<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
REGISTRATION NO. 333-59555
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SUN MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3571 94-2805249
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
901 SAN ANTONIO ROAD
PALO ALTO, CALIFORNIA 94303
(650) 960-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT G. MCNEALY
PRESIDENT
SUN MICROSYSTEMS, INC.
901 SAN ANTONIO ROAD
PALO ALTO, CALIFORNIA 94303
(650) 960-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
DAVID J. SEGRE MICHAEL H. MORRIS ROBERT V. GUNDERSON, JR.
DANIEL R. MITZ LAURA A. FENNELL BROOKS STOUGH
WILSON SONSINI GOODRICH & ROSATI SUN MICROSYSTEMS, INC. GUNDERSON DETTMER STOUGH VILLENEUVE
PROFESSIONAL CORPORATION 901 SAN ANTONIO ROAD FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94303 155 CONSTITUTION AVE.
PALO ALTO, CA 94304 (650) 960-1300 MENLO PARK, CA 94025
(650) 493-9300 (650) 321-2400
</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 Apollo Acquisition
Corp. with and into NetDynamics, Inc., as described in the Agreement and Plan of
Reorganization, dated as of June 30, 1998, attached as Annex A to the Proxy
Statement/Prospectus forming a part of this Registration Statement.
------------------------
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
LOGO
185 CONSTITUTION DRIVE
MENLO PARK, CA 94025
JULY 29, 1998
Dear Shareholder:
A Special Meeting of Shareholders of NetDynamics, Inc. ("NetDynamics") will
be held on August 28, 1998 at 9:00 a.m., local time, at NetDynamics' offices
located at 185 Constitution Avenue, Menlo Park, CA 94025.
At this Special Meeting, you will be asked to consider and vote upon a
proposal to approve (i) the Merger (as defined below), (ii) the terms of an
Agreement and Plan of Reorganization, dated as of June 30, 1998 (the "Merger
Agreement"), entered into by and among Sun Microsystems, Inc., a Delaware
corporation ("Sun"), Apollo Acquisition Corp., a newly-formed, wholly-owned
subsidiary of Sun ("Merger Sub"), NetDynamics and certain shareholders of
NetDynamics (the "Founders") and (iii) certain related matters. Pursuant to the
Merger and the terms of the Merger Agreement, Merger Sub will merge with and
into NetDynamics, with NetDynamics being the surviving corporation and becoming
a wholly-owned subsidiary of Sun (the "Merger"), as more fully described in the
accompanying Proxy Statement/Prospectus.
At the effective time of the Merger ("Effective Time"), (i) each
outstanding share of NetDynamics Common Stock and NetDynamics Series A, Series B
and Series C Preferred Stock (collectively "NetDynamics Capital Stock") will be
converted into shares of common stock of Sun ("Sun Common Stock") and (ii) each
outstanding option to purchase NetDynamics Common Stock ("NetDynamics Stock
Option") will be assumed by Sun and become an option to acquire Sun Common
Stock. The aggregate number of shares of Sun Common Stock issued at the
Effective Time upon conversion of NetDynamics Capital Stock and issuable upon
exercise of NetDynamics Stock Options assumed by Sun at the Effective Time
(collectively, the "Merger Consideration") will equal $160 million divided by
the average of the closing price of Sun Common Stock for the ten (10) trading
days ending three (3) business days prior to the closing date of the Merger
("Market Price"). As a result, the Merger Consideration will not be determined
until immediately prior to the Effective Time. However, based upon NetDynamics'
capitalization at June 30, 1998 and assuming a Market Price of $43.4375 per
share and that each share of NetDynamics Series A and Series C Preferred Stock
is converted into NetDynamics Common Stock and that NetDynamics Series B
Preferred Stock has not been converted into NetDynamics Common Stock, prior to
the Effective Time, holders of NetDynamics Common Stock would receive
approximately 0.27 shares of Sun Common Stock with a value of approximately
$11.71 for each share of NetDynamics Common Stock (based upon the closing sale
price of the Sun Common Stock on June 30, 1998) and holders of NetDynamics
Series B Preferred Stock would receive approximately 0.33 shares of Sun Common
Stock with a value of approximately $14.41 for each share of NetDynamics Common
Stock that such NetDynamics Series B Preferred Stock is convertible into (based
upon the closing sale price of the Sun Common Stock on June 30, 1998). Based
upon the respective liquidation preferences of the NetDynamics Series A, Series
B and Series C Preferred Stock, NetDynamics' management believes that holders of
NetDynamics' Series A and Series C Preferred Stock will receive more of the
Merger Consideration by converting such Series A and Series C Preferred Stock
into NetDynamics Common Stock on or before the Effective Time and that holders
of NetDynamics Series B Preferred Stock will receive more of the Merger
Consideration by not converting such Series B Preferred Stock into NetDynamics
Common Stock. Ten percent (10%) of the Sun Common Stock to be issued at the
Effective Time to holders of NetDynamics Capital Stock shall be placed in escrow
for one (1) year after consummation of the Merger to compensate Sun for any
potential losses it may suffer as a result of the breach of any representations,
warranties or covenants in the Merger Agreement.
<PAGE> 3
NETDYNAMICS' BOARD OF DIRECTORS HAS UNANIMOUSLY RATIFIED AND APPROVED THE
MERGER AGREEMENT, THE TRANSACTIONS CONTEMPLATED THEREBY AND CERTAIN RELATED
MATTERS AND HAS DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS
OF NETDYNAMICS AND ITS SHAREHOLDERS. AFTER CAREFUL CONSIDERATION, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL OF THE MERGER, THE
MERGER AGREEMENT AND CERTAIN RELATED MATTERS.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders and a Proxy Statement/Prospectus relating to the actions
to be taken by NetDynamics shareholders at the Special Meeting and a Proxy Card.
The Proxy Statement/Prospectus more fully describes the proposed Merger and
includes information about Sun and NetDynamics.
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE.
You may revoke your proxy at any time before it has been voted, and if you
attend the meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
/s/ ZAH RINAT
Zah Rinat
President and Chief Executive Officer
<PAGE> 4
NETDYNAMICS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 28, 1998
TO THE SHAREHOLDERS OF NETDYNAMICS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (including
any and all adjournments or postponements thereof, the "Special Meeting") of
NetDynamics, Inc., a California corporation ("NetDynamics"), will be held on
August 28, 1998 at 9:00 a.m., local time, at NetDynamics' offices located at 185
Constitution Avenue, Menlo Park, California 94025, for the following purposes:
1. To consider and vote upon the approval of the (i) the Merger (as
defined below) and (ii) the Agreement and Plan of Reorganization, dated as
of June 30, 1998 (the "Merger Agreement"), entered into by and among Sun
Microsystems, Inc., a Delaware corporation ("Sun"), Apollo Acquisition
Corp., a newly-formed, wholly-owned subsidiary of Sun ("Merger Sub"),
NetDynamics and certain shareholders of NetDynamics (the "Founders"), which
provides for the merger of Merger Sub with and into NetDynamics, with
NetDynamics being the surviving corporation and becoming a wholly-owned
subsidiary of Sun (the "Merger"). At the effective time of the Merger
("Effective Time"), (i) each outstanding share of NetDynamics Common Stock
and NetDynamics Series A, Series B and Series C Preferred Stock
(collectively "NetDynamics Capital Stock") will be converted into shares of
common stock of Sun ("Sun Common Stock") and (ii) each outstanding option
to purchase NetDynamics Common Stock ("NetDynamics Stock Options") will be
assumed by Sun and become an option to acquire Sun Common Stock. The
aggregate number of shares of Sun Common Stock issued at the Effective Time
upon conversion of NetDynamics Common Stock and issuable upon exercise of
NetDynamics Stock Options assumed by Sun at the Effective Time
(collectively, "Merger Consideration") will equal $160 million divided by
the average of the closing price of Sun Common Stock for the ten (10)
trading days ending three (3) business days prior to the closing date of
the Merger. Consummation of the proposed Merger is conditioned upon, among
other things, the receipt of government clearance and all required
shareholder approvals.
2. To consider and vote upon the approval of the acceleration of
vesting of certain options to purchase shares of NetDynamics Common Stock
held by Ronald A. Abelmann and James A. Dorrian, each a director of
NetDynamics, and A. Brooke Seawell, the Executive Vice President and Chief
Financial Officer of NetDynamics.
3. To transact such other business as may properly come before the
Special Meeting, including any motion to adjourn to a later date to permit
further solicitation of proxies if necessary, or before any adjournments
thereof.
The Merger and related transactions are more fully described in the Proxy
Statement/Prospectus and the annexes thereto, including the Merger Agreement,
accompanying this Notice; PLEASE READ IT CAREFULLY.
Any action may be taken on any of the foregoing proposals at the Special
Meeting on the date specified above or on any date to which the Special Meeting
may properly be adjourned. ONLY SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS
ON JUNE 30, 1998 ARE ENTITLED TO NOTICE OF AND TO VOTE AT THE SPECIAL MEETING OR
ANY ADJOURNMENT THEREOF.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. A shareholder who executes a proxy may revoke it at any
time before it is exercised by giving written notice to NetDynamics, by
subsequently filing another proxy or by attending the Special Meeting and voting
in person.
By Order of the Board of Directors
/s/ A. BROOKE SEAWELL
A. Brooke Seawell
Executive Vice President
and Chief Financial Officer
Menlo Park, California
July 29, 1998
<PAGE> 5
PROXY STATEMENT
OF
NETDYNAMICS, INC.
------------------------
PROSPECTUS
OF
SUN MICROSYSTEMS, INC.
------------------------
This Proxy Statement of NetDynamics, Inc., a California corporation
("NetDynamics"), and Prospectus of Sun Microsystems, Inc., a Delaware
corporation ("Sun"), is being furnished to the shareholders of NetDynamics in
connection with the solicitation of proxies by the NetDynamics Board of
Directors for use at NetDynamics' Special Meeting of Shareholders (including any
and all adjournments or postponements thereof, the "NetDynamics Special
Meeting") to be held at 9:00 a.m., local time, on August 28, 1998, 1998, at
NetDynamics' offices located at 185 Constitution Avenue, Menlo Park, California
94025. At the NetDynamics Special Meeting, shareholders of NetDynamics, will be
asked to consider and vote upon the approval of: (i) the merger of Apollo
Acquisition Corp., a California corporation and a newly-formed, wholly-owned
subsidiary of Sun ("Merger Sub"), with and into NetDynamics (the "Merger"), with
the result that NetDynamics will become a wholly-owned subsidiary of Sun
pursuant to the terms of the Agreement and Plan of Reorganization, dated as of
June 30, 1998, as amended from time to time (the "Merger Agreement"), entered
into by and among Sun, Merger Sub, NetDynamics and certain shareholders of
NetDynamics (the "Founders"), (ii) the Merger Agreement and (iii) the
acceleration of vesting of certain options to purchase shares of the capital
stock of NetDynamics ("NetDynamics Capital Stock") held by Ronald A. Abelmann
and James A. Dorrian, directors of NetDynamics, and A. Brooke Seawell, the
Executive Vice President and Chief Financial Officer of NetDynamics.
This Prospectus of Sun and Proxy Statement of NetDynamics constitutes the
Prospectus of Sun with respect to the shares of common stock of Sun ("Sun Common
Stock") to be issued in connection with the proposed Merger. At the effective
time of the Merger (the "Effective Time"), (i) each outstanding share of
NetDynamics Common Stock and NetDynamics Series A, Series B and Series C
Preferred Stock (collectively "NetDynamics Capital Stock") will be converted
into shares of Sun Common Stock and (ii) each outstanding option to purchase
NetDynamics Common Stock ("NetDynamics Stock Option") will be assumed by Sun and
become an option to acquire Sun Common Stock. The aggregate number of shares of
Sun Common Stock issued at the Effective Time upon conversion of NetDynamics
Capital Stock and issuable upon exercise of NetDynamics Stock Options assumed by
Sun at the Effective Time (collectively, "Merger Consideration") will equal $160
million divided by the average of the closing price of Sun Common Stock for the
ten (10) trading days ending three (3) business days prior to the closing date
of the Merger ("Market Price"). As a result, the Merger Consideration will not
be determined until immediately prior to the Effective Time. See "The Merger and
Related Transactions -- Manner and Basis of Converting Shares" and "The Merger
Agreement -- Conditions to the Merger." In connection with the Merger, ten
percent (10%) of the shares of Sun Common Stock issuable to holders of
outstanding NetDynamics Capital Stock at the Effective Time by virtue of the
Merger (the "Escrow Shares") will be placed into escrow for one (1) year after
consummation of the Merger and held as security for losses incurred by Sun in
the event of certain breaches by NetDynamics or the Founders of the covenants,
representations or warranties and to satisfy certain other obligations contained
in the Merger Agreement. See "The Merger Agreement -- Escrow Fund and
Indemnity." Holders of NetDynamics Capital Stock who do not vote in favor of the
Merger may, under certain circumstances and by following prescribed statutory
procedures, receive cash for their shares. See "The Merger and Related
Transactions -- California Appraisal Rights."
This Proxy Statement/Prospectus and the accompanying form of proxy card are
first being mailed to the shareholders of NetDynamics on or about July 30, 1998.
------------------------
SEE "RISK FACTORS" BEGINNING AT PAGE 15 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY SHAREHOLDERS OF NETDYNAMICS IN EVALUATING THE PROPOSALS TO BE
VOTED UPON AND THE ACQUISITION OF THE SECURITIES OFFERED HEREBY.
------------------------
THE SECURITIES 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 PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is July 29, 1998.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 4
TRADEMARKS.................................................. 5
FORWARD-LOOKING STATEMENTS.................................. 5
PROSPECTUS SUMMARY.......................................... 6
The Companies............................................. 6
Special Meeting of Shareholders of NetDynamics............ 6
Recommendations of the NetDynamics Board of Directors..... 7
The Merger and Related Transactions....................... 7
The Merger Agreement...................................... 9
NetDynamics' Selected Historical Consolidated Financial
Data.................................................... 13
Comparative per Share Data................................ 14
RISK FACTORS................................................ 15
Risks Related to the Merger............................... 15
Risks Related to NetDynamics Business..................... 16
NETDYNAMICS SPECIAL MEETING................................. 21
Date, Time and Place of NetDynamics Special Meeting....... 21
Purposes of NetDynamics Special Meeting................... 21
Record Date and Outstanding Shares........................ 22
Vote Required; Quorum..................................... 22
Voting of Proxies......................................... 22
Solicitation of Proxies; Expenses......................... 23
Appraisal Rights.......................................... 23
THE MERGER AND RELATED TRANSACTIONS......................... 24
Background of the Merger.................................. 24
Joint Reasons for the Merger.............................. 26
NetDynamics' Reasons for the Merger....................... 26
Sun's Reasons For The Merger.............................. 27
Interests of Certain Persons in the Merger................ 28
Effective Time............................................ 29
Legal Structure of the Merger............................. 29
Manner and Basis of Converting Shares..................... 29
Stock Ownership Following the Merger...................... 31
Listing on Nasdaq National Market......................... 31
Expenses.................................................. 31
Certain Federal Income Tax Considerations................. 32
Governmental and Regulatory Approvals..................... 33
Accounting Treatment...................................... 33
California Appraisal Rights............................... 34
Resale of Sun Common Stock................................ 35
THE MERGER AGREEMENT........................................ 36
The Merger................................................ 36
Representations and Warranties............................ 38
Conduct of NetDynamics' Business Prior to the Merger...... 38
No Solicitation........................................... 40
Indemnification of NetDynamics Officers and Directors..... 40
Employment Matters........................................ 40
Conditions to the Merger.................................. 41
Termination............................................... 42
Escrow Fund and Indemnity................................. 43
</TABLE>
2
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Voting Agreements..................................... 44
The Note.................................................. 44
The Noncompetition Agreements............................. 45
The Restricted Stock Purchase Agreements.................. 45
The Affiliate Agreements.................................. 45
PARACHUTE PAYMENT PROPOSALS................................. 45
The Applicable Tax Laws................................... 45
Acceleration of NetDynamics Stock Options and Shares...... 46
SUN BUSINESS................................................ 47
MANAGEMENT AND OPERATIONS AFTER THE MERGER.................. 47
NETDYNAMICS BUSINESS........................................ 47
Background................................................ 48
Products.................................................. 48
Strategy.................................................. 48
Services and Support...................................... 49
Strategic Relationships................................... 49
Sales and Marketing....................................... 49
Customers................................................. 49
Research and Development.................................. 50
Competition............................................... 50
Proprietary Technology.................................... 50
Employees................................................. 51
Facilities................................................ 51
NETDYNAMICS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 52
Overview.................................................... 52
Results of Operations....................................... 53
Liquidity and Capital Resources............................. 56
The Note.................................................... 57
Year 2000 Compliance........................................ 57
Recent Accounting Pronouncements............................ 57
NETDYNAMICS MANAGEMENT...................................... 59
NETDYNAMICS STOCK INFORMATION............................... 61
NetDynamics Principal Shareholders........................ 61
NetDynamics' Stock Price and Dividend Information......... 62
COMPARISON OF RIGHTS OF HOLDERS OF SUN COMMON STOCK AND
HOLDERS OF NETDYNAMICS CAPITAL STOCK...................... 63
EXPERTS..................................................... 71
LEGAL MATTERS............................................... 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF NETDYNAMICS... F-1
ANNEX A -- Agreement and Plan of Reorganization
ANNEX B -- Form of Voting Agreement
ANNEX C -- Form of Note
ANNEX D -- Chapter 13 of the California General Corporation
Law
</TABLE>
3
<PAGE> 8
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY SUN OR NETDYNAMICS. NEITHER THE DELIVERY
HEREOF NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY STATEMENT/ PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
AVAILABLE INFORMATION
Sun is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048, and
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of
such material may be obtained by mail from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Sun Common Stock is quoted on the Nasdaq National Market
("Nasdaq"), and such reports, proxy statements and other information can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006. The SEC maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC.
Sun has filed with the SEC a registration statement on Form S-4 (herein,
together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. Statements contained in
this Proxy Statement/Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. For further information, reference is hereby made to the
Registration Statement. Copies of the Registration Statement and the exhibits
and schedules thereto may be inspected, without charge, at the offices of the
SEC, or obtained at prescribed rates from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are incorporated herein by
reference:
1. Sun's Annual Report on Form 10-K, as amended on Form 10-K/A for the
fiscal year ended June 30, 1997.
2. Sun's Reports on Form 10-Q for the quarters ended September 28, 1997,
December 28, 1997 and March 29, 1998 filed with the SEC on November 12,
1997, February 9, 1998 and May 7, 1998, respectively (each as amended on
Form 10-Q/A as filed with the SEC on July 17, 1998).
3. Sun's Definitive Proxy Statement pursuant to Schedule 14A filed with the
SEC on October 2, 1997.
4. The description of Sun's Common Stock contained in Sun's Registration
Statement on Form 8-A filed with the SEC on October 24, 1986, as
amended.
5. The description of Sun's Common Share Purchase Rights contained in Sun's
Registration Statement on Form 8-A filed with the SEC on May 22, 1989,
as amended.
4
<PAGE> 9
All reports and all definitive proxy or information statements subsequently
filed by Sun pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange
Act, prior to the filing of a post-effective amendment which indicates that all
securities registered have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and the Registration Statement of which this Proxy
Statement/Prospectus is a part and to be part hereof from the date of filing of
such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document that also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus. Sun will provide, without charge to each person to whom
this Proxy Statement/ Prospectus is delivered, upon written or oral request of
such person, a copy of any and all of the information that has been or may be
incorporated by reference in this Proxy Statement/Prospectus, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Such request should be directed to the
Investor Relations Department, Sun Microsystems, Inc., 901 San Antonio Road,
Palo Alto, CA 94303, telephone (650) 960-1300. In order to ensure timely
delivery, any request should be made by August 18, 1998
The information set forth herein concerning NetDynamics has been furnished
by NetDynamics, and the information set forth herein concerning Sun has been
furnished by Sun.
------------------------
TRADEMARKS
This Proxy Statement/Prospectus contains trademarks and servicemarks of
NetDynamics and Sun and may contain trademarks of others. Sun's trademarks and
servicemarks include without limitation Sun, the Sun Logo, Sun Microsystems, The
Network Is The Computer, JDK, and Java are trademarks or registered trademarks
of Sun Microsystems, Inc. in the United States and other countries. NetDynamics
trademarks and servicemarks include without limitation NetDynamics, the
NetDynamics Logo, WebDynamics, WebExtend, BusinessBeans, ProcessBeans and
AgentBeans. All other brand names or trademarks appearing in this Proxy
Statement/Prospectus are the property of their respective holders.
------------------------
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW
BEGINNING ON PAGE 15 HEREOF AND IN THE SUN AND NETDYNAMICS BUSINESS SECTIONS,
NETDYNAMICS MANAGEMENTS' DISCUSSION AND ANALYSIS SECTIONS AND ELSEWHERE HEREIN.
IN CONNECTION WITH FORWARD-LOOKING STATEMENTS WHICH APPEAR IN THESE AND
OTHER DISCLOSURES, SHAREHOLDERS OF NETDYNAMICS SHOULD CAREFULLY REVIEW THE
FACTORS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS UNDER "RISK FACTORS"
BEGINNING ON PAGE 15 HEREOF.
