
transactions contemplated thereby. As of the date hereof and at all times on or
prior to the Effective Time, the restrictions applicable to business
combinations contained in Section 203 of the DGCL are, and will be, inapplicable
to the execution, delivery and performance of this Agreement and to the
consummation of the Merger and the other transactions contemplated by this
Agreement, including but not limited to the Voting Agreements of even date
herewith between Parent and each of the individuals identified on Exhibit F.
3.24 Full Disclosure.
(a) To Parent's knowledge, all documents, contracts, instruments,
certificates, notices, consents, affidavits, letters, telegrams, telexes,
written statements, schedules (including the Parent Disclosure Schedule),
exhibits (including the Exhibits to this Agreement) and any other papers
whatsoever (excluding in all cases drafts and interim versions marked as such or
apparent as such on their face) delivered to the Company by Parent in connection
with this Agreement and the transactions contemplated thereby, are true and
complete copies thereof. The representations and warranties of Parent contained
in this Agreement, as modified by the Parent Disclosure Schedule, contain no
untrue statements of any material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not false or misleading.
(b) The information supplied by Parent for inclusion in the Joint Proxy
Statement (including the Parent Financial Statements) will not, as of the date
of the Joint Proxy Statement or as of the date of the Parent Stockholders'
Meeting (as defined in Section 5.5), and in each case, as of the date such
information is prepared or presented, contain any statement that is inaccurate
or misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make such information not false or
misleading.
3.25 Finder's Fee. Except for Smith Barney Inc. (now associated with
Salomon Brothers Inc and with Salomon Brothers Inc collectively doing business
as, and hereinafter referred to as "Salomon Smith Barney"), no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated thereby based upon arrangements made by or on behalf of Parent or
any of its subsidiaries. A true and correct copy of Parent's agreement with
Salomon Smith Barney has been delivered to the Company.
3.26 Opinion of Financial Advisor to Parent. The Board of Directors of
Parent has received the written opinion of Salomon Smith Barney, financial
advisor to Parent, dated the date of this Agreement, to the effect that the
Applicable Multiple is fair to Parent from a financial point of view.
SECTION 4. Certain Covenants of the Company
4.1 Access and Investigation. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company and each
Company Subsidiary and (b) provide Parent and Parent's Representatives with such
copies of the existing books, records, Tax Returns, work papers and other
documents and information relating to the Company and each Company Subsidiary,
and with such additional financial, operating and other data and information
regarding the Company and each Company Subsidiary, as Parent may reasonably
request.
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4.2 Operation of the Company's Business. During the Pre-Closing Period,
the Company shall, and shall causes each Company Subsidiary to:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with the Company or any Company Subsidiary;
(c) keep in full force all insurance policies in effect as of the date
of this Agreement;
(d) cause its officers to report regularly to Parent concerning the
status of the Company's and the Company Subsidiaries' businesses;
(e) not declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities (other than repurchases of unvested shares from employees
upon termination of employment);
(f) not sell, issue or authorize the issuance of (i) any capital stock
or other security, (ii) any option, call, warrant or right to acquire, or
relating to, any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company shall be permitted to issue Company Common Stock
upon the exercise of outstanding Company Options or upon conversion of
convertible securities outstanding on the date hereof) and the Company may
continue to grant stock options in the ordinary course and consistent with
past practice, provided that any such options shall be subject to the
Company's standard vesting schedule (but such options shall not vest more
than 25% per year following the grant thereof) and in no event shall any
such options contain any provisions pursuant to which the vesting of such
options may or would be accelerated in any respect upon any change in
control transaction or any other transaction (including without limitation
the Merger) or any similar provision;
(g) not amend or waive any of its rights under, or permit the
acceleration of vesting under any provision of any agreement evidencing any
outstanding Company Option or Company Warrant;
(h) not amend or permit the adoption of any amendment to the Company's
articles of incorporation or bylaws, or effect or permit the Company or any
Company Subsidiary to become a party to any Company Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(i) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(j) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made by the Company or
any Company Subsidiary during the Pre-Closing Period, do not exceed
$300,000 in the aggregate;
(k) not (i) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Company Contract
except in the ordinary course of business, or (ii) amend or prematurely
terminate, or waive any material right or remedy under, any Material
Company Contract;
(l) not (i) acquire, lease or license any material right or other
material asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any material right or other material asset to any other
Person, or (iii) waive or relinquish any material right, other than in the
ordinary course of business and except for immaterial assets acquired,
leased, licensed or disposed of by the Company pursuant to Contracts that
are not Material Company Contracts;
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(m) not (i) lend money to any Person, or (ii) incur or guarantee any
indebtedness, except for routine advances of expenses to employees in the
ordinary course of business and except that the Company and each Company
Subsidiary may make routine borrowings in the ordinary course of business
under its existing bank lines of credit;
(n) not (i) pay any bonus or make any profit-sharing or similar
payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees, other than in the ordinary course of
business and solely with respect to non-officers and non-directors or (ii)
establish, adopt or amend any Employee Benefit Plan;
(o) not change any of its methods of accounting or accounting
practices in any respect;
(p) not make any Tax election;
(q) not commence or settle any Legal Proceeding not disclosed in the
Company Disclosure Schedule;
(r) not enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with its
past practices; and
(s) not agree or commit to take any of the actions described in
clauses "(e)" through "(r)" of this Section 4.2.
4.3 Notification; Updates to Company Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall promptly notify Parent
in writing of:
(i) the discovery by the Company of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of any
representation or warranty made by the Company in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
an inaccuracy in or breach of any representation or warranty made by the
Company in this Agreement if (A) such representation or warranty had been
made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (B) such event, condition, fact
or circumstance had occurred, arisen or existed on or prior to the date of
this Agreement;
(iii) any breach of any covenant or obligation of the Company
hereunder; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Company
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Company Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then the Company shall promptly deliver to Parent an
update to the Company Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Company Disclosure Schedule for the
purpose of (i) determining the accuracy of any of the representations and
warranties made by the Company in this Agreement, or (ii) determining whether
any of the conditions set forth in Section 7 has been satisfied.
4.4 No Solicitation. During the Pre-Closing Period:
(a) Company shall not directly or indirectly, and shall not authorize
or permit any Company Subsidiary or Representative of Company directly or
indirectly to, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal or take any action
(excluding any press releases issued in connection with the announcement of
the execution of this Agreement) that could reasonably be expected to lead
to an Acquisition Proposal, (ii) furnish any information regarding Company
or any Company Subsidiary to any Person in connection with or in
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response to an Acquisition Proposal, (iii) continue or engage in
discussions with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into
any letter of intent or similar document or any Contract contemplating or
otherwise relating to any Company Acquisition Transaction; provided,
however, that this Section 4.4(a) shall not prohibit Company from
furnishing information regarding the Company or any Company Subsidiary to,
or entering into discussions with, any Person in response to a Superior
Company Proposal if (1) the Board of Directors of Company concludes in good
faith, based upon the written advice of its outside legal counsel, that
such action is required in order for the Board of Directors of Company to
comply with its fiduciary obligations to Company's shareholders under
applicable law, (2) prior to furnishing any such information to, or
entering into discussions with, such Person, Company gives Parent written
notice of the identity of such Person and of Company's intention to furnish
information to, or enter into discussions with, such Person, and Company
receives from such Person an executed confidentiality agreement containing
customary limitations on the use and disclosure of all written and oral
information furnished to such Person by or on behalf of Company, (3) prior
to furnishing any such information to such Person, Company furnishes such
information to Parent (to the extent such information has not been
previously furnished by Company to Parent) and (4) neither the Company nor
any Representative of the Company shall have violated any of the
restrictions set forth in this Section 4.4. Without limiting the generality
of the foregoing, Company acknowledges and agrees that any violation of any
of the restrictions set forth in the preceding sentence by any
Representative of Company or any Company Subsidiary, whether or not such
Representative is purporting to act on behalf of Company or any Company
Subsidiary, shall be deemed to constitute a breach of this Section 4.4 by
Company.
(b) The Company shall promptly advise Parent orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the term thereof) that is made or
submitted by any Person during the Pre-Closing Period. The Company shall
keep Parent fully informed with respect to the status of any such
Acquisition Proposal and any modifications or proposed modifications
thereto.
(c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition
Proposal.
4.5 Company Shareholders' Meeting.
(a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of Company Common Stock and Company Preferred Stock (the "Company
Shareholders' Meeting") to consider, act upon and vote upon the adoption and
approval of this Agreement and approval of the Merger. The Company Shareholders'
Meeting will be held as promptly as practicable and within 45 days after the S-4
Registration Statement (as defined below) is declared effective under the
Securities Act (which 45-day period shall be extended on a day-for-day basis if
and for so long as any stop order or other similar action is in place, pending
or threatened by the SEC). The Company's obligation to call, give notice of,
convene and hold the Company Shareholders' Meeting in accordance with this
Section 4.5(a) shall not be limited or otherwise affected by the commencement,
disclosure, announcement or submission of any Superior Company Offer or other
Company Acquisition Transaction, or by any withdrawal, amendment or modification
of the recommendation of the Board of Directors of the Company with respect to
the Merger.
(b) Subject to Section 4.5(c): (i) the Board of Directors of the Company
shall unanimously recommend that the Company's shareholders vote in favor of and
adopt and approve this Agreement and approve the Merger at the Company
Shareholders' Meeting; (ii) the Joint Proxy Statement shall include a statement
to the effect that the Board of Directors of the Company has unanimously
recommended that the Company's shareholders vote in favor of and adopt and
approve this Agreement and approve the Merger at the Company Shareholders'
Meeting; and (iii) neither the Board of Directors of the Company nor any
committee thereof shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify, in a manner adverse to Parent, the unanimous
recommendation of the Board of Directors of the Company that the Company's
shareholders vote in favor of the adoption and approval this Agreement and the
approval of the
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Merger. For purposes of this Agreement, said recommendation of the Board of
Directors shall be deemed to have been modified in a manner adverse to Parent if
said recommendation shall no longer be unanimous.
(c) Nothing in Section 4.5(b) shall prevent the Board of Directors of the
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Company Proposal is made to the Company
and is not withdrawn, (ii) neither the Company nor any of its Representatives
shall have violated any of the restrictions set forth in Section 4.4, and (iii)
the Board of Directors of the Company concludes in good faith, based upon the
written advice of its outside counsel, that the withdrawal, amendment or
modification of such recommendation is required in order for the Board of
Directors of the Company to comply with its fiduciary obligations to the
Company's shareholders under applicable law. Nothing contained in this Section
4.5 shall limit the Company's obligation to call, give notice of, convene and
hold the Company Shareholders' Meeting (regardless of whether the unanimous
recommendation of the Board of Directors of the Company shall have been
withdrawn, amended or modified).
4.6 Tax Representation Letters; Continuity of Interest Certificates. As
soon as practicable after the execution of this Agreement, the Company shall
deliver to Cooley Godward LLP and Wilson Sonsini Goodrich & Rosati, tax
representation letters substantially in the form of Exhibit G (which will be
used and relied upon by such firms in connection with the legal opinions
contemplated by Section 7.8 and Section 8.9) and the Company shall use its
reasonable efforts to obtain and deliver to Parent, Continuity of Interest
Certificates in the form of Exhibit H signed by each shareholder of the Company
holding in excess of 1% of the capital stock of the Company.
4.7 Affiliate Agreements. The Company shall use all reasonable efforts to
cause each Person who could reasonably be deemed to be an "affiliate" of the
Company to execute and deliver to Parent, prior to the Closing, an Affiliate
Agreement in the form of Exhibit I.
SECTION 5. Certain Covenants of Parent
5.1 Access and Investigation. During the Pre-Closing Period, Parent shall,
and shall cause its Representatives to: (a) provide the Company and the
Company's Representatives with reasonable access to Parent's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to Parent and each Parent
Subsidiary; and (b) provide the Company and the Company's Representatives with
such copies of the existing books, records, Tax Returns, work papers and other
documents and information relating to Parent and each Parent Subsidiary, and
with such additional financial, operating and other data and information
regarding Parent and each Parent Subsidiary, as the Company may reasonably
request.
5.2 Operation of Parent's Business. During the Pre-Closing Period, Parent
shall, and shall cause each Parent Subsidiary to:
(a) conduct its business and operations in the ordinary course and in
substantially the same manner as such business and operations have been
conducted prior to the date of this Agreement;
(b) use reasonable efforts to preserve intact its current business
organization, keep available the services of its current officers and
employees and maintain its relations and goodwill with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with Parent or any Parent Subsidiary;
(c) keep in full force all insurance policies in place as of the date
of this Agreement;
(d) cause its officers to report regularly to the Company concerning
the status of Parent's and the Parent Subsidiaries' businesses, taken as a
whole;
(e) not declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, and shall not
repurchase, redeem or otherwise reacquire any shares of capital stock or
other securities;
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(f) not, without the written consent of the Company, sell, issue or
authorize the issuance of (i) any capital stock or other security, (ii) any
option, call, warrant or right to acquire, or relating to, any capital
stock or other security, or (iii) any instrument convertible into or
exchangeable for any capital stock or other security (except that Parent
shall be permitted to issue Parent Common Stock upon the exercise of Parent
Options outstanding as of the date hereof and sell shares of Parent Common
Stock under its 1996 Employee Stock Purchase Plan in accordance with the
terms of such plan);
(g) not amend or waive any of its rights under, or (except pursuant to
the express terms of Parent Options outstanding on the date hereof and
listed on Part 3.3 of the Parent Disclosure Schedule which provide for
automatic acceleration upon consummation of the Merger) permit the
acceleration of vesting under, (i) any provision of its Parent Stock Plans,
(ii) any provision of any agreement evidencing any outstanding Parent
Option or Parent Warrant, or (iii) any provision of any restricted stock
purchase agreement;
(h) not amend or permit the adoption of any amendment to its
certificate of incorporation or bylaws, or effect or permit Parent or any
Parent Subsidiary to become a party to any Acquisition Transaction,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(i) not form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(j) not make any capital expenditure, except for capital expenditures
that, when added to all other capital expenditures made by Parent or any
Parent Subsidiary during the Pre-Closing Period, do not exceed $100,000 in
the aggregate;
(k) not (i) enter into or become bound by, or permit any of the assets
owned or used by it to become bound by, any Material Parent Contract except
in the ordinary course of business, or (ii) amend or prematurely terminate,
or waive any material right or remedy under, any Material Parent Contract;
(l) not (i) acquire, lease or license any material right or other
material asset from any other Person, (ii) sell or otherwise dispose of, or
lease or license, any material right or other material asset to any other
Person, or (iii) waive or relinquish any material right, other than in the
ordinary course of business and except for immaterial assets acquired,
leased, licensed or disposed of by Parent pursuant to Contracts that are
not Material Parent Contracts;
(m) not (i) lend money to any Person, or (ii) incur or guarantee any
indebtedness, except for routine advances of expenses to employees in the
ordinary course of business and except that Parent and each Parent
Subsidiary may make routine borrowings in the ordinary course of business
under its existing bank lines of credit disclosed in the Parent SEC
Documents;
(n) not (i) pay any bonus or make any profit-sharing or similar
payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of
its directors, officers or employees other than in the ordinary course of
business and solely with respect to non-officers and non-directors, or (ii)
establish, adopt or amend any Employee Benefit Plan;
(o) not change any of its methods of accounting or accounting
practices in any respect;
(p) not make any Tax election;
(q) not commence or settle any Legal Proceeding;
(r) not enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with its
past practices; and
(s) not agree or commit to take any of the actions described in
clauses "(e)" through "(r)" of this Section 5.2.
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5.3 Notification; Updates to Parent Disclosure Schedule.
(a) During the Pre-Closing Period, Parent shall promptly notify the Company
in writing of:
(i) the discovery by Parent of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes an inaccuracy in or breach of any
representation or warranty made by Parent in this Agreement or an
inaccuracy in the Parent SEC Documents;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or constitute
an inaccuracy in or breach of any representation or warranty made by Parent
in this Agreement or inaccuracy in the Parent SEC Documents; if (A) such
representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or
(B) such event, condition, fact or circumstance had occurred, arisen or
existed on or prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of Parent hereunder;
and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 5.3(a) requires any change in the Parent
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Parent Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Parent shall promptly deliver to the Company an
update to the Parent Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Parent Disclosure Schedule for the
purpose of (i) determining the accuracy of any of the representations and
warranties made by Parent in this Agreement, or (ii) determining whether any of
the conditions set forth in Section 8 has been satisfied.
5.4 No Solicitation. During the Pre-Closing Period:
(a) Parent shall not directly or indirectly, and shall not authorize
or permit any Parent Subsidiary or any Representative of Parent directly or
indirectly to, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal or take any action
(excluding any press releases issued in connection with the execution of
this Agreement or action in compliance with Parent's required disclosure
obligations under the Exchange Act) that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding
Parent or any Parent Subsidiary to any Person in connection with or in
response to an Acquisition Proposal, (iii) continue or engage in
discussions with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into
any letter of intent or similar document or any Contract contemplating or
otherwise relating to any Parent Acquisition Transaction; provided,
however, that this Section 5.4(a) shall not prohibit Parent from furnishing
information regarding Parent or any Parent Subsidiary to, or entering into
discussions with, any Person in response to a Superior Parent Proposal if
(1) the Board of Directors of Parent concludes in good faith, based upon
the written advice of its outside legal counsel, that such action is
required in order for the Board of Directors of Parent to comply with its
fiduciary obligations to Parent's stockholders under applicable law, (2)
prior to furnishing any such information to, or entering into discussions
with, such Person, Parent gives the Company written notice of the identity
of such Person and of Parent's intention to furnish information to, or
enter into discussions with, such Person, and Parent receives from such
Person an executed confidentiality agreement containing customary
limitations on the use and disclosure of all written and oral information
furnished to such Person by or on behalf of Parent, (3) prior to furnishing
any such information to such Person, Parent furnishes such information to
the Company (to the extent such information has not been previously
furnished by Parent to the Company) and (4) neither Parent nor any
Representative of Parent shall have violated any of the restrictions set
forth in this Section 5.4. Without limiting the generality of the
foregoing, Parent acknowledges and agrees that any violation of any of the
restrictions set forth in the
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preceding sentence by any Representative of Parent, whether or not such
Representative is purporting to act on behalf of Parent, shall be deemed to
constitute a breach of this Section 5.4 by Parent.
(b) Parent shall promptly advise the Company orally and in writing of
any Acquisition Proposal (including the identity of the Person making or
submitting such Acquisition Proposal and the term thereof) that is made or
submitted by any Person during the Pre-Closing Period. Parent shall keep
the Company fully informed with respect to the status of any such
Acquisition Proposal and any modifications or proposed modifications
thereto.
(c) Parent shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition
Proposal.
5.5 Parent Stockholders' Meeting.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of Parent Common Stock (the "Parent Stockholders' Meeting") to consider,
act upon and vote upon the approval of the issuance of the Merger Shares, the
adoption and approval of this Agreement, the Merger and the Certificate of
Amendment. The Parent Stockholders' Meeting will be held as promptly as
practicable and in any event within 45 days after the S-4 Registration Statement
is declared effective under the Securities Act (which 45-day period shall be
extended on a day-for-day basis if and for so long as any stop order or other
similar action is in place, pending or threatened by the SEC). Parent's
obligation to call, give notice of, convene and hold the Parent Stockholders'
Meeting in accordance with this Section 5.5(a) shall not be limited or otherwise
affected by the commencement, disclosure, announcement or submission of any
Superior Parent Offer or other Parent Acquisition Transaction, or by any
withdrawal, amendment or modification of the recommendation of the Board of
Directors of Parent with respect to the Merger.
(b) Subject to Section 5.5(c): (i) the Board of Directors of Parent shall
unanimously recommend that Parent's stockholders vote in favor of and approve
the issuance of the Merger Shares and adopt and approve this Agreement, the
Merger and the Certificate of Amendment; (ii) the Joint Proxy Statement shall
include a statement to the effect that the Board of Directors of Parent has
unanimously made such recommendation; and (iii) neither the Board of Directors
of Parent nor any committee thereof shall withdraw, amend or modify, or propose
or resolve to withdraw, amend or modify, in a manner adverse to the Company,
such unanimous recommendation. For purposes of this Agreement, said
recommendation of the Board of Directors shall be deemed to have been modified
in a manner adverse to the Company if said recommendation shall no longer be
unanimous.
(c) Nothing in Section 5.5(b) shall prevent the Board of Directors of
Parent from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Parent Proposal is made to Parent and is
not withdrawn, (ii) neither Parent nor any of its Representatives shall have
violated any of the restrictions set forth in Section 5.4, and (iii) the Board
of Directors of Parent concludes in good faith, based upon the written advice of
its outside counsel, that the withdrawal, amendment or modification of such
recommendation is required in order for the Board of Directors of Parent to
comply with its fiduciary obligations to Parent's stockholders under applicable
law. Nothing contained in this Section 5.5 shall limit Parent's obligation to
call, give notice of, convene and hold the Parent Stockholders' Meeting
(regardless of whether the unanimous recommendation of the Board of Directors of
Parent shall have been withdrawn, amended or modified).
5.6 Tax Representation Letters. As soon as practicable after the execution
of this Agreement, Parent shall deliver to Cooley Godward LLP and Wilson Sonsini
Goodrich & Rosati, tax representation letters in the form of Exhibit J (which
will be used and relied upon in connection with the legal opinions contemplated
by Section 7.8 and Section 8.9).
5.7 Merger Sub Activities. During the Pre-Closing Period, Merger Sub shall
not engage in any activities of any nature except as provided in or contemplated
by this Agreement. Parent shall take all actions necessary to cause Merger Sub
to perform its obligations under this Agreement and to consummate the Merger on
the terms and conditions set forth herein.
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SECTION 6. Additional Covenants of the Parties
6.1 Filings and Consents. As promptly as practicable after the execution
of this Agreement, each party to this Agreement (a) shall make all filings (if
any) and give all notices (if any) required to be made and given by such party
in connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use his or its reasonable efforts to obtain each
Consent (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
Merger or any of the other transactions contemplated by this Agreement. Each
party shall promptly deliver to the other party a copy of each such filing made,
each such notice given and each such Consent obtained by such parties during the
Pre-Closing Period.
6.2 Public Announcements. The parties shall consult with each other before
issuing any press release or otherwise making any public statements with respect
to the Merger and the transactions contemplated thereby. Without limiting the
generality of the foregoing, neither party shall (and neither party shall permit
any of its Representatives to) issue any press release or make any public
statement regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without the other party's prior
consent, except that either party shall be permitted, without the consent of the
other party, to make such disclosures as are required to be made under
applicable law.
6.3 Reasonable Efforts. During the Pre-Closing Period, (a) the Company
shall use its reasonable efforts to cause the conditions set forth in Section 7
to be satisfied on a timely basis, and (b) Parent and Merger Sub shall use their
reasonable efforts to cause the conditions set forth in Section 8 to be
satisfied on a timely basis.