5
<PAGE> 10
PROSPECTUS SUMMARY
The following contains a summary of certain information contained elsewhere
in this Proxy Statement/ Prospectus. This summary does not contain a complete
statement of all material elements of the proposals to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement/Prospectus and in the information and documents annexed
hereto.
THE COMPANIES
Sun Microsystems, Inc. Sun is a leading supplier of enterprise network
computing products, including desktop systems, servers, storage subsystems,
network switches, software, microprocessors, and a full range of services and
support. Sun's products command a significant share of a rapidly growing segment
of the computer industry: networked computing environments. Sun's products are
used for many demanding commercial and technical applications in various
industries. Sun has differentiated itself from its competitors by its commitment
to the network computing model and the UNIX operating system, its rapid
innovation and its open systems architecture.
Sun Microsystems, Inc. was incorporated in California in February 1982 and
reincorporated in Delaware in July 1987. Sun's principal executive offices are
located at 901 San Antonio Road, Palo Alto, California 94303, and its telephone
number is (650) 960-1300.
NetDynamics, Inc. NetDynamics designs, develops and markets high-end
enterprise network application software. Network applications allow
organizations to leverage the Internet to pursue new markets and business
opportunities, respond more rapidly to dynamic market conditions, and realize
greater cost efficiencies through direct interaction with customers, suppliers,
partners and employees. A key benefit of NetDynamics' products is that they
allow Global 2000 organizations to leverage substantial investments in legacy
systems by adapting such systems for use on the Internet.
NetDynamics was incorporated in California in May 1995. NetDynamics'
principal executive offices are located at 185 Constitution Avenue, Menlo Park,
California 94025, and its telephone number is (650) 462-7600.
Apollo Acquisition Corp. Merger Sub is a California corporation recently
organized for the purpose of effecting the Merger. Merger Sub 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 901 San
Antonio Road, Palo Alto, CA 94303 and its telephone number is (650) 960-1300.
SPECIAL MEETING OF SHAREHOLDERS OF NETDYNAMICS
Date, Time, Place and Purpose. The NetDynamics Special Meeting will be held
at the corporate offices of NetDynamics located at 185 Constitution Avenue,
Menlo Park, CA 94025 on August 28, 1998, at 9 a.m., local time. At the
NetDynamics Special Meeting, holders of NetDynamics Capital Stock will consider
and vote upon a proposal to approve (i) the Merger, (ii) the Merger Agreement
and (iii) the acceleration of vesting of certain options to purchase shares of
NetDynamics Common Stock ("Option Acceleration") held by A. Brooke Seawell, the
Executive Vice President and Chief Financial Officer of NetDynamics, and Ronald
A. Abelmann and James A. Dorrian, each a director of NetDynamics (each a
"Parachute Payment Proposal" and together the "Parachute Payment Proposals").
Holders of NetDynamics Capital Stock may also consider and vote upon such other
matters as may be properly brought before the NetDynamics Special Meeting.
Record Date and Vote Required. Only NetDynamics shareholders of record at
the close of business on June 30, 1998 (the "NetDynamics Record Date") are
entitled to notice of and to vote at the NetDynamics Special Meeting. Under
California law and the charter documents of NetDynamics, as applicable, approval
of the Merger and the Merger Agreement requires the affirmative vote of holders
of a majority of the outstanding shares of Common Stock and a majority of the
outstanding shares of Preferred Stock of NetDynamics. Under the Internal Revenue
Code of 1986, as amended (the "Code"), approval of each Parachute Payment
Proposal requires the affirmative vote of holders of more than seventy-five
percent (75%) of the shares of NetDynamics
6
<PAGE> 11
Capital Stock other than the holder receiving such Option Acceleration. Certain
Founders, certain entities affiliated with the Founders and certain other
shareholders affiliated with a member of the NetDynamics Board, who as of June
30, 1998 beneficially owned approximately 87% of the NetDynamics Common Stock
and 21% of the NetDynamics Preferred Stock entitled to vote at the NetDynamics
Special Meeting, have agreed to vote all shares over which they exercise voting
control FOR the approval of (i) the Merger, (ii) the Merger Agreement and (iii)
the Parachute Payment Proposals. See "NetDynamics Special Meeting -- Vote
Required; Quorum."
As of the NetDynamics Record Date, there were (a) 45 shareholders of record
of NetDynamics Common Stock (the "NetDynamics Common Stock") and 5,445,771
shares of NetDynamics Common Stock outstanding, (b) 7 shareholders of record of
NetDynamics Series A Preferred Stock and 1,891,371 shares of NetDynamics Series
A Preferred Stock outstanding, (c) 9 shareholders of record of NetDynamics
Series B Preferred Stock and 940,206 shares of NetDynamics Series B Preferred
Stock outstanding, and (d) 27 shareholders of record of NetDynamics Series C
Preferred Stock and 1,220,000 shares of NetDynamics Series C Preferred Stock
outstanding (the Series A, Series B and Series C Preferred Stock of NetDynamics
are herein collectively referred to as the "NetDynamics Preferred Stock").
No approval by stockholders of Sun is required to effect the Merger. Sun,
as the sole shareholder of Merger Sub, has approved the Merger and the Merger
Agreement.
RECOMMENDATIONS OF THE NETDYNAMICS BOARD OF DIRECTORS
The Board of Directors of NetDynamics (the "NetDynamics Board") has
unanimously approved the Merger Agreement and the transactions contemplated
thereby and determined that the Merger is fair to, and in the best interests of,
NetDynamics and its shareholders. The NetDynamics Board, therefore, unanimously
recommends that holders of NetDynamics Capital Stock vote FOR approval of the
Merger and the Merger Agreement and FOR the Parachute Payment Proposals. See
"The Merger and Related Transactions -- NetDynamics' Reasons for the Merger."
THE MERGER AND RELATED TRANSACTIONS
Reasons for the Merger. The NetDynamics Board and the Board of Directors of
Sun (the "Sun Board") in voting to approve the proposed Merger, identified a
number of potential benefits that Sun and NetDynamics believe will contribute to
the success of the combined companies, including the potential to offer broader
software development expertise and market presence.
In reaching its determination, the NetDynamics Board considered a number of
factors including, among others, that the Merger would reduce competitive risks
to NetDynamics compared to continuing as a stand-alone entity, create the
potential to increase sales of NetDynamics' software products using Sun's
world-wide sales and marketing resources, create the opportunity to generate
significant potential savings in sales, marketing, general and administrative
expenses, create the opportunity to reduce exposure to the risks inherent in
NetDynamics' reliance on products in a limited market segment, and the value of
Sun Common Stock that NetDynamics shareholders would receive in the Merger and
the greater potential liquidity of such shares of Sun Common Stock relative to
shares of NetDynamics Common Stock and NetDynamics Preferred Stock. See "The
Merger and Related Transactions -- NetDynamics' Reasons for the Merger."
In addition to the anticipated benefits described above, the Sun Board
believes that the acquisition of NetDynamics will reduce Sun's time to market in
providing an enterprise application middleware software platform, leverage Sun's
Java technologies and Solaris strengths in establishing Sun's position in the
application middleware software market and broaden Sun's software product and
services offerings to enterprise customers. See "The Merger and Related
Transactions -- Sun's Reasons for the Merger."
Interests of Certain Persons in the Merger. A condition to the consummation
of the Merger is that certain officers and key employees of NetDynamics enter
into employment arrangements with Sun. Upon consummation of the Merger, the
vesting of NetDynamics Stock Options held by certain directors and executive
officers of NetDynamics will be fully accelerated. In addition, key employees of
NetDynamics identified in the Merger Agreement, including certain NetDynamics
executive officers (the "Key Employees"), and certain other employees of
NetDynamics will have the opportunity to: (i) receive restricted stock
7
<PAGE> 12
of Sun ("Sun Restricted Stock") reserved for NetDynamics employees with an
aggregate value of up to $10 million, and (ii) receive nonqualified options to
purchase Sun Common Stock (the "Nonqualified Sun Options") exercisable in the
aggregate for 175,000 shares of Sun Common Stock. See "The Merger and Related
Transactions -- Interest of Certain Persons in the Merger." See "The Merger
Agreement -- Employment Matters."
Effective Time of the Merger. The Merger will become effective upon the
effectiveness of the filing of an agreement of merger with the Secretary of
State of California. Assuming all conditions to the Merger are met or waived
prior thereto, it is anticipated that the Effective Time will be on or about
August 28, 1998.
Effect of the Merger. At the Effective Time, Merger Sub will be merged with
and into NetDynamics, the separate corporate existence of Merger Sub will cease
and NetDynamics will continue as the surviving corporation and as a wholly-owned
subsidiary of Sun (the "Surviving Corporation").
Conversion of NetDynamics Capital Stock. Subject to the terms and
conditions of the Merger Agreement, as of the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, NetDynamics or the
holder of any shares of NetDynamics Capital Stock, shares of Sun Common Stock
will be exchanged for shares of NetDynamics Capital Stock outstanding, and
options, warrants and other rights to purchase NetDynamics Capital Stock will be
converted into options, warrants and other rights to purchase Sun Common Stock.
The number of shares to be exchanged for NetDynamics Capital Stock outstanding
and subject to options, warrants and other rights to purchase NetDynamics
Capital Stock will equal the number of shares resulting from dividing $160
million by the Market Price.
Each share of NetDynamics Capital Stock issued and outstanding immediately
prior to the Effective Time (other than any shares held by a holder who has
demanded and perfected appraisal rights for such shares in accordance with the
applicable provisions of the California General Corporation Law (the "CGCL") or
who has not withdrawn or lost such rights ("Dissenting Shares")) will be
canceled and extinguished and be converted automatically into a number of shares
of Sun Common Stock computed in accordance with the Merger Agreement.
NetDynamics shareholders will be asked to surrender each certificate
representing NetDynamics Capital Stock in the manner provided in a letter of
transmittal to be sent to each record holder of NetDynamics Capital Stock
promptly following the Effective Time (a "Letter of Transmittal"). After the
NetDynamics shareholders have surrendered such certificates representing shares
of NetDynamics Capital Stock, Sun will cause to be issued to such shareholders
certificates for Sun Common Stock representing such shareholder's respective
portion of the Merger Consideration, subject to the escrow provisions of the
Merger Agreement described under the section entitled "The Merger
Agreement -- Escrow Fund and Indemnity" below.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF NETDYNAMICS
CAPITAL STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM SUN'S
EXCHANGE AGENT.
The number of shares of Sun Common Stock distributed in respect of each
share of NetDynamics Common Stock in accordance with the Merger Agreement is
referred to herein as the "Exchange Ratio." For a more detailed discussion of
the calculation of the number of shares of Sun Common Stock to be exchanged for
outstanding shares of NetDynamics Capital Stock, see "The Merger and Related
Transactions -- Manner and Basis of Converting Shares" below.
NetDynamics Stock Options. Pursuant to the Merger, at the Effective Time,
each NetDynamics Stock Option, whether or not exercisable, will be assumed by
Sun and will be exercisable, in accordance with its terms, for that number of
shares of Sun Common Stock equal to the product of the number of shares of
NetDynamics Common Stock that were issuable upon exercise of such NetDynamics
Stock Option immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounded down to the nearest whole number of shares of Sun Common Stock.
The per share exercise price for the shares of Sun Common Stock issuable upon
exercise of such assumed NetDynamics Stock Option will be equal to the quotient
determined by dividing the exercise price per share of NetDynamics Common Stock
at which such NetDynamics Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. See
"The Merger and Related Transactions -- Effect on NetDynamics Stock Options."
8
<PAGE> 13
No Fractional Shares. No fractional shares will be issued by Sun in the
Merger. Each shareholder of NetDynamics otherwise entitled to a fractional share
(after aggregating all fractional shares of such shareholder) will receive an
amount of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction and (ii) the Market Price.
Market Price Data. Sun Common Stock trades on Nasdaq under the symbol
"SUNW." On July 1, 1998, the last trading day before the announcement by Sun and
NetDynamics that they had signed the Merger Agreement, the closing price of Sun
Common Stock as reported on Nasdaq was $44.9375 per share. On July 27, 1998, the
closing price of Sun Common Stock as reported on Nasdaq was $48.4375. There can
be no assurance as to the actual price of Sun Common Stock prior to, at or at
any time following the Effective Time of the Merger.
No established trading market exists for NetDynamics Capital Stock.
Certain Federal Income Tax Considerations. The Merger is intended to
qualify as a reorganization under Section 368(a) of the Code. If the Merger so
qualifies, no gain or loss will generally be recognized by the holders of shares
of NetDynamics Capital Stock on the exchange of their shares of NetDynamics
Capital Stock for shares of Sun Common Stock, except to the extent of cash
received in lieu of fractional shares. Receipt of an opinion by each of Sun and
NetDynamics from their respective tax counsels that the Merger will constitute a
reorganization under Section 368(a) of the Code is a condition to the closing of
the Merger. Each such opinion will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations of Sun, Merger Sub and NetDynamics. All NetDynamics shareholders
should read carefully the discussion under "The Merger and Related
Transactions -- Certain Federal Income Tax Considerations." HOWEVER, ALL
NETDYNAMICS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS.
Regulatory Matters. Consummation of the Merger is subject to compliance
with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"). The notifications required under the HSR Act have been furnished to
the Federal Trade Commission and the Antitrust Division of the Department of
Justice. The specified waiting period under the HSR Act is not expected to
impact the closing of the Merger. The Merger must also satisfy the federal
securities laws and applicable laws of the various states. See "The Merger and
Related Transactions -- Governmental and Regulatory Approvals."
Accounting Treatment. Sun intends to account for the Merger as a purchase
for financial reporting purposes in accordance with generally accepted
accounting principles. See "The Merger and Related Transactions -- Accounting
Treatment."
Appraisal Rights. Holders of NetDynamics Capital Stock who do not vote in
favor of the Merger may, under certain circumstances and by following procedures
prescribed by the CGCL, exercise appraisal rights and receive cash for their
shares of NetDynamics Capital Stock. A dissenting shareholder of NetDynamics
must follow the appropriate procedures under California law or suffer the
termination or waiver of such rights. See "The Merger and Related
Transactions -- California Appraisal Rights."
THE MERGER AGREEMENT
The Merger. Following the approval and adoption of the Merger Agreement by
the shareholders of NetDynamics and the satisfaction or waiver of the other
conditions to the Merger, Merger Sub will be merged with and into NetDynamics
(with NetDynamics being the Surviving Corporation). The Effective Time will
occur upon the effectiveness of the filing with the Secretary of State of the
State of California of a duly executed Agreement of Merger or at such later time
as is specified in such Agreement of Merger.
Conversion of NetDynamics Capital Stock in the Merger. At the Effective
Time, each issued and outstanding share of NetDynamics Capital Stock will be
converted into the right to receive a number of fully paid and nonassessable
shares of Sun Common Stock in accordance with the Merger Agreement. Each
outstanding NetDynamics Stock Option, whether or not exercisable, will be
assumed by Sun and will become exercisable, in accordance with its terms, for
shares of Sun Common Stock. Cash will be paid to NetDynamics shareholders in
lieu of fractional shares of Sun Common Stock and any dividends or other
distributions to which such holder is entitled. See "The Merger and Related
Transactions -- Manner and Basis of Converting
9
<PAGE> 14
Shares" and "The Merger Agreement -- Exchange Agent; Exchange Procedures;
Dividends; No Further Ownership Rights in NetDynamics Common Stock."
Representations and Warranties. The Merger Agreement includes various
customary representations and warranties of the parties thereto.
Conduct of NetDynamics' Business Prior to the Merger. Under the Merger
Agreement, NetDynamics has agreed, during the period from the date of the Merger
Agreement and continuing until the earlier of the termination of the Merger
Agreement or the Effective Time, except as contemplated by the Merger Agreement
or to the extent that Sun consents in writing, to carry on its business in the
usual manner and ordinary course.
No Solicitation. The Merger Agreement provides that, until the earlier of
the Effective Time or the date of termination of the Merger Agreement, neither
NetDynamics nor any of the Founders may: (i) solicit or participate in any
negotiations or discussions or enter into any agreement with respect to, any
offer or proposal to acquire all, substantially all or a significant portion of
NetDynamics' assets or any portion of the NetDynamics' Capital Stock whether by
merger, purchase of assets, tender offer or otherwise, or effect any such
transaction, (ii) disclose any information not customarily disclosed to any
person concerning or afford to any person or entity access to NetDynamics'
properties, technologies, books or records or (iii) assist or cooperate with any
person to make any proposal to purchase all or any part of the NetDynamics
Capital Stock or NetDynamics' assets.
Indemnification of NetDynamics Officers and Directors. The Merger Agreement
provides that from and after the Effective Time, Sun will cause the Surviving
Corporation to fulfill the obligations of NetDynamics pursuant to any
indemnification agreements between NetDynamics and its directors and officers
existing prior to the date of the Merger Agreement and applicable provisions of
NetDynamics' organizational documents, as currently in effect, which provisions
will not be amended, repealed or otherwise modified for a period of three (3)
years from the Effective Time in any manner that would adversely affect the
rights thereunder.
Employment Matters. Each person who was an employee of NetDynamics
immediately prior to the Effective Time, shall be, at the Effective Time,
subject to certain conditions, an employee of Sun or the Surviving Corporation.
Each such employee will be eligible, upon completion of Sun's standard employee
background and reference check, to receive salary and benefits consistent with
Sun's standard human resource policies and shall receive credit under such
policies for prior service at NetDynamics.
Conditions to the Merger. Consummation of the Merger is subject to the
satisfaction of various conditions, including: SEC declaration of effectiveness
of the Registration Statement; expiration of the waiting period imposed by the
HSR Act; no temporary restraining order, preliminary or permanent injunction or
other order issued preventing the consummation of the Merger being in effect;
and the receipt by Sun and NetDynamics of substantially identical written
opinions from their respective counsel to the effect that the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
In addition, the obligations of NetDynamics to consummate the Merger are
further subject to a number of conditions including: the truth and accuracy of
the representations and warranties of Sun and Merger Sub contained in the Merger
Agreement except as would not have a material adverse effect on Sun; and Sun and
Merger Sub having performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement. See "The Merger
Agreement -- Conditions to the Merger."
The obligations of Sun and Merger Sub to consummate the Merger are also
subject to further conditions including: the truth and accuracy of the
representations and warranties of NetDynamics and the Founders contained in the
Merger Agreement except as would not have a material adverse effect on
NetDynamics; NetDynamics having performed or complied in all material respects
with all agreements and covenants required by the Merger Agreement; NetDynamics
having obtained certain consents, approvals and waivers contemplated in the
Merger Agreement; the receipt of a legal opinion by Sun from legal counsel to
NetDynamics; NetDynamics having retained a specified number of its employees;
approval of the Merger Agreement and the Merger by shareholders holding at least
90% of the NetDynamics Capital Stock; approval of the Parachute Payment
Proposals; holders of more than 10% of the outstanding shares of NetDynamics
Capital Stock shall not have exercised, nor shall they have given notice of
their intent to exercise, appraisal,
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<PAGE> 15
dissenters' or similar rights under applicable law with respect to their shares
by virtue of the Merger; NetDynamics shall have obtained evidence of the release
of certain liens contemplated in the Merger Agreement; and each director of
NetDynamics and each subsidiary of NetDynamics shall have resigned effective as
of the Effective Time. See "The Merger Agreement -- Conditions to the Merger."
Termination. The Merger Agreement may be terminated under certain
circumstances, including, without limitation, by mutual written consent of Sun
and NetDynamics; by Sun if NetDynamics or any Founder commits certain breaches
of any representation, warranty or covenant contained in the Merger Agreement,
or if NetDynamics has not delivered to Sun certain irrevocable proxies
authorizing votes in favor of the Merger and related matters; by NetDynamics if
Sun or Merger Sub commits certain breaches of any representation, warranty or
covenant contained in the Merger Agreement; by Sun or NetDynamics if the Merger
is not consummated on or before November 30, 1998. See "The Merger
Agreement -- Termination."