6.4 Registration Statement.
(a) As promptly as practicable after the date of this Agreement, Parent
shall prepare and cause to be filed with the SEC a preliminary Joint Proxy
Statement to be sent to the stockholders of Parent and the shareholders of the
Company in connection with the Parent Stockholders' Meeting and the Company
Shareholders' Meeting, respectively. Parent and the Company shall use all
reasonable efforts to cause the Joint Proxy Statement to comply with the rules
and regulations promulgated by the SEC, to respond promptly to any comments of
the SEC or its staff and to have the Joint Proxy Statement cleared by the SEC
for distribution to the Parent stockholders and the Company shareholders. Parent
shall prepare and cause to be filed with the SEC a registration statement on
Form S-4 concerning the Parent Common Stock to be issued upon the Merger (the
"S-4 Registration Statement") after the Company's financial statements for the
nine months ended December 31, 1997 have been audited by the Company's
independent auditors and such auditors' report is available. The S-4
Registration Statement shall contain or incorporate by reference the Joint Proxy
Statement (which shall include such Company December 31, 1997 financial
statements) as a prospectus, and any other documents required by the Securities
Act or the Exchange Act in connection with the Merger. The parties acknowledge
and agree that the foregoing arrangements may be altered by mutual consent of
the parties as reasonably necessary to respond to any comments or requests
received from the SEC. Parent shall use all reasonable efforts to cause the S-4
Registration Statement (including the Joint Proxy Statement) to comply with the
rules and regulations promulgated by the SEC, to respond promptly to any
comments of the SEC or its staff and to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after it
is filed with the SEC. Parent will use all reasonable efforts to cause the Joint
Proxy Statement to be mailed to Parent's stockholders, and the Company will use
all reasonable efforts to cause the Joint Proxy Statement to be mailed to the
Company's shareholders, as promptly as practicable after the S-4 Registration
Statement is declared effective under the Securities Act. The Company shall
promptly furnish to Parent all information concerning the Company and the
Company's shareholders that may be required or reasonably requested in
connection with any action contemplated by this Section 6.4 (including, without
limitation, the Company Financial Statements). In addition, the Company shall
promptly furnish to Parent all information concerning the Company and the
Company shareholders that may be required or reasonably requested in connection
with any pre- or post-effective amendment to the S-4 Registration Statement. If
the Company becomes aware of any information that should be set forth in an
amendment or supplement to the S-4 Registration Statement or the Joint Proxy
Statement, then the
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Company shall promptly inform Parent thereof and shall cooperate with Parent in
filing such amendment or supplement with the SEC and, if appropriate, in mailing
such amendment or supplement to the shareholders of the Company.
(b) Prior to the Effective Time, Parent shall make all required filings
with state regulatory authorities and the NASD, and shall ensure that the Parent
Common Stock to be issued in the Merger will be qualified under the securities
or "blue sky" law of every jurisdiction of the United States in which any
registered stockholder of the Company has an address of record on the record
date for determining the stockholders entitled to notice of and to vote on the
Merger (other than qualifying to do business in a state in which it is not now
qualified).
(c) Parent shall amend its 1996 Employee Stock Purchase Plan to provide
that Company employees will be eligible to participate in such plan effective no
later than five (5) days following the Closing and that the Offering Period with
respect to such employees under such Plan shall commence as of such day (and
shall have purchase dates and otherwise end consistent with those for Parent
employees). To the extent required by the rules and regulations of the SEC, the
amendment to the Parent's 1996 Employee Stock Purchase Plan shall be reflected
in the Joint Proxy Statement.
6.5 Additional Agreements.
(a) Subject to Section 6.5(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject to
Section 6.5(b), each party to this Agreement shall use all reasonable efforts to
lift any restraint, injunction or other legal bar to the Merger. Each party
shall promptly deliver to the other, to the extent material, a copy of each such
filing made, each such notice given and each such Consent obtained by such party
during the Pre-Closing Period.
(b) Notwithstanding anything to the contrary contained in this Agreement,
neither Parent nor the Company shall have any obligation under this Agreement to
do any of the following (or cause the other to do any of the following): (i) to
dispose or cause any of its subsidiaries to dispose of any assets; (ii) to
discontinue or cause any of its subsidiaries to discontinue offering any
product; (iii) to license or otherwise make available, or cause any of its
subsidiaries to license or otherwise make available, to any Person, any
technology, software or other Proprietary Asset; (iv) to hold separate or cause
any of its subsidiaries to hold separate any assets or operations (either before
or after the Closing Date); or (v) to make or cause any of its subsidiaries to
make any commitment (to any Governmental Body or otherwise) regarding its future
operations.
6.6 Regulatory Approvals. The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. Without limiting the generality of the foregoing, the
Company and Parent shall, promptly after the date of this Agreement, prepare and
file the notifications, if any, required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), in connection with the
Merger. The Company and Parent shall respond as promptly as practicable to (i)
any inquiries or requests received from the Federal Trade Commission or the
Department of Justice for additional information or documentation and (ii) any
inquiries or requests received from any state attorney general or other
Governmental Body in connection with antitrust or related matters. Each of the
Company and Parent shall (1) give the other party prompt notice of the
commencement of any Legal Proceeding by or before any Governmental Body with
respect to the Merger or any of the other transactions contemplated by this
Agreement, (2) keep the other party informed as to the status of any Legal
Proceeding, and (3) promptly inform the other party of any communication to or
from the Federal Trade Commission, the Department of Justice or any other
Governmental Body regarding the Merger. The Company and Parent will consult and
cooperate with one another, and will consider in good faith the views of one
another, in connection with any analysis, appearance, presentation, memorandum,
brief, argument, opinion or proposal made or submitted in connection with any
Legal Proceeding under or relating to the HSR Act of any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited
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by the HSR Act of any Governmental Body or by any Legal Requirement, in
connection with any Legal Proceeding under or relating to any other federal or
state antitrust or fair trade law or any other similar Legal Proceeding, each of
the Company and Parent agrees to permit authorized Representatives of the other
party to be present at each meeting or conference relating to any such Legal
Proceeding and to have access to and be consulted in connection with any
document, opinion or proposal made or submitted to any Governmental Body in
connection with any such Legal Proceeding.
6.7 Indemnification.
(a) From and after the consummation of the Merger, Parent will fulfill and
honor in all material respects the obligations of the Parent and the Company
pursuant to (i) each indemnification agreement in effect at such time between
the Parent and each person who is or was a director or officer of Parent and the
Company at or prior to the Effective Time and (ii) any indemnification
provisions under Parent's and the Company's Certificate of Incorporation or
Articles of Incorporation, as the case may be or Bylaws, as each is in effect on
the date hereof (the persons to be indemnified pursuant to this agreement and
provisions referred to in clauses (i) and (ii) of this Section 6.7 shall be
referred to individually, the "Indemnified Party"). The Certificate of
Incorporation or Articles of Incorporation, as the case may be, and the Bylaws
of the Parent and the Company shall continue to contain the provisions with
respect to indemnification and exculpation from liability set forth in such
documents as of the date of this Agreement and such provisions shall not be
amended, repealed or otherwise modified for a period of six years after the
Effective Time in any manner that would adversely affect the rights thereunder
of any Indemnified Party.
(b) This Section 6.7 shall survive the consummation of the Merger at the
Effective Time, is intended to be for the benefit of the Parent and the Company
and each Indemnified Party and such Indemnified Party's heirs and
representatives, and shall be binding on all successors and assigns of Parent
and the Surviving Corporation.
SECTION 7. Conditions Precedent to Obligations of Parent and Merger Sub
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
7.1 Accuracy of Representations. The representations and warranties made
by the Company in this Agreement shall have been accurate in all material
respects as of the date of this Agreement; provided, however, that any
representations or warranties of the Company that are qualified as to
materiality or "Material Adverse Effect" shall have been true and correct in all
respects as of the date of this Agreement.
7.2 Performance of Covenants. Each material covenant or obligation
contained in this Agreement that the Company is required to comply with or to
perform at or prior to the Closing shall have been complied with and performed
in all material respects.
7.3 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
7.4 Compliance Certificate. The Company shall have delivered to Parent a
certificate of the Chief Executive Officer of the Company evidencing compliance
with the conditions set forth in Sections 7.1 and 7.2.
7.5 Stockholder Approval. The issuance of the Merger Shares, this
Agreement, the Merger and the Certificate of Amendment shall have been adopted
and approved by the Requisite Parent Vote and this Agreement and the Merger
shall have been adopted and approved by the Requisite Company Vote.
7.6 Consents. All Consents listed in Part 2.21 of the Company Disclosure
Schedule and Part 3.21 of the Parent Disclosure Schedule shall have been
obtained and shall be in full force and effect.
7.7 Legal Opinion. Parent shall have received a legal opinion of Cooley
Godward LLP, in substantially the form of Exhibit L, dated as of the Closing
Date;
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7.8 Tax Opinion. Company shall have received a legal opinion of Cooley
Godward LLP in substantially the form of Exhibit M, dated as of the Closing
Date, to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code (it being understood that, in rendering
such opinion, Cooley Godward LLP may rely upon the tax representation letters
and Continuity of Interest Certificates referred to in Section 4.6).
7.9 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
7.10 HSR Act. If applicable, the waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
7.11 Termination of Repurchase Agreement. That certain Agreement for
Repurchase of Preferred Shares of Stock at Artecon, Inc. dated December 22, 1994
by and among Artecon, Inc., Flambeau Corporation, Flambeau Products Corporation,
Seats, Inc. and W.R. Sauey shall have been terminated.
SECTION 8. Conditions Precedent to Obligations of the Company
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
8.1 Accuracy of Representations. The representations and warranties made
by Parent and Merger Sub in this Agreement shall have been accurate in all
material respects as of the date of this Agreement; provided, however, that any
representations or warranties of Parent or Merger Sub that are qualified as to
materiality or "Material Adverse Effect" shall have been true and correct in all
respects as of the date of this Agreement.
8.2 Performance of Covenants. Each material covenant or obligation
contained in this Agreement that Parent and/or Merger Sub is required to comply
with or to perform at or prior to the Closing shall have been complied with and
performed in all material respects.
8.3 Effectiveness of Registration Statement. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
8.4 Nasdaq National Market. The shares of Parent Common Stock to be issued
in the Merger shall have been approved for quotation (subject to notice of
issuance) on the Nasdaq National Market.
8.5 Compliance Certificate. Parent shall have delivered to the Company a
certificate of the Chief Executive Officer of the Parent evidencing compliance
with the conditions set forth in Sections 8.1 and 8.2.
8.6 Stockholder Approval. The issuance of the Merger Shares and this
Agreement, the Merger and the Certificate of Amendment shall have been adopted
and approved by the Requisite Parent Vote and this Agreement and the Merger
shall have been adopted and approved by the Requisite Company Vote.
8.7 Consents. All Consents listed in Part 2.21 of the Company Disclosure
Schedule and Part 3.21 of the Parent Disclosure Schedule) shall have been
obtained and shall be in full force and effect.
8.8 Legal Opinion. The Company shall have received a legal opinion of
Wilson Sonsini Goodrich & Rosati, dated as of the Closing Date, in substantially
the form of Exhibit N;
8.9 Tax Opinion. Parent shall have received a legal opinion of Wilson
Sonsini Goodrich & Rosati in substantially the form of Exhibit O, dated as of
the Closing Date, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code (it being understood that, in
rendering such opinion, Wilson Sonsini Goodrich & Rosati may rely upon the tax
representation letters and Continuity of Interest Certificates referred to in
Section 4.6);
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8.10 No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
8.11 HSR Act. If applicable, the waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
8.12 Resignations of Certain Directors. The Company shall have received
the written resignations of the directors of Parent listed on Exhibit P hereto,
effective as of the Effective Time.
SECTION 9. Termination
9.1 Termination. This Agreement may be terminated prior to the Effective
Time (whether before or after approval of the Merger by the Requisite Company
Vote and/or the Requisite Parent Vote):
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by May 31, 1998 (unless the failure to consummate the Merger is
attributable to a failure on the part of the party seeking to terminate
this Agreement to perform any material obligation required to be performed
by such party at or prior to the Effective Time);
(c) by either Parent or the Company if a court of competent
jurisdiction or other Governmental Body shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(d) by either Parent or the Company if (i) the Parent Stockholders'
Meeting (including any adjournments thereof) shall have been held and
completed and Parent's stockholders shall have taken a final vote on a
proposal to approve the issuance of the Merger Shares and to approve and
adopt this Agreement, the Merger and the Certificate of Amendment and (ii)
this Agreement, the Merger and the Certificate of Amendment shall not have
been adopted and approved at such meeting by the Requisite Parent Vote;
provided, however, that Parent shall not be permitted to terminate this
Agreement pursuant to this Section 9.1(d) if the failure of Parent's
stockholders to approve the issuance of the Merger Shares and to adopt and
approve this Agreement, the Merger and the Certificate of Amendment at the
Parent Stockholders' Meeting is attributable to a failure on the part of
Parent to perform any material obligation required to have been performed
by Parent under this Agreement; and provided, further, that Parent shall
not be permitted to terminate this Agreement pursuant to this Section
9.1(d) unless Parent shall have paid the fee referred to in Section 9.3(b);
(e) by either Parent or the Company if (i) the Company Shareholders'
Meeting (including any adjournments thereof) shall have been held and
completed and the Company's shareholders shall have taken a final vote on a
proposal to approve and adopt this Agreement and the Merger and (ii) this
Agreement and the Merger shall not have been adopted and approved at such
meeting by the Requisite Company Vote; provided, however, that Company
shall not be permitted to terminate this Agreement pursuant to this Section
9.1(e) if the failure of the Company's shareholders to adopt and approve
this Agreement and the Merger at the Company Shareholders' Meeting is
attributable to a failure on the part of the Company to perform any
material obligation required to have been performed by the Company under
this Agreement; and provided, further, that the Company shall not be
permitted to terminate this Agreement pursuant to this Section 9.1(e)
unless the Company shall have paid the fee referred to in Section 9.3(b);
(f) at any time prior to the adoption and approval of this Agreement
and the Merger by the Requisite Parent Vote and the Requisite Company Vote,
by the Company if a Parent Triggering Event shall have occurred or by
Parent if a Company Triggering Event shall have occurred; or
(g) by either party if any of the other party's covenants contained in
this Agreement shall have been breached in any material respect; provided,
however, that if a breach of a covenant by a party is curable
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by such party and such party is continuing to exercise all reasonable
efforts to cure such breach, then the other party may not terminate this
Agreement under this Section 9.1(g) on account of such breach and provided,
further, that a party may not terminate this Agreement pursuant to this
Section 9.1(g) if it shall have materially breached this Agreement.
9.2 Effect of Termination. In the event of the termination of this
Agreement as provided in Section 9.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 9.2, Section 9.3,
Section 6.2 and Section 10 shall survive the termination of this Agreement and
shall remain in full force and effect, and (ii) the termination of this
Agreement shall not relieve any party from any liability for any breach of this
Agreement.
9.3 Fees and Expenses; Termination Fees.
(a) Except as set forth in this Section 9.3, each party to this Agreement
shall bear and pay all fees, costs and expenses (including legal fees and
accounting fees) that have been incurred or that are incurred in the future by
such party in connection with the transactions contemplated by this Agreement,
including all fees, costs and expenses incurred by such party in connection with
or by virtue of (a) the investigation and review conducted by such party (or its
Representatives) with respect to the other party's business (and the furnishing
of information to the other party and its Representatives in connection with
such investigation and review), (b) the negotiation, preparation and review of
this Agreement and all agreements, certificates, opinions and other instruments
and documents delivered or to be delivered in connection with the transactions
contemplated by this Agreement, (c) the preparation and submission of any filing
or notice required to be made or given in connection with any of the
transactions contemplated by this Agreement, and the obtaining of all Consents
and Governmental Authorizations required to be obtained in connection with any
of such transactions, and (d) the consummation of the Merger ("Out of Pocket
Costs").
(b) If this Agreement is terminated by Parent or the Company pursuant to
Section 9.1(d), or if this Agreement is terminated by the Company pursuant to
Section 9.1(f), Parent shall pay to the Company, in cash (at the time specified
in Section 9.3(c)), a nonrefundable fee in the amount of $1,500,000, along with
the Company's Out of Pocket Costs through the date of such termination.
(c) In the case of termination of this Agreement by Parent pursuant to
Section 9.1(d), the fee referred to in Section 9.3(b) shall be paid by Parent
prior to such termination, and in the case of termination of this Agreement by
the Company pursuant to Section 9.1(d) or Section 9.1(f), the fee referred to in
Section 9.3(b) shall be paid by Parent within three (3) business days after such
termination.
(d) If this Agreement is terminated by Parent or the Company pursuant to
Section 9.1(e), or if this Agreement is terminated by Parent pursuant to Section
9.1(f), the Company shall pay to Parent, in cash (at the time specified in
Section 9.3(e)), a nonrefundable fee in the amount of $1,500,000, along with
Parent's Out of Pocket Costs through the date of such termination.
(e) In the case of termination of this Agreement by the Company pursuant to
Section 9.1(e), the fee referred to in Section 9.3(d) shall be paid by the
Company prior to such termination, and in the case of termination of this
Agreement by Parent pursuant to Section 9.1(e) or Section 9.1(f), the fee
referred to in Section 9.3(d) shall be paid by the Company within three (3)
business days after such termination.
SECTION 10. Miscellaneous Provisions
10.1 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger.
10.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
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10.3 Attorneys' Fees. Subject to Section 9.3(b), if any action at law or
suit in equity to enforce this Agreement or the rights of any of the parties
hereunder is brought against any party hereto, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
10.4 Notices. Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Parent or Merger Sub:
Storage Dimensions, Inc.
1656 McCarthy Blvd.
Milpitas, CA 95035
Attention: Chief Executive Officer
Facsimile: (408) 944-1200
with a copy to (which shall not constitute notice):
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Kenneth M. Siegel, Esq.
Facsimile: (415) 493-6811
if to the Company:
Artecon, Inc.
6305 El Camino Real
Carlsbad, CA 92009-1606
Attention: Chief Executive Officer
Facsimile: (760) 931-5527
with a copy to (which shall not constitute notice):
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Thomas A. Coll, Esq.
Facsimile: (619) 453-3555
All such notices and other communications shall be deemed to have been
received (a) in the case of personal delivery, on the date of such delivery, (b)
in the case of a telecopy, when the party receiving such telecopy shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally recognized, overnight courier, on the business day following dispatch
and (d) in the case of mailing, on the fifth business day following such
mailing.
10.5 Time of the Essence. Time is of the essence of this Agreement.
10.6 Governing Law; Venue. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
California (without giving effect to principles of conflicts of laws).
10.7 Successors and Assigns. Except as provided in Section 10.8, this
Agreement shall be binding upon and shall be enforceable by and inure solely to
the benefit of, the parties hereto and their successors and
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assigns; provided, however, that this Agreement may not be assigned by any party
without the written consent of the other parties, and any attempted assignment
without such consent shall be void and of no effect.
10.8 Remedies Cumulative; Specific Performance. The rights and remedies of
the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
10.9 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Person
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
Person; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
10.10 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
10.11 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.12 Parties in Interest. None of the provisions of this Agreement is
intended to provide any rights or remedies to any Person other than the parties
hereto and their respective successors and assigns (if any); provided, however,
that the provisions of Section 1.5(c) shall inure to the benefit of and may be
enforced by holders of Company Options and/or Company Warrants, and the
provisions of Section 6.7 shall inure to the benefit of and may be enforced by
the Indemnified Parties.
10.13 Disclosure Schedules. The disclosure schedules shall be arranged in
separate parts corresponding to the numbered and lettered sections contained in
Section 2 or in Section 3, as the case may be. The information disclosed in any
numbered or lettered part shall be deemed to be disclosed and incorporated in
any other numbered or lettered part where the relevance of such disclosure to
another numbered or lettered part would be reasonably apparent from such
disclosure.
10.14 Entire Agreement. This Agreement and the other agreements referred
to herein set forth the entire understanding of the parties hereto relating to
the subject matter hereof and supersede all prior and contemporaneous agreements
and understandings among or between any of the parties relating to the subject
matter hereof.
10.15 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
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(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
10.16 Headings. The bold-faced section headings contained in this
Agreement are for convenience of reference only, shall not be deemed to be a
part of this Agreement and shall not be referred to in connection with the
construction or interpretation of this Agreement.
10.17 Counterparts. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one and the same instrument.
The parties hereto have caused this Agreement to be executed and delivered
as of December 22, 1997.
STORAGE DIMENSIONS, INC.,
a Delaware corporation
By: /s/ DAVID A. EEG
------------------------------------
David A. Eeg
President and CEO
STORAGE ACQUISITION CORP.,
a California corporation
By: /s/ JAMES L. LAMBERT
------------------------------------
James L. Lambert
President
ARTECON, INC.,
a California corporation
By: /s/ JAMES M. LAMBERT
------------------------------------
James L. Lambert
President
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Proposal. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal by Parent or the Company, as the case
may be) contemplating or otherwise relating to any Company Acquisition
Transaction or Parent Acquisition Transaction, as the case may be.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including all other
exhibits), as it may be amended from time to time.
Company Acquisition Transaction. "Company Acquisition Transaction" shall
mean any transaction involving:
(a) any sale, lease exchange, transfer or other disposition of the
assets of Company or any Company Subsidiary constituting more than 10% of
the consolidated assets of Company or accounting for more than 10% of the
consolidated revenues of Company in any one transaction or in a series of
related transactions.
(b) any offer to purchase, tender offer, exchange offer or any similar
transaction or series of related transactions made by any Person involving
more than 10% of the outstanding shares of the capital stock of the Company
or any shares of the capital stock of any Company Subsidiary.
(c) any merger, consolidation, business combination, share exchange,
reorganization or other similar transaction or series of related
transactions involving Company or any Company Subsidiary.
(d) any assignment, transfer or licensing or other disposition of, in
whole or in part, the Company Proprietary Assets, other than in the
ordinary course of business.
Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has, or may become subject to, any
obligation; or (c) under which the Company has or may acquire any right or
interest.
Company Disclosure Schedule. "Company Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to Parent by the
Company.
Company Option. "Company Option" shall mean any option to purchase capital
stock of the Company held by any director, officer or employee of, or consultant
to, the Company.
Company Proprietary Asset. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or any Company Subsidiary
or otherwise used by the Company or any Company Subsidiary.
Company Shareholders. "Company Shareholders" shall mean those holders of
Company Common Stock entitled to receive shares of Parent Common Stock pursuant
to Section 1.5.
Company Triggering Event. A "Company Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent its unanimous recommendation in favor of,
the Merger or approval or adoption of this Agreement; (ii) Company shall have
failed to include in the Joint Proxy Statement the unanimous recommendation of
the Board of Directors of Company in favor of approval and adoption of this
Agreement and the Merger; (iii) the Board of Directors of Company shall have
approved, endorsed or recommended any Acquisition Proposal; (iv) Company shall
have entered into any letter of intent or similar document or any Contract
relating to any Acquisition Proposal; (v) Company shall have failed to hold the
Company Shareholders' Meeting as promptly as practicable and in any event within
45 days after the definitive Proxy Statement was filed with the SEC; (vi) a
tender or exchange offer relating to securities of Company shall have been
commenced and Company shall not have sent to its securityholders, within five
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business days after the commencement of such tender or exchange offer, a
statement disclosing that Company recommends rejection of such tender or
exchange offer; (vii) an Acquisition Proposal is publicly announced, and Company
(A) fails to issue a press release announcing its opposition to such Acquisition
Proposal within five business days after such Acquisition Proposal is announced
or (B) otherwise fails to actively oppose such Acquisition Proposal; or (viii) a
person or group (as defined in the Exchange Act and the rules promulgated
thereunder) shall have acquired more than fifty percent (50%) of the Company's
voting securities (excluding persons and groups that, as of the date of this
Agreement, hold more than fifty percent (50%) of the Company's voting securities
or that may be deemed to have acquired such percentage upon execution of the
Voting Agreements).
Company Warrant. "Company Warrant" shall mean any warrant granted by the
Company to any Person to purchase capital stock of the Company.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan, or legally binding commitment or undertaking of
any nature.
Employee Benefit Plan. "Employee Benefit Plan" shall have the meaning
specified in Section 3(3) of ERISA.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company, limited liability company,
joint stock company, firm or other enterprise, association, organization or
entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
Joint Proxy Statement. "Joint Proxy Statement" shall mean that proxy
statement to be prepared by Parent with the cooperation of the Company to be
filed with the SEC and to be included or incorporated by reference into the Form
S-4 registration statement to be filed by Parent with the SEC.
Knowledge. "Knowledge" shall mean, as it relates to either the Company or
Parent with respect to any matter in question, that any of the Chief Executive
Officer, Chief Financial Officer or any other executive officers of the Company
or Parent, as the case may be, has actual knowledge of such matter.
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
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Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to have
a "Material Adverse Effect" on the Company or Parent, as the case may be, if
such violation or other matter would have a material adverse effect on the
business, condition, assets, liabilities, operations, financial performance or
prospects of the Company and its subsidiaries or the Parent and its subsidiaries
taken as a whole, as the case may be.
Parent Acquisition Transaction. "Parent Acquisition Transaction" shall mean
any transaction involving:
(a) any sale, lease exchange, transfer or other disposition of the
assets of Parent or any Parent Subsidiary constituting more than 10% of the
consolidated assets of Parent or accounting for more than 10% of the
consolidated revenues of Parent in any one transaction or in a series of
related transactions.
(b) any offer to purchase, tender offer, exchange offer or any similar
transaction or series of related transactions made by any Person involving
more than 10% of the outstanding shares of the capital stock of Parent or
any shares of the capital stock of any Parent Subsidiary.
(c) any merger, consolidation, business combination, share exchange,
reorganization or other similar transaction or series of related
transactions involving Parent or any Parent Subsidiary.
(d) any assignment, transfer or licensing or other disposition of, in
whole or in part, the Parent Proprietary Assets, other than in the ordinary
course of business.
Parent Contract. "Parent Contract" shall mean any Contract: (a) to which
Parent is a party; (b) by which Parent or any of its assets is or may become
bound or under which Parent has, or may become subject to, any obligation; or
(c) under which Parent has or may acquire any right or interest.
Parent Disclosure Schedule. "Parent Disclosure Schedule" shall mean the
schedule (dated as of the date of the Agreement) delivered to the Company by
Parent.
Parent Proprietary Asset. "Parent Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to Parent or any Parent Subsidiary or
otherwise used by Parent or any Parent Subsidiary.
Parent Triggering Event. A "Parent Triggering Event" shall be deemed to
have occurred if: (i) the Board of Directors of Parent shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to the Company its unanimous recommendation in
favor of, the Merger or approval or adoption of this Agreement; (ii) Parent
shall have failed to include in the Joint Proxy Statement the unanimous
recommendation of the Board of Directors of Parent in favor of approval and
adoption of this Agreement and the Merger; (iii) the Board of Directors of
Parent shall have approved, endorsed or recommended any Acquisition Proposal;
(iv) Parent shall have entered into any letter of intent or similar document or
any Contract relating to any Acquisition Proposal; (v) Parent shall have failed
to hold the Parent Stockholders' Meeting as promptly as practicable and in any
event within 45 days after the definitive Proxy Statement was filed with the
SEC; (vi) a tender or exchange offer relating to securities of Parent shall have
been commenced and Parent shall not have sent to its securityholders, within
five business days after the commencement of such tender or exchange offer, a
statement disclosing that Parent recommends rejection of such tender or exchange
offer; (vii) an Acquisition Proposal is publicly announced, and Parent (A) fails
to issue a press release announcing its opposition to such Acquisition Proposal
within five business days after such Acquisition Proposal is announced or (B)
otherwise fails to actively oppose such Acquisition Proposal; or (viii) a person
or group (as defined in the Exchange Act and the rules promulgated thereunder)
shall have acquired more than fifty percent (50%) of Parent's voting securities
(excluding persons and groups that, as of the date of this Agreement, hold more
than fifty percent (50%) of Parent's voting securities or that may be deemed to
have acquired such percentage upon execution of the Voting Agreements).
Person. "Person" shall mean any individual, Entity or Governmental Body.
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Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, source code, computer program, invention, design, blueprint,
engineering drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset; or (b) right to use or exploit
any of the foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Superior Company Proposal. "Superior Company Proposal" shall mean an
unsolicited, bona fide written proposed Acquisition Proposal submitted by a
third party that the Board of Directors of the Company determines, in good
faith, based upon the written advice of its financial advisor, to be more
favorable from a financial point of view to the Company's shareholders than the
terms of the Merger; provided, however, that any such Acquisition Proposal shall
not be deemed to be a "Superior Company Proposal" if any financing required to
consummate the transaction contemplated by such offer is not committed at the
time such Acquisition Proposal is made.
Superior Parent Proposal. "Superior Parent Proposal" shall mean an
unsolicited, bona fide written proposed Acquisition Proposal submitted by a
third party that the Board of Directors of Parent determines, in good faith,
based upon the written advice of its financial advisor, to be more favorable
from a financial point of view to the Parent's stockholders than the terms of
the Merger; provided, however, that any such Acquisition Proposal shall not be
deemed to be a "Superior Parent Proposal" if any financing required to
consummate the transaction contemplated by such offer is not committed at the
time such Acquisition Proposal is made.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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ANNEX B
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
STORAGE DIMENSIONS, INC.
A DELAWARE CORPORATION
Storage Dimensions, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
First: The name of the Corporation is Storage Dimensions, Inc.
Second: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of Delaware on November 25, 1992 under the
name SDI Acquisition Corporation.
Third: The Board of Directors of the Corporation, acting in accordance with
the provisions of Sections 141 and 242 of the General Corporation Law of the
State of Delaware, adopted resolutions amending its Second Amended and Restated
Certificate of Incorporation as follows:
ARTICLE I shall be amended and restated to read in its entirety as
follows:
"The name of the Corporation is Artecon, Inc. (hereinafter
sometimes referred to as the "Corporation")."
ARTICLE IV shall be amended and restated to read in its entirety as
follows:
"1. The Corporation is authorized to issue a total of Fifty Million
(50,000,000) shares of stock in two classes designated respectively
"Preferred Stock" and "Common Stock." The total number of shares of
Preferred Stock the Corporation shall have authority to issue is Ten
Million (10,000,000), par value one-half of one cent ($.005) per share,
and the total number of shares of Common Stock the Corporation shall
have authority to issue is Forty Million (40,000,000), par value
one-half of one cent ($.005) per share.
2. The preferences, privileges and restrictions granted to or
imposed on the respective classes and series of shares of Common Stock
and Preferred Stock are as follows:
(a) Designation of Series of Preferred Stock. The Preferred
Stock may be issued from time to time in one or more series. The
Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Certificate of Incorporation, to fix or
alter the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and the
number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
(b) Designation of Series A Preferred Stock. Two Million Four
Hundred Ninety-Four Thousand One Hundred Fifty-Nine (2,494,159) of
the shares of Preferred Stock are hereby designated "Series A
Preferred Stock" ("Series A Stock"). The rights, preferences and
privileges of the Series A Stock are as specified in this Section 2
of Article IV.
(c) Dividend Rights. The holders of record of Preferred Stock
and Common Stock shall be entitled to receive dividends on a
non-cumulative basis when and as declared by the Board of Directors
out of funds legally available therefor. No right shall accrue to the
holders of the
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Series A Stock by reason of the fact that dividends are not declared
and thereafter paid in any year.
(d) Preference on Liquidation.
(i) In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, the
holders of the Series A Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common
Stock or any other class or series of stock of the Corporation,
an amount equal to two dollars ($2.00) per share (as adjusted for
any stock dividends, combinations or splits, reclassifications or
the like with respect to such shares) plus all accrued,
accumulated or declared but unpaid dividends on each share of
Series A Stock held by such holders. If upon the occurrence of
any liquidation, dissolution or winding up of the Corporation,
either voluntary or involuntary, the assets and funds to be
distributed among the holders of Series A Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amount, the entire assets and funds of the
Corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Stock in
proportion to the preferential amount each such holder is
otherwise entitled to receive.
(ii) After payment to the holders of the Series A Stock of
the amount set forth in subsection (i), the entire remaining
assets and funds of the Corporation legally available for
distribution, if any, shall be distributed ratably among the
holders of the Common Stock in proportion to the number of shares
then held by such holders.
(iii) For purposes of this subsection (d), a merger or
consolidation of the Corporation with or into any other
corporation or corporations, or the merger of any other
corporation or corporations into the Corporation in which the
holders of the Corporation's outstanding Common Stock immediately
prior to the effective date of such transaction do not hold at
least fifty percent (50%) of all outstanding voting securities of
the surviving entity, or a sale of all or substantially all of
the assets of the Corporation, shall be treated as a liquidation,
dissolution or winding up of the Corporation.
(e) Voting Rights. Except as otherwise required by law, the
shares of the Series A Stock shall be voted together with this
Corporation's Common Stock as a single class at any annual or special
meeting of stockholders of this Corporation, or may act by written
consent in the same manner as this Corporation's Common Stock. Each
share of Common Stock shall be entitled to one vote. The holder of
each share of Series A Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share
of Series A Stock could be converted on the record date for the vote
or, if no such record date is established, at the date such vote is
taken or any written consent is solicited (in each case assuming such
share is convertible as of such date notwithstanding the time
limitation on any such conversion set forth in Section 2(f)(i)),
shall have voting rights and powers equal to the voting rights and
powers of the Common Stock, and shall be entitled to notice of any
stockholders meeting in accordance with the Bylaws of this
Corporation in the same manner and to the same extent as holders of
the Common Stock. Fractional votes shall not be permitted, however,
and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Series A Stock
held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward.)
(f) Conversion. The holders of the Series A Stock shall have the
following rights and shall be subject to the following restrictions
with respect to the conversion of the Series A Stock into shares of
Common Stock:
(i) Conversion at the Option of the Holder. Each share of
Series A Stock shall be convertible, at the option of the holder
thereof, without the payment of additional
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consideration, at any time after January 1, 1999, at the office
of the Corporation or any transfer agent for the Series A Stock,
into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing two dollars ($2.00) by the
greater of (A) $6.00 and (B) the then applicable Conversion
Price, determined as provided in subsection (f)(iii).
(ii) Automatic Conversion. Each share of Series A Stock
shall automatically be converted into fully paid and
nonassessable shares of Common Stock effective as of 5:30 p.m.
East Coast Time on the earlier of:
(1) at the close of business on the day on which the
Board of Directors shall have duly and unanimously adopted a
resolution requesting such conversion, in which case the
number of shares of Common Stock issuable upon conversion of
each Share of Series A Stock shall be determined by dividing
two dollars ($2.00) by the then applicable Conversion Price,
determined as provided in subsection (f)(iii); and
(2) at the close of business on the first business day
following the date on which the average of the closing per
share sales price of the Common Stock as reported on the
Nasdaq National Market (or any other U.S. securities market
or exchange on which the Common Stock may trade) for twenty
(20) consecutive trading days equals or exceeds nine dollars
($9.00) per share (subject to adjustment for any stock
splits, stock dividends, stock consolidations or the like)
(the "Average Price"), in which case the number of shares of
Common Stock issuable upon conversion of each such share of
Series A Stock shall be determined by dividing two dollars
($2.00) by the Average Price.
(iii) Conversion Price. In the case of conversion under
subsections (f)(i) and (f)(ii)(1), the conversion price for the
Series A Stock shall be equal to the average of the closing sales
prices of the Common Stock as traded on the Nasdaq National
Market (or any other U.S. securities market or exchange on which
the Common Stock may trade) during the twenty (20) trading day
period ending on the day that is two (2) days prior to the date
on which conversion is requested by the Company or the holder, as
the case may be (the "Conversion Price"). Such Conversion Price
shall be adjusted from time to time in accordance with this
subsection (f). All references to the Conversion Price herein
shall mean the Conversion Price as so adjusted.
(iv) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series A Stock. In lieu
of any fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then effective Conversion Price. Before any
holder of Series A Stock shall be entitled to convert the same
into full shares of Common Stock pursuant to subsection (f)(i),
it shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer
agent for the Series A Stock, and shall give written notice to
the Corporation at such office that it elects to convert the
same. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
surrender of the shares of Series A Stock to be converted, and
the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common
Stock on such date. In the event of a conversion pursuant to
subsection (f)(ii), such conversion shall be deemed to have
occurred automatically without any further action by the
Corporation or the holder as of the day specified in subsection
(f)(ii), and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated
for all purposes as the record holder or holders of such shares
of Common Stock on such date; provided, however, that before any
holder of Series A Stock shall be entitled to receive a
certificate representing the shares of Common Stock into
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which such holder's shares of Series A Stock have been converted
into pursuant to subsection (f)(ii), it shall surrender the
certificate or certificates representing such shares of Series A
Stock, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Stock. The Corporation shall, as
soon as practicable after receipt of such surrendered
certificates and notice, if applicable, issue and deliver at such
office to such holder of Series A Stock a certificate or
certificates, registered in such names as specified by the
holder, for the number of shares of Common Stock to which he
shall be entitled as aforesaid and a check payable to the holder
in the amount of any cash amounts payable as the result of a
conversion into fractional shares of Common Stock.
(v) Adjustments to Conversion Price.
(1) In the event the Corporation shall at any time or
from time to time make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive,
a dividend or other distribution payable in securities of the
Corporation or any of its subsidiaries other than shares of
Common Stock, then in each such event provision shall be made
so that the holders of Series A Stock shall receive, upon the
conversion thereof, the securities of the Corporation which
they would have received had their stock been converted into
Common Stock on the date of such event.
(2) If there occurs any capital reorganization or any
reclassification of the capital stock of the Corporation
(other than any event provided for in subsection (f)(v)(1)
above), each share of Series A Stock shall thereafter be
convertible into the same kind and amounts of securities or
other assets, or both, that were issuable or distributable to
the holders of shares of outstanding Common Stock upon such
reorganization or reclassification, in respect of that number
of shares of Common Stock into which such shares of Series A
Stock might have been converted immediately prior to such
reorganization or reclassification; and in any such case,
appropriate adjustments (as determined by the Board of
Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests
thereafter of the holders of Series A Stock to the end that
the provisions of this Article IV shall thereafter be
applicable, as nearly as reasonably may be, in relation to
any securities or other assets thereafter deliverable upon
the conversion of the Series A Stock.
(3) Upon the occurrence of each adjustment or
readjustment of the number or kind of shares issuable upon
conversion of a share of Series A Stock pursuant to this
subsection (f)(v), the Corporation at its expense shall
promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to
each holder of Series A Stock a certificate setting forth
such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time
of any holder of Series A Stock, furnish or cause to be
furnished to such holder a like certificate prepared by the
Corporation setting forth (i) such adjustments and
readjustments, and (ii) the number of shares and the amount,
if any, of other property which at the time would be received
upon the conversion of Series A Stock.
(vi) Notices of Record Date. In the event of any taking by
the Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend)
or other distribution, any security or right convertible into or
entitling the holder thereof to receive additional shares of
Common Stock, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series A Stock at least
30 days prior to the date specified therein, a notice specifying
the date on which any such record is
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to be taken for the purpose of such dividend, distribution,
security or right, and the amount and character of such dividend,
distribution, security or right.
(vii) Issue Taxes. The holders of Series A Stock shall pay
any and all issue, transfer and other taxes that may be payable
in respect of any issue or delivery of shares of Common Stock on
conversion of shares of Series A Stock pursuant hereto.
(viii) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the
Series A Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Series A Stock; and if at any time
the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purpose, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any
necessary amendment to the Articles of Incorporation.
(ix) Notices. Any notice required by the provisions of this
Section 2 to be given to the holders of shares of Series A Stock
shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at its
address appearing on the books of the Corporation.
(g) No Reissuance of Series A Stock. No share or shares of
Series A Stock acquired by the Corporation by reason of conversion or
otherwise shall be reissued. In the event of any such conversion or
other acquisition, the shares so issued or acquired shall revert to
the status of authorized but unissued shares of Preferred Stock."
ARTICLE VII shall be amended and restated to read in its entirety as
follows:
"1. The number of directors which shall constitute the whole Board
of Directors shall be fixed exclusively by one or more resolutions
adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board
for adoption).
2. Subject to the rights of the holders of any series of Preferred
Stock (other than the Series A Stock) to elect additional directors
under specified circumstances, the directors shall be divided into three
classes as nearly equal in size as practicable designated as Class I,
Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the
Board of Directors. At the first annual meeting of stockholders
following the adoption and filing of this Certificate of Amendment of
Certificate of Incorporation, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full
term of three years. At the second annual meeting of stockholders
following the adoption and filing of this Certificate of Amendment of
Certificate of Incorporation, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders
following the adoption and filing of this Certificate of Amendment of
Certificate of Incorporation (the "First Class Three Meeting"), the term
of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class
whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified
or until his death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of
any incumbent director.
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3. The Board of Directors or any individual director may be removed
from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the Corporation entitled to vote at an
election of directors (the "Voting Stock") or (ii) without cause by (1)
until the First Class III Meeting, the affirmative vote of the holders
of at least eighty percent (80%) of the voting power of all the
then-outstanding shares of the Voting Stock, and (2) after the First
Class III Meeting, the affirmative vote of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all the
then-outstanding shares of the Voting Stock."
Fourth: Thereafter, pursuant to a resolution of the Board of Directors,
this Certificate of Amendment was submitted to the stockholders of the
Corporation for their approval, and was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned, and
, have signed this Certificate of Amendment as
President and Secretary, respectively, of the Corporation, this day of
, 1998.
--------------------------------------
, President
--------------------------------------
, President
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<PAGE> 262
ANNEX C
[LETTERHEAD OF SALOMON SMITH BARNEY]
December 22, 1997
The Board of Directors
Storage Dimensions, Inc.
1656 McCarthy Boulevard
Milpitas, California 93035
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to Storage Dimensions, Inc. ("Storage") of the consideration to be paid
by Storage pursuant to the terms and subject to the conditions set forth in the
Agreement and Plan of Merger and Reorganization, dated as of December 22, 1997
(the "Reorganization Agreement"), by and among Storage, Storage Acquisition
Corp., a wholly owned subsidiary of Storage ("Sub"), and Artecon, Inc.
("Artecon"). As more fully described in the Reorganization Agreement, (i) Sub
will be merged with and into Artecon (the "Merger"), (ii) each outstanding share
of the common stock of Artecon (the "Artecon Common Stock") will be converted
into that number of shares of the common stock, par value $0.005 per share, of
Storage (the "Storage Common Stock") equal to a fraction, the numerator of which
is that number of shares of Storage Common Stock equal to the product of (A)
1.5641 and (B) the sum of (x) the number of shares of Storage Common Stock
outstanding immediately prior to the effective time of the Merger (the
"Effective Time") plus (y) the maximum number of shares of Storage Common Stock
issuable upon exercise of options to purchase Storage Common Stock outstanding
as of the date of the Reorganization Agreement and that are also outstanding
immediately prior to the Effective Time with exercise prices less than $3.94
(the average of the closing bid and ask prices per share of Storage Common Stock
as traded on the Nasdaq Stock Market on December 18, 1997), and the denominator
of which is (A) the number of shares of Artecon Common Stock outstanding
immediately prior to the Effective Time plus (B) the number of shares of Artecon
Common Stock underlying instruments convertible into or exchangeable for Artecon
Common Stock outstanding immediately prior to the Effective Time, other than
2,494,159 shares of the preferred stock of Artecon (the "Artecon Preferred
Stock") held by the Sauey Affiliates (as defined in the Reorganization
Agreement) immediately prior to the closing of the Merger, and (iii) each
outstanding share of Artecon Preferred Stock will be converted into one share of
a new series of preferred stock of Storage (the "Storage Preferred Stock" and,
together with the Storage Common Stock into which shares of Artecon Common Stock
will be converted in the Merger, the "Merger Consideration").
In arriving at our opinion, we reviewed the Reorganization Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of Storage and certain senior officers and other
representatives and advisors of Artecon concerning the businesses, operations
and prospects of Storage and Artecon. We examined certain publicly available
business and financial information relating to Storage and certain available
business and financial information relating to Artecon as well as certain
financial forecasts and other information and data for Storage and Artecon which
were provided to or otherwise discussed with us by the respective managements of
Storage and Artecon, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger. We
reviewed the financial terms of the Merger as set forth in the Reorganization
Agreement in relation to, among other things: current and historical market
prices and trading volumes of Storage Common Stock; the historical and projected
earnings and other operating data of Storage and Artecon; and the capitalization
and financial condition of Storage and Artecon. We considered, to the extent
publicly available, the financial terms of certain other similar transactions
recently effected which we considered relevant in evaluating the Merger and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of Storage and Artecon. We also
evaluated the potential pro forma financial impact of the Merger on Storage. In
addition to the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
<PAGE> 263
The Board of Directors
Storage Dimensions, Inc.
December 22, 1997
Page 2
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of Storage and Artecon that such forecasts and other
information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of
Storage and Artecon as to the future financial performance of Storage and
Artecon and the strategic implications and operational benefits (including the
amount, timing and achievability thereof) anticipated to result from the Merger.