Escrow Fund and Indemnity. In connection with the Merger, at the Effective
Time, the Escrow Shares will be registered in the name of and deposited with
U.S. Bank Trust, N.A., as escrow agent (the "Escrow Agent"), such deposit to
constitute the escrow fund (the "Escrow Fund"). The Escrow Shares will be the
number of shares of Sun Common Stock equal to 10% of the number of shares of Sun
Common Stock issuable to holders of outstanding NetDynamics Capital Stock at the
Effective Time in connection with the Merger. The Escrow Shares will be
contributed to the Escrow Fund on behalf of each holder of outstanding
NetDynamics Capital Stock at the Effective Time in proportion to the aggregate
number of shares of Sun Common Stock that such holder would otherwise be
entitled under the Merger Agreement. The Escrow Fund will be available to
compensate Sun for any losses incurred by Sun or for which Sun would otherwise
be liable as a result of any inaccuracy or breach of a representation or
warranty of NetDynamics or the Founders contained in the Merger Agreement or any
failure by NetDynamics or the Founders to perform or comply with any covenant
contained therein. The Escrow Fund will also be used to pay any third party fees
and expenses in excess of $2.25 million (or such other amount, not to exceed
$2.5 million, in Sun's reasonable discretion) ("Excess Expenses") that have been
incurred by NetDynamics in connection with the Merger. Shareholders will have
voting rights with respect to the Escrow Shares while in escrow, and will
receive dividends, if any, attributable to the Escrow Shares currently. Sun may
not receive any shares from the Escrow Fund for breach of a representation and
warranty or covenant unless and until cumulative losses in excess of $500,000
have been suffered, in which case Sun may recover from the Escrow Fund the
entire amount of such cumulative losses. In addition, losses of less than
$50,000 will not be counted toward such $500,000 threshold, unless and until all
of such losses equal in the aggregate greater than $500,000, in which case Sun
may recover from the Escrow Fund amounts in excess of $500,000 which are
attributed to such losses. Sun may receive shares from the Escrow Fund to pay
for Excess Expenses, amounts expended to indemnify NetDynamics' officers and
directors pursuant to the Merger Agreement and excess amounts paid to
NetDynamics shareholders in respect of their exercise of appraisal rights,
without regard to such thresholds. For the purpose of compensating Sun from the
Escrow Fund, the Escrow Shares will be valued at the average closing sale price
for the ten (10) consecutive trading days ending three (3) business days prior
to delivery of such Escrow Shares to Sun. Subject to resolution of unsatisfied
claims of Sun, the Escrow Fund will terminate one year following the closing
date of the Merger. See "The Merger Agreement -- Escrow Fund and Indemnity."
BY APPROVING THE MERGER AGREEMENT, NETDYNAMICS SHAREHOLDERS WILL BE DEEMED
TO HAVE CONSENTED TO THE APPOINTMENT OF JOHN R. HUMMER, A GENERAL PARTNER OF
HUMMER WINBLAD EQUITY PARTNERS II L.P., THE GENERAL PARTNER OF HUMMER WINBLAD
VENTURE PARTNERS II, L.P., A SHAREHOLDER OF NETDYNAMICS, TO ACT AS THE
SECURITYHOLDER AGENT ON BEHALF OF NETDYNAMICS' SHAREHOLDERS TO DELIVER SHARES
HELD IN ESCROW TO SUN IN SATISFACTION OF CLAIMS BROUGHT BY SUN, TO OBJECT TO
SUCH DELIVERIES, TO AGREE TO, TO NEGOTIATE AND TO ENTER INTO SETTLEMENTS AND
COMPROMISES WITH RESPECT TO SUCH CLAIMS, AND TO TAKE CERTAIN OTHER ACTION ON
BEHALF OF NETDYNAMICS' SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED IN ARTICLE VII
OF THE MERGER AGREEMENT. SEE ARTICLE VII OF THE MERGER AGREEMENT FOR A MORE
DETAILED EXPLANATION OF THE ESCROW FUND AND RIGHTS WITH RESPECT THERETO.
Voting Agreements. The Founders and certain entities affiliated with the
Founders and other shareholders affiliated with a member of the NetDynamics
Board have entered into Voting Agreements with Sun and
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<PAGE> 16
NetDynamics. Under the Voting Agreements, such shareholders have agreed to vote
in favor of approval of the Merger, the Merger Agreement and the Parachute
Payment Proposals.
The Note. Concurrent with the execution of the Merger Agreement,
NetDynamics executed a promissory note (the "Note") evidencing a loan of $10
million by Sun to NetDynamics. The Note bears interest, payable upon default or
maturity of the Note, at a rate of ten percent (10%) per annum. The principal
amount of the Note, together with all accrued interest, shall become due and
payable one hundred eighty (180) days after certain events of termination under
the Merger Agreement. In the event of such a termination of the Merger
Agreement, NetDynamics may within one hundred eighty (180) days after the date
of such termination, either (i) pay the unpaid principal and accrued interest
due and owing on the Note or (ii) convert such unpaid principal and accrued
interest into stock of NetDynamics. However, upon the occurrence of certain
events of default, including termination of the Merger Agreement as a result of
NetDynamics' failure to deliver to Sun proxies representing a majority of both
the NetDynamics Common Stock and the NetDynamics Preferred Stock upon the
earlier to occur of (i) ten (10) days after the mailing of this Proxy
Statement/Prospectus to shareholders of NetDynamics and (ii) twenty (20) days
after the effectiveness of the Registration Statement, the unpaid principal and
accrued interest then owing on the Note shall be immediately due and payable.
The Note is convertible into shares of the series of stock of NetDynamics which
is the most favorable of: (i) that series of preferred stock of NetDynamics
outstanding on the date of such conversion having the most favorable terms with
respect to dividends, liquidation preference, anti-dilution protection,
conversion ratio, voting rights, redemption and all other rights, privileges and
preferences or (ii) such other capital stock being offered to investors by
NetDynamics on the date of such conversion. The number of shares into which the
Note shall convert is determined by dividing (a) the unpaid aggregate principal
amount plus accrued interest by (b) the quotient of (x) $160 million and (y) the
total number of outstanding shares of capital stock of NetDynamics, treating all
preferred stock, options, warrants and other rights on an as-converted,
fully-diluted basis.
The Non-Competition Agreements. Concurrent with the execution of the Merger
Agreement, certain shareholders of NetDynamics entered into agreements (the
"Noncompetition Agreements") with Sun that provide, among other things, that,
such shareholders shall not, without the consent of Sun, engage in certain
competitive business activities in any region in which Sun or its Java Software
Division ("Java Software") engages in business and that such shareholders shall
not directly or indirectly solicit, encourage or induce any employee of Sun or
Java Software to terminate such employee's employment with Sun or Java Software.
Restricted Stock Purchase Agreements. Sun has agreed to grant to certain
employees of NetDynamics the right to purchase in aggregate $10.0 million in
market value of shares of restricted stock of Sun for $.01 per share. The
Restricted Stock Purchase Agreement provides, among other things, that Sun shall
have a right to repurchase the restricted stock of any employee at the purchase
price upon the voluntary or involuntary termination or cessation of employment
or association of such employee with Sun. Such right of repurchase lapses at a
rate of twenty-five percent (25%) of the shares of restricted stock per year for
each year that the employee remains employed by Sun, such that the restricted
stock is fully vested at the end of four years of employment with Sun. See "The
Merger and Related Transactions -- Interests of Certain Persons in the Merger."
Affiliate Agreements. Pursuant to the Merger Agreement, certain affiliates
of NetDynamics shall enter into Affiliate Agreements with Sun prior to the
Effective Time restricting the sale, transfer or other disposition of the shares
of Sun Common Stock issued to such affiliate in connection with the Merger other
than in compliance with the requirements of the federal securities laws.
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NETDYNAMICS' SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial information of
NetDynamics has been derived from its historical consolidated financial
statements for the period from May 30, 1995 (inception) to December 31, 1995 and
the years ended December 31, 1996 and 1997 and should be read in conjunction
with such consolidated financial statements and the notes thereto included
elsewhere herein. NetDynamics' historical consolidated financial statement data
as of and for the three months ended March 31, 1997 and 1998 have been derived
from NetDynamics unaudited financial statements which in the opinion of
NetDynamics' management, have been prepared on the same basis as the audited
historical consolidated financial statements and contain all adjustments
(consisting only of normal recurring adjustments), necessary for the fair
presentation of the financial position and results of operations. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the full year.
<TABLE>
<CAPTION>
MAY 30,
1995
(INCEPTION) YEAR ENDED THREE MONTHS
THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses................ $ 86,000 $ 2,059,000 $ 9,535,000 $ 1,278,000 $ 1,997,000
Services................ 16,000 641,000 3,765,000 522,000 1,803,000
Total revenues............ 102,000 2,700,000 13,300,000 1,800,000 3,800,000
Gross profit.............. 102,000 1,823,000 9,345,000 1,183,000 2,419,000
Total operating
expenses................ 1,043,000 7,323,000 15,545,000 2,883,000 4,819,000
Net loss.................. (914,000) (5,438,000) (6,252,000) (1,712,000) (2,434,000)
Net loss attributable to
common stock............ (914,000) (5,444,000) (6,262,000) (1,715,000) (2,437,000)
Net loss per share:
Basic and diluted(1).... $ (.73) $ (2.54) $ (1.79) $ (.60) $ (.54)
Shares used to compute net
loss per share:
Basic and diluted(1).... 1,252,206 2,141,189 3,502,534 2,881,678 4,492,155
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA:
Cash and cash
equivalents............. $1,002,000 $ 1,725,000 $ 3,777,000 $ 883,000 $ 4,320,000
Working capital
(deficit)............... 846,000 12,000 1,573,000 (1,662,000) (509,000)
Total assets.............. 1,393,000 4,132,000 11,167,000 3,954,000 10,923,000
Deferred revenue.......... 20,000 381,000 1,804,000 577,000 1,907,000
Long-term debt(2)......... 176,000 625,000 1,059,000 737,000 1,401,000
Mandatorily redeemable
convertible preferred
stock................... 1,836,000 6,893,000 15,400,000 6,896,000 15,403,000
Shareholders' deficit..... (914,000) (6,356,000) (12,438,000) (7,978,000) (14,839,000)
</TABLE>
- ---------------
(1) See Note 1 of Notes to NetDynamics' Consolidated Financial Statements for
information regarding calculation of net loss per share.
(2) NetDynamics, pursuant to the Merger Agreement, has agreed to repay certain
indebtedness prior to the Effective Time of the Merger. Such indebtedness
would include amounts outstanding under the line of credit and term loan
aggregating $5.0 million at March 31, 1998. See Notes 4 and 10 of Notes to
NetDynamics' Consolidated Financial Statements.
13
<PAGE> 18
COMPARATIVE PER SHARE DATA
The following tables set forth certain historical per share data of Sun and
NetDynamics and combined per share data on an unaudited pro forma basis after
giving effect to the Merger using the purchase method of accounting and assuming
the issuance of approximately 3,636,000 shares of Sun Common Stock (based on an
assumed Market Price of $44.00 per share of Sun Common Stock) for all shares of
NetDynamics Capital Stock outstanding at the Effective Time and issuable
pursuant to the exercise of NetDynamics Stock Options assumed by Sun pursuant to
the Merger Agreement. The actual number of shares of Sun Common Stock to be
exchanged for all of the outstanding NetDynamics Capital Stock will be
determined at the Effective Time based on the capitalization of NetDynamics
immediately prior to the Effective Time and the Market Price. The following data
should be read in conjunction with NetDynamics' Selected Historical Consolidated
Financial Data and the separate historical consolidated financial statements of
Sun and NetDynamics incorporated by reference or included elsewhere herein. The
unaudited pro forma combined per share data are not necessarily indicative of
the operating results that would have been achieved had the Merger been
consummated as of the beginning of the earliest period presented and should not
be construed as representative of future operations. All per share information
has been restated, as applicable, for stock splits, as discussed in each
entity's respective consolidated financial statements and notes thereto. In
addition, Sun's per share information represents diluted earnings per share
computed in accordance with SFAS No. 128 for all periods presented. No cash
dividends have ever been declared or paid on NetDynamics Capital Stock.
<TABLE>
<CAPTION>
SUN
---------
<S> <C>
NET INCOME PER SHARE:
Nine months ended March 29,
1998......................... $1.24
Year ended June 30, 1997........ $1.96
BOOK VALUE PER SHARE:
March 29, 1998.................. $8.60
June 30, 1997................... $7.40
</TABLE>
<TABLE>
<CAPTION>
SUN
PRO FORMA
COMBINED
---------
<S> <C>
NET INCOME PER SHARE(1):
Nine months ended March 29,
1998......................... $1.18
Year ended June 30, 1997........ $1.87
BOOK VALUE PER SHARE(2):
March 29, 1998.................. $8.66
June 30, 1997................... $7.47
</TABLE>
<TABLE>
<CAPTION>
NETDYNAMICS
-----------
<S> <C>
NET LOSS PER SHARE:
Three months ended March 31,
1998....................... $(0.54)
Year ended December 31,
1997....................... $(1.79)
DEFICIT BOOK VALUE PER SHARE:
March 31, 1998................ $(2.78)
December 31, 1997............. $(2.38)
AS ADJUSTED BOOK VALUE PER
SHARE(3):
March 31, 1998................ $ 0.05
December 31, 1997............. $ 0.28
</TABLE>
- ---------------
(1) Pro forma combined net income per share reflects Sun's and NetDynamics' net
income (loss) for the respective periods, and is based on (i) Sun's weighted
average common and potential common shares outstanding for the respective
periods and (ii) approximately 3,636,000 shares of Sun Common Stock assumed
to be issued for all of the outstanding NetDynamics Capital Stock at the
Effective Time and to be issuable for NetDynamics Stock Options assumed by
Sun pursuant to the terms of the Merger Agreement. To the extent that the
Market Price increases or decreases, the number of shares of Sun Common
Stock to be issued in connection with the Merger will increase or decrease
accordingly. Pro forma combined net income per share includes pro forma
adjustments to reflect the estimated effect of amortization of intangibles
and other charges related to the Merger.
(2) Pro forma combined book value per share reflects the stockholders' equity of
Sun as of the end of the respective periods and Sun's estimated allocation
of the total purchase price of NetDynamics, including the effect of a charge
for in-process research and development (estimated to be in the range of $95
million to $115 million), and the outstanding shares of Sun Common Stock as
of the end of the respective periods and the shares of Sun Common Stock
assumed to be issued in connection with the Merger.
(3) As adjusted book value per share assumes the conversion of NetDynamics
mandatorily redeemable convertible preferred stock into shares of
NetDynamics Common Stock on a pro forma basis.
14
<PAGE> 19
RISK FACTORS
The following factors should be considered carefully in evaluating the
proposals to be voted upon by the shareholders of NetDynamics and in evaluating
an investment in the Sun Common Stock offered hereby. With respect to Sun,
shareholders of NetDynamics should consider the factors discussed in the
documents incorporated herein by reference particularly in the sections therein
entitled "Future operating results." For periods following the Merger,
references to the products, business, results of operations or financial
condition of Sun herein and therein should be considered to refer to Sun and its
subsidiaries, including NetDynamics, unless the context otherwise requires. See
"Available Information" and "Incorporation of Certain Documents by Reference."
FORWARD-LOOKING STATEMENTS MADE IN THIS SECTION ARE MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN FOR A VARIETY OF REASONS.
RISKS RELATED TO THE MERGER
Uncertainties Relating to Integration of Operations. Sun and NetDynamics
have entered into the Merger Agreement with the expectation that the Merger will
result in beneficial synergies for the combined companies. See "The Merger and
Related Transactions -- Sun's Reasons for the Merger" and "-- NetDynamics'
Reasons for the Merger." Achieving the anticipated benefits of the Merger will
depend in part upon whether the integration of the two companies' businesses is
achieved in an efficient, cost effective and timely manner, and there can be no
assurance that this will occur. The successful combination of the two companies
will require, among other things, the timely integration of the companies'
respective product and service offerings and the coordination of their
respective sales and marketing and research and development efforts and
continuation of key members of the NetDynamics management team. There can be no
assurance that integration will be accomplished smoothly, on time or
successfully.
Potential Dilutive Effect to Stockholders. Sun and NetDynamics believe that
beneficial synergies will result from the Merger; however, there can be no
assurance that the combining of the two companies' businesses, even if achieved
in an efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to what would have been achieved by
each company independently, including the results of operations which each
company could have achieved independently in the same period of time. The
issuance of Sun Common Stock in connection with the Merger is expected to have
the effect of initially reducing Sun's net income per share and could reduce the
market price of Sun Common Stock. While the transaction is not expected to be
accretive until at least fiscal 2000, the degree of such accretion, if any, will
depend on revenue growth, cost savings and/or other business synergies
sufficient to offset the effect of such stock issuance. There can be no
assurance that such synergies will be achieved. In addition, there can be no
assurance that shareholders of NetDynamics would not achieve greater returns on
investment if NetDynamics were to remain an independent company.
Material Charges Resulting from the Merger. Sun estimates Merger-related
expenditures, consisting primarily of nonrecurring transaction costs of
financial advisors, attorneys, accountants, financial printing and other related
charges to be in the range of approximately $2.5 to $3.5 million. In addition,
Sun expects to incur additional charges to operations estimated to be in the
range of $95 to $115 million with respect to in-process research and
development. These costs will be recorded in, and will therefore negatively
impact operating results for, the fiscal quarter in which the Merger is
consummated. Although Sun and NetDynamics do not believe that the costs will
exceed these estimates, there is no assurance that these estimates are correct
or that unanticipated contingencies will not occur that would result in charges
in subsequent periods to reflect additional costs associated with the Merger.
15
<PAGE> 20
RISKS RELATED TO NETDYNAMICS BUSINESS
Limited Operating History; History of Operating Losses. NetDynamics was
founded in May 1995 and first shipped product in September 1995. Although
NetDynamics has experienced significant revenue growth since inception,
NetDynamics has incurred net losses in each quarter from inception through the
quarter ended March 31, 1998, and had an accumulated deficit of $15.1 million as
of March 31, 1998. A substantial portion of the accumulated deficit is due to
the significant commitment of resources to NetDynamics' product development and
sales organizations. NetDynamics would expect to continue to devote substantial
resources in these areas as a stand-alone company and as a result would need to
recognize significant quarterly revenues to achieve profitability. There can be
no assurance that any of NetDynamics' business strategies as a stand-alone
company would be successful or that NetDynamics would be profitable in any
future quarter or period. See "NetDynamics Selected Consolidated Financial Data"
and "NetDynamics Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Fluctuations in Quarterly Results; Uncertainty of Future
Operating Results; Seasonality. NetDynamics' quarterly operating results have
varied significantly in the past and are likely to vary significantly in the
future, depending on factors such as the size and timing of significant orders
and their fulfillment, demand for its products, changes in pricing policies by
NetDynamics or its competitors, the number, timing and significance of product
enhancements and new product announcements by NetDynamics and its competitors,
the ability of NetDynamics to develop, introduce and market new and enhanced
versions of its products on a timely basis, changes in the level of operating
expenses, changes in NetDynamics' sales incentive plans, budgeting cycles of its
customers, customer order deferrals in anticipation of enhancements or new
products offered by NetDynamics or its competitors, the cancellation of licenses
during the warranty period or non-renewal of maintenance agreements, product
life cycles, software bugs and other product quality problems, personnel
changes, changes in NetDynamics' strategy, the level of international expansion,
seasonal trends and general domestic and international economic and political
conditions, among others. A significant portion of NetDynamics' revenues has
been, and NetDynamics believes as a stand-alone company it would continue to be,
derived from a limited number of orders placed by large organizations, and the
timing of such orders and their fulfillment has caused and would be expected to
continue to cause material fluctuations in NetDynamics' operating results,
particularly on a quarterly basis. In addition, if NetDynamics were to remain a
stand-alone company it believes that it would need to continue to expand its
domestic and international direct sales force. The timing of such expansion and
the rate at which new sales people become productive could cause material
fluctuations in NetDynamics' quarterly operating results if NetDynamics were to
remain a stand-alone company. Revenues are also difficult to forecast because
the market for enterprise network application software is rapidly evolving and
NetDynamics' sales cycle, from initial evaluation to purchase and the provision
of support services, is lengthy and varies substantially from customer to
customer. Product orders are typically shipped shortly after receipt, and
consequently, order backlog at the beginning of any quarter has in the past
represented only a small portion of that quarter's revenues. As a result,
license revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter. Moreover, a substantial portion of these revenues are
often booked and shipped in the last month, or even weeks or days, of that
quarter. Due to all of the foregoing, quarterly revenues and operating results
are difficult to forecast. Accordingly, NetDynamics believes that
period-to-period comparisons of its operating results would not necessarily be
meaningful and should not be relied upon as indications of future performance.
Failure by NetDynamics, to increase revenues would have a material adverse
effect on NetDynamics' business, operating results and financial condition. See
"-- Product Concentration; Dependence on Emerging Market for Enterprise Network
Application Software."
NetDynamics' expense levels are based, in significant part, on NetDynamics'
expectations as to future revenues and are therefore relatively fixed in the
short term. If revenue levels fall below expectations, net operating results are
likely to be disproportionately adversely affected because a proportionately
smaller amount of NetDynamics' expenses varies with its revenues. There can be
no assurance that NetDynamics would be able to achieve or maintain profitability
on a stand-alone basis on a quarterly or annual basis in the future.
16
<PAGE> 21
The operating results of many software companies reflect seasonal trends,
and NetDynamics expects to be affected by such trends in the future. NetDynamics
believes that it is likely that it would experience relatively higher revenues
in its quarter ending December 31 and relatively lower revenues in its quarter
ending March 31 as a result of efforts by its direct sales force to meet fiscal
year-end sales quotas. See "NetDynamics Selected Consolidated Financial Data"
and "NetDynamics Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Product Concentration; Dependence on Emerging Market for Enterprise Network
Application Software. All of NetDynamics' revenues have been attributable to
sales of enterprise network application software and related services.
NetDynamics currently expects enterprise network application software and
related services to account for all or substantially all of its future revenues.