We have assumed, with your consent, that the Merger will be treated as a
tax-free reorganization for federal income tax purposes. We also have assumed,
with your consent, that the number of fully diluted shares of Storage Common
Stock outstanding immediately prior to the Effective Time will not vary
materially from the number of fully diluted shares of Storage Common Stock
outstanding as of the date hereof. Our opinion, as set forth herein, relates to
the relative values of Storage and Artecon. We are not expressing any opinion as
to what the value of the Storage Common Stock or Storage Preferred Stock
actually will be when issued pursuant to the Merger, what the value of the
Storage Common Stock will be upon conversion of the Storage Preferred Stock or
the prices at which the Storage Common Stock or Storage Preferred Stock will
trade or otherwise be transferable subsequent to the Merger. We have not made or
been provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Storage or Artecon nor have we made any
physical inspection of the properties or assets of Storage or Artecon. We were
not requested to consider, and our opinion does not address, the relative merits
of the Merger as compared to any alternative business strategies that might
exist for Storage or the effect of any other transaction in which Storage might
engage. Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney Inc. (now associated with Salomon Brothers Inc and
collectively with Salomon Brothers Inc doing business as Salomon Smith Barney)
has been engaged to render financial advisory services to Storage in connection
with the Merger and will receive a fee for such services, a significant portion
of which is contingent upon consummation of the Merger. We also will receive a
fee upon the delivery of this opinion. We have in the past provided investment
banking services to Storage unrelated to the proposed Merger, for which services
we have received compensation. In the ordinary course of our business, we and
our affiliates may actively trade or hold the securities of Storage for our own
account or for the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, we and our
affiliates (including Travelers Group Inc. and its affiliates) may maintain
relationships with Storage and Artecon.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Storage in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on any
matter relating to the proposed Merger. Our opinion may not be published or
otherwise used or referred to, nor shall any public reference to Salomon Smith
Barney be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to Storage.
Very truly yours,
SALOMON SMITH BARNEY
<PAGE> 264
ANNEX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE;
"DISSENTING SHARES" AND DISSENTING SHAREHOLDER. -- (a) If the approval of the
outstanding shares (Section 152) of a corporation is required for a
reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of
Section 1201, each shareholder of the corporation entitled to vote on the
transaction and each shareholder of a subsidiary corporation in a short-form
merger may, by complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market value the
shares owned by the shareholder which are dissenting shares as defined in
subdivision (b). The fair market value shall be determined as of the day before
the first announcement of the terms of the proposed reorganization or short-form
merger, excluding any appreciation or depreciation in consequence of the
proposed action, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in 3 subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF
SHARES. -- (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivisions (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivisions
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares describe in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. DISSENTING SHARES, STAMPING OR ENDORSING. -- Within 30 days after the
date on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements issued
therefor shall bear a like statement, together with the name of the original
dissenting holder of the shares.
1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME
OF PAYMENT. -- (a) If the corporation and the shareholder agree that the shares
are dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS. -- (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. APPRAISERS DUTY AND REPORT; COURT JUDGMENT; PAYMENT; APPEAL; COSTS OF
ACTION. -- (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per
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share. Within the time fixed by the court, the appraisers, or a majority of
them, shall make and file a report in the office of the clerk of the court.
Thereupon, on the motion of any party, the report shall be 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.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market vale of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be 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 which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
undercertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay 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 of compliance with Section 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. DISSENTING SHAREHOLDERS; EFFECT OF PREVENTION OF PAYMENT OF
FAIRMARKET VALUE. -- To the extent that the provisions of Chapter 5 prevent the
payment to any holders of dissenting shares of their fair market value, they
shall become creditors of the corporation for the amount thereof together with
interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5.
1307. DISSENTING SHARES, DISPOSITION OF DIVIDENDS. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. DISSENTING SHARES, RIGHTS AND PRIVILEGES. -- Except as expressly
limited in this chapter, 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 dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
1309. DISSENTING SHARES, LOSS OF STATUS. -- Dissenting shares lose their
status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivisions (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
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1310. SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING. -- If
litigation is instituted to test the sufficiency of regularity of the votes of
the shareholder in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES. -- This chapter,
except Section 1312, does not apply to classes of shares whose terms and
provisions specifically set forth the amount to be paid in respect to such
shares in the event of a reorganization or merger.
1312. VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF. -- (a) No shareholder of a corporation
who has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right or law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an action
to test whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions or,
if the principal terms of the reorganization are approved pursuant to
subdivision(b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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ANNEX E
STORAGE DIMENSIONS, INC.
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of December 22, 1997 by and
between STORAGE DIMENSIONS, INC., a Delaware corporation ("Parent"), and
("Shareholder").
RECITALS
A. ARTECON, INC., a California corporation ("Company"), STORAGE ACQUISITION
CORP. a California corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), and Parent are entering into an Agreement and Plan of Merger and
Reorganization of even date herewith (as amended from time to time, the
"Reorganization Agreement"; capitalized terms used but not otherwise defined in
this Voting Agreement have the meanings assigned to such terms in the
Reorganization Agreement), which provides (subject to the conditions set forth
therein) for the merger of Merger Sub into the Company (the "Merger").
B. As a condition to the willingness of Parent and Merger Sub to enter into
the Reorganization Agreement, Parent and Merger Sub have required that
Shareholder agree, and in order to induce Parent and Merger Sub to enter into
the Reorganization Agreement Shareholder has agreed, to enter into this Voting
Agreement.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. No Transfer of Subject Shares
1.1 Subject Shares. "Subject Shares" shall mean: (i) all securities of the
Company (including shares of Company Common Stock and all options, warrants and
other rights to acquire shares of Company Common Stock) Owned by Shareholder as
of the date of this Agreement; and (ii) all additional securities of the Company
(including all additional shares of Company Common Stock and all additional
options, warrants and other rights to acquire shares of Company Common Stock) of
which Shareholder acquires Ownership during the period from the date of this
Agreement through the Expiration Date (as defined below). For purposes of the
foregoing sentence, Shareholder shall be deemed to "Own" or to have acquired
"Ownership" of a security if Shareholder: (i) is the record owner of such
security; or (ii) is the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act) of such security.
1.2 No Disposition or Encumbrance of Subject Shares.
(a) Shareholder hereby covenants and agrees that prior to the Expiration
Date (as defined below), Shareholder will not, directly or indirectly, (i)
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise dispose of or transfer (or announce any offer, sale, offer
of sale, contract of sale or grant of any option to purchase or other
disposition or transfer of) any Subject Shares to any Person, (ii) create or
permit to exist any Encumbrance with respect to any of the Subject Shares, (iii)
reduce his beneficial ownership of, interest in or risk relating to any of the
Subject Shares or (iv) commit or agree to do any of the foregoing.
(b) As used in this Voting Agreement, the term "Expiration Date" shall mean
the earlier of the date upon which the Reorganization Agreement is validly
terminated or the date upon which the Merger becomes effective; provided,
however, that the "Expiration Date" shall be the date 180 days following the
date on which the Reorganization Agreement is validly terminated, if an
Identified Termination occurs. For purposes of this Voting Agreement, an
"Identified Termination" shall occur if:
(1) the Reorganization Agreement is validly terminated by Parent or
the Company pursuant to Section 9.1(d) or 9.1(e) of the Reorganization
Agreement at any time after (A) an Acquisition Proposal has been made,
submitted or announced (provided such Acquisition Proposal was not
"publicly
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withdrawn" prior to the Parent Stockholders' Meeting or the Company
Shareholders' Meeting, as applicable) or (B) the occurrence of a Parent
Triggering Event or a Company Triggering Event (provided, if such
Triggering Event is the result of an Acquisition Proposal, such Acquisition
Proposal was not "publicly withdrawn" prior to the Parent Stockholders'
Meeting or the Company Shareholders' Meeting, as applicable); or
(2) the Reorganization Agreement is validly terminated by Parent
pursuant to Section 9.1(f) of the Reorganization Agreement.
1.3 No Transfer of Voting Rights. Shareholder covenants and agrees that,
prior to the Expiration Date, Shareholder will not deposit any of the Subject
Shares into a voting trust or grant another proxy (except as provided herein) or
enter into a voting agreement with respect to any of the Subject Shares.
SECTION 2. Voting of Subject Shares
2.1 Pre-termination Voting Agreement. Shareholder hereby agrees that,
prior to the Expiration Date, at any meeting of the shareholders of the Company,
however called, and in any written action by consent of shareholders of the
Company, unless otherwise directed in writing by Parent, Shareholder shall vote
the Subject Shares:
(i) in favor of the Merger, the execution and delivery by the Company
of the Reorganization Agreement and the adoption and approval of the terms
thereof and in favor of each of the other actions contemplated by the
Reorganization Agreement and any action required in furtherance hereof and
thereof;
(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of the Company in the
Reorganization Agreement; and
(iii) against the following actions (other than the Merger and the
transactions contemplated by the Reorganization Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Company or any subsidiary of the
Company; (B) any sale, lease or transfer of a material amount of assets of
the Company or any subsidiary of the Company (other than in the ordinary
course of business); (C) any reorganization, recapitalization, dissolution
or liquidation of the Company or any subsidiary of the Company; (D) any
change in a majority of the board of directors of the Company; (E) any
amendment to the Company's articles of incorporation; (F) any material
change in the capitalization of the Company or the Company's corporate
structure; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement or this Voting Agreement.
Prior to the Expiration Date, Shareholder shall not enter into any
agreement or understanding with any Person to vote or give instructions in any
manner inconsistent with clause "(i)", "(ii)" or "(iii)" of the preceding
sentence.
2.2 Post-termination Voting Agreement. If an Identified Termination
occurs, then, prior to the Expiration Date, at any meeting of the shareholders
of the Company, however called, and in any written action by consent of
shareholders of the Company, unless otherwise directed in writing by Parent,
Shareholder shall vote the Subject Shares (i) against any Acquisition Proposal
and any related transaction or agreement and (ii) against any action which is
intended, or could reasonably be expected, to facilitate the consummation of any
Acquisition Transaction. Shareholder shall not enter into any agreement or
understanding with any Person prior to the Expiration Date to vote or give
instructions in any manner inconsistent with clause "(i)" or "(ii)" of the
preceding sentence.
2.3 Proxy; Further Assurances.
(a) Contemporaneously with the execution of this Voting Agreement,
Shareholder shall deliver to Parent a proxy in the form attached hereto as
Exhibit A, which shall be irrevocable to the fullest extent permitted by law
prior to the Expiration Date, with respect to the Subject Shares (the "Proxy").
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(b) Shareholder shall perform such further acts and execute such further
documents and instruments as may reasonably be required to vest in Parent the
power to carry out and give effect to the provisions of this Voting Agreement.
SECTION 3. Waiver of Appraisal Rights.
Shareholder hereby waives any rights of appraisal and any dissenters'
rights that Shareholder may have in connection with the Merger.
SECTION 4. No Solicitation
Shareholder covenants and agrees that, during the period commencing on the
date of this Voting Agreement and ending on the Expiration Date, Shareholder
shall not, directly or indirectly, and shall not authorize or permit any
Representative of Shareholder, directly of indirectly, to: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal; (ii) furnish any nonpublic information
regarding Company to any Person in connection with or in response to an
Acquisition Proposal or potential Acquisition Proposal; (iii) engage in
discussions with any Person with respect to any Acquisition Proposal; (iv)
approve, endorse or recommend any Acquisition Proposal; or (v) enter into any
letter of intent or other similar document or any Contract contemplating or
otherwise relating to any Acquisition Transaction. The foregoing provision shall
not prevent Shareholder from acting in accordance with Shareholder's fiduciary
duties as a director or officer of Company, provided Shareholder complies with
the provisions of Sections 4.3 and 4.4 of the Reorganization Agreement.
Shareholder shall immediately cease any existing discussions with any Person
that relate to any Acquisition Proposal.
SECTION 5. Representations and Warranties of Shareholder
Shareholder hereby represents and warrants to Parent as follows:
5.1 Due Authorization, Etc. Shareholder has all requisite power and
capacity to execute and deliver this Voting Agreement and to perform his
obligations hereunder. This Voting Agreement has been duly executed and
delivered by Shareholder and constitutes a legal, valid and binding obligation
of Shareholder, enforceable against Shareholder in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
5.2 No Conflicts, Required Filings And Consents.
(a) The execution and delivery of this Voting Agreement by Shareholder do
not, and the performance of this Voting Agreement by Shareholder will not: (i)
conflict with or violate any order, decree or judgment applicable to Shareholder
or by which he or any of his properties is bound or affected; or (ii) result in
any breach of or constitute a default (with notice or lapse of time, or both)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of an Encumbrance on the Subject
Shares pursuant to, any Contract to which Shareholder is a party or by which
Shareholder or any of his properties is bound or affected.
(b) The execution and delivery of this Voting Agreement by Shareholder do
not, and the performance of this Voting Agreement by Shareholder will not,
require any Consent of any Person.
5.3 Title to Subject Shares. As of the date hereof, Shareholder Owns in
the aggregate (including shares owned of record and shares owned beneficially)
the number of issued and outstanding shares of Company Common Stock set forth
below Shareholder's name on the signature page hereof, and the number of
options, warrants and other rights to acquire shares of Company Common Stock set
forth below Shareholder's name on the signature page hereof, and does not
directly or indirectly Own, any shares of capital stock of the Company, or any
option, warrant or other right to acquire any shares of capital stock of the
Company, other than the shares and options, warrants and other rights set forth
below Shareholder's name on the signature page hereof.
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5.4 Accuracy of Representations. The representations and warranties
contained in this Voting Agreement are accurate in all respects as of the date
of this Voting Agreement, will be accurate in all respects at all times through
the Expiration Date and will be accurate in all material respects as of the date
of the consummation of the Merger as if made on that date.
SECTION 6. Covenants of Shareholder
6.1 Further Assurances. From time to time and without additional
consideration, Shareholder will execute and deliver, or cause to be executed and
delivered, such additional or further arrangements, proxies, consents and other
instruments as Parent may reasonably request for the purpose of effectively
carrying out and furthering the intent of this Voting Agreement.
6.2 Legend. Immediately after the execution of this Voting Agreement,
Shareholder shall instruct the Company to cause each certificate of Shareholder
evidencing the Subject Shares to bear a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE VOTING AGREEMENT DATED AS OF DECEMBER 22, 1997, AS IT
MAY BE AMENDED, EXECUTED BY THE REGISTERED HOLDER OF THIS CERTIFICATE, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
SECTION 7. Miscellaneous
7.1 Non-survival of Representations, Warranties and Agreements. All
representations, warranties and agreements made by Shareholder and Parent in
this Voting Agreement shall promptly terminate upon the Expiration Date.
7.2 Indemnification. Without in any way limiting any of the rights or
remedies otherwise available to Parent, Shareholder shall hold harmless and
indemnify Parent from and against any damages suffered or incurred by Parent and
that arise from any breach of any representation, warranty, covenant or
obligation of Shareholder contained herein.
7.3 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
7.4 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party hereto):
if to Shareholder:
at the address set forth below Shareholder's signature on the signature
page hereto;
if to Parent:
Storage Dimensions, Inc.
1656 McCarthy Blvd.
Milpitas, CA 95035
Attention: Chief Executive Officer
Facsimile: (408) 911-1200
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with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Kenneth M. Siegel, Esq.
Facsimile: (650) 493-9300
7.5 Severability. Any term or provision of this Voting Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Voting Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Voting Agreement in any other jurisdiction. If any
provision of this Voting Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
7.6 Entire Agreement. This Voting Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings between the parties with respect thereto. No
addition to or modification of any provision of this Voting Agreement shall be
binding upon either party hereto unless made in writing and signed by both
parties hereto. The parties hereto waive trial by jury in any action at law or
suit in equity based upon, or arising out of, this Voting Agreement or the
subject matter hereof.
7.7 Assignment, Binding Effect. Neither this Voting Agreement nor any
portion hereof shall be assignable (whether by operation of law or otherwise and
including, for this purpose, a change in control as an assignment). Subject to
the preceding sentence, this Voting Agreement shall be binding upon and shall
inure to the benefit of (i) Shareholder and his heirs, successors and assigns
and (ii) Parent and its successors and assigns. Notwithstanding anything
contained in this Voting Agreement to the contrary, nothing in this Voting
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto or their respective heirs, successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Voting
Agreement.
7.8 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Voting Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that Parent shall be entitled to an injunction or
injunctions to prevent breaches of this Voting Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which Parent is entitled at law or in equity.
7.9 Other Agreements. Nothing in this Voting Agreement shall limit any of
the rights or remedies of Parent or any of the obligations of Shareholder under
any Affiliate Agreement between Parent and Shareholder or any other agreement.
7.10 Governing Law. This Voting Agreement shall be governed in all
respects by the laws of the State of California, as applied to contracts entered
into and to be performed entirely within the State of California.
7.11 Counterparts. This Voting Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
7.12 Construction.
(a) Headings of the Sections of this Voting Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(b) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
(c) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Voting Agreement.
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<PAGE> 273
(d) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(e) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
[The remainder of this page is intentionally left blank.]
E-6
<PAGE> 274
IN WITNESS WHEREOF, Parent and Shareholder have caused this Voting
Agreement to be executed as of the date first written above.
STORAGE DIMENSIONS, INC.
By:
--------------------------------------
SHAREHOLDER:
--------------------------------------
Name:
Address:
------------------------------------
-------------------------------
-------------------------------
Facsimile:
--------------------------------------
Number of issued and
outstanding shares of
Company Common Stock owned
of record as of the date of
this Voting Agreement:
---------------------------------
Number of additional issued
and outstanding shares of
Company Common Stock owned
beneficially (but not of
record) as of the date of
this Voting Agreement:
---------------------------------
Number of issued and
outstanding shares of
Company Preferred Stock
owned of record as of the
date of this Voting
Agreement:
---------------------------------
Number of options, warrants
and other rights to acquire
shares of Company Common
Stock owned of record as of
the date of this Voting
Agreement:
---------------------------------
Number of additional
options, warrants and other
rights to acquire shares of
Company Common Stock owned
beneficially (but not of
record) as of the date of
this Voting Agreement:
---------------------------------
[Signature page to Voting Agreement]
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<PAGE> 275
EXHIBIT A
FORM OF IRREVOCABLE PROXY
IRREVOCABLE PROXY
The undersigned shareholder of Artecon, Inc., a California corporation
("Company"), hereby irrevocably (to the fullest extent permitted by law)
appoints and constitutes David A. Eeg, Gene E. Bowles, George Gebauer and
Storage Dimensions, Inc., a Delaware corporation ("Parent"), and each of them,
the attorneys and proxies of the undersigned with full power of substitution and
resubstitution, to the full extent of the undersigned's rights with respect to
(i) the shares of capital stock of Company owned by the undersigned as of the
date of this proxy, which shares are specified on the final page of this proxy
and (ii) any and all other shares of capital stock of Company which the
undersigned may acquire after the date hereof. (The shares of the capital stock
of Company referred to in clauses (i) and (ii) of the immediately preceding
sentence are collectively referred to as the "Shares.") Upon the execution
hereof, all prior proxies given by the undersigned with respect to any of the
Shares are hereby revoked, and no subsequent proxies will be given with respect
to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between
Parent and the undersigned (the "Voting Agreement"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Storage Acquisition
Corp., a California corporation and wholly owned subsidiary of Parent, and
Company (the "Reorganization Agreement"). Capitalized terms used but not
otherwise defined in this proxy have the meanings ascribed to such terms in the
Reorganization Agreement.
The attorney and proxy named above will be empowered, and may exercise this
proxy, to vote the Shares at any time until the earlier to occur of the valid
termination of the Reorganization Agreement or the Effective Time at any meeting
of the shareholders of Company, however called, or in any written action by
consent of shareholders of Company:
(i) in favor of the Merger, the execution and delivery by the Company
of the Reorganization Agreement and the adoption and approval of the terms
thereof and in favor of each of the other actions contemplated by the
Reorganization Agreement and any action required in furtherance hereof and
thereof;
(ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of the Company in the
Reorganization Agreement; and
(iii) against the following actions (other than the Merger and the
transactions contemplated by the Reorganization Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Company or any subsidiary of the
Company; (B) any sale, lease or transfer of a material amount of assets of
the Company or any subsidiary of the Company (other than in the ordinary
course of business); (C) any reorganization, recapitalization, dissolution
or liquidation of the Company or any subsidiary of the Company; (D) any
change in a majority of the board of directors of the Company; (E) any
amendment to the Company's articles of incorporation; (F) any material
change in the capitalization of the Company or the Company's corporate
structure; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement or this Voting Agreement.
The undersigned shareholder may vote the Shares on all other matters.
This proxy shall be binding upon the heirs, successors and assigns of the
undersigned (including any transferee of any of the Shares).
Any obligation of the undersigned hereunder shall be binding upon the
heirs, successors and assigns of the undersigned (including any transferee of
any of the Shares).
E-A-1
<PAGE> 276
This proxy shall terminate upon the Expiration Date.
Dated: December 22, 1997
SHAREHOLDER
--------------------------------------
Number of Shares of Company Common
Stock owned of record as of the date
of this proxy:
E-A-2
<PAGE> 277
ANNEX F
ARTECON, INC.
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT is entered into as of December 22, 1997 by and
between ARTECON, INC., a California corporation ("Company"), and
("Stockholder").
RECITALS
A. Company, STORAGE DIMENSIONS, INC., a Delaware corporation ("Parent"),
and STORAGE ACQUISITION CORP., a California corporation and a wholly owned
subsidiary of Parent ("Merger Sub"), are entering into an Agreement and Plan of
Merger and Reorganization of even date herewith (as amended from time to time,
the "Reorganization Agreement"; capitalized terms used but not otherwise defined
in this Voting Agreement have the meanings assigned to such terms in the
Reorganization Agreement), which provides (subject to the conditions set forth
therein) for the merger of Merger Sub into the Company (the "Merger").
B. As a condition to the willingness of Company to enter into the
Reorganization Agreement, Company has required that Stockholder agree, and in
order to induce Company to enter into the Reorganization Agreement Stockholder
has agreed, to enter into this Voting Agreement.
AGREEMENT
The parties to this Voting Agreement, intending to be legally bound, agree
as follows:
SECTION 1. No Transfer of Subject Shares
1.1 Subject Shares. "Subject Shares" shall mean: (i) all securities of the
Parent (including shares of Parent Common Stock and all options, warrants and
other rights to acquire shares of Parent Common Stock) Owned by Stockholder as
of the date of this Agreement; and (ii) all additional securities of the Parent
(including all additional shares of Parent Common Stock and all additional
options, warrants and other rights to acquire shares of Parent Common Stock) of
which Stockholder acquires Ownership during the period from the date of this
Agreement through the Expiration Date (as defined below). For purposes of the
foregoing sentence, Stockholder shall be deemed to "Own" or to have acquired
"Ownership" of a security if Stockholder: (i) is the record owner of such
security; or (ii) is the "beneficial owner" (within the meaning of Rule 13d-3
under the Exchange Act) of such security.
1.2 No Disposition or Encumbrance of Subject Shares.
(a) Stockholder hereby covenants and agrees that, prior to the Expiration
Date (as defined below), Stockholder will not, directly or indirectly, (i)
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise dispose of or transfer (or announce any offer, sale, offer
of sale, contract of sale or grant of any option to purchase or other
disposition or transfer of) any Subject Shares to any Person other than Company
or Company's designee, (ii) create or permit to exist any Encumbrance with
respect to any of the Subject Shares, (iii) reduce his beneficial ownership of,
interest in or risk relating to any of the Subject Shares or (iv) commit or
agree to do any of the foregoing.
(b) As used in this Voting Agreement, the term "Expiration Date" shall mean
the earlier of the date upon which the Reorganization Agreement is validly
terminated or the date upon which the Merger becomes effective; provided,
however, that the "Expiration Date" shall be the date 180 days following the
date on which the Reorganization Agreement is validly terminated, if an
Identified Termination occurs. For purposes of this Voting Agreement, an
"Identified Termination" shall occur if:
(i) the Reorganization Agreement is validly terminated by Parent or
the Company pursuant to Section 9.1(d) or 9.1(e) of the Reorganization
Agreement at any time after (A) an Acquisition Proposal has been made,
submitted or announced (provided such Acquisition Proposal was not
"publicly
F-1
<PAGE> 278
withdrawn" prior to the Parent Stockholders' Meeting or the Company
Shareholders' Meeting, as applicable) or (B) the occurrence of a Parent
Triggering Event or a Company Triggering Event (provided, if such
Triggering Event is the result of an Acquisition Proposal, such Acquisition
Proposal was not "publicly withdrawn" prior to the Parent Stockholders'
Meeting or the Company Shareholders' Meeting, as applicable); or
(ii) the Reorganization Agreement is validly terminated by Parent
pursuant to Section 9.1(f) of the Reorganization Agreement.
1.3 No Transfer of Voting Rights. Stockholder covenants and agrees that,
prior to the Expiration Date, Stockholder will not deposit any of the Subject
Shares into a voting trust or grant another proxy (except as provided herein) or
enter into a voting agreement with respect to any of the Subject Shares.
SECTION 2. Voting of Subject Shares
2.1 Pre-Termination Voting Agreement. Stockholder hereby agrees that,
prior to the Expiration Date, at any meeting of the stockholders of the Parent,
however called, and in any written action by consent of stockholders of the
Parent, unless otherwise directed in writing by Company, Stockholder shall vote
the Subject Shares:
(a) in favor of the issuance of the Merger Shares, the Merger, the
execution and delivery by the Parent of the Reorganization Agreement and
the adoption and approval of the terms thereof and in favor of each of the
other actions contemplated by the Reorganization Agreement and any action
required in furtherance hereof and thereof;
(b) against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of Parent in the
Reorganization Agreement; and
(c) against the following actions (other than the Merger and the
transactions contemplated by the Reorganization Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Parent or any subsidiary of the
Parent; (B) any sale, lease or transfer of a material amount of assets of
the Parent or any subsidiary of the Parent (other than in the ordinary
course of business); (C) any reorganization, recapitalization, dissolution
or liquidation of the Parent or any subsidiary of the Parent; (D) any
change in a majority of the board of directors of the Parent; (E) any
amendment to the Parent's articles of incorporation; (F) any material
change in the capitalization of the Parent or the Parent's corporate
structure; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement or this Voting Agreement.
Prior to the Expiration Date, Stockholder shall not enter into any agreement or
understanding with any Person to vote or give instructions in any manner
inconsistent with clause "(i)", "(ii)" or "(iii)" of the preceding sentence.
2.2 Post-Termination Voting Agreement. If an Identified Termination
occurs, then, prior to the Expiration Date, at any meeting of the stockholders
of the Parent, however called, and in any written action by consent of
stockholders of the Parent, unless otherwise directed in writing by Parent,
Stockholder shall vote the Subject Shares (i) against any Acquisition Proposal
and any related transaction or agreement and (ii) against any action which is
intended, or could reasonably be expected, to facilitate the consummation of any
Acquisition Transaction. Stockholder shall not enter into any agreement or
understanding with any Person prior to the Expiration Date to vote or give
instructions in any manner inconsistent with clause "(i)" or "(ii)" of the
preceding sentence.
2.3 Proxy; Further Assurances.
(a) Contemporaneously with the execution of this Voting Agreement,
Stockholder shall deliver to Company a proxy in the form attached hereto as
Exhibit A, which shall be irrevocable to the fullest extent permitted by law
prior to the Expiration Date, with respect to the Subject Shares (the "Proxy").
F-2
<PAGE> 279
(b) Stockholder shall perform such further acts and execute such further
documents and instruments as may reasonably be required to vest in Company the
power to carry out and give effect to the provisions of this Voting Agreement.
SECTION 3. Waiver of Appraisal Rights
Stockholder hereby waives any rights of appraisal and any dissenters'
rights that Stockholder may have in connection with the Merger.
SECTION 4. No Solicitation
Stockholder covenants and agrees that, during the period commencing on the
date of this Voting Agreement and ending on the Expiration Date, Stockholder
shall not, directly or indirectly, and shall not authorize or permit any
Representative of Stockholder, directly of indirectly, to: (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal; (ii) furnish any nonpublic information
regarding Parent to any Person in connection with or in response to an
Acquisition Proposal or potential Acquisition Proposal; (iii) engage in
discussions with any Person with respect to any Acquisition Proposal; (iv)
approve, endorse or recommend any Acquisition Proposal; or (v) enter into any
letter of intent or other similar document or any Contract contemplating or
otherwise relating to any Acquisition Transaction. The foregoing provision shall
not prevent Stockholder from acting in accordance with Stockholder's fiduciary
duties as a director or officer of Parent, provided Stockholder complies with
the provisions of Sections 5.3 and 5.4 of the Reorganization Agreement.
Stockholder shall immediately cease any existing discussions with any Person
that relate to any Acquisition Proposal.
SECTION 5. Representations and Warranties of Stockholder
Stockholder hereby represents and warrants to Company as follows:
5.1 Due Authorization, Etc. Stockholder has all requisite power and
capacity to execute and deliver this Voting Agreement and to perform his
obligations hereunder. This Voting Agreement has been duly executed and
delivered by Stockholder and constitutes a legal, valid and binding obligation
of Stockholder, enforceable against Stockholder in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
5.2 No Conflicts, Required Filings and Consents.
(a) The execution and delivery of this Voting Agreement by Stockholder do
not, and the performance of this Voting Agreement by Stockholder will not: (i)
conflict with or violate any order, decree or judgment applicable to Stockholder
or by which he or any of his properties is bound or affected; or (ii) result in
any breach of or constitute a default (with notice or lapse of time, or both)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of an Encumbrance on the Subject
Shares pursuant to, any Contract to which Stockholder is a party or by which
Stockholder or any of his properties is bound or affected.
(b) The execution and delivery of this Voting Agreement by Stockholder do
not, and the performance of this Voting Agreement by Stockholder will not,
require any Consent of any Person.
5.3 Title to Subject Shares. As of the date hereof, Stockholder Owns in
the aggregate (including shares owned of record and shares owned beneficially)
the number of issued and outstanding shares of Parent Common Stock set forth
below Stockholder's name on the signature page hereof, and the number of
options, warrants and other rights to acquire shares of Parent Common Stock set
forth below Stockholder's name on the signature page hereof, and does not
directly or indirectly Own, any shares of capital stock of the Parent, or any
option, warrant or other right to acquire any shares of capital stock of the
Parent, other than the shares and options, warrants and other rights set forth
below Stockholder's name on the signature page hereof.
5.4 Accuracy of Representations. The representations and warranties
contained in this Voting Agreement are accurate in all respects as of the date
of this Voting Agreement, will be accurate in all respects at all
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<PAGE> 280
times through the Expiration Date and will be accurate in all material respects
as of the date of the consummation of the Merger as if made on that date.
SECTION 6. Covenants of Stockholder
6.1 Further Assurances. From time to time and without additional
consideration, Stockholder will execute and deliver, or cause to be executed and
delivered, such additional or further arrangements, proxies, consents and other
instruments as Company may reasonably request for the purpose of effectively
carrying out and furthering the intent of this Voting Agreement.
6.2 Legend. Immediately after the execution of this Voting Agreement,
Stockholder shall instruct Parent to cause each certificate of Stockholder
evidencing the Subject Shares to bear a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE VOTING AGREEMENT DATED AS OF DECEMBER 22, 1997, AS IT
MAY BE AMENDED, EXECUTED BY THE REGISTERED HOLDER OF THIS CERTIFICATE, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
SECTION 7. Miscellaneous
7.1 Non-survival of Representations, Warranties and Agreements. All
representations, warranties and agreements made by Stockholder and Company in
this Voting Agreement shall promptly terminate upon the Expiration Date.
7.2 Indemnification. Without in any way limiting any of the rights or
remedies otherwise available to Company, Stockholder shall hold harmless and
indemnify Company from and against any damages suffered or incurred by Company
and that arise from any breach of any representation, warranty, covenant or
obligation of Stockholder contained herein.
7.3 Expenses. All costs and expenses incurred in connection with the
transactions contemplated by this Voting Agreement shall be paid by the party
incurring such costs and expenses.
7.4 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Voting Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party hereto):
if to Stockholder:
at the address set forth below Stockholder's signature on the signature
page hereto;
if to Company:
Artecon, Inc.
6305 El Camino Real
Carlsbad, CA 92009-1606
Attention: Chief Executive Officer
Facsimile: (760) 931-5527
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<PAGE> 281
with a copy to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, CA 92121-2128
Attention: Thomas A. Coll, Esq.
Facsimile: (619) 453-3555
7.5 Severability. Any term or provision of this Voting Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Voting Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Voting Agreement in any other jurisdiction. If any
provision of this Voting Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
7.6 Entire Agreement. This Voting Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement between the
parties with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings between the parties with respect thereto. No
addition to or modification of any provision of this Voting Agreement shall be
binding upon either party hereto unless made in writing and signed by both
parties hereto. The parties hereto waive trial by jury in any action at law or
suit in equity based upon, or arising out of, this Voting Agreement or the
subject matter hereof.
7.7 Assignment, Binding Effect. Neither this Voting Agreement nor any
portion hereof shall be assignable (whether by operation of law or otherwise and
including, for this purpose, a change in control as an assignment). Subject to
the preceding sentence, this Voting Agreement shall be binding upon and shall
inure to the benefit of (i) Stockholder and his heirs, successors and assigns
and (ii) Company and its successors and assigns. Notwithstanding anything
contained in this Voting Agreement to the contrary, nothing in this Voting
Agreement, expressed or implied, is intended to confer on any Person other than
the parties hereto or their respective heirs, successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Voting
Agreement.
7.8 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Voting Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that Company shall be entitled to an injunction or
injunctions to prevent breaches of this Voting Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which Company is entitled at law or in equity.
7.9 Other Agreements. Nothing in this Voting Agreement shall limit any of
the rights or remedies of Company or any of the obligations of Stockholder under
any Affiliate Agreement between Company and Stockholder.
7.10 Governing Law. This Voting Agreement shall be governed in all
respects by the laws of the State of California, as applied to contracts entered
into and to be performed entirely within the State of Delaware.
7.11 Counterparts. This Voting Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
7.12 Construction.
(a) Headings of the Sections of this Voting Agreement are for the
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
(b) For purposes of this Voting Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender shall
include the masculine and neuter genders; and the neuter gender shall include
masculine and feminine genders.
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<PAGE> 282
(c) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Voting Agreement.
(d) As used in this Voting Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(e) Except as otherwise indicated, all references in this Voting Agreement
to "Sections" and "Exhibits" are intended to refer to Sections of this Voting
Agreement and Exhibits to this Voting Agreement.
IN WITNESS WHEREOF, Company and Stockholder have caused this Voting
Agreement to be executed as of the date first written above.
ARTECON, INC.
By:
--------------------------------------
STOCKHOLDER:
--------------------------------------
Name:
Address:
--------------------------------------
---------------------------------
---------------------------------
Facsimile:
--------------------------------------
Number of issued and outstanding
shares of Company Common Stock owned
of record as of the date of this
Voting Agreement:
--------------------------------------
Number of additional issued and
outstanding shares of Company Common
Stock owned beneficially (but not of
record) as of the date of this Voting
Agreement:
--------------------------------------
Number of options, warrants and other
rights to acquire shares of Company
Common Stock owned of record as of the
date of this Voting Agreement:
--------------------------------------
Number of additional options, warrants
and other rights to acquire shares of
Company Common Stock owned
beneficially (but not of record) as of
the date of this Voting Agreement:
--------------------------------------
[Signature page to Voting Agreement]
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<PAGE> 283
EXHIBIT A
FORM OF IRREVOCABLE PROXY
IRREVOCABLE PROXY
The undersigned stockholder of Storage Dimensions, Inc., a Delaware
corporation ("Parent"), hereby irrevocably (to the fullest extent permitted by
law) appoints and constitutes James L. Lambert, Tesfaye Hailemichael and
Artecon, Inc, Inc., a California corporation ("Company"), and each of them, the
attorneys and proxies of the undersigned with respect to (i) the shares of
capital stock of Parent owned by the undersigned as of the date of this proxy,
which shares are specified on the final page of this proxy and (ii) any and all
other shares of capital stock of Parent which the undersigned may acquire after
the date hereof. (The shares of the capital stock of Parent referred to in
clauses (i) and (ii) of the immediately preceding sentence are collectively
referred to as the "Shares.") Upon the execution hereof, all prior proxies given
by the undersigned with respect to any of the Shares are hereby revoked, and no
subsequent proxies will be given with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, between
Company and the undersigned (the "Voting Agreement"), and is granted in
consideration of Company entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Storage Acquisition
Corp., a California corporation and wholly owned subsidiary of Parent, and the
Company (the "Reorganization Agreement"). Capitalized terms used but not
otherwise defined in this proxy have the meanings ascribed to such terms in the
Reorganization Agreement.
The attorney and proxy named above will be empowered, and may exercise this
proxy, to vote the Shares at any time until the earlier to occur of the valid
termination of the Reorganization Agreement or the Effective Time at any meeting
of the stockholders of Parent, however called, or in any written action by
consent of stockholders of Parent:
1. in favor of the issuance of the Merger Shares, the Merger, the
execution and delivery by the Parent of the Reorganization Agreement and
the adoption and approval of the terms thereof and in favor of each of the
other actions contemplated by the Reorganization Agreement and any action
required in furtherance hereof and thereof;
2. against any action or agreement that would result in a breach of
any representation, warranty, covenant or obligation of Parent in the
Reorganization Agreement; and
3. against the following actions (other than the Merger and the
transactions contemplated by the Reorganization Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or
other business combination involving the Parent or any subsidiary of the
Parent; (B) any sale, lease or transfer of a material amount of assets of
the Parent or any subsidiary of the Parent (other than in the ordinary
course of business); (C) any reorganization, recapitalization, dissolution
or liquidation of the Parent or any subsidiary of the Parent; (D) any
change in a majority of the board of directors of the Parent; (E) any
amendment to the Parent's articles of incorporation; (F) any material
change in the capitalization of the Parent or the Parent's corporate
structure; or (G) any other action which is intended, or could reasonably
be expected to, impede, interfere with, delay, postpone, discourage or
adversely affect the Merger or any of the other transactions contemplated
by the Reorganization Agreement or this Voting Agreement.
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
heirs, successors and assigns of the undersigned (including any transferee of
any of the Shares).
[The Remainder of This Page Left Intentionally Blank]
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<PAGE> 284
This proxy shall terminate upon the Expiration Date.
Dated: December 22, 1997
STOCKHOLDER
--------------------------------------
Name:
Number of Shares of Company Common
Stock owned of record as of the date
of this proxy:
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<PAGE> 285
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws, as
amended, of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and officers and persons serving in such capacities in
other business enterprises (including, for example, subsidiaries of the
Registrant) at the Registrant's request, to the fullest extent permitted by
Delaware law, including in those circumstances in which indemnification would
otherwise be discretionary; (ii) the Registrant may, in its discretion,
indemnify employees and agents in those circumstances where indemnification is
not required by law; (iii) the Registrant is required to advance expenses, as
incurred, to its directors and officers in connection with defending a
proceeding (except that it is not required to advance expenses to a person
against whom the Registrant brings a claim for breach of the duty of loyalty,
failure to act in good faith, intentional misconduct, knowing violation of law
or deriving an improper personal benefit); (iv) the rights conferred in the
Bylaws, as amended, are not exclusive, and the Registrant is authorized to enter
into indemnification agreements with its directors, officers and employees; and
(v) the Registrant may not retroactively amend the Bylaw provisions in a way
that is adverse to such directors, officers and employees.
The Registrant has entered into indemnification agreements with each of its
directors and officers that provide the maximum indemnity allowed to directors
and officers by Section 145 of the Delaware General Corporation Law and the
Bylaws, as amended, as well as certain additional procedural protections.
The indemnification provisions in the Bylaws, as amended, and the
indemnification agreements entered into between the Registrant and its directors
and officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the Securities
Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of
December 22, 1997, among the Registrant, Artecon, Inc. and
Storage Acquisition Corp. Reference is made to Annex A to
the Joint Proxy Statement/Prospectus which is included in
this Registration Statement.(1)(3)
3.1 Second Amended and Restated Certificate of Incorporation of
Registrant.(2)
3.2 Form of Certificate of Amendment of Registrant's Amended and
Restated Certificate of Incorporation. Reference is made to
Annex B to the Joint Proxy Statement/Prospectus which is
included in this Registration Statement.
3.3 Bylaws of Registrant.(2)
4.1 Form of Registrant's Common Stock Certificate.(2)
4.2 Form of Registrant's Series A Preferred Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being
issued.
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
8.2 Tax Opinion of Cooley Godward LLP.
10.1 Form of Voting Agreement, dated as of December 22, 1997,
between Registrant and certain shareholders of Artecon, Inc.
Reference is made to Annex E to the Joint Proxy
Statement/Prospectus which is included in this Registration
Statement.(3)
</TABLE>
II-1
<PAGE> 286
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.2 Form of Voting Agreement, dated December 22, 1997, between
Artecon, Inc. and certain stockholders of the Registrant as
named therein. Reference is made to Annex F to the Joint
Proxy Statement/Prospectus which is included in this
Registration Statement.(3)
10.3 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(2)
10.4 Registrant's 1996 Stock Option Plan, as amended.
10.5 Registrant's 1996 Employee Stock Purchase Plan, as amended.
10.6 Stockholders Agreement, dated December 26, 1992, among the
Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B,
Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
certain other management investors.(2)
10.7 Loan and Security Agreement, dated May 16, 1996, between the
Registrant and Congress Financial Corporation (Western).(2)
10.8 Lease, dated October 8, 1993, between the Registrant and
Callahan-Pentz Properties, McCarthy Four.(2)
10.9 First Amendment to Lease, dated June 28, 1995, between the
Registrant and Callahan-Pentz Properties, McCarthy Four.(2)
10.10 Form of employment agreement between the Registrant and
certain employees.(2)
10.11 Standstill Agreement, dated December 22, 1997, between the
Registrant, Artecon, Inc., CP Acquisition, L.P. No. 4A, CP
Acquisition, L.P. No. 4B, Capital Partners, Inc., and FGS,
Inc.
10.12 Form of Amendment No. 1 to the Employment Agreement between
the Registrant and David Eeg.
10.13 Form of Amendment No. 1 to the Employment Agreement between
the Registrant and Robert Bylin.
16.1 Letter of Ernst & Young dated March 9, 1998 regarding the
disclosure contained on page 96 of this Registration
Statement on Form S-4.
21.1 Subsidiaries of Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Reference is made to Exhibits 5.1 and 8.1.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
8.2.
23.3 Consent of Price Waterhouse LLP, Independent Auditors.
23.4 Consent of Deloitte & Touche LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Arthur Andersen LLP.
23.7 Consent of William J. Filip LLP.
24.1 Power of Attorney. Reference is made to page II-4.
27.1 Financial Data Schedule -- Storage Dimensions, Inc.
99.1 Form of proxy card for the Registrant's Special Meeting of
Stockholders.
99.2 Form of proxy card for Artecon's Special Meeting of
Shareholders.
99.3 Consent of Salomon Smith Barney.
</TABLE>
- ---------------
(1) Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant
undertakes to furnish such schedules to the Commission supplementally upon
request.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-20045), as amended, and incorporated herein by reference.
II-2
<PAGE> 287
(3) Filed as an exhibit to the Schedule 13D filed by Artecon, Inc. on December
29, 1997, and incorporated herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES
[No schedules are included because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.]
(c) ITEM 4(B) REPORTS
Reference is made to Annex C to the Joint Proxy Statement/Prospectus which
is included in this Registration Statement.
ITEM 22. UNDERTAKINGS
(1) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Joint Proxy Statement/Prospectus
pursuant to Items 4.10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(2) The Registrant hereby undertakes: (a) to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement, (i) to include any prospectus required by Section
10(a)(3) of the Securities Act, (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)(sec.230.424(b) of
this chapter) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement,
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the Registration Statement; (b) that, for
the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(3) Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware Corporation Law, the Registrant's Amended
and Restated Certificate of Incorporation, the Registrant's Bylaws, as amended,
the Registrant's indemnification agreements or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(4)(A) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
II-3
<PAGE> 288
(B) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (A) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE> 289
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Milpitas,
State of California, on this 9th day of March 1998.
STORAGE DIMENSIONS, INC.
By: /s/ DAVID A. EEG
------------------------------------
David A. Eeg
President and Chief Executive
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David A. Eeg and Robert E. Bylin, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereto.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID A. EEG President and Chief Executive March 9, 1998
- ------------------------------------------------ Officer
David A. Eeg (Principal Executive Officer)
/s/ ROBERT E. BYLIN Senior Vice President, Finance, and March 9, 1998
- ------------------------------------------------ Chief Financial Officer (Principal
Robert E. Bylin Financial and Accounting Officer)
/s/ BRIAN D. FITZGERALD Director March 9, 1998
- ------------------------------------------------
Brian D. Fitzgerald
/s/ A. GEORGE GEBAUER Director March 9, 1998
- ------------------------------------------------
A. George Gebauer
/s/ CHONG SUP PARK Director March 9, 1998
- ------------------------------------------------
Chong Sup Park
</TABLE>
II-5
<PAGE> 290
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE NO.
- ------- -------- ------------
<C> <S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of
December 22, 1997, among the Registrant, Artecon, Inc. and
Storage Acquisition Corp. Reference is made to Annex A to
the Joint Proxy Statement/Prospectus which is included in
this Registration Statement.(1)(3)..........................
3.1 Second Amended and Restated Certificate of Incorporation of
Registrant.(2)..............................................
3.2 Form of Certificate of Amendment of Registrant's Amended and
Restated Certificate of Incorporation. Reference is made to
Annex B to the Joint Proxy Statement/Prospectus which is
included in this Registration Statement.....................