As a result, factors adversely affecting the pricing of or demand for enterprise
network application software, such as competition or technological change, could
have a material adverse effect on NetDynamics' business, operating results and
financial condition. NetDynamics' future financial performance will depend, in
significant part, on the successful development, introduction and customer
acceptance of new and enhanced versions of enterprise network application
software. There can be no assurance that NetDynamics would continue to be
successful as a stand-alone company in marketing enterprise network application
software products or other products. Although NetDynamics has recently
experienced growth in sales of enterprise network application software, there
can be no assurance that the market for enterprise network application software
will continue to grow. If the enterprise network application software market
fails to grow, or grows more slowly than NetDynamics currently anticipates, its
business, operating results and financial condition would be materially and
adversely affected.
Risks Associated with Expanding Distribution. To date, NetDynamics has sold
its products through its direct sales force, original equipment manufacturers
("OEMs") systems integrators, independent software vendors ("ISVs"), value-added
resellers ("VARs") and alliance partners. NetDynamics' ability to achieve
significant revenue growth will depend in large part on its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with third party distribution channels. Although
NetDynamics has recently invested significant resources to expand its direct
sales force and third party distribution channels, NetDynamics has at times
experienced and continues to experience difficulty in recruiting qualified sales
personnel and in establishing necessary third party distribution channels. There
can be no assurance that NetDynamics would, as a stand-alone company, be able to
successfully expand its direct sales force or third party distribution channels
or that any such expansion would result in an increase in revenues. Any failure
by NetDynamics to expand its direct sales force or third party distribution
channels would materially adversely affect NetDynamics' business, operating
results and financial condition. See "-- Dependence on Key Personnel,"
"NetDynamics Business -- Strategy" and "-- Sales and Marketing."
Lengthy Sales Cycle. NetDynamics' products are typically used to develop
Internet applications that are critical to a customer's business and the
purchase of NetDynamics' products is often part of a customer's larger business
process reengineering initiative or implementation of Internet computing. As a
result, the license and implementation of NetDynamics' software products
generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, NetDynamics' sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons, the sales cycle associated with the license of NetDynamics' products is
often lengthy and subject to a number of significant delays over which the
Company has little or no control. There can be no assurance that NetDynamics
would not experience these and additional delays in the future as a stand-alone
company. See "-- Potential Fluctuations in Quarterly Results; Uncertainty of
Future Operating Results" and "NetDynamics' Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Limited Deployment; Dependence on Third Parties. NetDynamics shipped its
first product in September 1995. To date, a relatively limited number of
NetDynamics' customers have completed the development and deployment of high-end
Internet applications using NetDynamics' products. If some of NetDynamics'
customers are not able to successfully develop and deploy high-end Internet
applications with NetDynamics' products, NetDynamics' reputation could be
damaged, which could have a material adverse effect on its
17
<PAGE> 22
business, operating results and financial condition. In addition, NetDynamics
expects that a significant percentage of its future revenues will be derived
from sales to existing customers. If existing customers have difficulty
deploying applications built with NetDynamics' products or for any other reason
are not satisfied with NetDynamics' products, its business, operating results
and financial condition would be materially adversely affected. NetDynamics'
customers and potential customers often rely on third-party OEMs, system
integrators ISVs, VARs and alliance partners to develop, deploy and manage
high-end Internet applications. If NetDynamics is unable to adequately train a
sufficient number of such third parties or if, for any reason, a large number of
such third parties adopt a competing product or technology, NetDynamics'
business, operating results and financial condition would be materially and
adversely affected.
Competition. The market for high-end enterprise network application
software is intensely competitive and characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions and
rapidly changing customer requirements. Internet applications that can be
developed and deployed using NetDynamics' products can in some cases also be
implemented using a combination of first generation application development
tools and server programming techniques such as stored procedures in relational
databases, C or C++ programming, and networking and database middleware to
connect the various components. As such, NetDynamics effectively experiences
some competition from potential customers' decisions to pursue this type of
approach as opposed to utilizing an application environment such as NetDynamics'
products. As a result, NetDynamics must continuously educate existing and
prospective customers as to the advantages of NetDynamics' products. There can
be no assurance that these customers or potential customers will perceive
sufficient value in NetDynamics' products to justify purchasing them.
NetDynamics has experienced and expects to continue to experience increased
competition from current and future competitors, many of whom have significantly
greater financial, technical, marketing and other resources than NetDynamics.
NetDynamics' current direct competitors, among others, include Bluestone
Software, HAHT, Netscape, SilverStream Software and Weblogic. NetDynamics
expects to compete increasingly with Oracle, IBM, Microsoft, BEA, Novell and
others. NetDynamics' competitors may be able to embed application server
technology in broader software platforms, respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than
NetDynamics. Also, many current and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to NetDynamics' detriment. NetDynamics expects to face
additional competition as other established and emerging companies enter the
enterprise network application software market and new products and technologies
are introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect NetDynamics' business, operating results and
financial condition. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of NetDynamics' prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. Such competition could
materially adversely affect NetDynamics' ability to sell additional licenses and
services on terms favorable to NetDynamics. Further, competitive pressures could
require NetDynamics to reduce the price of software licenses and related
services, which could materially adversely affect its business, operating
results and financial condition. There can be no assurance that NetDynamics will
be able to compete successfully against current and future competitors, and the
failure to do so would have a material adverse effect upon NetDynamics'
business, operating results and financial condition.
Risk Associated with New Versions and New Products; Rapid Technological
Change. The market for high-end enterprise network application software is
intensely competitive and characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and rapidly changing
customer requirements. The introduction of products embodying new technologies
and the emergence of new industry standards can render existing products
obsolete and unmarketable. For example, NetDynamics' customers have adopted a
wide variety of hardware, software, database and networking platforms, and as a
result, to gain broad market acceptance, NetDynamics has had to support its
products on many of such
18
<PAGE> 23
platforms. NetDynamics' future success will depend upon its ability to address
the increasingly sophisticated needs of its customers by supporting existing and
emerging hardware, software, database and networking platforms and by developing
and introducing enhancements to its products and new products on a timely basis
that keep pace with such technological developments and emerging industry
standards and customer requirements. There can be no assurance that NetDynamics
would be successful in developing and marketing enhancements to its products
that respond to technological change, evolving industry standards or customer
requirements, that NetDynamics would not experience difficulties that could
delay or prevent the successful development, introduction and sale of such
enhancements or that such enhancements would adequately meet the requirements of
the marketplace and achieve any significant degree of market acceptance.
NetDynamics has in the past experienced delays in the release dates of
enhancements to its products. If release dates of any future product
enhancements or new products are delayed or if when released they fail to
achieve market acceptance, NetDynamics' business, operating results and
financial condition would be materially adversely affected. In addition, the
introduction or announcement of new product offerings or enhancements by
NetDynamics or its competitors may cause customers to defer or forgo purchases
of current versions of its products, which could have a material adverse effect
on NetDynamics' business, operating results and financial condition. See
"NetDynamics Business -- Research and Development."
Risk of Software Defects. Enterprise network application software is
complex and frequently contains errors or defects, especially when first
introduced or when new versions or enhancements are released. NetDynamics has
not experienced material adverse effects resulting from any such defects or
errors to date. There can be no assurance that, despite testing by NetDynamics
and by current and potential customers, defects and errors will not be found in
current versions, new versions or enhancements after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance. Such
losses in revenues and delays in market acceptance could have a material adverse
effect upon NetDynamics' business, operating results and financial condition.
Product Liability. NetDynamics' license agreements with its customers
typically contain provisions designed to limit NetDynamics' exposure to
potential product liability claims. It is possible, however, that such
provisions contained in NetDynamics' license agreements may not be effective as
a result of existing or future federal, state or local laws or ordinances or
unfavorable judicial decisions. Although NetDynamics has not experienced any
product liability claims to date, NetDynamics' sale and support of its products
may entail the risk of such claims, which are likely to be substantial due to
the intended use of its products in business-critical applications. A successful
product liability claim brought against NetDynamics could have a material
adverse effect upon its business, operating results and financial condition.
Risks Associated with International Operations. Revenues from sales outside
the United States accounted for 9%, 11% and 20% of NetDynamics' total revenues
in 1996, 1997 and the quarter ended March 31, 1998, respectively. NetDynamics
believes that in order to increase sales opportunities and profitability it will
be required to expand its international operations. NetDynamics has committed
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that NetDynamics will be able to maintain or increase international
market demand for its products. To the extent that NetDynamics is unable to do
so in a timely manner, its international sales as a stand-alone company would be
limited, and its business, operating results and financial condition would be
materially and adversely affected.
International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, costs of localizing products for foreign markets, longer receivables
collection periods and greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, difficulties and costs of
staffing and managing foreign operations, reduced protection for intellectual
property rights in some countries, potentially adverse tax consequences and
political and economic instability. There can be no assurance that NetDynamics
as a stand-alone company (or its distributors or resellers) would be able to
sustain or increase international revenues from licenses or from maintenance and
service, or that the foregoing factors would not have a material adverse effect
on NetDynamics' future international revenues and, consequently, on its
business, operating results and financial condition. Revenues generated by
NetDynamics' distributors and resellers are generally paid to it in United
19
<PAGE> 24
States dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on revenues from
international sales and thus NetDynamics' business, operating results and
financial condition. See "NetDynamics Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Proprietary Rights; Risks of Infringement. NetDynamics relies primarily on
a combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. NetDynamics also believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. NetDynamics seeks
to protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. NetDynamics
currently has one patent issued and two patent applications pending in the
United States. There can be no assurance that NetDynamics' patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to NetDynamics or that any of its pending or
future patent applications, whether or not being currently challenged by
applicable governmental patent examiners, will be issued with the scope of the
claims sought by NetDynamics, if at all. Furthermore, there can be no assurance
that others will not develop technologies that are similar or superior to
NetDynamics' technology or design around any patents owned by NetDynamics.
Despite NetDynamics' efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of NetDynamics' products or to obtain and
use information that NetDynamics regards as proprietary. Policing unauthorized
use of NetDynamics' products is difficult, and while NetDynamics is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect NetDynamics' proprietary rights as fully as do
the laws of the United States. There can be no assurance that NetDynamics' means
of protecting its proprietary rights in the United States or abroad will be
adequate or that others will not independently develop similar technology.
NetDynamics is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by NetDynamics of their intellectual property rights.
NetDynamics expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in its
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, against NetDynamics
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
NetDynamics to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
NetDynamics, if at all. In the event of a successful claim of product
infringement against NetDynamics and the failure or inability of NetDynamics to
license the infringed or similar technology, its business, operating results and
financial condition would be materially adversely affected.
NetDynamics relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in its products to perform key functions. There can
be no assurance that these third-party software licenses will continue to be
available to NetDynamics on commercially reasonable terms. The loss of, or
inability to maintain, any such software licenses could result in shipment
delays or reductions until equivalent software could be developed, identified,
licensed and integrated which would materially adversely affect NetDynamics'
business, operating results and financial condition.
Need to Manage a Changing Business. NetDynamics has recently experienced a
period of significant growth and an expansion in the number of its employees,
the scope of its operating and financial systems and geographic area of its
operations. This growth has resulted in new and increased responsibilities for
management personnel and has placed significant strain upon NetDynamics'
management, operating and financial systems and resources. To accommodate recent
growth, compete effectively and manage potential future growth, if any, as a
stand-alone company, NetDynamics would have to continue to implement and improve
information systems, procedures and controls and expand, train, motivate and
manage its work force.
20
<PAGE> 25
These demands will require the addition of new management personnel.
NetDynamics' future success as a stand-alone company would also depend to a
significant extent on the ability of its current and future management personnel
to operate effectively, both independently and as a group. There can be no
assurance that NetDynamics' personnel, systems, procedures and controls would be
adequate to support its future operations. Any failure to implement and improve
NetDynamics' operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on its
business, operating results and financial condition.
Dependence on Key Personnel. NetDynamics' success depends to a significant
degree upon the continuing contributions of its key management, sales,
marketing, customer support and product development personnel. The loss of key
management or technical personnel could adversely affect NetDynamics.
NetDynamics believes that its future success as a stand-alone company will
depend in large part upon its ability to attract and retain highly skilled
managerial, sales, customer support and software development personnel.
NetDynamics has at times experienced and continues to experience difficulty in
recruiting qualified personnel. Competition for qualified software development,
sales and other personnel is intense, and there can be no assurance that
NetDynamics will be successful in attracting and retaining such personnel.
Competitors and others have in the past and may in the future attempt to recruit
NetDynamics' employees. Failure to attract and retain key personnel could have a
material adverse effect on its business, operating results and financial
condition.
Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. Failure to accept four
digit entries could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements. NetDynamics has not commenced an audit of its internal operating
systems to determine whether they are Year 2000 compliant. However, NetDynamics
does not believe it will incur significant incremental costs, if any, in order
to bring its internal operating systems into Year 2000 compliance. Based upon
NetDynamics' design and testing of its software products, NetDynamics believes
that its software products are Year 2000 compliant. However, there can be no
assurance that this is the case or that NetDynamics' products will interoperate
with the products of third parties in a Year 2000 compliant manner. Failure of
NetDynamics' software products to operate properly with regard to Year 2000
compliance could require NetDynamics to incur significant unanticipated expenses
to remedy any problems and could have a material adverse effect on NetDynamics'
business, financial condition and results of operations.
No Assurance as to Liquidity. NetDynamics is privately held. If the Merger
is not consummated, there can be no assurance that NetDynamics can provide
liquidity for its shareholders through an alternative combination or sale
transaction, an initial public offering or other means. Moreover, there can be
no assurance that NetDynamics could complete an alternative business combination
to the Merger or an initial public offering on attractive terms, or at all. In
particular, many potential buyers of NetDynamics might acquire companies that
compete with NetDynamics or acquire or internally develop technologies that
compete with NetDynamics' products.
NETDYNAMICS SPECIAL MEETING
DATE, TIME AND PLACE OF NETDYNAMICS SPECIAL MEETING
The NetDynamics Special Meeting will be held on August 28, 1998 at 9:00
a.m., local time, at NetDynamics' executive offices located at 185 Constitution
Avenue, Menlo Park, California 94025.
PURPOSES OF NETDYNAMICS SPECIAL MEETING
The purpose of the NetDynamics Special Meeting is to consider and vote upon
approval and adoption of the Merger, the Merger Agreement and the Parachute
Payment Proposals. As a result of the Merger, all outstanding shares of
NetDynamics Capital Stock will be converted into a right to receive shares of
Sun
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Common Stock, and NetDynamics Stock Options will be assumed by Sun and be
converted into options to purchase Sun Common Stock. See "The Merger
Agreement -- Manner and Basis of Converting Shares."
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record of NetDynamics Capital Stock at the close of
business on the NetDynamics Record Date, which is June 30, 1998, are entitled to
notice of, and to vote at, the NetDynamics Special Meeting. As of the
NetDynamics Record Date, there were approximately 45 shareholders of record
holding an aggregate of 5,445,771 shares of NetDynamics Common Stock, 7
shareholders of record holding an aggregate of 1,891,371 shares of NetDynamics
Series A Preferred Stock, 9 shareholders of record holding an aggregate of
940,206 shares of NetDynamics Series B Preferred Stock and 27 shareholders of
record holding an aggregate of 1,220,000 shares of NetDynamics Series C
Preferred Stock.
VOTE REQUIRED; QUORUM
Pursuant to the CGCL and the NetDynamics Restated Articles of
Incorporation, as amended, approval of the Merger and the Merger Agreement
requires the affirmative vote of the holders of a majority of the NetDynamics
Common Stock and a majority of the NetDynamics Preferred Stock, in each case
voting as a separate class, outstanding as of the NetDynamics Record Date is
required to approve and adopt the Merger Agreement. Under the Code, approval of
each Parachute Payment Proposal requires the affirmative vote of the holders of
more than seventy-five percent (75%) of the shares of NetDynamics Capital Stock
other than the holder receiving such Option Acceleration. Each shareholder of
NetDynamics Capital Stock of record on the NetDynamics Record Date will be
entitled to cast one vote per share on the approval of the Merger and Merger
Agreement. On the vote for approval of the Parachute Payment Proposals, the
holders of NetDynamics Series A and Series B Preferred Stock will be entitled to
cast one and one-half (1.5) votes per share and holders of NetDynamics Common
Stock and Series C Preferred Stock will be entitled to cast one vote per share.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of NetDynamics Capital Stock entitled to vote
at the NetDynamics Special Meeting will constitute a quorum. If an executed
NetDynamics proxy is returned and the shareholder has specifically abstained
from voting on any matter, the shares represented by such proxy will be
considered present at the NetDynamics Special Meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not be
considered to have been voted in favor of such matter.
The Founders and certain entities affiliated with the Founders and other
shareholders affiliated with a member of the NetDynamics Board have entered into
Voting Agreements with Sun, pursuant to which each such holder has agreed to
vote (i) in favor of approval and adoption of the Merger Agreement and each of
the other transactions contemplated thereby; (ii) against approval of any
proposal in opposition to or in competition with the Merger and the Merger
Agreement; (iii) against any merger, business combination, sale of assets (in
whole or significant part) or other material change in NetDynamics'
capitalization or corporate structure that could adversely affect the Merger or
the Merger Agreement; (iv) in favor of John R. Hummer as securityholder agent on
behalf of the NetDynamics shareholders; and (v) in favor of the Parachute
Payment Proposal. In addition, pursuant to the Voting Agreements, each such
holder has granted pursuant to such holder's Voting Agreement, to two officers
of Sun, an irrevocable proxy to vote shares as aforesaid. The shares of
NetDynamics Capital Stock subject to the Voting Agreements represent
approximately 87% of the votes entitled to be cast by holders of shares of
NetDynamics Common Stock and approximately 21% of the votes entitled to be cast
by holders of shares of NetDynamics Preferred Stock as of the NetDynamics Record
Date.
VOTING OF PROXIES
All shares of NetDynamics Capital Stock that are entitled to vote and are
represented at the NetDynamics Special Meeting either in person or by properly
executed proxies received prior to or at the NetDynamics Special Meeting and not
duly and timely revoked will be voted at the NetDynamics Special
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Meeting in accordance with the instructions indicated on such proxies. If no
such instructions are indicated, such proxies will be voted for the approval of
the Merger, the Merger Agreement and the Parachute Payment Proposals.
If any other matters are properly presented for consideration at the
NetDynamics Special Meeting including, among other things, consideration of a
motion to adjourn or postpone the NetDynamics Special Meeting to another time
and/or place (including, without limitation, for the purpose of soliciting
additional proxies), the persons named in the enclosed forms of proxy and voting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of NetDynamics at or before the taking of the vote at the
NetDynamics Special Meeting, a written notice of revocation bearing a later date
than the proxy; (ii) duly executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of NetDynamics, before the taking of
the vote at the NetDynamics Special Meeting or (iii) attending the NetDynamics
Special Meeting and voting in person (although attendance at the NetDynamics
Special Meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent so as to be
delivered to NetDynamics, Inc. at 185 Constitution Avenue, Menlo Park,
California 94025, Attention: Secretary, or hand-delivered to the Secretary of
NetDynamics, in each case at or before the taking of the vote at the NetDynamics
Special Meeting.
Because the required vote of holders of NetDynamics Capital Stock for
approval of the Merger, the Merger Agreement and the Parachute Payment Proposals
is based on the number of outstanding shares rather than upon the shares
actually voted in person or by proxy at the NetDynamics Special Meeting, the
failure of a holder to submit a proxy or to vote in person at the NetDynamics
Special Meeting (including abstentions) will have the same effect as a vote
against approval of such proposals.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies of NetDynamics shareholders will be
borne by NetDynamics. Proxies may be solicited by certain NetDynamics directors,
officers and employees personally or by telephone, telecopy or other means of
communication. Such persons will not receive additional compensation, but may be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
such solicitation.
APPRAISAL RIGHTS
Holders of NetDynamics Capital Stock who do not vote in favor of the Merger
may, under certain circumstances and by following procedures prescribed by the
CGCL, exercise appraisal rights and receive cash for their shares of NetDynamics
Capital Stock. A dissenting shareholder of NetDynamics must follow the
appropriate procedures under the CGCL or suffer the termination or waiver of
such rights. See "The Merger and Related Transactions -- California Appraisal
Rights."
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THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the proposed Merger and related
transactions. The following is not, however, a complete statement of all
provisions of the Merger Agreement and related agreements. Detailed terms of and
conditions to the Merger and certain related transactions are contained in the
Merger Agreement, a conformed copy of which is attached to this Proxy
Statement/Prospectus as Annex A. Statements made in this Proxy
Statement/Prospectus with respect to the terms of the Merger and such related
transactions are qualified in their respective entireties by reference to, and
holders of NetDynamics Capital Stock are urged to read the more detailed
information set forth in the Merger Agreement and the other documents annexed
hereto.
BACKGROUND OF THE MERGER
NetDynamics has from time to time considered a strategic transaction that
would represent an attractive way to realize its long-term potential. In
September 1997, NetDynamics retained the Technology Group of Deutsche Morgan
Grenfell Inc. (subsequently renamed Deutsche Bank Securities, Inc. ("DBS")) to
explore a possible strategic transaction, including a sale or merger of
NetDynamics or an initial public offering of NetDynamics Common Stock. From time
to time thereafter, NetDynamics considered and in some cases conducted
preliminary negotiations regarding a possible strategic transaction.
On December 19, 1997, a meeting was held at Java Software. Shel
Finkelstein, Enterprise Engineering Manager of Sun and members of Mr.
Finkelstein's staff, Ofer Ben-Shachar, Founder and Chief Technical Officer of
NetDynamics, Peter Yared, Director of Technology of NetDynamics and Steve
Zocchi, Vice President Business Development of NetDynamics attended the meeting.
At the meeting, NetDynamics provided an overview of NetDynamics' products, and
Sun provided an overview of certain Sun products.
On January 8, 1998, a meeting was held at NetDynamics, and attended by Mr.
Finkelstein and members of Mr. Finkelstein's staff, Messrs. Ben-Shachar and
Yared, and Vijay Anand, Director of Servers of NetDynamics and Sherrick Murdoff,
Product Marketing Manager of NetDynamics. At the meeting, NetDynamics provided
Sun a more detailed overview of NetDynamics' technologies and products.
On January 14, 1998, a meeting was held at Java Software, and attended by
Alan Baratz, President of JavaSoft, Stuart Macmillan, Manager Business
Development of Sun, Mala Chandra, Director Enterprise Engineering of Sun, and
Jonathan Schwartz, Director of Product Marketing of Sun, and Zah Rinat,
President and Chief Executive Officer of NetDynamics, Mr. Zocchi, Brooke
Seawell, Chief Financial Officer of NetDynamics and Mr. Ben-Shachar. At the
meeting, the participants explored possible partnering relationships and
NetDynamics presented to Sun an overview of NetDynamics' technologies, products
and plans.
On February 6, 1998, a meeting was held at Java Software, and attended by
Alan Patty, Vice President Sales of Sun, members of Mr. Patty's staff, Mr.
Macmillan, Tom Schroeder, Director Business Development of Sun, Gerald Wagner,
Business Development Manager of Sun, La Mont Chappell, Business Development
Manager of Sun, Kitty Cullen, Vice President Sales of NetDynamics, Mr. Zocchi
and Vic Morris, Vice President Marketing of NetDynamics. At the meeting,
NetDynamics presented to Sun an overview of NetDynamics and discussed joint
product sales opportunities.
On February 10, 1998, a meeting was held at Java Software, and attended by
Messrs. Macmillan, Schroeder, Wagner and Chapell of Sun and Messrs. Rinat,
Zocchi and Seawell of NetDynamics. At the meeting, NetDynamics provided Sun an
overview of NetDynamics' business plans and discussed in more detail potential
business opportunities between the companies.
On March 26, 1998 a meeting was held at the JavaOne Developers' Conference
in San Francisco with Messrs. Baratz, Macmillan and Wagner and Jim Johnson,
Director Java Software Finance of Sun and Messrs. Rinat and Seawell of
NetDynamics. At the meeting, Sun discussed its interest in pursuing a business
arrangement with NetDynamics including a possible acquisition.
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On April 15, 1998, a lunch meeting was attended by Messrs. Baratz,
Macmillan and Schwartz of Sun and Messrs. Rinat, Zocchi and Seawell of
NetDynamics, to continue discussions regarding a possible business arrangement
between Sun and NetDynamics, including a possible acquisition of NetDynamics by
Sun.
On April 29, 1998, a meeting was held at Java Software, and attended by Ms.
Chandra, Mr. Finkelstein, Mr. Finkelstein's staff members, and Messrs. Macmillan
and Wagner of Sun, Olivia Dillan, Vice President Engineering of NetDynamics,
Messrs. Zocchi and Anand and technical staff of NetDynamics. At the meeting, the
participants from NetDynamics provided Sun a detailed overview of NetDynamics'
server and tools technologies, products and roadmaps.
On April 30, 1998, a meeting was held at Java Software and attended by
Messrs. Baratz, Macmillan, Wagner, Chapell, Johnson and Schroeder and Ms.
Chandra of Sun and Messrs. Rinat, Zocchi and Seawell of NetDynamics. At the
meeting, the representatives of NetDynamics presented NetDynamics' business
outlook and a proposal for a business relationship between Sun and NetDynamics.
On May 26, 1998, the NetDynamics Board held a regularly scheduled meeting
at which, among other matters, the merits of Sun's potential acquisition of
NetDynamics were discussed.
On May 28, 1998, a meeting was held at Java Software, and attended by
Messrs. Macmillan, Schroeder, Wagner and Chapell of Sun and Messrs. Zocchi and
Seawell of NetDynamics. At the meeting, representatives of Sun presented and
discussed potential acquisition proposal terms and issues.
On May 30, 1998, William Raduchel, Vice President of Strategic Planning of
Sun and Mr. Rinat of NetDynamics and George Boutros then of DBS discussed via
telephone proposed terms and issues related to the proposed acquisition.
On June 1, 1998, Messrs. Raduchel and Schroeder of Sun, Mr. Rinat of
NetDynamics and Mr. Boutros and David Popowitz then of DBS spoke via telephone,
and NetDynamics presented and discussed its response to Sun's acquisition
proposal.
At various times throughout June, members of the NetDynamics Board and
NetDynamics' senior management held informal discussions regarding Sun's
proposed acquisition of NetDynamics.
On June 3, 1998, a meeting was held at Java Software and attended by
Messrs. Baratz and Raduchel and Ken Alvares, Vice President Human Resources of
Sun and Messrs. Rinat, Seawell and Boutros and Stephanie Jensen, Director of
Human Resources and Facilities of NetDynamics where further acquisition related
issues were discussed.
On June 6, 1998, Messrs. Baratz and Rinat discussed additional acquisition
related issues.
On June 8, 1998, a meeting and dinner was held at NetDynamics and attended
by Messrs. Baratz and Raduchel and Mr. Edward Zander, Chief Operating Officer of
Sun and Mr. Rinat of NetDynamics and Mr. Rinat's staff. At the meeting,
NetDynamics' staff presented overviews of its organization to Sun and discussed
mutual opportunities.
On June 9, 1998, the Sun Board met and approved the Merger.
On June 16, 1998, via telephone, Messrs. Raduchel and Schroeder of Sun, Mr.
Rinat of NetDynamics and Mr. Boutros and Ravi Kaza then of DBS discussed key
terms of the potential merger.
From June 16, 1998 through June 30, 1998, representatives of NetDynamics
and representatives of Sun and their respective legal and accounting advisors
held numerous meetings to prepare and discuss definitive agreements and perform
due diligence.
On June 18, 1998, the NetDynamics Board had a regularly scheduled meeting
at which, among other things, Sun's proposed acquisition of NetDynamics was
discussed.
On June 30, 1998, the NetDynamics Board held a special meeting attended by
NetDynamics' outside financial and legal advisors to consider approval of the
Merger and the Merger Agreement. After an update on
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the status of negotiations between Sun and NetDynamics by Mr. Rinat and
presentations by NetDynamics' outside financial and legal advisors, the
NetDynamics Board, among other things, unanimously (i) determined that the
Merger is fair to, and in the best interest of NetDynamics and its shareholders,
(ii) approved the Merger, the Merger Agreement and the transactions contemplated
thereby, (iii) approved the Parachute Payment Proposals, and (iv) recommended
that holders of NetDynamics Capital Stock vote FOR approval of the Merger, the
Merger Agreement and the transactions contemplated thereby and the Parachute
Payment Proposals.
On June 30, 1998 the Merger Agreement and related agreements were signed by
Sun and NetDynamics.
JOINT REASONS FOR THE MERGER
The Boards of Directors of Sun and NetDynamics, in voting to recommend the
proposed Merger, identified a number of potential benefits that Sun and
NetDynamics believe will contribute to the success of the combined companies,
including:
- The combination of Sun's and NetDynamics' products, technologies,
services and distribution channels will offer the combined company the
potential to provide enterprises with a more comprehensive middleware
software solution.
- The combination of Sun and NetDynamics will provide the combined company
with the potential to offer broader software development expertise and
market presence.
NETDYNAMICS' REASONS FOR THE MERGER
The NetDynamics Board has unanimously approved the Merger Agreement and
determined that the Merger is fair to, and in the best interests of, NetDynamics
and its shareholders. The NetDynamics Board, therefore, unanimously recommends
that holders of NetDynamics' Capital Stock vote FOR approval of the Merger, the
Merger Agreement and the transactions contemplated thereby and the Parachute
Payment Proposals. In reaching its determination, the NetDynamics Board
consulted with NetDynamics' management, as well as its financial adviser, legal
counsel and accountants, and gave significant consideration to a number of
factors bearing on its decision.
Among other things, the NetDynamics Board considered the following
strategic factors:
- The Merger would reduce competitive risks to NetDynamics compared to
continuing as a stand-alone entity. In particular, the NetDynamics Board
considered that competition in the enterprise network application
software market is expected to increase significantly from large,
well-capitalized computer, software, Internet and enterprise application
companies, such as Microsoft, IBM, Netscape and Oracle, that can embed
application server technology in a broader software platform and make it
more difficult for NetDynamics to compete on a stand-alone basis. In
addition, the NetDynamics Board considered that, by continuing on a
stand-alone basis, NetDynamics would have to explore entering alternative
markets to the enterprise network application software market with a
number of attendant risks and uncertainties.
- The Merger would potentially create increased sales of NetDynamics'
software products using Sun's world-wide sales and marketing resources
by, among other things, generating additional enterprise licenses and
increasing NetDynamics' transaction volume.
- The Merger would create the opportunity to generate significant savings
in sales, marketing, general and administrative expenses by enabling
NetDynamics to use Sun's sales, marketing and administrative
infrastructure.
- The Merger would allow NetDynamics' shareholders to reduce exposure to
the risks inherent in NetDynamics' reliance on products in a limited
market segment. In addition, the Merger would offer NetDynamics the
opportunity to use the resources of Sun to develop additional products
and provide additional and more comprehensive levels of service.
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- The Merger would provide liquidity for NetDynamics' shareholders through
their ownership of Sun Common Stock.
In the course of its deliberations, the NetDynamics Board reviewed a number
of additional factors relevant to the Merger. These factors included: (i)
information concerning the respective businesses, prospects, historical
financial performances and conditions, operations, technologies, management,
products, customers and future development plans of NetDynamics and Sun; (ii)
the historical market prices, volatility and trading information with respect to
the Sun Common Stock; (iii) the value of the Sun Common Stock to be received in
the Merger in exchange for outstanding NetDynamics Capital Stock and to become
issuable upon exercise of NetDynamics Stock Options to be assumed by Sun; (iv)
the relationship between the market value of the shares of Sun Common Stock and
NetDynamics Common Stock; (v) the terms of the Merger Agreement; (vi) the
compatibility of the management and businesses of NetDynamics and Sun, as well
as the fact that certain members of NetDynamics' senior management would
continue to be involved in the operations relating to NetDynamics' products and
business following the Merger; (vii) results from NetDynamics' management of the
results of their due diligence investigation of Sun; and (viii) the fact that
the Merger is expected to qualify as a tax-free reorganization.
The NetDynamics Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger. These factors include: (i)
the relatively slower growth rate of Sun's revenues compared to the potential
growth rate of NetDynamics' revenues on a stand-alone basis; (ii) the potential
loss of revenues from NetDynamics business following the Merger as a result of
confusion in the marketplace and the possible exploitation of such confusion by
competitors of NetDynamics; (iii) the possibility of management disruption
associated with Merger; (iv) the risk that benefits sought to be achieved by
Merger might not be realized; and (v) the risks described above under "Risk
Factors."
The foregoing discussion of the information and factors considered by the
NetDynamics Board is not intended to be exhaustive but is believed to include
all material factors considered by the NetDynamics Board. In view of the variety
of factors considered in connection with its evaluation of the Merger, the
NetDynamics Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination. In addition, individual members of the NetDynamics Board may
have given different weights to different factors. In the course of its
deliberations, the NetDynamics Board did not establish a range of values for
NetDynamics Capital Stock; however, based on the factors outlined above and on
the oral advice of its financial advisor, DBS, the NetDynamics Board determined
that the terms of the Merger Agreement are fair to, and that the Merger is in
the best interests of, NetDynamics and its shareholders.
SUN'S REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, the Sun
Board believes, for the following additional reasons, the Merger will be
beneficial to Sun:
- The acquisition of NetDynamics offers the opportunity to reduce Sun's
time to market in providing an enterprise application middleware
platform.
- The acquisition of NetDynamics will leverage Sun's Java technologies and
Solaris operating system's strengths in connection with establishing
Sun's position in the application middleware software market.
- Acquiring NetDynamics will broaden Sun's software product and services
offerings to enterprise customers.
The foregoing discussion of the information and factors considered by the
Sun Board is not intended to be exhaustive but is believed to include all
material factors considered by the Sun Board. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Sun Board did
not find it practicable to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the Sun Board may have given different weights
to different factors.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the NetDynamics Board with respect to
the Merger, NetDynamics shareholders should be aware that certain members of the
NetDynamics Board and management have certain interests in the Merger that are
in addition to the interests of NetDynamics shareholders generally. The
NetDynamics Board was aware of these interests and considered them, among other
factors, in approving the Merger Agreement. These interests are as follows:
Upon consummation of the Merger, the vesting of NetDynamics Stock Options
held by certain directors and executive officers of NetDynamics will be fully
accelerated. In addition, Key Employees will receive the following, subject to
certain conditions: (i) the opportunity to receive a portion of the nonqualified
stock options of Sun (the "Nonqualified Sun Options") exercisable in the
aggregate for 175,000 shares of Sun Common Stock, and (ii) the opportunity to
receive a portion of the $10 million in aggregate value of Sun Restricted Stock
reserved for employees of NetDynamics.
Option Acceleration. NetDynamics Stock Options granted to certain officers
of NetDynamics, including the chief executive officer, chief scientist, each
vice president of NetDynamics and certain other persons, provide that the
vesting of such Stock Options will fully accelerate upon (i) an acquisition of
NetDynamics and (ii) termination of such person's employment within twelve (12)
months of the acquisition. Each such person has waived any rights to
acceleration as a result of accepting employment at Sun following the Merger,
other than A. Brooke Seawell, Executive Vice President and Chief Financial
Officer, and Victor Morris, Vice President of Marketing, Vice President/General
Manager, EMEA, who are not anticipated to render services for Sun following the
Merger. As a result, all of their presently unvested NetDynamics Stock Options
will vest upon the consummation of the Merger and become exercisable for 153,184
and 59,063 shares of NetDynamics Common Stock, respectively, except that the
vesting of options exercisable for 17,850 shares held by Mr. Seawell will not
accelerate if the Parachute Payment Proposal relating to his Option Acceleration
is not approved. Messrs. Abelmann and Dorrian, each a director of NetDynamics,
hold unvested NetDynamics Stock Options exercisable for 66,732 and 48,763 shares
of NetDynamics Common Stock, respectively, which will fully vest upon
consummation of the Merger, except that the vesting of such options will not
accelerate if the Parachute Payment Proposal relating to their respective Option
Acceleration is not approved.
Nonqualified Sun Options. In connection with the Merger, Key Employees are
entitled to receive Nonqualified Sun Options exercisable for a total of 175,000
shares of Sun Common Stock. Such Nonqualified Sun Options are subject to the
approval of Sun's Board of Directors, exercisable at fair market value on the
date of grant by Sun's Board of Directors, and vest over a five-year period at
the rate of twenty percent (20%) per annum commencing at the Effective Time. The
receipt of such Nonqualified Sun Options is contingent upon the consummation of
the Merger.
Sun Restricted Stock. In connection with the execution of the Merger
Agreement, Key Employees were granted the right to purchase, at the Effective
Time, shares of Sun Restricted Stock with an aggregate value of $8.2 million
based on the Market Price for $.01 per share. Sun Restricted Stock shall vest
over a four-year period at the rate of twenty-five percent (25%) per annum
commencing at the time of purchase. Pursuant to the Merger Agreement, Sun will
grant additional shares of Sun Restricted Stock with an aggregate value of $1.8
million to certain employees of NetDynamics which may include certain members of
NetDynamics' management. The receipt of such Sun Restricted Stock is contingent
upon the consummation of the Merger.
Indemnification of Directors and Officers. The Merger Agreement provides
that from and after the Effective Time, Sun will cause the Surviving Corporation
to fulfill the obligations of NetDynamics pursuant to (i) any indemnification
agreements between NetDynamics and its directors and officers existing prior to
the date of the Merger Agreement and (ii) applicable provisions of NetDynamics'
organizational documents, as currently in effect, which provisions will not be
amended, repealed or otherwise modified for a period of three years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of NetDynamics, unless such modification is
required by law.
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EFFECTIVE TIME
The Merger Agreement provides that the Merger will become effective upon
the filing of an Agreement of Merger with the Secretary of State of California
in accordance with the CGCL. It is anticipated that if all conditions of the
Merger have been fulfilled or waived, the Effective Time will occur on or about
August 28, or on a date as soon as practicable thereafter.
LEGAL STRUCTURE OF THE MERGER
Under the Merger Agreement, Merger Sub, a wholly-owned subsidiary of Sun
formed for this purpose, will merge with and into NetDynamics with NetDynamics
being the surviving corporation of the Merger. The Articles of Incorporation of
Merger Sub in effect immediately prior to the Effective Time will become the
Articles of Incorporation of the Surviving Corporation, the Bylaws of Merger Sub
will become the Bylaws of the Surviving Corporation and the Board of Directors
of Merger Sub will become the initial Board of Directors of the Surviving
Corporation. Sun and NetDynamics shall each use its reasonable efforts to cause
the Merger to be treated as a reorganization within the meaning of Section
368(a) of the Code.
MANNER AND BASIS OF CONVERTING SHARES
Subject to the terms and conditions of the Merger Agreement, as of the
Effective Time, by virtue of the Merger and without any action on the part of
Merger Sub, NetDynamics or the holder of any shares of NetDynamics Capital
Stock, the following will occur:
Conversion of NetDynamics Capital Stock. Under the terms of the Merger,
shares of Sun Common Stock will be exchanged for the outstanding shares of
NetDynamics Capital Stock. Each share of NetDynamics Capital Stock issued and
outstanding immediately prior to the Effective Time (other than any shares held
by a holder who has demanded and perfected appraisal rights for such shares in
accordance with the applicable provisions of the CGCL and who has not withdrawn
or lost such rights) will be canceled and extinguished and be converted
automatically into the right to receive a number of shares of Sun Common Stock
as follows:
Conversion of NetDynamics Preferred Stock. The holders of NetDynamics
Series A, Series B, and Series C Preferred Stock are entitled to receive shares
of Sun Common Stock prior and in preference to any delivery of Sun Common Stock
to the holders of NetDynamics Common Stock, provided that if the assets and
funds available for distribution among the holders of the NetDynamics Preferred
Stock are insufficient to permit the receipt of such Sun Common Stock to holders
of NetDynamics Preferred Stock in the amounts to which they would otherwise be
entitled, then holders of NetDynamics Series A, Series B and Series C Preferred
Stock will be entitled to their pro rata share of the Sun Common Stock available
in proportion to the respective amounts which would be received by them if the
respective amounts were paid in full.
Conversion of NetDynamics Series A Preferred Stock. Holders of
NetDynamics Series A Preferred Stock will entitled to receive in aggregate
prior and in preference to any delivery of Sun Common Stock to the holders
of NetDynamics Common Stock that number of shares of Sun Common Stock equal
to the product of (i) the quotient obtained by dividing $0.985 by the
Market Price and (ii) the number of shares of NetDynamics Series A
Preferred issued and outstanding immediately prior to the Effective Time.
See "-- Participation of NetDynamics Series A and Series B Preferred Stock"
and "-- Limitations on Participation of NetDynamics Series A and Series B
Preferred Stock."
Conversion of NetDynamics Series B Preferred Stock. Holders of
NetDynamics Series B Preferred Stock will entitled to receive in aggregate
prior and in preference to any delivery of Sun Common Stock to the holders
of NetDynamics Common Stock that number of shares of Sun Common Stock equal
to the product of (i) the quotient obtained by dividing $5.4042 by the
Market Price and (ii) the number of shares of NetDynamics Series B
Preferred issued and outstanding immediately prior to the Effective Time.
See "-- Participation of NetDynamics Series A and Series B Preferred Stock"
and "-- Limitations on Participation of NetDynamics Series A and Series B
Preferred Stock."
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Conversion of NetDynamics Series C Preferred Stock. Holders of
NetDynamics Series C Preferred Stock will entitled in aggregate to receive
prior and in preference to any delivery of Sun Common Stock to the holders
of NetDynamics Common Stock that number of shares of Sun Common Stock equal
to the product of (i) the quotient obtained by dividing $7.00 by the Market
Price and (ii) the number of shares of NetDynamics Series C Preferred
issued and outstanding immediately prior to the Effective Time.