3.3 Bylaws of Registrant.(2)....................................
4.1 Form of Registrant's Common Stock Certificate.(2)...........
4.2 Form of Registrant's Series A Preferred Stock
Certificate.................................................
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being
issued......................................................
8.1 Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation....................................
8.2 Tax Opinion of Cooley Godward LLP...........................
10.1 Form of Voting Agreement, dated as of December 22, 1997,
between Registrant and certain shareholders of Artecon, Inc.
Reference is made to Annex E to the Joint Proxy
Statement/Prospectus which is included in this Registration
Statement.(3)...............................................
10.2 Form of Voting Agreement, dated December 22, 1997, between
Artecon, Inc. and certain stockholders of the Registrant as
named therein. Reference is made to Annex F to the Joint
Proxy Statement/Prospectus which is included in this
Registration Statement.(3)..................................
10.3 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.(2)...............
10.4 Registrant's 1996 Stock Option Plan, as amended.............
10.5 Registrant's 1996 Employee Stock Purchase Plan, as
amended.....................................................
10.6 Stockholders Agreement, dated December 26, 1992, among the
Registrant, Gene E. Bowles, Jr., David A. Eeg, CP
Acquisition, L.P. No. 4A, CP Acquisition, L.P. No. 4B,
Capital Partners, Inc., FGS, Inc., Maxtor Corporation and
certain other management investors.(2)......................
10.7 Loan and Security Agreement, dated May 16, 1996, between the
Registrant and Congress Financial Corporation
(Western).(2)...............................................
10.8 Lease, dated October 8, 1993, between the Registrant and
Callahan-Pentz Properties, McCarthy Four.(2)................
10.9 First Amendment to Lease, dated June 28, 1995, between the
Registrant and Callahan-Pentz Properties, McCarthy
Four.(2)....................................................
10.10 Form of employment agreement between the Registrant and
certain employees(2)........................................
10.11 Standstill Agreement, dated December 22, 1997, between the
Registrant, Artecon, Inc., CP Acquisition, L.P. No. 4A, CP
Acquisition, L.P. No. 4B, Capital Partners, Inc. and FGS,
Inc.........................................................
10.12 Form of Amendment No. 1 to the Employment Agreement between
the Registrant and David Eeg................................
</TABLE>
<PAGE> 291
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE NO.
- ------- -------- ------------
<C> <S> <C>
10.13 Form of Amendment No. 1 to the Employment Agreement between
the Registrant and Robert Bylin.............................
16.1 Letter of Ernst & Young dated March 9, 1998 regarding the
disclosure contained on page 96 of this Registration
Statement on Form S-4.......................................
21.1 Subsidiaries of Registrant..................................
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation. Reference is made to Exhibits 5.1 and 8.1......
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
8.2.........................................................
23.3 Consent of Price Waterhouse LLP, Independent Auditors.......
23.4 Consent of Deloitte & Touche LLP............................
23.5 Consent of Ernst & Young LLP................................
23.6 Consent of Arthur Andersen LLP..............................
24.1 Power of Attorney. Reference is made to page II-4...........
27.1 Financial Data Schedule -- Storage Dimensions, Inc..........
99.1 Form of proxy card for the Registrant's Special Meeting of
Stockholders................................................
99.2 Form of proxy card for Artecon's Special Meeting of
Shareholders................................................
99.3 Consent of Salomon Smith Barney.............................
</TABLE>
- ---------------
(1) Schedules omitted pursuant to Item 601(b)(2) of Regulation S-K. Registrant
undertakes to furnish such schedules to the Commission supplementally upon
request.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-20045), as amended, and incorporated herein by reference.
(3) Filed as an exhibit to the Schedule 13D filed by Artecon, Inc. on December
29, 1997, and incorporated herein by reference.
<PAGE> 1
Exhibit 4.2
Number __ ________ Shares
STORAGE DIMENSIONS, INC.
(A Delaware Corporation)
SERIES A PREFERRED STOCK
THIS CERTIFIES THAT _________________________ is the registered holder of
_________________ Shares of the Series A Preferred Stock of STORAGE DIMENSIONS,
INC. (hereinafter, the "Corporation"), transferable only on the books of the
Corporation by the holder hereof, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed or assigned.
This Certificate and shares represented thereby shall be held subject to
all the provisions of the Certificate of Incorporation and the Bylaws of the
Corporation, a copy of each of which is on file at the office of the
Corporation, and made a part thereof as fully as though the provisions of said
Certificate of Incorporation and Bylaws were imprinted in full on this
certificate, to all of which the holder of this certificate, by acceptance
hereof, assents and agrees to be bound. Any stockholder may obtain from the
principal office of the Corporation, upon request and without charge, a
statement of the number of the shares constituting each class or series of stock
and the designation thereof; and a copy of the rights, preferences, privileges,
and restrictions granted to or imposed upon the respective classes or series of
stock and upon the holders thereof by said Certificate of Incorporation and the
Bylaws.
The shares of the Series A Preferred Stock are convertible at the times
and on the terms set forth in the Certificate of Incorporation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its duly authorized officers this ___ day of ____________, 19__.
- ---------------------------- ---------------------------
President Secretary
<PAGE> 2
FOR VALUE RECEIVED ____________________ I DO HEREBY SELL, ASSIGN, AND TRANSFER
UNTO ________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT _________________, AS ATTORNEY TO TRANSFER
THE SAID SHARES REGISTER OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF
SUBSTITUTION IN THE PREMISES.
DATED ___________, 19__
IN PRESENCE OF __________________________ ____________________________________
(Witness) (Stockholder)
____________________________________
(Stockholder)
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
THE SHARES OF PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER COMPLIES WITH THE
PROVISIONS OF RULE 144 UNDER THE ACT IN THE OPINION OF COUNSEL TO THE COMPANY OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING
THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE ACT.
<PAGE> 1
Exhibit 5.1
March 9, 1998
Storage Dimensions, Inc.
1656 McCarthy Blvd.
Milpitas, CA 95035
Re: Storage Dimensions, Inc. Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by
you with the Securities and Exchange Commission on, or about March 9, 1998, (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 13,982,776 shares of your Common Stock,
par value $.005 per share and of 2,494,159 shares of your Preferred Stock, par
value $.005 per share (collectively the "Shares"). The Shares are to be issued
in connection with the merger of Storage Acquisition Corp., a California
corporation and a wholly-owned subsidiary of Storage Dimensions, Inc., with and
into Artecon, Inc., a California corporation, pursuant to an Agreement of Merger
and Plan of Reorganization dated as of December 22, 1997 (the "Merger
Agreement"). As your counsel in connection with this transaction, we have
examined the proceedings taken and proposed to be taken in connection with the
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated to be taken prior to the issuance of the Shares, the Shares,
when issued in the manner referred to in the Merger Agreement will be legally
and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus/Proxy Statement constituting a
part thereof, and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
Exhibit 8.1
March 9, 1998
Storage Dimensions, Inc.
1656 McCarthy Boulevard
Milpitas, California 95035
Ladies and Gentlemen:
We have acted as counsel for Storage Dimensions, Inc., a Delaware
corporation ("Storage") in connection with the preparation and execution of the
Agreement and Plan of Merger and Reorganization dated as of December 22, 1997
(the "Reorganization Agreement") among Storage, Storage Acquisition Corp., a
wholly-owned subsidiary of Storage incorporated in California ("Merger Sub"),
and Artecon, Inc., a California corporation ("Artecon"). Pursuant to the
Reorganization Agreement, Merger Sub will merge with and into Artecon (the
"Merger"), and Artecon will become a wholly-owned subsidiary of Storage. Unless
otherwise defined, capitalized terms referred to herein have the meanings set
forth in the Reorganization Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the Reorganization Agreement (including Exhibits) and the Form S-4
Registration Statement (the "Registration Statement") filed with the Securities
and Exchange Commission, and such other documents pertaining to the Merger as we
have deemed necessary or appropriate. We have also relied upon certificates of
officers of Storage and Artecon respectively (the "Officers' Certificates") and
Continuity of Interest Certificates executed by certain shareholders of Artecon.
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to the effectiveness thereof;
2. Any statement made in any of the documents referred to herein,"to the
best of the knowledge" of any person or party is correct without such
qualification;
<PAGE> 2
Storage Dimensions, Inc.
March 9, 1998
Page 2
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by Storage and Artecon on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
5. The Merger will be consummated pursuant to the Reorganization
Agreement and will be effective under the laws of the States of Delaware and
California; and
6. The shareholders of Artecon do not, and will not on or before the
Effective Time, have an existing plan or intent to dispose of an amount of
Storage common stock and Storage preferred stock to be received in the Merger
(or to dispose of Artecon capital stock in anticipation of the Merger) such that
the shareholders of Artecon will not receive and retain a meaningful continuing
equity ownership in Storage that is sufficient to satisfy the continuity of
interest requirement as specified in Treas. Reg. Section 1.368-1(b) and as
interpreted in certain Internal Revenue Service rulings and federal judicial
decisions.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any of
the provisions thereof) and the statements set forth in the Officers'
Certificates and the Continuity of Interest Certificates are true and correct as
of the Effective Time, then it is our opinion that:
(i) For federal income tax purposes, the Merger will qualify as a
"reorganization" as defined in Section 368(a) of the Code; and
(ii) The discussion entitled "Certain Federal Income Tax Matters" in
the Prospectus constituting a part of the Registration Statement,
insofar as it relates to statements of law and legal conclusions,
is correct in all material respects.
This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or the
courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion addresses only the matters described above and does not
address any other federal, state, local or foreign tax consequences that may
result from the Merger or any other transaction (including any transaction
undertaken in connection with the Merger).
<PAGE> 3
Storage Dimensions, Inc.
March 9, 1998
Page 3
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and assumptions
upon which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion has been delivered to you solely in connection with the
Registration Statement. It may not be relied upon for any other purpose or by
any other person or entity, and may not be made available to any other person or
entity without our prior written consent. We hereby consent to the reference to
our firm under the caption "Certain Federal Income Tax Matters" in the Proxy
Statement included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 8.2
[COOLEY GODWARD LETTERHEAD]
March 9, 1998
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009-1606
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger and Reorganization dated as of December 22, 1997
(the "Reorganization Agreement") by and among Storage Dimensions, Inc., a
Delaware corporation ("Parent"), Storage Acquisition Corp., a California
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Artecon,
Inc., a California corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in, the following documents (including all exhibits and
schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters dated March 9, 1998,
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters");
(c) Continuity of Interest Certificates delivered to us by certain
shareholders of the Company in favor of Parent, Merger Sub and the Company (the
"Continuity of Interest Certificates"); and
(d) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
<PAGE> 2
Artecon, Inc.
March 9, 1998
Page Two
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
1. Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
2. All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and shareholders in connection with the Merger, including, but not
limited to, those set forth in the Reorganization Agreement (including the
exhibits thereto), the Tax Representation Letters and the Continuity of Interest
Certificates are true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement (including
exhibits thereto), the Tax Representation Letters and the Continuity of Interest
Certificates are performed without waiver or breach of any material provision
thereof;
4. The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below;
5. There is no plan or intention on the part of the shareholders of the
Company to engage in a sale, exchange, transfer, distribution, pledge, or other
disposition or any transaction which results in a reduction of risk of
ownership, or a direct or indirect disposition of shares of Parent Common Stock
and Parent Preferred Stock (collectively, "Parent Stock") to be received in the
Merger that would reduce the Company's shareholders' ownership of Parent Stock
to a number of shares having an aggregate fair market value, as of the Effective
Time, of less than fifty percent (50%) of the aggregate fair market value of all
of the Company capital stock outstanding immediately prior to the Effective
Time. (For purposes of the preceding sentence, shares of Company capital stock
pursuant to which shareholders of the Company exercise dissenters' rights in the
Merger, which are exchanged for consideration in the Merger other than shares of
Parent Stock, including being exchanged for cash in lieu of fractional shares of
Parent Stock or are sold, redeemed or disposed of in a transaction that is in
contemplation of or related to the Merger, shall be considered shares of the
Company capital stock held by shareholders of the Company immediately prior to
the Merger which are exchanged for shares of Parent Stock in the Merger and then
disposed of pursuant to a plan); and
6. Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax
<PAGE> 3
Artecon, Inc.
March 9, 1998
Page Three
purposes, the Merger will be a reorganization within the meaning of Section
368(a)(1) of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Certain Federal Income Tax Matters" contained in the Registration
Statement and believe that, insofar as it relates to statements of law and legal
conclusions, is correct in all material respects.
We consent to the reference to our firm under the caption "Certain Federal
Income Tax Matters" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth herein, and this opinion may not be relied upon except with respect to
the consequences specifically discussed herein. Further, no opinion is expressed
as to the federal income tax treatment with respect to holders of Company
Warrants.
No opinion is expressed as to any transaction other than the Merger as described
in the Reorganization Agreement, or as to any other transaction whatsoever,
including the Merger, if all of the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of the Reorganization
Agreement and without waiver of any material provision thereof. To the extent
that any of the representations, warranties, statements and assumptions material
to our opinion and upon which we have relied are not accurate and complete in
all material respects at all relevant times, our opinion would be adversely
affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
<PAGE> 4
Artecon, Inc.
March 9, 1998
Page Four
This opinion is being delivered solely in connection with the Registration
Statement. It is intended for the benefit of the Company and its shareholders
and may not be relied upon or utilized for any other purpose or by any other
person and may not be made available to any other person without our prior
written consent.
Sincerely,
COOLEY GODWARD LLP
/s/ Susan Cooper Philpot
Susan Cooper Philpot
SCP:dp
<PAGE> 1
Exhibit 10.4
STORAGE DIMENSIONS, INC.
1996 STOCK OPTION PLAN
(AS AMENDED BY THE BOARD OF DIRECTORS IN JANUARY 1998
AND APPROVED BY THE STOCKHOLDERS IN __________ 1998)
1. Purposes of the Plan. The purposes of this Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide incentives to Employees, including Officers,
Directors and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan will be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Storage Dimensions, Inc., a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, excluding Officers, employed by
the Company or any Parent or Subsidiary of the Company. A Service Provider shall
not cease to be an Employee in the case of (i) any leave of absence approved by
the Company or (ii) transfers between locations of the Company or between the
Company, its Parent, any Subsidiary, or any successor. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant
to the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
-2-
<PAGE> 3
(r) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(s) "Optioned Stock" means the Common Stock subject to an Option.
(t) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(u) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1996 Stock Option Plan.
(w) "Service Provider" means an Employee, Consultant, Director or
Officer.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 3,000,000 Shares (after giving effect to a one-for-four
reverse stock split of the Common Stock approved by the Board December 5, 1996).
The Shares may be authorized, but unissued, or reacquired Common Stock. If an
Option expires or becomes unexercisable without having been exercised in full,
or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares
which were subject thereto shall become available for future grant or sale under
the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) The Plan shall be administered by (A) the Board or (B) a
Committee, which committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common
Stock;
(ii) to select the Service Providers to whom Options may
be granted hereunder;
(iii) to determine whether and to what extent Options
are granted hereunder;
-3-
<PAGE> 4
(iv) to determine the number of shares of Common Stock
to be covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(xi) to modify or amend each Option (subject to Section
15(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xii) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option or
previously granted by the Administrator;
(xiii) to determine the terms and restrictions
applicable to Options;
(xiv) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary
or advisable for administering the Plan.
-4-
<PAGE> 5
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon the later of (i)
its adoption by the Board and (ii) that date on which the Company first becomes
subject to the periodic reporting requirements of the Exchange Act. It shall
continue in effect until terminated under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
-5-
<PAGE> 6
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of
payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
-6-
<PAGE> 7
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Nontransferability of Options . Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the Stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
-7-
<PAGE> 8
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Change of Control. In the event of a Change of Control
(defined below), Options under this Plan shall be assumed or an equivalent
option shall be substituted by any successor corporation or a Parent or
Subsidiary of such successor corporation. If, in such event the Option is not
assumed or substituted, the Option shall terminate as of the date of closing of
the Change of Control. For purposes of this paragraph, the Option shall be
considered assumed if, following the Change of Control, the Option confers the
right to purchase, for each share of Optioned Stock subject to the Option
immediately prior to the Change of Control, the consideration (whether stock,
cash or other securities or property) received in the Change of Control by
holders of Common Stock for each Share held on the effective date of the
transaction (and, if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the Change of Control
was not solely Common Stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each share
of Optioned Stock subject to the Option, to be solely Common Stock of the
successor corporation or its Parent equal and fair market value to the per share
consideration received by the holders of Common Stock in the Change of Control.
For purposes of this Plan, "Change of Control" shall mean a corporate
reorganization of the Company which results in the then current stockholders of
the Company holding less than 50% of the equity securities of the surviving
company, or the sale of all or substantially all of the assets of the Company.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
-8-
<PAGE> 9
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Inability to Obtain Authority. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
16. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-9-
<PAGE> 10
STORAGE DIMENSIONS, INC.
1996 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Date of Grant
------------------------------
Vesting Commencement Date
------------------------------
Exercise Price per Share $
------------------------------
Total Number of Shares Granted
------------------------------
Type of Option: Nonstatutory Stock Option ("NSO")
Term/Expiration Date:
------------------------------
Vesting Schedule: For so long as the Optionee shall continue to be a
Service Provider, this Option shall vest cumulatively as follows:
1/4th of the Shares subject to the Option shall vest twelve (12) months
following the Vesting Commencement Date set forth above, and 1/48th of the
Shares subject to the Option shall vest on the first day of each month
thereafter.
Termination Period:
This Option may be exercised for thirty (30) days after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
-1-
<PAGE> 11
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
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<PAGE> 12
4. Nontransferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Change of Control. In the event of a Change of Control, this Option
shall be exercisable in accordance with Section 12(c) of the Plan
notwithstanding anything to the contrary set forth elsewhere herein.
7. Arbitration. Any dispute or claim arising out of or in connection
with this Agreement shall be settled by binding arbitration. Any such
arbitration shall be conducted in accordance with the Rules of Conciliation and
Arbitration of the American Arbitration Association and shall take place in San
Jose, California. The arbitration shall be conducted by one arbitrator; provided
that if the parties cannot agree on a single arbitrator, then the arbitration
shall be conducted by a panel of three arbitrators, one selected by each party
and the third selected by the other two arbitrators. The determination of the
arbitrator(s) shall be final and binding upon the parties.
8. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
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9. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
10. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: STORAGE DIMENSIONS, INC.
- -------------------------------- -------------------------------------
Signature By
- -------------------------------- -------------------------------------
Print Name Title
- --------------------------------
Residence Address
- --------------------------------
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<PAGE> 14
EXHIBIT A
STORAGE DIMENSIONS, INC.
1996 STOCK OPTION PLAN
EXERCISE NOTICE
Storage Dimensions, Inc.
1656 McCarthy Blvd.
Milpitas, CA 95035
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, _______________ ____,
_____, the undersigned ("Purchaser") hereby elects to purchase ______________
shares (the "Shares") of the Common Stock of Storage Dimensions, Inc. (the
"Company") under and pursuant to the 1996 Stock Option Plan (the "Plan") and the
Stock Option Agreement dated ______________ __, 19___ (the "Option Agreement").
The purchase price for the Shares shall be $______, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
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<PAGE> 15
6. Arbitration. Any dispute or claim arising out of or in connection
with this Exercise Notice shall be settled by binding arbitration. Any such
arbitration shall be conducted in accordance with the Rules of Conciliation and
Arbitration of the American Arbitration Association and shall take place in San
Jose, California. The arbitration shall be conducted by one arbitrator; provided
that if the parties cannot agree on a single arbitrator, then the arbitration
shall be conducted by a panel of three arbitrators, one selected by each party
and the third selected by the other two arbitrators. The determination of the
arbitrator(s) shall be final and binding upon the parties.
7. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: STORAGE DIMENSIONS, INC.
- ---------------------------------- ------------------------------------
Signature By
- ---------------------------------- ------------------------------------
Print Name Title
Date Received
------------------------------------
Address: Address:
- ---------------------------------- ------------------------------------
- ---------------------------------- ------------------------------------
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<PAGE> 1
Exhibit 10.5
STORAGE DIMENSIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED BY THE BOARD OF DIRECTORS IN JANUARY 1998
AND APPROVED BY THE STOCKHOLDERS IN __________ 1998)
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Storage Dimensions, Inc., a Delaware
corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
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<PAGE> 2
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(4) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Period" shall mean a period of approximately six
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after February 15 and terminating on
the last Trading Day in the period ending the following August 14, or commencing
on the first Trading Day on or after August 15 and terminating on the last
Trading Day in the period ending the following February 14; provided, however,
that the first Offering Period under the Plan shall commence with the first
Trading Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and ending on the last
Trading Day on or after August 14. The duration of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower (subject to any limit imposed by the Code).
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(o) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds any limit imposed by the Code for each calendar
year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period, up to a maximum of seven thousand five hundred dollars ($7,500) during
such Offering Period. Without limiting the generality of Section 20 hereof, the
Company may, with respect to any prospective Offering Period, amend the maximum
percent of Compensation which participants
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<PAGE> 4
may elect to have deducted pursuant to the Plan or the maximum aggregate amount
which may be withheld in any Offering Period (subject to any limit imposed by
the Code).
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The Option shall expire
on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such
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<PAGE> 5
participant at the applicable Purchase Price with the accumulated payroll
deductions in his or her account. No fractional shares shall be purchased; any
payroll deductions accumulated in a participant's account which are not
sufficient to purchase a full share shall be retained in the participant's
account for the subsequent Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be Four Hundred
Thousand (400,000) shares (after giving effect to a one-for-four reverse split
of the Common Stock approved by the Board on December 5, 1996),
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<PAGE> 6
subject to adjustment upon changes in capitalization of the Company as provided
in Section 19 hereof. If, on a given Exercise Date, the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
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<PAGE> 7
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Offering Period then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date"). The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment
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<PAGE> 8
may make any change in any option theretofore granted which adversely affects
the rights of any participant. To the extent necessary to comply with Section
423 of the Code (or any other applicable law, regulation or stock exchange
rule), the Company shall obtain shareholder approval in such a manner and to
such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the later to
occur of (i) its adoption by the Board of Directors and (ii) that date on which
the Company first becomes subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended. It shall continue in effect for a
term of ten (10) years unless sooner terminated under Section 20 hereof.
-8-
<PAGE> 9
EXHIBIT A
STORAGE DIMENSIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the Storage Dimensions, Inc. 1996 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement
and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): _____ .
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at
the time of such disposition in an amount equal to the excess of the
fair market value of the shares at the time such shares were purchased
by me over the price which I paid for the shares. I hereby agree to
notify the Company in writing within 30 days after the date of any
disposition of shares and I will make adequate provision for Federal,
state or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but will not be
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation including any withholding
necessary to make available to the
<PAGE> 10
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any
time after the expiration of the 2-year holding period, I understand
that I will be treated for federal income tax purposes as having
received income only at the time of such disposition, and that such
income will be taxed as ordinary income only to the extent of an amount
equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Offering Period. The remainder of the gain, if
any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME OF BENEFICIARY: (Please print)
----------------------------------------
(First) (Middle Initial) (Last)
- ----------------------------------- ----------------------------------------
Relationship
----------------------------------------
(Address)
Employee's Social
Security Number:
----------------------------------------
Employee's Address:
----------------------------------------
----------------------------------------
----------------------------------------
-2-
<PAGE> 11
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
----------------------------- ----------------------------------------
Signature of Employee
----------------------------------------
Spouse's Signature (If beneficiary other
than spouse)
-3-
<PAGE> 12
EXHIBIT B
STORAGE DIMENSIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Storage
Dimensions, Inc. 1996 Employee Stock Purchase Plan which began on ___________
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
----------------------------------------
----------------------------------------
----------------------------------------
Signature:
----------------------------------------
Date:
-----------------------------------
<PAGE> 1
EXHIBIT 10.11
STANDSTILL AGREEMENT
THIS STANDSTILL AGREEMENT is entered into as of December 22, 1997 (the
"Effective Date") by and among ARTECON, INC., a California corporation
("Company"), STORAGE DIMENSIONS, INC., a Delaware corporation ("Parent"), and CP
ACQUISITION, L.P. NO. 4A, a Delaware limited partnership, CP ACQUISITION, L.P.
NO. 4B, a Delaware limited partnership, CAPITAL PARTNERS, INC., a Connecticut
corporation, and FGS, INC., a Delaware corporation (each a "Stockholder" and
collectively the "Stockholders").
RECITALS
A. Company, Parent and Storage Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), are entering
into an Agreement and Plan of Merger and Reorganization of even date herewith
(the "Merger Agreement"); capitalized terms used but not otherwise defined in
this Agreement shall have the meanings assigned to such terms in the Merger
Agreement, which provides for, among other things, the Merger on the terms set
forth therein.
B. As of the date hereof, the Stockholders are the record and beneficial
holders of an aggregate of 2,900,623 shares of Common Stock of Parent, which
shares represent all of the Parent Securities (as defined herein) held of record
or beneficially by the Stockholders and their affiliates.
C. As a condition to the willingness of the Company to enter into the
Merger Agreement, the Company has required that each Stockholder agree, and in
order to induce the Company to enter into the Merger Agreement each Stockholder
has agreed, to enter into and be bound by the terms of this Agreement.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
1.1 "Parent Securities" shall mean all shares of any class of capital
stock of Parent and any other Parent securities entitled to vote generally for
the election of directors or on any other matter submitted to a vote of
securityholders, outstanding before and/or after the Merger, and any rights to
acquire Parent Securities or other Parent Securities or rights convertible into
or exchangeable or exercisable for the purchase of Parent Common Stock or such
other Parent voting securities.
1.2 "affiliate" shall mean present or future affiliates within the
meaning of Rule 405 of the Securities Act of 1933, as amended (the "Securities
Act").
1.
<PAGE> 2
1.3 "beneficially owned" shall have the meaning set forth in Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended.
SECTION 2. STANDSTILL BY STOCKHOLDERS
2.1 RESTRICTIONS ON ACTIONS OF PARENT SECURITIES. Except as permitted by
Section 2.2 and subject to the terms of this Agreement, each Stockholder agrees
that, from the date hereof until the earlier to occur of (i) the date that is
five (5) years from the Closing Date, and (ii) the date on which the
Stockholders and their affiliates beneficially hold in the aggregate less than
five percent (5%) of the outstanding voting stock of Parent (such earlier date
being referred to as the "Termination Date"), it shall not (acting individually
or in conjunction with one or more other Stockholders) nor shall it permit any
of its affiliates to:
(a) acquire or offer to acquire or agree to acquire, directly or
indirectly, by purchase or otherwise, any Parent Securities not already owned,
beneficially or of record, by the Stockholders as of the date hereof, except for
Parent Securities issued to the Stockholders in connection with any stock split
or other reclassification affecting the outstanding securities of Parent or
stock dividend or other pro rata distribution by Parent to holders of its
outstanding securities;
(b) solicit proxies or become a "participant" in a "solicitation"
(as such terms are defined in Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) with respect to any matter involving
Parent or otherwise initiate, propose or solicit any stockholder, or induce any
other person to initiate any stockholder proposal or a tender offer for shares
of Parent Securities or any change of control of Parent, or for the purpose of
convening a stockholders' meeting of Parent;
(c) deposit any Parent Securities in any voting trust or subject
them to any voting agreement or other agreement of similar effect (other than
the Voting Agreements entered into in connection with the Merger Agreement);
(d) join any partnership, limited partnership, syndicate, or
other group for the purpose of acquiring, holding or disposing of Parent
Securities within the meaning of Section 13(d) of the Exchange Act;
(e) acquire or offer to acquire or hold, or agree to acquire or
hold, directly or indirectly or permit any person or entity under any
Stockholder's control to acquire, offer to acquire or hold, or agree to acquire
or hold, directly or indirectly, by purchase or otherwise, more than five
percent (5%) of any class of equity securities of any entity which is the
beneficial owner of more than five percent (5%) of the outstanding voting power
of Parent Securities; or
(f) otherwise take any action individually or jointly with any
partnership, limited partnership, syndicate, or other group or assist any other
person, corporation, entity or group in taking any action it could not
individually take under this Agreement.
2.
<PAGE> 3
2.2 PERMITTED ACQUISITIONS.
(a) Notwithstanding the limitations imposed on the Stockholders
and their affiliates under Section 2.1 of this Agreement, one or more
Stockholders or their affiliates may acquire from time to time up to that number
of Parent Securities such that immediately following each such acquisition, the
total number of Parent Securities owned beneficially or of record by all
Stockholders and all of their respective affiliates together does not exceed
that percentage of the Common Stock of Parent (the "Maximum Percentage"),
calculated after giving pro forma effect to the exercise of all outstanding
options and warrants and the conversion of all outstanding securities
convertible into Common Stock of Parent, held by all Stockholders and their
affiliates immediately after the Effective Time. Any Stockholder or its
affiliates that acquire shares of Parent Securities under this Section 2 shall,
promptly following such acquisition, provide written notice of such acquisition
to Parent or, if such acquisition is prior to the Closing Date, to the Company.
(b) If, as a result of any purchase or other acquisition of
securities of Parent other than pursuant to the provisions set forth above in
Section 2(a), any Stockholder or affiliate thereof shall at any time own any
Parent Securities such that the total number of Parent Securities owned by all
Stockholders and their affiliates together exceeds the maximum percentage
permitted by this Section 2 (such excess securities so purchased or otherwise
acquired shall be referred to as "Prohibited Securities"), subject to the
provisions of all applicable securities laws, such Stockholder shall sell as
promptly as practicable Parent Securities having voting power at least equal to
the voting power of the Prohibited Securities. Prior to such sale, each
Stockholder agrees, and hereby grants Parent its irrevocable proxy, to vote the
Prohibited Securities in accordance with the recommendation of the Parent's
management in any matter submitted to a vote of the stockholders of Parent
(provided, however, that the foregoing paragraph shall not be deemed to limit
Parent's remedies in the event that Prohibited Securities were acquired in
violation of this Section 2). Notwithstanding the foregoing, if the aggregate
beneficial ownership of the Stockholders and their affiliates exceeds the
Maximum Percentage solely as a result of any stock repurchase or other action
effected by Parent or the Company which has the effect of reducing the number of
outstanding Parent capital stock, then securities of Parent held by the
Stockholders shall not be deemed to be Prohibited Securities and the provisions
of this Section 2.2(b) shall not be applicable to any such excess holdings.
SECTION 3. WAIVER OF RESTRICTIONS. The provisions of this Agreement may be
waived with respect to any proposed acquisition or transfer of Parent Securities
solely (i) after the Closing Date by Parent and (ii) prior to the Closing Date
by Parent and the Company, upon duly authorized action of their respective
Boards of Directors.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER
Each Stockholder hereby represents and warrants to Parent and the
Company as follows:
4.1 DUE AUTHORIZATION. Each Stockholder has full power and capacity to
execute and deliver this Agreement and to make the representations, warranties
and agreements herein
3.
<PAGE> 4
and to perform such Stockholder's obligations hereunder. The Stockholders that
are parties to this Agreement represent all of the current affiliates of Capital
Partners, Inc. who own, beneficially or of record, Parent Securities.
4.2 ACKNOWLEDGMENT. Each Stockholder has carefully read this Agreement
and has discussed with counsel, to the extent such Stockholder felt necessary,
the requirements, limitations and restrictions on its ability to sell, transfer
or otherwise dispose of its Parent Securities and fully understands the
requirements, limitations and restrictions this Agreement places upon such
Stockholder's ability to transfer, sell or otherwise dispose of such Parent
Securities.
4.3 NO CONFLICTS. The execution and delivery of this Agreement by
Stockholder do not, and the performance of this Agreement by Stockholder will
not: (i) conflict with or violate any current law, order, decree or judgment
applicable to Stockholder or its affiliates or by which Stockholder, its
affiliates or any of their properties is bound or affected; or (ii) result in
any breach of or constitute a default (with notice or lapse of time, or both)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of any indenture or other loan document provisions or other
Contract, license, franchise, permit or other instrument or obligation to which
such Stockholder or any of its affiliates is a party or by which Stockholder,
its affiliate or any of their properties is bound or affected.
4.4 TITLE TO PARENT SECURITIES. Each Stockholder further represents that
it is the beneficial owner of the number of shares of Parent Securities set
forth below, which Parent Securities represent all Parent Securities owned
beneficially or of record by such Stockholder.
4.5 ACCURACY OF REPRESENTATIONS. The representations and warranties
contained in this Agreement are accurate in all respects as of the date of this
Agreement, will be accurate in all respects at all times through the
consummation of the Merger, and will be accurate in all material respects as of
the date of the consummation of the Merger as if made on that date.
Notwithstanding the previous sentence, the representations and warranties
contained in this Agreement shall expire on the Closing Date.
SECTION 5. MISCELLANEOUS
5.1 EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
4.
<PAGE> 5
5.2 NOTICES. All notices or other communications under this Agreement
shall be in writing and shall be given by delivery in person, by facsimile,
cable, telegram, telex or other standard form of telecommunications, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows (or such other address for a party as shall be specified in
a notice given in accordance with this Section 5.2) and shall be deemed to have
been given one business day after transmission by facsimile, cable, telegram,
telex of other standard form of telecommunications or four days after deposit in
the U.S.
mail:
if to Stockholder:
Capital Partners, Inc.
One Pickwick Plaza
Suite 310 Greenwich, CT 06830
if to Parent:
Storage Dimensions, Inc.
1656 McCarthy Blvd.
Milpitas, CA 95035
Attention: Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Kenneth M. Siegel, Esq.
Facsimile No.: (415) 493-6811
if to Company:
Artecon, Inc.
6305 El Camino Real
Carlsbad, CA 92009-1606
with a copy to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, CA 92121-2128
Attention: Thomas A. Coll, Esq.
Facsimile No.: (619) 453-3555
5.
<PAGE> 6
5.3 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
5.4 ENTIRE AGREEMENT. This Agreement and any documents delivered by the
parties in connection herewith constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto. This Agreement
shall terminate in the event the Merger Agreement is validly terminated pursuant
to its terms so long as any termination does not occur by reason of any breach
by Parent.
5.5 ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor any of
Stockholder's rights, interests or obligations hereunder shall be assigned by
Stockholder (whether by operation of law or otherwise) without the prior written
consent of the Company and Parent. The Company and Parent may assign all or any
of their rights and obligations hereunder without the consent of any Person.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, expressed or implied, is intended to confer
on any Person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
5.6 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
5.7 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California, as applied to contracts entered into and to
be performed entirely within the State of California.
5.8 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
6.
<PAGE> 7
IN WITNESS WHEREOF, the Company, Parent and each Stockholder have caused
this Agreement to be executed, as of the date first written above.
ARTECON, INC.
By: /s/ JAMES L. LAMBERT
-------------------------------
Name: James L. Lambert
Title: President and CEO
STORAGE DIMENSIONS, INC.
By:/s/ DAVID A. EEG
-------------------------------
Name: David A. Eeg
Title: President and CEO
STOCKHOLDERS:
CP ACQUISITION, L.P. NO. 4A
By: /s/ A. GEORGE GEBAUER
-------------------------------
Name:
Title:
Parent Securities owned as of the date
of this Standstill Agreement:
1,676,440 shares of Common Stock
CP ACQUISITION, L.P. NO. 4B
By: /s/ A. GEORGE GEBAUER
-------------------------------
Name:
Title:
Parent Securities owned as of the date
of this Standstill Agreement:
926,790 shares of Common Stock
7.
<PAGE> 8
CAPITAL PARTNERS, INC.
By: /s/ A. GEORGE GEBAUER
-------------------------------
Name:
Title:
Parent Securities owned as of the date
of this Standstill Agreement:
3,612 shares of Common Stock
FGS, INC.
By: /s/ A. GEORGE GEBAUER
-------------------------------
Name:
Title:
Parent Securities owned as of the date
of this Standstill Agreement:
293,781 shares of Common Stock
<PAGE> 1
Exhibit 10.12
AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE AGREEMENT made as of December 26, 1992,
between STORAGE DIMENSIONS, INC., a Delaware corporation (the "Employer"), and
David A. Eeg (the "Employee"), is made as of this __ day of March, 1998.
WITNESSETH:
WHEREAS, Employer and Employee entered into an Employment Agreement on
December 22, 1992 (the "Agreement") by which Employee currently serves as
President and Chief Executive Officer of Employer;
WHEREAS, Employer and Employee now desire to amend the Agreement to
change the benefits payable to Employee in the event of termination of
Employee's employment or consulting relationship with Employer.
NOW, THEREFORE, in consideration of the premises, the covenants
contained herein, and other good and valuable consideration, the Employer and
the Employee hereby amend the Agreement as follows:
1. Amendment to Section 2.1 of the Agreement. Section 2.1 of the
Agreement is hereby amended to add the following sentence as a new penultimate
sentence to Section 2.1 of the Agreement:
"Notwithstanding the foregoing, effective as of the closing date (the
"Closing Date") of the merger contemplated pursuant to that certain
Agreement and Plan of Merger and Reorganization dated as of December 22,
1997 among Employer, Storage Acquisition Corp. and Artecon, Inc. (the
"Merger Agreement"), Employee shall serve as a consultant to Employer."
2. Amendment to Section 3.2 of the Agreement. Section 3.2 of the
Agreement is hereby amended to read as follows:
"(a) Management Bonus Plan. Employee shall no longer be entitled
to receive any bonuses under the terms of Employer's Management Bonus
Plan, a copy of which is attached hereto as Exhibit A."
3. Amendment to Section 4.1(b) of the Agreement. Section 4.1(b) of the
Agreement is hereby amended to read in its entirety as follows:
"(b) In addition, for so long as Employee continues to be
engaged by Employer or any subsidiary thereof as an employee or a
consultant and for the period during which Employer or any subsidiary
thereof makes severance payments to Employee pursuant to
-1-
<PAGE> 2
Section 5.3(a), Employee will not, without the express written consent
of Employer, directly or indirectly engage, participate or invest in or
assist, as owner, part owner, shareholder, partner, director, officer,
trustee, employee, agent or consultant, or in any other capacity, any
business organization other than Employer whose activities or products
are competitive with activities or products of Employer or any
subsidiary thereof in which activities Employee shall have participated
or as to which products Employee shall have had responsibility either in
their development, marketing or otherwise, provided that Employee may
make passive investments in a competitive enterprise the shares of which
are publicly traded if Employee's investment constitutes less than 5% of
the outstanding shares of such enterprise. The foregoing agreement not
to compete shall apply in any and all cities and counties of each state
of the United States of America in which the activities of Employer or
any subsidiary thereof shall have been conducted, or the products of any
of them sold, on or before the date upon which Employee's employment by
Employer or any subsidiary thereof ceases."
4. Amendment to Section 4.2 of the Agreement. Section 4.2 of the
Agreement is hereby amended to add the following sentence to the end of Section
4.2 of the Agreement:
"For purposes of this Section 4.2, the term "Employer" shall be deemed
to include Storage Dimensions, Inc. or its successor and any entity
which is a subsidiary of the foregoing during the period in which the
noncompetition agreement set forth in Section 4.1 is in effect."
5. Amendment to Section 5.1 of the Agreement. Section 5.1 of the
Agreement is hereby amended to add the following language to the end thereof:
"or until terminated pursuant to Section 5.2 of this Agreement, as
amended."
6. Amendment of Section 5.2 of the Agreement.
(a) Section 5.2(b) is hereby amended to delete the phrase
"thirty (30) days" from the first sentence thereof.
(b) Section 5.2(b) of the Agreement is hereby amended to add the
following language to the end of Section 5.2(b):
"Any termination of Employee's status as an employee or
consultant of the Employer (but not a change in status from
employee to consultant) following a "Change in Control", whether
at Employer's or Employee's option (other than a termination by
Employer under Section 5.2(c)), shall be deemed to be a
termination by Employer pursuant to this Section 5.2(b) and
Employer shall make severance payments as provided in Section
5.3(a). "Change of Control" shall mean any merger or sale of
substantially all of the assets of the Employer or other
transaction pursuant to which the stockholders of Employer before
such transaction no longer hold at least 50% of the voting
securities of the Employer after such transaction. In no event,
however, shall the change in Employee's title
-2-
<PAGE> 3
contemplated under Section 2.1 of this Agreement, as amended, or
any commensurate change in Employee's duties be a termination
pursuant to this Section 5.2(b) or trigger Employer's obligation
to make severance payments under Section 5.3(a)."
(c) Section 5.2 of the Agreement is hereby amended to add a new
subsection (d), as follows:
"(d) If, following termination of Employee's employment with
Employer by either Employee or Employer, the parties mutually determine
that Employee should be retained as a consultant to Employer, the
parties will execute the Consulting Agreement attached hereto as Exhibit
B."
7. Amendment of Section 5.3(a) of the Agreement. Section 5.3(a) of the
Agreement is hereby amended to read in its entirety as follows:
"(a) Upon a termination described in Section 5.2(b), Employer
shall pay to Employee for a period of 66 weeks following such
termination one hundred percent (100%) of Employee's regular weekly base
salary in effect on the date of termination of Employee's employment or
consulting relationship hereunder (less applicable income tax
withholding), such amount to be payable in equal installments on the
Company's normal payment date for employees beginning on the payment
date next following the date of such termination. In the event of such
termination, the stock option referred to in Section 3.2(b), and any
subsequently granted stock options, shall be exercisable only to the
extent vested as of such termination in accordance with their terms;
provided, however, that such options shall be amended by the Company in
order to provide that they may be exercised, to the extent exercisable
at the time of such termination, for a period of two years from the date
of such termination."
8. Amendment of Section 6.2 of the Agreement. Section 6.2 shall be
amended to add the following as a new paragraph immediately following the
paragraph which begins "To Employer":
"provided, however, that notwithstanding the foregoing, following the
Closing Date, any notice to be delivered hereunder to Employer shall
instead be sent to the following address:
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Attn: James L. Lambert, President and CEO"
9. No other Amendment. Except as expressly amended hereby, all
provisions of the Agreement shall remain in full force and effect.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Employment Agreement as of the day and year first above written.
STORAGE DIMENSIONS, INC.
By:
---------------------------------------
Brian Fitzgerald, Chairman of the Board
---------------------------------------
David A. Eeg
The foregoing amendment is consented to pursuant to Section 5.2 of the
Merger Agreement.
ARTECON, INC.
- ---------------------------------------
James L. Lambert
President and CEO
-4-
<PAGE> 5
Exhibit B
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is effective as of February
____, 1998 between Storage Dimensions, Inc., a Delaware corporation (the
"Company") and David A. Eeg (the "Consultant").
RECITALS
A. The Company and Consultant are parties to that certain employment
agreement (the "Employment Agreement"), dated December 26, 1992, by and between
the Company and Consultant, as amended, a copy of which is attached hereto.
B. The parties have determined to end Consultant's employment
relationship with the Company and to enter into a Consulting Agreement by which
Consultant would perform certain services for the Company.
In consideration of the mutual covenants herein contained the Company
and the Consultant agree as follows:
1. Services.
(a) The Consultant shall provide consulting services to the
Company in such matters as may be agreed upon by the Consultant and the Company.
In such capacity, Consultant shall have the duties and responsibilities
determined by the Company's Board, and shall report to the Company's Chief
Executive Officer or such other person designated by the Board.
(b) Unless otherwise determined by the Company and Consultant,
the Consultant shall render such services to the Company on a full-time basis
and shall not accept other employment during the term of this Agreement.
Consultant shall not participate in Company employee benefit plans in which he
participated at the time of termination of his employment with the Company,
other than under COBRA or similar laws and at Consultant's expense.
2. Compensation. As full consideration for the consulting services
provided by the Consultant, the Company shall pay to the Consultant the
Consultant's monthly salary as an employee of the Company in effect on the date
of termination of Consultant's employment with the Company, payable in
accordance with the regular payroll procedures of the Company. In addition to
the foregoing amount, the Company shall promptly reimburse the Consultant for
all reasonable expenses incurred by the Consultant in providing consulting
services under this Agreement.
3. Competition. The Consultant represents to the Company that the
Consultant does not have any agreement with any other party, firm, or company
which would preclude Consultant from fulfilling his obligations hereunder.
<PAGE> 6
4. Confidentiality. The parties agree that the Proprietary Information
and Assignment of Inventions Agreement previously executed by the parties with
respect to Consultant's former employment with the Company shall remain in full
force and effect during the term of this Agreement.
5. Return of Materials. The Consultant agrees to promptly return,
following the termination of this Agreement or upon earlier request by the
Company, all drawings, tracings, and written materials in the Consultant's
possession and (i) supplied by the Company in conjunction with the Consultant's
consulting services under this Agreement or (ii) generated by the Consultant in
the performance of consulting services under this Agreement.
6. Defense and Indemnification. The Company agrees, at its sole expense,
to defend the Consultant against, and to indemnify and hold the Consultant
harmless from, any claims or suits by a third party against the Consultant or
any liabilities or judgments based thereon, either arising from the Consultant's
performance of services for the Company under this Agreement or arising from any
Company products which result from the Consultant's performance of services
under this Agreement.
7. Term and Termination.
(a) Either party may terminate this Agreement at any time and for
any reason upon two weeks notice to the other.
(b) Termination of this Agreement shall not affect (i) the
Company's obligation to pay for services previously performed by the Consultant
or expenses reasonably incurred by the Consultant for which the Consultant is
entitled to reimbursement under paragraph 2, above, (ii) the Company's
obligations to defend and indemnify the Consultant under paragraph 6 above,
(iii) the Consultant's continuing obligations to the Company under paragraphs 4
and 5, above, or (iv) the Company's obligations to make severance payments
pursuant to the Employment Agreement following termination of this Agreement.