Participation of NetDynamics Series A and Series B Preferred
Stock. Each holder of shares of NetDynamics Series A and Series B Preferred
Stock, issued and outstanding immediately prior to the Effective Time, will
receive, in addition to and to the extent that there are remaining shares
of Sun Common Stock after distribution of the preferential amounts referred
to above, the number of shares of Sun Common Stock equal to: the number of
shares of Sun Common Stock remaining after distribution of the preferential
amounts referred to above multiplied by a fraction, (a) the numerator of
which is the aggregate number of shares of NetDynamics Common Stock
issuable upon conversion of the shares of NetDynamics Series A and Series B
Preferred Stock held by such holder immediately prior to the Effective Time
(the current conversion rate is 1.5 shares of NetDynamics Common Stock for
each share of NetDynamics Series A and Series B Preferred Stock), and (b)
the denominator of which is (i) the aggregate number of shares of
NetDynamics Common Stock outstanding immediately prior to the Effective
Time plus (ii) the aggregate number of shares of NetDynamics Common Stock
issuable upon conversion of the shares of NetDynamics Series A and Series B
Preferred Stock outstanding immediately prior to the Effective Time (other
than shares of NetDynamics Series A and Series B Preferred Stock that
become subject to the limitations on participation of NetDynamics Series A
and Series B Preferred Stock contained on the NetDynamics Articles of
Incorporation (see "-- Limitations on Participation of NetDynamics Series A
and Series B Preferred Stock")) plus (iii) the aggregate number of shares
of NetDynamics Common Stock issuable upon the exercise or conversion of all
options, warrants and other rights to acquire or receive shares of
NetDynamics Common Stock outstanding immediately prior to the Effective
Time, rounded to the nearest whole number.
Limitations on Participation of NetDynamics Series A and Series B
Preferred Stock. Notwithstanding the participating and preferential amounts
described above, in accordance with the Articles of Incorporation of
NetDynamics, under no circumstances may the holder of any share of
NetDynamics Series A Preferred Stock be entitled pursuant to the Merger
Agreement to receive a number of shares of Sun Common Stock equal to in
excess of $3.94 divided by the Market Price in respect of any such share,
and under no circumstances may the holder of any share of NetDynamics
Series B Preferred Stock be entitled pursuant to the Merger Agreement to
receive a number of shares of Sun Common Stock equal to in excess of
$21.6168 divided by the Market Price in respect of any such share. Any
shares of Sun Common Stock that would otherwise be distributed to holders
of NetDynamics Series A and Series B Preferred Stock but for the
limitations described in this paragraph will be distributed to the holders
of NetDynamics Common Stock and any participating series of NetDynamics
Preferred Stock that continues to be entitled to such participation in
light of such limitations. In addition, any shares of NetDynamics Series A
and Series B Preferred Stock that because of such limitations are converted
into fewer shares of Sun Common Stock than they would in the absence of
such limitations will not be counted as participating shares in determining
the distribution of remaining shares of Sun Common Stock to participating
shareholders. See "-- Participation of NetDynamics Series A and Series B
Preferred Stock" and "-- Conversion of NetDynamics Common Stock."
Conversion of NetDynamics Common Stock. Each holder of shares of
NetDynamics Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares held by a holder who has demanded and
perfected appraisal rights for such shares in accordance with the applicable
provisions of the CGCL and who has not withdrawn or lost such rights) will be
canceled and extinguished and will be converted automatically into the right to
receive a number of shares of Sun Common Stock equal to the number of shares of
Sun Common Stock available for distribution pursuant to the Merger Agreement
minus the number of shares of Sun Common Stock distributed to holders of
NetDynamics Preferred Stock pursuant to applicable preferences (see
"-- Conversion of NetDynamics Preferred Stock,") plus the number of shares
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of Sun Common Stock available for distribution by reason of the limitations on
participation of NetDynamics Series A and Series B Preferred Stock contained on
the NetDynamics Articles of Incorporation (see "-- Conversion of NetDynamics
Preferred Stock -- Limitations on Participation of NetDynamics Series A and
Series B Preferred Stock") multiplied by a fraction, (a) the numerator of which
is the number of shares of NetDynamics Common Stock held by such holder
immediately prior to the Effective Time, and (b) the denominator of which is (i)
the aggregate number of shares of NetDynamics Common Stock outstanding
immediately prior to the Effective Time plus (ii) the aggregate number of shares
of NetDynamics Common Stock issuable upon conversion of the shares of
NetDynamics Series A and Series B Preferred Stock outstanding immediately prior
to the Effective Time (other than shares of NetDynamics Series A and Series B
Preferred Stock that become subject to the limitations on participation of
NetDynamics Series A and Series B Preferred Stock contained on the NetDynamics
Articles of Incorporation (see "-- Conversion of NetDynamics Preferred
Stock -- Limitations on Participation of NetDynamics Series A and Series B
Preferred Stock")) plus (iii) the aggregate number of shares of NetDynamics
Common Stock issuable upon the exercise or conversion of all options, warrants
and other rights to acquire or receive shares of NetDynamics Common Stock
outstanding immediately prior to the Effective Time, rounded to the nearest
whole number.
Conversion of NetDynamics Capital Stock will occur in the manner provided
in a Letter of Transmittal to be sent to each record holder of NetDynamics
Capital Stock promptly following the Effective Time. After the NetDynamics
shareholders have surrendered such certificates representing NetDynamics Capital
Stock, Sun will cause to be issued to such shareholders certificates of Sun
Common Stock representing their portion of the Merger Consideration, subject to
the escrow provisions of the Merger Agreement described under the section
entitled "The Merger Agreement -- Escrow Fund and Indemnity" below.
Fractional Shares. No fraction of a share of Sun Common Stock will be
issued, but in lieu thereof, each holder of shares of NetDynamics Capital Stock
who would otherwise be entitled to a fraction of a share of Sun Common Stock
(after aggregating all fractional shares of Sun Common Stock to be received by
such holder) shall be entitled to receive from Sun an amount of cash (rounded to
the nearest whole cent) equal to the product of (i) such fraction and (ii) the
Market Price.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based on the closing price of Sun Common Stock of $43.4375 as of June 30,
1998 on the Nasdaq National Market System and the capitalization of NetDynamics
as of such date, an aggregate of approximately 3,036,000 shares of Sun Common
Stock will be issued to NetDynamics shareholders in the Merger, and an aggregate
of approximately 647,000 shares of Sun Common Stock will be issuable upon the
exercise of NetDynamics Stock Options assumed by Sun in the Merger. Based upon
the number of shares of Sun Common Stock issued and outstanding as of June 20,
1998, the former holders of NetDynamics Capital Stock would hold approximately
0.8% of Sun's total issued and outstanding shares. The foregoing numbers of
shares and percentages are subject to change as they will depend on the
capitalization of NetDynamics and be computed using the Market Price. There can
be no assurance as to the Market Price of the Sun Common Stock to be used in
calculating the Merger Consideration.
LISTING ON NASDAQ NATIONAL MARKET
Sun will cause the shares of Sun Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, to be authorized for
listing on the Nasdaq National Market upon official notice of issuance.
EXPENSES
In the event the Merger is not consummated, all fees and expenses incurred
by a party in connection with the Merger shall be the obligation of the party
incurring such fees and expenses. In the event the Merger is consummated, all
reasonable fees and expenses incurred by NetDynamics in connection with the
Merger shall be assumed by and paid by Sun upon the Effective Time; provided,
however, that any legal, accounting, financial advisory, consulting and all
other fees and expenses of third parties in excess of $2.25 million (or such
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greater number, not to exceed $2.5 million, in Sun's reasonable discretion)
shall be deducted from the Escrow Fund. See "The Merger Agreement -- Escrow Fund
and Indemnity."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of NetDynamics Capital Stock for Sun
Common Stock pursuant to the Merger. This discussion is based on currently
existing provisions of the Code, existing 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 Sun, NetDynamics or the NetDynamics shareholders as
described herein.
NetDynamics shareholders should be aware that this discussion does not
address all federal income tax considerations that may be relevant to particular
shareholders of NetDynamics in light of their particular circumstances, such as
shareholders who are banks, insurance companies, tax-exempt organizations,
dealers in securities, or foreign persons, shareholders who do not hold their
NetDynamics Capital Stock as capital assets, shareholders who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions who hold NetDynamics capital stock as part of an
integrated investment (including a "straddle") comprised of shares of
NetDynamics capital stock and one or more other positions, or who have
previously entered into a constructive sale of NetDynamics capital stock. 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
transactions effectuated prior or subsequent to or concurrently with the Merger
(whether or not such transactions are in connection with the Merger), including,
without limitation, transactions in which NetDynamics Capital Stock is acquired
or Sun Common Stock (including the Escrow Shares) is disposed of. ACCORDINGLY,
NETDYNAMICS SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR
PARTICULAR CIRCUMSTANCES.
Sun and NetDynamics have received opinions (the "Exhibit Tax Opinions")
from their respective counsel to the effect that the Merger will be treated as a
"reorganization" within the meaning of Section 368(a) of the Code (a
"Reorganization"). The Exhibit Tax Opinions are subject to certain assumptions,
limitations and qualifications, are based on the truth and accuracy of certain
factual representations of Sun, Merger Sub and NetDynamics and have been filed
as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part. In addition, the closing of the Merger is
conditioned upon the delivery at the closing of the Merger of opinions (the
"Final Tax Opinions") from counsel to both Sun and NetDynamics substantially
similar to the Exhibit Tax Opinions but based on representations of Sun, Merger
Sub and NetDynamics as of the date of the closing of the Merger. Assuming the
Merger is a Reorganization, then, subject to the assumptions, limitations and
qualifications referred to herein and in the Exhibit Tax Opinions, the Merger
should result in the following federal income tax consequences:
(a) No gain or loss will be recognized by holders of NetDynamics
Capital Stock upon their receipt of Sun Common Stock solely in exchange for
NetDynamics Capital Stock in the Merger (except to the extent of cash
received in lieu of a fractional share of the Common Stock of Sun).
(b) The aggregate tax basis of the Sun Common Stock received by
NetDynamics shareholders in the Merger (including the Escrow Shares and any
fractional share of Sun Common Stock not actually received) will be the
same as the aggregate tax basis of NetDynamics Capital Stock surrendered in
exchange therefor.
(c) The holding period of the Sun Common Stock (including the Escrow
Shares) received in the Merger will include the period for which the
NetDynamics Capital Stock surrendered in exchange therefor was held
provided that the NetDynamics Capital Stock so surrendered is held as a
capital asset at the time of the Merger.
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(d) Cash payments received by holders of NetDynamics Capital Stock in
lieu of a fractional share will be treated as if a fractional share of Sun
Common Stock had been issued in the Merger and then redeemed by Sun. A
shareholder of NetDynamics receiving such cash will generally recognize
capital gain or loss upon such payment, equal to the difference (if any)
between such shareholder's tax basis in the fractional share and the amount
of cash received.
(e) A shareholder who exercises dissenters' rights with respect to a
share of NetDynamics Capital Stock and who receives payment for such stock
in cash will generally recognize capital gain or loss measured by the
difference between the shareholder's tax basis in such share and the amount
of cash received, provided that such payment is neither essentially
equivalent to a dividend nor has the effect of a distribution of a dividend
(a "Dividend Equivalent Transaction"). A sale of NetDynamics Capital Stock
pursuant to an exercise of dissenters' rights will generally not be a
Dividend Equivalent Transaction if, as a result of such exercise, the
shareholder exercising dissenters' rights and all parties related to such
shareholder own no shares of Sun Stock (either actually or constructively,
within the meaning of Section 318 of the Code) after the Merger. If,
however, a shareholder's sale for cash of NetDynamics Capital Stock
pursuant to an exercise of dissenters' rights is a Dividend Equivalent
Transaction, then such shareholder will generally recognize ordinary income
for federal income tax purposes in an amount up to the entire amount of
cash so received.
(f) Neither Sun, Merger Sub nor NetDynamics will recognize material
amounts of gain solely as a result of the Merger.
Although Sun and NetDynamics have received the Exhibit Tax Opinions and
will receive the Final Tax Opinions from their respective counsel that the
Merger will be treated as a Reorganization, a recipient of shares of Sun Common
Stock could recognize gain to the extent that such shares were considered to be
received in exchange for services or property (other than solely NetDynamics
Capital Stock). All or a portion of such gain may be taxable as ordinary income.
Gain could also have to be recognized to the extent that a NetDynamics
shareholder was treated as receiving (directly or indirectly) consideration
other than the Common Stock of Sun in exchange for such stockholder's
NetDynamics Capital Stock.
No ruling has been or necessarily will be obtained from the Internal
Revenue Service (the "IRS") in connection with the Merger. NetDynamics
shareholders should be aware that neither the Exhibit Tax Opinions nor the Final
Tax Opinions bind the IRS and that the IRS is therefore not precluded from
successfully asserting a contrary opinion. In addition, the Exhibit Tax Opinions
and the Final Tax Opinions are subject to certain assumptions and qualifications
and will be based on the truth and accuracy of certain representations made by
Sun, Merger Sub and NetDynamics, including, without limitation, representations
in certificates to be delivered to counsel by the respective managements of Sun,
Merger Sub and NetDynamics.
A successful IRS challenge to the Reorganization status of the Merger would
result in NetDynamics shareholders recognizing taxable capital gain or loss with
respect to each share of NetDynamics Capital Stock surrendered equal to the
difference between the shareholder's tax basis in such share and the fair market
value, as of the Effective Time, of the Sun Common Stock received in exchange
therefor. In such event, a shareholder's aggregate basis in the Sun Common Stock
so received would equal its fair market value as of the Effective Time and the
holding period for such stock would begin the day after the Effective Time.
GOVERNMENTAL AND REGULATORY APPROVALS
Consummation of the Merger is subject to compliance with the HSR Act. The
notifications required under the HSR Act have been furnished to the Federal
Trade Commission and the Antitrust Division of the Department of Justice. The
specified waiting period under the HSR Act is not expected to impact the
Effective Time. The Merger must also satisfy the federal securities laws and
applicable securities laws of the various states.
ACCOUNTING TREATMENT
Sun intends to account for the Merger as a purchase.
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CALIFORNIA APPRAISAL RIGHTS
If the Merger Agreement is approved by the required vote of NetDynamics
shareholders and is not abandoned or terminated, holders of NetDynamics 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 NetDynamics 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."
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 Annex 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 NetDynamics Capital Stock must satisfy each of the following
requirements to qualify as Dissenting Shares under the CGCL: (i) the shares of
NetDynamics capital stock must have been outstanding on the NetDynamics Record
Date; (ii) the shares of NetDynamics Capital Stock must not have been voted in
favor of the Merger; (iii) the holder of such shares of NetDynamics Capital
Stock must make a written demand that NetDynamics repurchase such shares of
NetDynamics Capital Stock at fair market value (as described below); and (iv)
the holder of such shares of NetDynamics 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 NetDynamics 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 NetDynamics
shareholders, NetDynamics is required to mail to each holder of shares of
NetDynamics not voted in favor of the Merger a notice of the approval of the
Merger, a statement of the price determined by NetDynamics to represent the fair
market value of Dissenting Shares (which shall constitute an offer by
NetDynamics 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 NetDynamics 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 NetDynamics 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
NetDynamics or its transfer agent certificates representing any Dissenting
Shares that the Dissenting Shareholder demands NetDynamics 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 NetDynamics 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
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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 NetDynamics 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 NetDynamics shareholders is mailed, to resolve
such dispute. In such action, the court will determine whether the shares of
NetDynamics Common Stock held by such shareholder are Dissenting Shares, the
fair market value of such shares of NetDynamics 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
NetDynamics consents to such request for withdrawal.
RESALE OF SUN COMMON STOCK
The Sun Common Stock issued pursuant to the Merger will be transferable
under the Securities Act except for shares issued to any NetDynamics shareholder
who may be deemed to be an affiliate of NetDynamics (an "Affiliate") for
purposes of Rule 145 under the Securities Act. An Affiliate is defined generally
as including, without limitation, directors, certain executive officers and
beneficial owners of 10% or more of a class of common stock of a company.
NetDynamics has agreed to use its reasonable efforts to cause each Affiliate to
deliver to Sun on or prior to the Closing Date, a written agreement providing,
among other things, that such Affiliate will not transfer any Sun Common Stock
received in the Merger, except in compliance with the Securities Act. This Proxy
Statement/Prospectus does not cover resales of shares of Sun Common Stock
received by any person who may be deemed to be an Affiliate.
The Sun Common Stock received upon the exercise of NetDynamics Stock
Options assumed by Sun in the Merger will be transferable under the Securities
Act upon the effectiveness of a registration statement on Form S-8. Pursuant to
the Merger Agreement, Sun has agreed to file such a registration statement
within forty-five (45) days of the Effective Time.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, which is attached as Annex A to this Proxy Statement/Prospectus and
is incorporated herein by reference. Such summary is qualified in its entirety
by reference to the Merger Agreement.
THE MERGER
The Merger. The Merger Agreement provides that, following the approval and
adoption of the Merger Agreement by the shareholders of NetDynamics and the
satisfaction or waiver of the other conditions to the Merger, Merger Sub will be
merged with and into NetDynamics (with NetDynamics being the Surviving
Corporation). The Effective Time will occur upon the effectiveness of the filing
with the Secretary of State of the State of California of a duly executed
Agreement of Merger or at such later time as is specified in such Agreement of
Merger.
Certificate of Incorporation and By-laws. The Merger Agreement provides
that the Articles of Incorporation of Merger Sub as in effect immediately prior
to the Effective Time will be the Articles of Incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law except that the name of the Surviving Corporation will be changed
to "NetDynamics, Inc." in such Articles of Incorporation. The By-laws of Merger
Sub as in effect immediately prior to the Effective Time will be the By-laws of
the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law. See "The Merger and Related
Transactions -- Interests of Certain Persons in the Merger."
Conversion of NetDynamics Capital Stock in the Merger. At the Effective
Time, each issued and outstanding share of NetDynamics Capital Stock will be
canceled and will be converted into the right to receive that number of fully
paid and nonassessable shares of Sun Common Stock determined in accordance with
the Merger Agreement. Cash will be paid to NetDynamics shareholders in lieu of
fractional shares of Sun Common Stock and any dividends or other distributions
to which such holder is entitled. See "The Merger and Related
Transactions -- Manner and Basis of Converting Shares" and "-- Exchange Agent;
Exchange Procedures; Dividends; No Further Ownership Rights in NetDynamics
Common Stock."
NetDynamics Stock Options. Pursuant to the Merger, at the Effective Time,
each outstanding NetDynamics Stock Option, whether or not exercisable, will be
assumed by Sun. Each NetDynamics Stock Option so assumed by Sun under the Merger
Agreement will continue to have, and be subject to, the same terms and
conditions governing such NetDynamics Stock Option immediately prior to the
Effective Time (including, without limitation, any vesting schedule or
repurchase rights), except that (i) each NetDynamics Stock Option will be
exercisable (or will become exercisable in accordance with its terms) for that
number of whole shares of Sun Common Stock equal to the product of the number of
shares of NetDynamics Common Stock that were issuable upon exercise of such
NetDynamics Stock Option immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of Sun
Common Stock, and (ii) the per share exercise price for the shares of Sun Common
Stock issuable upon exercise of such assumed NetDynamics Stock Option will be
equal to the quotient determined by dividing the exercise price per share of
NetDynamics Common Stock at which such NetDynamics Stock Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent. It is the intention of Sun and NetDynamics that NetDynamics
Stock Options assumed by Sun will, to the extent permitted by applicable law,
qualify as incentive stock options as defined in Section 422 of the Code, to the
extent NetDynamics Stock Options qualified as incentive stock options
immediately prior to the Effective Time. After the Effective Time, Sun will
issue to each holder of an outstanding NetDynamics Stock Option a notice
describing the assumption of such NetDynamics Stock Option.
Exchange Agent. The Merger Agreement requires Sun to deposit as of the
Effective Time, with Boston Equiserve LLP, or such other institution as it shall
select (the "Exchange Agent"), for the benefit of the holders of shares of
NetDynamics Capital Stock, certificates representing the shares of Sun Common
Stock issuable in exchange therefor.
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Exchange Procedures. Within 10 days after the Effective Time, Sun will
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding shares of NetDynamics Capital Stock (the "Certificates") whose
shares were converted into the right to receive shares of Sun Common Stock
pursuant to the Merger Agreement, (i) a Letter of Transmittal (which will
specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon delivery of the Certificates to the Exchange
Agent and will be in such form and have such other provisions as Sun may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of Sun Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate will be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Sun Common Stock, minus ten percent
(10%) of such shares which will be placed in the Escrow Fund, which such holder
has the right to receive after taking into account all the shares of NetDynamics
Capital Stock then held by such holder under all such Certificates so
surrendered, cash in lieu of fractional shares of Sun Common Stock to which such
holder is entitled and any dividends or other distributions to which such holder
is entitled, and the Certificate so surrendered will forthwith be canceled. See
"The Merger Agreement -- Escrow Fund and Indemnity." In the event of a transfer
of ownership of NetDynamics Capital Stock which is not registered in the
transfer records of NetDynamics, a certificate representing the proper number of
shares of Sun Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if, upon presentation
to the Exchange Agent, such Certificate will be properly endorsed or otherwise
be in proper form for transfer and the person requesting such issuance will pay
any transfer or other taxes required by reason of the issuance of shares of Sun
Common Stock to a person other than the registered holder of such Certificate or
establish to the reasonable satisfaction of Sun that such tax has been paid or
is not applicable. Until surrendered, each Certificate will be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Sun Common Stock, cash in lieu
of any fractional shares of Sun Common Stock and any dividends or other
distributions to which such holder is entitled. No interest will be paid or will
accrue on any cash payable pursuant to the exchange provisions of the Merger
Agreement.
NETDYNAMICS SHAREHOLDERS SHOULD NOT FORWARD NETDYNAMICS STOCK CERTIFICATES
TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. NETDYNAMICS
SHAREHOLDERS SHOULD NOT RETURN NETDYNAMICS STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
Dividends. No dividends or other distributions with respect to Sun Common
Stock with a record date after the Effective Time will be paid to the holder of
any unsurrendered Certificate with respect to the shares of Sun Common Stock
represented thereby and no cash payment in lieu of fractional shares will be
paid to any such holder until the holder of record of such Certificate
surrenders such Certificate. Following surrender of any such Certificate, there
will be paid to the record holder of the certificate representing whole shares
of Sun Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of Sun Common Stock to which such holder is entitled and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Sun Common Stock, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender, and a
payment date subsequent to such surrender payable with respect to such whole
shares of Sun Common Stock.
No Further Ownership Rights in NetDynamics Capital Stock. All shares of Sun
Common Stock issued upon the surrender for exchange of shares of NetDynamics
Capital Stock in accordance with the terms of the Merger Agreement (including
any cash paid) will be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to such shares of NetDynamics Capital
Stock, subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by NetDynamics on such
shares of NetDynamics Capital Stock in accordance with the terms of the Merger
Agreement or prior to the date of the Merger Agreement and which remain unpaid
at the Effective Time, and there will be no further registration of
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transfers on the stock transfer books of the Surviving Corporation of the shares
of NetDynamics Capital Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation or the Exchange Agent for any reason, they will be
canceled and exchanged as described herein.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto. The Merger Agreement includes representations
and warranties by NetDynamics and the Founders as to, among other things: (i)
the organization, good standing and corporate power of NetDynamics and its
subsidiaries; (ii) the capital structure of NetDynamics and its subsidiaries;
(iii) the authorization, execution, delivery, performance and enforceability of
the Merger Agreement and related matters; (iv) the Merger Agreement's
noncontravention of any charter document, agreement or law; (v) governmental or
third-party filings, consents, approvals or actions with respect to the Merger
Agreement; (vi) the financial statements of NetDynamics; (vii) the absence of
any undisclosed liabilities, indebtedness or obligations; (viii) the absence of
certain changes or events from May 31, 1998 through June 30, 1998, including the
absence of any amendment to the charter documents of NetDynamics, material
capital expenditures, loss of assets, business or customers, labor trouble or
employment-related claims, change in accounting methods, asset revaluation,
declaration, payment or setting aside of a dividend, any split or
reclassification of capital stock, salary increase or bonus payment, agreements
binding NetDynamics or its subsidiaries, licenses of assets of NetDynamics or
its subsidiaries, loan or other indebtedness, waiver or release of a claim,
notice or threat of a lawsuit, proceeding or investigation, claim or potential
claim of ownership of intellectual property, sale, purchase or license of
intellectual property, or event or condition that would have a material adverse
effect on NetDynamics; (ix) tax returns and taxes; (x) restrictions on the
business activities of NetDynamics or its subsidiaries; (xi) property and assets
used in NetDynamics' business; (xii) intellectual property and intellectual
property rights of NetDynamics; (xiii) the absence of breaches or defaults under
the contracts of NetDynamics and its subsidiaries; (xiv) material interested
party transactions with officers, directors or certain shareholders of
NetDynamics; (xv) requisite governmental authorizations; (xvi) litigation;
(xvii) accounts receivable and inventory; (xviii) the accuracy and completeness
of the minute books of the Company and its subsidiaries; (xix) compliance with
applicable environmental laws; (xx) certain brokers' and advisors' fees; (xxi)
employee benefit plans; (xxii) insurance; (xxiii) compliance with laws; (xxiv)
indemnification obligations; and (xxv) information supplied by NetDynamics in
connection with this Proxy Statement/Prospectus and the Registration Statement.
The Merger Agreement also includes representations and warranties by Sun
and Merger Sub as to, among other things: (i) the organization, good standing
and corporate power of Sun and Merger Sub; (ii) the authorization, execution,
delivery, performance and enforceability of the Merger Agreement, certain
related agreements and related matters; (iii) the Merger Agreement's
noncontravention of any charter document, agreement or law; (iv) governmental or
third-party filings, consents, approvals or actions with respect to the Merger
Agreement; (v) Sun's capital structure; (vi) documents filed by Sun with the
SEC, including financial statements; (vii) litigation; (viii) the absence of
brokers' or advisors' fees; and (ix) information supplied by Sun in connection
with this Proxy Statement/Prospectus and the Registration Statement.
CONDUCT OF NETDYNAMICS' BUSINESS PRIOR TO THE MERGER
Under the Merger Agreement, NetDynamics has agreed, during the period from
the date of the Merger Agreement and continuing until the earlier of the
termination of the Merger Agreement pursuant to its terms or the Effective Time,
except as contemplated by the Merger Agreement or to the extent that Sun shall
otherwise consent in writing to carry on its business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, to pay
its debts and taxes when due, to pay or perform other obligations when due, and,
to the extent consistent with such business, to use all reasonable efforts
consistent with past practice and policies to preserve intact its present
business organization, keep available the services of its present officers and
key employees and preserve their relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
all with the goal of preserving
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unimpaired its goodwill and ongoing business at the Effective Time. Following
the date of the Merger Agreement, NetDynamics shall promptly notify Sun of any
material event or occurrence or emergency not in the ordinary course of its
business, and any event involving or adversely affecting NetDynamics or its
business. Except as expressly contemplated by the Merger Agreement, NetDynamics
shall not, without the prior written consent of Sun: (a) except as contemplated
by the Merger Agreement, make any expenditures or enter into any commitment or
transaction exceeding $50,000 individually or $200,000 in the aggregate; (b)(i)
sell, license or transfer to any person or entity any rights to any of its
intellectual property or enter into any agreement with respect to its
intellectual property other than non-exclusive licenses pursuant to the
NetDynamics' standard end-user and distribution agreements, (ii) other than
intellectual property rights acquired pursuant to "shrink-wrap" and similar
widely available commercial end-user licenses (and not included in the
NetDynamics' products or technology including products and technology currently
available or under development), buy or license any intellectual property or
enter into any agreement with respect to the intellectual property of any person
or entity, (iii) enter into any agreement with respect to development of any
intellectual property with a third party or (iv) change the pricing or royalties
set forth in NetDynamics' current price list and associated discount schedules
or charged by NetDynamics to its customers or licensees or the pricing or
royalties set or charged by persons who have licensed intellectual property to
NetDynamics; (c) enter into or amend any contract pursuant to which any other
party is granted marketing, distribution, development or similar rights of any
type or scope with respect to any products or technology of the NetDynamics; (d)
amend or otherwise modify (or agree to do so), except in the ordinary course of
business, or violate the terms of, any of the contracts contemplated by the
Merger Agreement; (e) commence or settle any litigation; (f) declare, set aside
or pay any dividends on or make any other distributions (whether in cash, stock
or property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock or repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock of (or options, warrants or other
rights exercisable therefor); (g) other than options to acquire NetDynamics
Capital Stock, in the ordinary course with an exercise price equal to the fair
market value of such NetDynamics Capital Stock as of the date of grant, issue,
grant, deliver or sell or authorize or propose the issuance, grant, delivery or
sale of, or purchase or propose the purchase of, any shares of its capital stock
or securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue or purchase any such shares or other convertible securities; (h) cause or
permit any amendments to its Articles of Incorporation or Bylaws; (i) acquire or
agree to acquire by merging or consolidating with, or by purchasing any assets
or equity securities of, or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof, or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the NetDynamics' business; (j) other than
non-exclusive licenses of the NetDynamics' products in accordance with (b)(i)
above, sell, lease, license or otherwise dispose of any of its properties or
assets; (k) other than pursuant to the Note, incur any indebtedness for borrowed
money or guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others; (l) grant any loans to others or
purchase debt securities of others or amend the terms of any outstanding loan
agreement; (m) grant any severance or termination pay (i) to any director or
officer of NetDynamics or any Subsidiary or (ii) to any other employee of
NetDynamics or any Subsidiary except payments made pursuant to standard written
agreements outstanding on the date of the Merger Agreement or as disclosed in
the Disclosure Schedule; (n) adopt any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees; (o) revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business; (p) pay, discharge or satisfy, in
an amount in excess of $50,000 in any one case or $200,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business of liabilities reflected or reserved against in
the current balance sheet of NetDynamics; (q) make or change any material
election in respect of taxes, adopt or change any accounting method in respect
of taxes, enter into any closing agreement, settle any claim or assessment in
respect of taxes, or consent to any extension or waiver of the limitation period
applicable to any claim or assessment in respect of taxes; (r) enter into any
strategic alliance or joint marketing arrangement or agreement; (s) other than
as
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specifically requested in writing by Sun or as contemplated by the Merger
Agreement, accelerate the vesting schedule of any outstanding options or
NetDynamics Capital Stock; (t) hire or terminate employees or encourage
employees to resign; or (u) take, or agree in writing or otherwise to take, any
of the actions described in clauses (a) through (t) above, or any other action
that would prevent NetDynamics from performing or cause NetDynamics not to
perform its covenants in the Merger Agreement. In addition NetDynamics has
agreed, subject to certain conditions, to utilize any remaining principal amount
from the Note to satisfy all outstanding obligations of indebtedness of
NetDynamics at or prior to the Effective Time.
NO SOLICITATION
The Merger Agreement provides that, until the earlier of the Effective Time
or the date of termination of the Merger Agreement, neither NetDynamics nor any
of the Founders will (nor will NetDynamics nor any of the Founders permit any of
its officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with any party other than Sun and
its designees: (a) solicit, encourage, initiate or participate in any
negotiations or discussions or enter into any agreement with respect to, any
offer or proposal to acquire all, substantially all or a significant portion of
NetDynamics' business, properties or technologies or any portion of the
NetDynamics' Capital Stock (whether or not outstanding) whether by merger,
purchase of assets, tender offer or otherwise, or effect any such transaction,
(b) disclose any information not customarily disclosed to any person concerning
NetDynamics' business, technologies or properties or afford to any person or
entity access to NetDynamics' properties, technologies, books or records or (c)
assist or cooperate with any person to make any proposal to purchase all or any
part of the NetDynamics Capital Stock or NetDynamics' assets.
In addition to the foregoing, NetDynamics and the Founders have agreed that
if any of them receives prior to the Effective Time or the termination of the
Merger Agreement any offer or other proposal, as applicable, relating to any of
the above, such person shall promptly notify Sun thereof, and will provide
information as to the identity of the offeror or the party making any such offer
or proposal and the specific terms of such offer or proposal, as the case may
be, and such other information related thereto as Sun may reasonably request.
INDEMNIFICATION OF NETDYNAMICS OFFICERS AND DIRECTORS
The Merger Agreement provides that from and after the Effective Time, Sun
will cause the Surviving Corporation to fulfill the obligations of NetDynamics
pursuant to (i) any indemnification agreements between NetDynamics and its
directors and officers existing prior to the date of the Merger Agreement and
(ii) applicable provisions of NetDynamics' organizational documents, as
currently in effect, which provisions will not be amended, repealed or otherwise
modified for a period of three years from the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who, immediately
prior to the Effective Time, were directors, officers, employees or agents of
NetDynamics, unless such modification is required by law. Sun and the Surviving
Corporation shall not be liable for any amounts payable resulting from any claim
or action brought by any officer or director of NetDynamics or any of their
affiliates. Sun shall have full recourse to the Escrow Fund to recover any
amounts payable by Sun or the Surviving Corporation pursuant to Sun's
indemnification obligations.
EMPLOYMENT MATTERS
Each person who was an employee of NetDynamics immediately prior to the
Effective Time, shall be, at the Effective Time, upon proof of the right to work
in the United States (or such other country in which such employee's principal
place of employment is located), an at-will employee of Sun or the Surviving
Corporation. Sun shall notify all employees of NetDynamics of the terms of their
employment with Sun or the Surviving Corporation within thirty (30) days after
the Effective Time which such descriptions shall (i) provide for no initial
reduction in annual salary plus total on-target bonus cash compensation from
that applicable to any such employee of NetDynamics, (ii) in the case of sales
representatives and sales engineers, shall specify the sales compensation plan
and (iii) in the case of engineers, describe project bonus opportunities, in
each case, consistent with Sun's existing human resources policies. Each
employee of
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NetDynamics who remains an employee of Sun or the Surviving Corporation after
the Effective Time shall be eligible, upon completion of Sun's standard employee
background and reference check, to receive salary and benefits (such as medical
benefits, bonuses, 401(k) and stock options) consistent with Sun's standard
human resource policies and shall receive credit under such policies for prior
service at NetDynamics. Any such employee of NetDynamics who remains an employee
of Sun or the Surviving Corporation after the Effective Time who is "terminated
without cause" within twelve (12) months after the Effective Time shall be
entitled to receive, upon execution of a severance release in Sun's standard
form, notification and severance benefits in an amount not less than six (6)
month's base salary from the date of notification (plus any other benefits and
transition assistance provided for in Sun's standard severance policies).
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger shall be subject to the satisfaction at or prior to the closing of
the Merger of the following conditions: (a) the SEC shall have declared the
Registration Statement effective, no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose, and no similar proceeding in respect of the Proxy
Statement/Prospectus, shall have been initiated or threatened in writing by the
SEC; (b) no governmental entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which is
in effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger; (c) all waiting periods under the HSR
Act relating to the transactions contemplated by the Merger Agreement will have
expired or terminated early; (d) NetDynamics and Sun shall each have received
Final Tax Opinions from their respective counsels; and (e) no temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided that Sun,
Merger Sub and NetDynamics have used reasonable efforts to remove any such
injunction, order, restraint or prohibition; nor shall any proceeding brought by
an administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
In addition, the obligations of NetDynamics to consummate the Merger are
further subject to the satisfaction of a number of conditions, unless waived by
NetDynamics, including: (i) the representations and warranties of Sun and Merger
Sub in the Merger Agreement (other than the representations and warranties of
Sun and Merger Sub as of a specified date, which will be true and correct as of
such date) shall be true and correct on and as of the Effective Time as though
such representations and warranties were made on and as of such time, except
where any inaccuracies or breaches in any such representations and warranties
have not, individually or in the aggregate, had and would not, individually or
in the aggregate, have a material adverse effect on Sun, and (ii) each of Sun
and Merger Sub shall have performed and complied in all material respects with
all covenants and obligations in the Merger Agreement required to be performed
and complied with by it as of the Effective Time.
The obligations of Sun and Merger Sub to consummate the Merger and the
transactions contemplated by the Merger Agreement shall further be subject to
the satisfaction at or prior to the closing of each of the following conditions,
any of which may be waived, in writing, exclusively by Sun: (a)(i) the
representations and warranties of NetDynamics and the Founders in the Merger
Agreement (other than those relating to accounts receivable and inventory and
other than the representations and warranties of NetDynamics and the Founders as
of a specified date, which will be true and correct as of such date) shall be
true and correct on and as of the Effective Time as though such representations
and warranties were made on and as of the Effective Time, except where any
inaccuracies or breaches in any such representations and warranties has not,
individually or in the aggregate, had and would not, individually or in the
aggregate, have a material adverse effect on NetDynamics, and (ii) each of
NetDynamics and the Founders shall have performed and complied in all material
respects with all covenants and obligations of the Merger Agreement required to
be performed and complied with by them as of the Effective Time; (b) the
consents, waivers, assignments and approvals
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contemplated by the Merger Agreement shall have been obtained; (c) Sun shall
have received a legal opinion from legal counsel to NetDynamics; (d) no more
than (i) thirty (30) employees (excluding interns) of NetDynamics or any of its
subsidiaries nor (ii) fifteen (15) of certain engineering and sales personnel
identified in the Merger Agreement will have voluntarily or involuntarily
(without the consent of Sun, which consent was not unreasonably withheld)
terminated their employment with NetDynamics or any of its subsidiaries since
the date of the Merger Agreement, and each of the Key Employees will be employed
by NetDynamics immediately prior to the Effective Time; (e) shareholders holding
at least ninety percent (90%) of the NetDynamics' Capital Stock, including not
less than a majority of the outstanding NetDynamics Common Stock and a majority
of the outstanding NetDynamics Preferred Stock shall have approved the Merger
Agreement, the Merger and the transactions contemplated hereby and thereby; (f)
shareholders holding no more than ten percent (10%) of the NetDynamics Capital
Stock shall have exercised or given notice of their intent to exercise appraisal
rights in accordance with the CGCL; (g) shareholders of NetDynamics shall have
approved the Parachute Payment Proposals by the requisite vote; (h) NetDynamics
shall have provided Sun with evidence reasonably satisfactory to Sun of the
release of certain liens held by certain lenders to NetDynamics; and (i) each
director of NetDynamics and each director of each subsidiary shall have resigned
from such position effective as of the Effective Time.
TERMINATION
The Merger Agreement provides that it may be terminated and the Merger
abandoned at any time prior to the Effective Time: (a) by mutual consent of
NetDynamics and Sun; (b) by Sun or NetDynamics if: (i) the Effective Time has
not occurred by November 30, 1998, provided, however, that such right to
terminate the Merger Agreement shall not be available to any party whose action
or failure to act has been a principal cause of or resulted in the failure of
the Merger to occur on or before such date and such action or failure to act
constitutes a breach of the Merger Agreement; (ii) there shall be a final
nonappealable order of a federal or state court in effect preventing
consummation of the Merger; or (iii) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger by any governmental entity that would make consummation of the Merger
illegal; (c) by Sun if there shall be any action taken, or any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger by any governmental entity, which would (i) prohibit Sun's or Merger
Sub's ownership or operation of a material portion of the business of
NetDynamics, (ii) compel Sun or NetDynamics to dispose of or hold separate all
or a material portion of the business or assets of NetDynamics or (iii) compel
Sun to dispose or hold separate all or a portion of the business or assets of
Sun; (d) by Sun if it is not in material breach of its obligations under the
Merger Agreement, upon a breach of any representation, warranty, covenant or
agreement of NetDynamics or the Founders contained in the Merger Agreement such
that the closing conditions set forth in the Merger Agreement pertaining to the
representations and warranties and covenants of NetDynamics would not be
satisfied and such breach has not been cured within thirty (30) calendar days
after written notice to NetDynamics; provided, however, that, no cure period
shall be required for a breach which by its nature cannot be cured; or (e) by
NetDynamics if neither it nor any Founder is in material breach of their
respective obligations under the Merger Agreement, upon a breach of any
representation, warranty, covenant or agreement of Sun or Merger Sub contained
in the Merger Agreement such that the closing conditions set forth in the
Agreement pertaining to the representations and warranties and covenants of Sun
would not be satisfied and such breach has not been cured within thirty (30)
calendar days after written notice to Sun; provided, however, that no cure
period shall be required for a breach which by its nature cannot be cured; or
(f) by Sun, if on or prior to the earlier to occur of ten (10) days after the
mailing of the Proxy Statement to the Shareholders, or twenty (20) days after
the Registration Statement is declared effective by the SEC, NetDynamics has not
delivered to Sun irrevocable proxies authorizing Sun (or such person or persons
designated by Sun prior to the mailing of the Proxy Statement) to vote such
number of shares of NetDynamics Capital Stock in favor of the adoption and
approval of the Merger Agreement, the approval of the Merger and such other
matters as are included in the Voting Agreements such that the number of shares
subject to such proxies when added to the number of shares which parties to the
Voting Agreements have agreed to vote equal a majority of the outstanding
NetDynamics Common Stock and a majority of the outstanding NetDynamics Preferred
Stock eligible to vote on such matters.
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In the event of termination of the Merger Agreement, the Merger Agreement
shall become void and there shall be no liability or obligation on the part of
Sun, Merger Sub or NetDynamics, or their respective officers, directors or
shareholders, provided that each party shall remain liable for any breaches of
the Merger Agreement prior to its termination; provided further that, certain
provisions of the Merger Agreement shall remain in full force and effect and
survive any termination of the Merger Agreement.
The Merger Agreement may be amended by the parties thereto at any time by
execution of an instrument in writing signed on behalf of Sun, Merger Sub,
NetDynamics and the Founders.
At any time prior to the Effective Time, Sun and Merger Sub, on the one
hand, and NetDynamics and the Founders, on the other hand, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ESCROW FUND AND INDEMNITY
In connection with the Merger, at the Effective Time, the Escrow Shares
will be registered in the name of and deposited with the Escrow Agent, such
deposit to constitute the Escrow Fund. The Escrow Shares will be the number of
shares of Sun Common Stock equal to ten percent (10%) of the number of shares of
Sun Common Stock issuable in respect of outstanding NetDynamics Capital Stock at
the Effective Time. The Escrow Shares will be contributed to the Escrow Fund on
behalf of each holder of NetDynamics Capital Stock at the Effective Time in
proportion to the aggregate number of shares of Sun Common Stock that such
holder would otherwise be entitled under the Merger Agreement. The Escrow Fund
will be available to compensate Sun for any losses incurred by Sun or for which
Sun would otherwise be liable as a result of any inaccuracy or breach of a
representation or warranty of NetDynamics or the Founders contained in the
Merger Agreement or any failure by NetDynamics to perform or comply with any
covenant contained therein relating to unresolved contingencies existing at the
Effective Time. The Escrow Fund will also be used to pay Excess Expenses, which
are any third party fees and expenses in excess of $2,250,000 that have been
incurred by NetDynamics in connection with the Merger. Such number is subject to
increase in Sun's reasonable discretion to a number not exceeding $2,500,000.