8. Miscellaneous.
(a) This Agreement shall inure to the benefit of and be binding
upon the respective heirs, executors, successors, representatives, and assigns
of the parties, as the case may be; provided, however, the obligations hereunder
of each party to the other are personal and may not be assigned without the
express written consent of such other party.
(b) The relationship created by this Agreement shall be that of
independent contractor, and the Consultant shall have no authority to bind or
act as agent for the Company or its employees for any purpose.
(c) This Agreement shall be construed in accordance with
California law.
(d) Notice or payments given by one party to the other hereunder
shall be in writing and deemed to have been properly given or paid if deposited
with the United States Postal Service, registered or certified mail, addressed
to the Company's principal executive officer, in the care of the Company, or to
the address of Consultant shown in the records of the Company.
-2-
<PAGE> 7
(e) This Agreement replaces all previous agreements and the
discussions relating to the subject matters hereof and this Agreement and the
Employment Agreement constitute the entire agreement between the Company and the
Consultant with respect to the subject matters of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation, or
agreement made by any employee, officer, or representative of the Company, or by
any written documents unless it is signed by an officer of the Company and by
the Consultant.
(f) If any term or provision of this Agreement is deemed invalid,
contrary to, or prohibited under applicable laws or regulations of any
jurisdiction, this Agreement (save only this sentence) shall be invalid.
(g) This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
-3-
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement
effective the date first stated above.
STORAGE DIMENSIONS, INC.
By:
---------------------------------
Name:
----------------------------
Title:
----------------------------
- -------------------------------
David A. Eeg
-4-
<PAGE> 1
Exhibit 10.13
AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO THE AGREEMENT made as of December 26, 1992,
between STORAGE DIMENSIONS, INC., a Delaware corporation (the "Employer"), and
Robert Bylin (the "Employee"), is made as of this __ day of March, 1998.
WITNESSETH:
WHEREAS, Employer and Employee entered into an Employment Agreement on
December 22, 1992 (the "Agreement") by which Employee currently serves as Vice
President and Chief Financial Officer of Employer;
WHEREAS, Employer and Employee now desire to amend the Agreement to
change the benefits payable to Employee in the event of termination of
Employee's employment or consulting relationship with Employer.
NOW, THEREFORE, in consideration of the premises, the covenants
contained herein, and other good and valuable consideration, the Employer and
the Employee hereby amend the Agreement as follows:
1. Amendment to Section 4.1(b) of the Agreement. Section 4.1(b) of the
Agreement is hereby amended to read in its entirety as follows:
"(b) In addition, for so long as Employee continues to be engaged
by Employer or any subsidiary thereof as an employee or a consultant and
for the period during which Employer or any subsidiary thereof makes
severance payments to Employee pursuant to Section 5.3(a), Employee will
not, without the express written consent of Employer, directly or
indirectly engage, participate or invest in or assist, as owner, part
owner, shareholder, partner, director, officer, trustee, employee, agent
or consultant, or in any other capacity, any business organization other
than Employer whose activities or products are competitive with
activities or products of Employer or any subsidiary thereof in which
activities Employee shall have participated or as to which products
Employee shall have had responsibility either in their development,
marketing or otherwise, provided that Employee may make passive
investments in a competitive enterprise the shares of which are publicly
traded if Employee's investment constitutes less than 5% of the
outstanding shares of such enterprise. The foregoing agreement not to
compete shall apply in any and all cities and counties of each state of
the United States of America in which the activities of Employer or any
subsidiary thereof shall have been conducted, or the products of any of
them sold, on or before the date upon which Employee's employment by
Employer or any subsidiary thereof ceases."
-1-
<PAGE> 2
2. Amendment to Section 4.2 of the Agreement. Section 4.2 of the
Agreement is hereby amended to add the following sentence to the end of Section
4.2 of the Agreement:
"For purposes of this Section 4.2, the term "Employer" shall be deemed
to include Storage Dimensions, Inc. or its successor and any entity
which is a subsidiary of the foregoing during the period in which the
noncompetition agreement set forth in Section 4.1 is in effect."
3. Amendment to Section 5.1 of the Agreement. Section 5.1 of the
Agreement is hereby amended to add the following language to the end thereof:
"or until terminated pursuant to Section 5.2 of this Agreement, as
amended."
4. Amendment of Section 5.2 of the Agreement.
(a) Section 5.2(b) is hereby amended to delete the phrase
"thirty (30) days" from the first sentence thereof.
(b) Section 5.2(b) of the Agreement is hereby amended to add the
following language to the end of Section 5.2(b):
"Any termination of Employee's status as an employee or
consultant of the Employer (but not a change in status from employee to
consultant) following a "Change in Control", whether at Employer's or
Employee's option (other than a termination by Employer under Section
5.2(c)), shall be deemed to be a termination by Employer pursuant to
this Section 5.2(b) and Employer shall make severance payments as
provided in Section 5.3(a). "Change of Control" shall mean any merger or
sale of substantially all of the assets of the Employer or other
transaction pursuant to which the stockholders of Employer before such
transaction no longer hold at least 50% of the voting securities of the
Employer after such transaction. In no event, however, shall the change
in Employee's title contemplated under Section 2.1 of this Agreement, as
amended, or any commensurate change in Employee's duties be a
termination pursuant to this Section 5.2(b) or trigger Employer's
obligation to make severance payments under Section 5.3(a)."
(c) Section 5.2 of the Agreement is hereby amended to add a new
subsection (d), as follows:
"(d) If, following termination of Employee's employment with
Employer by either Employee or Employer, the parties mutually determine
that Employee should be retained as a consultant to Employer, the
parties will execute the Consulting Agreement attached hereto as Exhibit
B."
5. Amendment of Section 5.3(a) of the Agreement. Section 5.3(a) of the
Agreement is hereby amended to read in its entirety as follows:
-2-
<PAGE> 3
"(a) Upon a termination described in Section 5.2(b), Employer
shall pay to Employee for a period of 47 weeks following such
termination one hundred percent (100%) of Employee's regular weekly base
salary in effect on the date of termination of Employee's employment or
consulting relationship hereunder (less applicable income tax
withholding), such amount to be payable in equal installments on the
Company's normal payment date for employees beginning on the payment
date next following the date of such termination. In the event of such
termination, the stock option referred to in Section 3.2(b), and any
subsequently granted stock options, shall be exercisable only to the
extent vested as of such termination in accordance with their terms;
provided, however, that such options shall be amended by the Company in
order to provide that they may be exercised, to the extent exercisable
at the time of such termination, for a period of one year from the date
of such termination (provided, however, that the extension of time in
which the options may be exercised shall only be triggered if the
termination is at the Employer's option or is mutually agreed to by
Employer and Employee)."
6. Amendment of Section 6.2 of the Agreement. Section 6.2 shall be
amended to add the following as a new paragraph immediately following the
paragraph which begins "To Employer":
"provided, however, that notwithstanding the foregoing, following the
Closing Date, any notice to be delivered hereunder to Employer shall
instead be sent to the following address:
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Attn: James L. Lambert, President and CEO"
7. No other Amendment. Except as expressly amended hereby, all
provisions of the Agreement shall remain in full force and effect.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Amendment to the
Employment Agreement as of the day and year first above written.
STORAGE DIMENSIONS, INC.
By:
---------------------------------------
Brian Fitzgerald, Chairman of the Board
---------------------------------------
Robert Bylin
The foregoing amendment is consented to pursuant to Section 5.2 of the Merger
Agreement.
ARTECON, INC.
- -----------------------------------
James L. Lambert
President and CEO
-4-
<PAGE> 5
Exhibit B
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is effective as of February
____, 1998 between Storage Dimensions, Inc., a Delaware corporation (the
"Company") and Robert Bylin (the "Consultant").
RECITALS
A. The Company and Consultant are parties to that certain employment
agreement (the "Employment Agreement"), dated December 26, 1992, by and between
the Company and Consultant, as amended, a copy of which is attached hereto.
B. The parties have determined to end Consultant's employment
relationship with the Company and to enter into a Consulting Agreement by which
Consultant would perform certain services for the Company.
In consideration of the mutual covenants herein contained the Company
and the Consultant agree as follows:
1. Services.
(a) The Consultant shall provide consulting services to the
Company in such matters as may be agreed upon by the Consultant and the Company.
In such capacity, Consultant shall have the duties and responsibilities
determined by the Company's Board, and shall report to the Company's Chief
Executive Officer or such other person designated by the Board.
(b) Unless otherwise determined by the Company and Consultant,
the Consultant shall render such services to the Company on a full-time basis
and shall not accept other employment during the term of this Agreement.
Consultant shall not participate in Company employee benefit plans in which he
participated at the time of termination of his employment with the Company,
other than under COBRA or similar laws and at Consultant's expense.
2. Compensation. As full consideration for the consulting services
provided by the Consultant, the Company shall pay to the Consultant the
Consultant's monthly salary as an employee of the Company in effect on the date
of termination of Consultant's employment with the Company, payable in
accordance with the regular payroll procedures of the Company. In addition to
the foregoing amount, the Company shall promptly reimburse the Consultant for
all reasonable expenses incurred by the Consultant in providing consulting
services under this Agreement.
3. Competition. The Consultant represents to the Company that the
Consultant does not have any agreement with any other party, firm, or company
which would preclude Consultant from fulfilling his obligations hereunder.
<PAGE> 6
4. Confidentiality. The parties agree that the Proprietary Information
and Assignment of Inventions Agreement previously executed by the parties with
respect to Consultant's former employment with the Company shall remain in full
force and effect during the term of this Agreement.
5. Return of Materials. The Consultant agrees to promptly return,
following the termination of this Agreement or upon earlier request by the
Company, all drawings, tracings, and written materials in the Consultant's
possession and (i) supplied by the Company in conjunction with the Consultant's
consulting services under this Agreement or (ii) generated by the Consultant in
the performance of consulting services under this Agreement.
6. Defense and Indemnification. The Company agrees, at its sole expense,
to defend the Consultant against, and to indemnify and hold the Consultant
harmless from, any claims or suits by a third party against the Consultant or
any liabilities or judgments based thereon, either arising from the Consultant's
performance of services for the Company under this Agreement or arising from any
Company products which result from the Consultant's performance of services
under this Agreement.
7. Term and Termination.
(a) Either party may terminate this Agreement at any time and for
any reason upon two weeks notice to the other.
(b) Termination of this Agreement shall not affect (i) the
Company's obligation to pay for services previously performed by the Consultant
or expenses reasonably incurred by the Consultant for which the Consultant is
entitled to reimbursement under paragraph 2, above, (ii) the Company's
obligations to defend and indemnify the Consultant under paragraph 6 above,
(iii) the Consultant's continuing obligations to the Company under paragraphs 4
and 5, above, or (iv) the Company's obligations to make severance payments
pursuant to the Employment Agreement following termination of this Agreement.
8. Miscellaneous.
(a) This Agreement shall inure to the benefit of and be binding
upon the respective heirs, executors, successors, representatives, and assigns
of the parties, as the case may be; provided, however, the obligations hereunder
of each party to the other are personal and may not be assigned without the
express written consent of such other party.
(b) The relationship created by this Agreement shall be that of
independent contractor, and the Consultant shall have no authority to bind or
act as agent for the Company or its employees for any purpose.
(c) This Agreement shall be construed in accordance with
California law.
(d) Notice or payments given by one party to the other hereunder
shall be in writing and deemed to have been properly given or paid if deposited
with the United States Postal Service, registered or certified mail, addressed
to the Company's principal executive officer, in the care of the Company, or to
the address of Consultant shown in the records of the Company.
-2-
<PAGE> 7
(e) This Agreement replaces all previous agreements and the
discussions relating to the subject matters hereof and this Agreement and the
Employment Agreement constitute the entire agreement between the Company and the
Consultant with respect to the subject matters of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation, or
agreement made by any employee, officer, or representative of the Company, or by
any written documents unless it is signed by an officer of the Company and by
the Consultant.
(f) If any term or provision of this Agreement is deemed invalid,
contrary to, or prohibited under applicable laws or regulations of any
jurisdiction, this Agreement (save only this sentence) shall be invalid.
(g) This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Consulting Agreement
effective the date first stated above.
STORAGE DIMENSIONS, INC.
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
- -------------------------------
Robert Bylin
-3-
<PAGE> 1
EXHIBIT 16.1
[ERNST & YOUNG LLP LETTERHEAD]
March 6, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
We have read the section titled "Change in Accountants of Artecon" in the
Registration Statement (Form S-4) of Storage Dimensions, Inc. expected to be
filed on or about March 9, 1998 and are in agreement with the statements
contained in the first and second paragraphs within this section on page 96. We
have no basis to agree or disagree with other statements contained within this
section.
Very truly yours,
/s/ ERNST & YOUNG LLP
<PAGE> 1
EXHIBIT 21.1
List of Subsidiaries of Registrant
Storage Acquisition Corp.
SDI Foreign Operations, Inc.
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting part
of this Registration Statement on Form S-4 of our report dated January 16, 1998
relating to the consolidated financial statements of Storage Dimensions, Inc.,
which appears in such Proxy Statement/Prospectus. We also consent to the
reference to us under the headings "Selected Historical Financial Information"
and "Experts" in such Proxy Statement/Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Historical Financial Information".
/s/ PRICE WATERHOUSE LLP
San Jose, California
March 9, 1998
<PAGE> 1
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Storage Dimensions on
Form S-4 of our report for Artecon, Inc. dated February 27, 1998, appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Financial Information" and "Experts" in such Prospectus.
/S/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 9, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the captions "Experts" and
"Change in Accountants of Artecon" and to the use of our report dated June 12,
1996, with respect to the consolidated financial statements of Artecon, Inc.
included in the Joint Proxy Statement/Prospectus of Storage Dimensions, Inc. and
Artecon, Inc. that is made a part of the Registration Statement (Form S-4) of
Storage Dimensions, Inc. for the registration of shares of its common stock
expected to be filed on or about March 9, 1998.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
March 6, 1998
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/S/ ARTHUR ANDERSEN LLP
Sacramento, California
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,094
<SECURITIES> 0
<RECEIVABLES> 12,861
<ALLOWANCES> (683)
<INVENTORY> 5,606
<CURRENT-ASSETS> 25,610
<PP&E> 7,977
<DEPRECIATION> (6,155)
<TOTAL-ASSETS> 27,432
<CURRENT-LIABILITIES> 8,313
<BONDS> 0
0
0
<COMMON> 27,436
<OTHER-SE> (8,317)
<TOTAL-LIABILITY-AND-EQUITY> 27,432
<SALES> 71,332
<TOTAL-REVENUES> 71,332
<CGS> 45,723
<TOTAL-COSTS> 45,723
<OTHER-EXPENSES> 27,972
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255
<INCOME-PRETAX> (2,431)
<INCOME-TAX> 130
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,561)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
STORAGE DIMENSIONS, INC.
1656 MCCARTHY BOULEVARD, MILPITAS, CA 95035
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS OF STORAGE DIMENSIONS, INC.
TO BE HELD ON MARCH 31, 1998.
PROXY
The undersigned hereby appoints David A. Eeg and A. George Gebauer, each
with full power of substitution, as proxy of the undersigned, to attend the
Special Meeting of Stockholders of Storage Dimensions, Inc. (the "Company") to
be held at the principal executive offices of the Company located at 1656
McCarthy Boulevard, Milpitas, CA 95035 at 9:00 a.m., local time on March 31,
1998, and at any and all adjournments thereof, and to vote all Common Stock of
the Company, with all powers the undersigned would possess if personally present
at the meeting.
THIS PROXY WILL BE VOTED OR WITHHELD FROM BEING VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS SPECIFIED. WHERE NO CHOICE IS SPECIFIED, THIS PROXY WILL CONFER
DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR APPROVAL OF THE MERGER, FOR
APPROVAL OF THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION, FOR APPROVAL OF
THE AMENDMENT TO 1996 STOCK OPTION PLAN AND FOR APPROVAL OF THE AMENDMENT TO
1996 EMPLOYEE STOCK PURCHASE PLAN (EACH AS SPECIFIED ON THE REVERSE SIDE). THIS
PROXY CONFERS AUTHORITY FOR THE ABOVE NAMED PERSONS TO VOTE IN HIS DISCRETION
WITH RESPECT TO AMENDMENTS OR VARIATIONS TO THE MATTERS IDENTIFIED IN THE NOTICE
OF THE MEETING ACCOMPANYING THIS PROXY AND SUCH OTHER MATTERS WHICH MAY PROPERLY
COME BEFORE THE MEETING. A STOCKHOLDER HAS THE RIGHT TO APPOINT A PERSON, WHO
NEED NOT BE A STOCKHOLDER, TO ATTEND AND ACT ON HIS BEHALF AT THE MEETING, OTHER
THAN THE PERSON DESIGNATED IN THIS FORM OF PROXY, SUCH RIGHT MAY BE EXERCISED BY
INSERTING THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED.
(continued and to be signed on reverse side)
<PAGE> 2
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSALS:
1. Approval and adoption of the Agreement, and Plan of Merger and
Reorganization, dated as of December 22, 1997 (as amended, the
"Reorganization Agreement"), among Storage Dimensions, Inc. ("Storage
Dimensions"), Storage Acquisition Corp., a wholly owned subsidiary of Storage
Dimension ("Merger Sub"), and Artecon, Inc. ("Artecon"), providing for the
merger of Merger Sub with and into the Artecon upon the terms and subject to
the conditions of the Reorganization Agreement, the issuance of shares of
Storage Dimensions capital stock to the holders of Artecon capital stock and
all transactions contemplated thereby, all as more fully described in the
Joint Proxy Statement dated March 9, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of an amendment to the Certificate of Incorporation to provide for a
classified Board of Directors whereby the directors will be separated into
three classes with each class serving for a three-year term.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of an amendment to the Certificate of Incorporation to provide that
a director may not be removed from office without cause except, until the
third annual meeting following the filing of the Certificate of Amendment to
the Certificate of Incorporation, by the affirmative vote of at least 80% of
the outstanding voting stock and by the affirmative vote of at least 66 2/3%
of the outstanding voting stock thereafter.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Approval of Amendment to 1996 Stock Option Plan to increase the number of
shares of Common Stock issuable thereunder from 1,000,000 to 3,000,000, all
as more fully described in the Joint Proxy Statement dated March 9, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Approval of Amendment to 1996 Employee Stock Purchase Plan to increase the
number of shares of Common Stock issuable thereunder from 200,000 to 400,000,
all as more fully described in the Joint Proxy Statement dated March 9, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND
NOTE AT LEFT [ ]
Please sign date and return the
proxy card promptly in the
enclosed envelope.
NOTE: Please sign, exactly as name
appears hereon. When signing as
executor, administrator, attorney,
trustee or guardian please give
your full title as such. If a
corporation, please sign in full
corporation name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person. If a joint tenancy, please
have both tenants sign.
----------------------------------
Signature Date
----------------------------------
Signature Date
<PAGE> 1
EXHIBIT 99.2
ARTECON, INC.
6305 EL CAMINO REAL, CARLSBAD, CA 92009-1606
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF ARTECON, INC.
TO BE HELD ON MARCH 31, 1998.
PROXY
The undersigned hereby appoints James L. Lambert, Tesfaye Hailemichael and
Pamela L. Lambert, and each of them, with full power of substitution, as proxy
of the undersigned, to attend the Special Meeting of Shareholders of Artecon,
Inc. (the "Company") to be held at the principal executive offices of the
company located at 6305 El Camino Real, Carlsbad, CA 92009 at 9:00 a.m., local
time on March 31, 1998, and at any and all adjournments thereof, and to vote all
Common Stock and Preferred Stock of the Company, with all powers the undersigned
would possess if personally present at the meeting.
THIS PROXY WILL BE VOTED OR WITHHELD FROM BEING VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS SPECIFIED. WHERE NO CHOICE IS SPECIFIED, THIS PROXY WILL CONFER
DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR APPROVAL OF THE MERGER (AS
SPECIFIED ON THE REVERSE SIDE). THIS PROXY CONFERS AUTHORITY FOR THE ABOVE NAMED
PERSONS TO VOTE IN HIS DISCRETION WITH RESPECT TO AMENDMENTS OR VARIATIONS TO
THE MATTERS IDENTIFIED IN THE NOTICE OF THE MEETING ACCOMPANYING THIS PROXY AND
SUCH OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING. A SHAREHOLDER HAS
THE RIGHT TO APPOINT A PERSON, WHO NEED NOT BE A SHAREHOLDER, TO ATTEND AND ACT
ON HIS BEHALF AT THE MEETING, OTHER THAN THE PERSON DESIGNATED IN THIS FORM OF
PROXY, SUCH RIGHT MAY BE EXERCISED BY INSERTING THE NAME OF SUCH PERSON IN THE
BLANK SPACE PROVIDED.
(continued and to be signed on reverse side)
<PAGE> 2
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
Approval and adoption of the Agreement and Plan of Merger and
Reorganization dated as of December 22, 1997 (the "Reorganization Agreement"),
among Artecon, Inc. ("Artecon"), Storage Dimensions, Inc. ("Storage Dimensions")
and Storage Acquisition Corp., a newly formed California corporation and wholly
owned subsidiary of Storage Dimensions ("Merger Sub"), and the merger of Merger
Sub with and into Artecon whereby Merger Sub will cease to exist and Artecon
will become a wholly owned subsidiary of Storage Dimensions, all as more fully
described in the Joint Proxy Statement dated March 9, 1998.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] N N
</TABLE>
MARK HERE FOR ADDRESS CHANGE AND
NOTE AT LEFT [ ]
Please sign, date and return the
proxy card promptly in the
enclosed envelope.
NOTE: Please sign, exactly as name
appears hereon. When signing as
executor, administrator, attorney,
trustee or guardian please give
your full title as such. If a
corporation, please sign in full
corporation name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person. If a joint tenancy, please
have both tenants sign.
Signature: Date: __
Signature: Date: __
<PAGE> 1
EXHIBIT 99.3
[LETTERHEAD OF SALOMON SMITH BARNEY]
The Board of Directors
Storage Dimensions, Inc.
1656 McCarthy Boulevard
Milpitas, California 93035
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Storage Dimensions, Inc. ("Storage") as Annex C to the Joint Proxy
Statement/Prospectus of Storage and Artecon, Inc. ("Artecon") relating to the
proposed merger transaction involving Storage and Artecon and references thereto
in such Joint Proxy Statement/Prospectus under the captions "SUMMARY-The
Merger-Opinion of Financial Advisor to Storage Dimensions" and "THE
MERGER-Opinion of Financial Advisor to Storage Dimensions." In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
SMITH BARNEY INC.
SALOMON BROTHERS INC
By:
SMITH BARNEY INC.
March 9, 1998