Stockholders will have voting rights with respect to the Escrow Shares while in
escrow, and will receive dividends, if any, attributable to the Escrow Shares
currently, although in the event that Escrow Shares are to be delivered from the
Escrow Fund to Sun, any dividends received on such delivered shares shall be
returned to the Escrow Fund for distribution to Sun. Sun may not receive any
shares from the Escrow Fund for breach of a representation and warranty or
covenant unless and until Sun suffers cumulative losses in excess of $500,000,
in which case Sun may recover from the Escrow Fund the entire amount of such
cumulative losses. In addition, losses of less than $50,000 will not be counted
toward such $500,000 threshold, unless and until all of such losses of less than
$50,000 equal in the aggregate greater than $500,000, in which case Sun may
recover from the Escrow Fund to the extent such losses exceed $500,000 in the
aggregate. Sun may also recover shares from the Escrow Fund to pay for Excess
Expenses, amounts expended to indemnify NetDynamics' officers and directors
pursuant to the Merger Agreement and amounts paid to NetDynamics shareholders in
respect of their exercise of appraisal rights, without regard to such
thresholds. For the purpose of compensating Sun for its losses or Excess
Expenses, the Escrow Shares will be valued at the average closing sale price of
the Sun Common Stock on Nasdaq for the ten (10) consecutive trading days ending
three (3) business days prior to the delivery of the shares to Sun. Subject to
resolution of unsatisfied claims of Sun, the Escrow Fund will terminate one year
following the closing date of the Merger.
After the Effective Time, the Escrow Shares will be the exclusive remedy
for Sun to recover for any losses it suffers by reason of the breach of any
representation, warranty or covenant of NetDynamics or the Founders; provided
that Sun's remedy will not be so limited in the case of fraud by NetDynamics or
a Founder.
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BY APPROVING THE MERGER AGREEMENT, NETDYNAMICS SHAREHOLDERS WILL BE DEEMED
TO HAVE CONSENTED TO THE APPOINTMENT OF JOHN R. HUMMER, A GENERAL PARTNER OF
HUMMER WINBLAD EQUITY PARTNERS II L.P., THE GENERAL PARTNER OF HUMMER WINBLAD
VENTURE PARTNERS II L.P., A SHAREHOLDER OF NETDYNAMICS, TO ACT AS THE
SECURITYHOLDER AGENT ON BEHALF OF NETDYNAMICS' SHAREHOLDERS TO AUTHORIZE
DELIVERY OF ESCROW SHARES TO SUN IN SATISFACTION OF CLAIMS BROUGHT BY SUN, TO
OBJECT TO SUCH DELIVERIES, TO AGREE TO, TO NEGOTIATE AND TO ENTER INTO
SETTLEMENTS AND COMPROMISES WITH RESPECT TO SUCH CLAIMS, AND TO TAKE CERTAIN
OTHER ACTION ON BEHALF OF NETDYNAMICS' SHAREHOLDERS, ALL AS MORE FULLY DESCRIBED
IN ARTICLE VII OF THE MERGER AGREEMENT. SEE ARTICLE VII OF THE MERGER AGREEMENT
FOR A MORE DETAILED EXPLANATION OF THE ESCROW FUND AND RIGHTS WITH RESPECT
THERETO.
THE VOTING AGREEMENTS
The following is a brief summary of certain provisions of the Voting
Agreements, a form of which is attached hereto Annex B and incorporated herein
by reference; such summary is qualified in its entirety by reference to the form
of Voting Agreement.
On June 30, 1998, Sun and NetDynamics entered into Voting Agreements with
Zah Rinat, Ofer Ben-Shachar, Doron Sherman, Sherman Investments L.P., A. Brooke
Seawell, USVP Entrepreneur Partners II, L.P., U.S. Venture Partners IV, L.P.,
Second Ventures Limited Partnership and 2180 Associates Fund (each a "Voting
Agreement Party" and collectively, the "Voting Agreement Parties"), each of
which is either an affiliate, director, executive officer of NetDymanics or an
entity affiliated with a director or executive officer. Together, the Voting
Agreement Parties held at the Record Date 4,724,400 shares of NetDynamics Common
Stock and 831,661 shares of NetDynamics Preferred Stock accounting for
approximately 87% of the outstanding shares of NetDynamics Common Stock and 21%
of the NetDynamics Preferred Stock. Based on beneficial holdings of the Voting
Agreement Parties as of the Record Date, the vote in accordance with the Voting
Agreements of the shares of NetDynamics Capital Stock subject thereto will not
be sufficient to obtain shareholder approval of the Merger Agreement, the Merger
and related matters. Pursuant to the terms of the Voting Agreements, each Voting
Agreement Party has agreed to vote (or cause to be voted) at the NetDynamics
Special Meeting or in any other circumstances upon which a vote, consent or
other approval with respect to the Merger and the Merger Agreement is sought
his, her or its shares of NetDynamics Capital Stock now or hereafter owned
(together, the "Subject Shares"): (i) in favor of approval and adoption of the
Merger and the Merger Agreement and each of the other transactions contemplated
thereby; (ii) against approval of any proposal in opposition to or in
competition with the Merger and the Merger Agreement; (iii) against any merger,
business combination, sale of assets (in whole or significant part) or other
material change in NetDynamics' capitalization or corporate structure that could
adversely affect the Merger or the Merger Agreement; (iv) in favor of John R.
Hummer as securityholder agent on behalf of the NetDynamics shareholders; and
(v) in favor of approval of the Parachute Payment Proposals.
THE NOTE
The following is a brief summary of certain provisions of the Note, a form
of which is attached hereto as Annex C and incorporated herein by reference;
such summary is qualified in its entirety by reference to the form of the Note.
Concurrent with the execution of the Merger Agreement on June 30, 1998,
NetDynamics executed the Note evidencing a loan by Sun to NetDynamics in an
aggregate principal amount of $10 million. The Note bears interest, payable upon
default or maturity of the Note, at a rate of ten percent (10%) per annum. The
unpaid principal together with all accrued interest, shall be due and payable
one hundred eighty (180) days after certain events of termination specified in
the Merger Agreement.
In the event of such a termination of the Merger Agreement, NetDynamics may
within the one hundred eighty (180) days after the date of such termination,
either (i) pay the unpaid principal and accrued interest due and owing on the
Note or (ii) convert such unpaid principal and accrued interest into stock of
NetDynamics. However, upon the occurrence of certain events of default,
including termination of the Merger Agreement as a result of NetDynamics'
failure to deliver to Sun proxies representing a majority of both the
NetDynamics Common Stock and the NetDynamics Preferred Stock upon the earlier to
occur of (i) ten (10)
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days after the mailing of this Proxy Statement/Prospectus to shareholders of
NetDynamics and (ii) twenty (20) days after the effectiveness of the
Registration Statement, the unpaid principal and accrued interest then owing on
the Note shall be immediately due and payable. The Note is convertible into
shares of the series of stock of NetDynamics which is the most favorable of: (i)
that series of preferred stock of NetDynamics outstanding on the date of such
conversion having the most favorable terms with respect to dividends,
liquidation preference, anti-dilution protection, conversion ratio, voting
rights, redemption and all other rights, privileges and preferences or (ii) such
other capital stock being offered to investors by NetDynamics on the date of
such conversion. The number of shares into which the Note shall convert is
determined by dividing (a) the unpaid aggregate principal amount plus accrued
interest by (b) the quotient of (x) $160 million and (y) the total number of
outstanding shares of capital stock of NetDynamics, treating all preferred
stock, options, warrants and other rights on an as-converted, fully-diluted
basis. Such number of shares shall be adjusted to the extent that such series of
capital stock converts into Common Stock at a ratio other than 1:1.
THE NONCOMPETITION AGREEMENTS
Concurrent with the execution of the Merger Agreement and effective as of
the Effective Time, the founding shareholders and other employee shareholders of
NetDynamics entered into Noncompetition Agreements with Sun that provide, among
other things, that such founding shareholders and other employee shareholders
shall not, without the consent of Sun, engage in certain competitive business
activities in any country, province, state, city or other political subdivision
in which Sun or JavaSoft engages in business. The Noncompetition Agreements
executed by the founding shareholders and other employee shareholders also
provide that the founding shareholders and other employee shareholders shall not
directly or indirectly solicit, encourage or induce any employee of Sun or
JavaSoft to terminate such employee's employment with Sun or JavaSoft.
THE RESTRICTED STOCK PURCHASE AGREEMENTS
Pursuant to the Merger Agreement, Sun has agreed to grant to certain
employees of NetDynamics the right to purchase in aggregate $10.0 million in
market value of certain shares of restricted stock of Sun for $.01 per share.
Each Restricted Stock Purchase Agreement provides, among other things, that Sun
shall have a right to repurchase the restricted stock of any employee at the
purchase price upon the voluntary or involuntary termination or cessation of
employment or association of such employee with Sun. Such right of repurchase
lapses at a rate of twenty-five percent of the shares of restricted stock per
year for each year that the employee remains employed by Sun, such that the
restricted stock is fully vested at the end of four years of employment with
Sun.
THE AFFILIATE AGREEMENTS
Pursuant to the Merger Agreement, certain affiliates and affiliated
entities of NetDynamics shall enter into Affiliate Agreements with Sun prior to
the Effective Time. The Affiliate Agreement provides, among other things, that
(i) such affiliate will not sell, transfer or otherwise dispose of the shares of
Sun Common Stock issued to such affiliate in connection with the Merger other
than in compliance with the requirements of Rule 145(d) of the Securities Act of
1933, as amended, and (ii) Sun shall place legends and stop transfer orders on
such shares to ensure compliance with such Rule 145(d).
PARACHUTE PAYMENT PROPOSALS
THE APPLICABLE TAX LAWS
Under Section 280G of the Code, certain compensatory payments to employees
or other individuals who perform services for a corporation and who are
officers, highly-compensated individuals or significant shareholders of the
corporation are treated as "excess parachute payments," if such payments are
contingent on a change in control of the corporation and exceed certain
threshold amounts specified in the Code. Payments made under an agreement
entered into within one year prior to, or in connection with, a change in
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<PAGE> 50
control are presumed to be contingent on the change in control. On the other
hand, payments are not considered parachute payments if the taxpayer can show by
clear and convincing evidence that they constitute reasonable compensation for
personal services to be performed after the change in control or that they
otherwise are not contingent on the change in control. The value of accelerated
vesting of shares of stock or options to purchase such shares is considered a
compensatory payment for this purpose. If the corporation has issued no readily
tradable shares and if the compensatory payments have been approved by the
holders of stock possessing more than 75% of the voting power of its outstanding
capital stock immediately prior to the change in control after the material
terms of the payments were disclosed to shareholders, then the payments are not
considered parachute payments. For this purpose, stock actually or
constructively owned by the recipient of the payments is disregarded. If a
corporation submits the compensatory payments to a vote of its shareholders, and
the shareholders do not approve such payments, then such payments cannot be
received or retained.
Excess parachute payments are not deductible by the corporation, and the
recipient must pay a nondeductible excise tax equal to 20% of the excess
parachute payments in addition to other income taxes.
NetDynamics proposes to extend certain compensatory benefits to Ronald A.
Abelmann and James A. Dorrian, directors of NetDynamics, and A. Brooke Seawell,
its Executive Vice President and Chief Financial Officer, that may be considered
excess parachute payments, absent shareholder approval. Accordingly, NetDynamics
is requesting shareholder approval of such benefits.
ACCELERATION OF NETDYNAMICS OPTIONS AND SHARES
Ronald A. Abelmann and James A. Dorrian. Messrs. Abelmann and Dorrian have
each been granted options to purchase an aggregate of 108,000 shares of
NetDynamics Common Stock. Such options have an exercise price of $5.50 per
share, except that Mr. Dorrian's options include options covering 37,500 shares
with an exercise price of $0.36 per share. None of such options has been
exercised. Of Mr. Abelmann's options, 4,218 would be exercisable as of August
28, 1998, and of Mr. Dorrian's options, 22,187 would be exercisable as of such
date. Of the options held by Messrs. Abelmann and Dorrian, 66,732 and 48,763
options, respectively, would, by their terms, become exercisable in full as a
result of the Merger (assuming an Effective Time of August 28, 1998).
The acceleration of options exercisable for 66,732 shares for Mr. Abelmann
and 48,763 shares for Mr. Dorrian is being submitted to the NetDynamics
shareholders for approval. Absent such approval, Messrs. Abelmann and Dorrian
will forfeit their unexercisable options when their service to NetDynamics ends
in connection with the Merger.
A. Brooke Seawell. On April 15, 1996, the NetDynamics Board adopted
resolutions confirming the following policy with respect to options held by all
officers of NetDynamics with the title of Vice President or above and by two
other individuals:
- In the event that NetDynamics is acquired and the optionee is terminated
or constructively terminated within 12 months after the acquisition, the
vesting of the optionee's options accelerates.
- An optionee is "constructively terminated" if he or she is transferred
out of the San Francisco Bay Area or suffers a reduction in
responsibilities.
All officers of NetDynamics who hold unvested options or shares, other than A.
Brooke Seawell and Victor Morris, have waived their rights under such
resolutions with respect to the Merger.
The acceleration of Mr. Morris' options is not being submitted to the
NetDynamics shareholders for approval, since the value of such acceleration is
not expected to exceed the threshold amount specified in the Code.
Mr. Seawell has been granted options to purchase an aggregate of 249,400
shares of NetDynamics Common Stock. He has previously exercised such options
with respect to 224,200 shares, which had an exercise price of $0.36 per share.
Of the 224,200 shares that Mr. Seawell acquired by exercising options, 88,866
shares would be vested as of August 28, 1998. The remaining shares would, absent
the Merger, vest at
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the rate of 4,666.67 shares per month of continued employment. Unvested shares
are subject to repurchase by NetDynamics at the original exercise price in the
event that Mr. Seawell's employment terminates. Mr. Seawell has not exercised
the remaining options exercisable for 25,200 shares, which have an exercise
price of $1.80 per share. These options would be exercisable with respect to
7,350 shares as of August 28, 1998. The remaining options would, absent the
Merger, become exercisable at the rate of 525 shares per month of continued
employment.
The acceleration of the unvested portion of Mr. Seawell's option granted
with an exercise price of $1.80 per share, covering 17,850 shares, is being
submitted to the NetDynamics shareholders for approval. The acceleration of his
remaining shares and options is not being submitted to the shareholders for
approval, since the value of such acceleration is not expected to exceed the
threshold amount specified in the Code.
Mr. Seawell is not anticipated to render services for Sun following the
Merger. If the NetDynamics shareholders approve the acceleration of Mr.
Seawell's options, then, pursuant to the resolutions adopted on April 15, 1996,
by the NetDynamics Board, such options will become exercisable in full. If the
NetDynamics shareholders do not approve the acceleration of Mr. Seawell's
options, then Mr. Seawell will forfeit the unexercisable options granted with an
exercise price of $1.80 per share when his employment terminates in connection
with the Merger.
SUN BUSINESS
The discussion in this Proxy Statement/Prospectus contains forward-looking
statements which involve risks and uncertainties. Sun's 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," as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
Sun is a leading supplier of enterprise network computing products
including desktop systems, servers, storage subsystems, network switches,
software, microprocessors, and a full range of services and support. Sun's
products command a significant share of a rapidly growing segment of the
computer industry: networked computing environments. The Company's products are
used for many demanding commercial and technical applications in various
industries. Sun has differentiated itself from its competitors by its commitment
to the network computing model and the UNIX operating system, its rapid
innovation and its open systems architecture. See "Available Information" and
"Incorporation of Certain Documents by Reference."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
The directors of Merger Sub immediately prior to the Effective Time will
become the directors of NetDynamics at the Effective Time until their respective
successors have been duly elected and qualified or until their earlier
resignation or removal. As a result, the current directors of NetDynamics will
not be directors of the Surviving Corporation. The officers of Merger Sub
immediately prior to the Effective Time will be the officers of NetDynamics at
the Effective Time until their respective successors have been duly appointed
and qualified or until their earlier resignation or removal.
NETDYNAMICS BUSINESS
The discussion in this Proxy Statement/Prospectus contains forward-looking
statements which involve risks and uncertainties. NetDynamics' 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," as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
NetDynamics designs, develops, and markets high-end enterprise network
application software. Network applications allow organizations to leverage the
Internet to pursue new markets and business opportunities, respond more rapidly
to dynamic market conditions, and realize greater cost efficiencies through
direct
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interaction with customers, suppliers, partners and employees. A key benefit of
NetDynamics' products is that they allow Global 2000 organizations to leverage
substantial investments in legacy systems by adopting such systems for use on
the Internet.
BACKGROUND
Organizations today have significant investments in software applications
and systems that automate discrete business processes but that are typically
isolated from one another and that require application administrators to serve
as the middleman between the application and the people whose data resides in
the application. With the advent of the Internet, companies are seeking to
leverage their investments in these systems in order to communicate directly
with customers, partners, suppliers and employees. Because applications that
enable this type of interaction can significantly benefit top-line revenues or
significantly reduce bottom line costs, organizations increasingly need software
that enables development and delivery of applications and systems that leverage
Internet infrastructure while taking advantage of existing information
technology investments. NetDynamics' enterprise application software products
are designed to address this need.
PRODUCTS
NetDynamics has developed a family of products that allow organizations to
develop, deploy and integrate network-based applications. The NetDynamics
product family consists of the following:
Development Software: The NetDynamics Studio is a visual software
programming tool that includes pre-written and reusable Java code which is
designed to allow for rapid application development.
Deployment Software: The NetDynamics Application Server is software
designed to provide the performance, scalability, and reliability required to
deploy network applications across a wide variety of databases and applications
to a large number of users.
Integration Software: NetDynamics Platform Adaptor Components ("PACs") are
software modules designed to integrate third party applications and systems into
the Application Server and Studio so that developers can take advantage of
existing investments in enterprise software within the familiar NetDynamics
development and deployment environments.
STRATEGY
NetDynamics' objective is to be the leading provider of enterprise network
application software for the development, deployment and integration of network
applications. NetDynamics' strategy to achieve this objective, includes the
following elements:
Deliver Products Based on Open Standards and Cross-Platform
Environments: NetDynamics goal is to continue to introduce products based on
open standards such as Java APIs, CORBA and JavaBeans. NetDynamics believes that
support of open standards will enable NetDynamics to interface with products
from other vendors and better integrate new technologies as they emerge around
these standards, thereby protecting customers investment in their existing
legacy systems. Cross-platform support protects customers investments in their
existing and future hardware systems.
Develop Key Technology and Marketing Relationships: NetDynamics has entered
into and intends to continue to develop strategic technology and marketing
relationships that will accelerate penetration and acceptance of NetDynamics'
products. Technical relationships enable NetDynamics to rapidly integrate new
product features and penetrate target markets such as DCE or CICS. Marketing
relationships provide access to a customer prospect base and joint marketing
activities in target markets.
Implement Comprehensive Distribution Strategy: NetDynamics has a worldwide
distribution strategy which relies on both direct and indirect channels. It
plans to continue to expand its direct sales, support and service organizations
to focus on strategic accounts. NetDynamics plans to expand its presence through
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indirect channels by establishing new relationships and leveraging its existing
relationships with systems integrators, distributors, OEMs, VARs and ISVs.
SERVICES AND SUPPORT
NetDynamics believes that a high level of customer service, support and
education programs is important to successfully develop and market its products
and strengthen relationships with leading customers. NetDynamics offers three
types of services: maintenance, training, and consulting. Substantially all of
NetDynamics direct sales to customers include maintenance contracts, which are
typically for twelve months and entitle customers to upgrades, if and when
available, and technical support. Optional benefits include around-the-clock
emergency support.
NetDynamics training and consulting services are designed to educate its
existing and potential customers and support its customers and resellers in
implementing the NetDynamics' software solutions. NetDynamics believes its
services play a significant role in providing knowledge transfer to customers,
resellers and training partners delivering NetDynamics solutions. NetDynamics
currently offers 12 courses, with on-site and custom training options, and
NetDynamics' implementation partners have trained consultants to provide longer
term consulting support.
STRATEGIC RELATIONSHIPS
NetDynamics has built a number of strategic alliances to aid in
accelerating the adoption of its products. These alliances are designed to
enable it to focus on development. NetDynamics seeks to establish close
engineering and marketing relationships with strategic corporate platform
partners such as hardware systems vendors, database software vendors, Internet
technology vendors and applications providers. Close engineering relationships
are maintained through active involvement in early technology access programs
and engineering exchanges. NetDynamics has also established alliance agreements
with a number of important major and regional systems integrators and with ISVs
building applications for the World Wide Web. The objective of these alliances
is to provide NetDynamics' customers with complete business solutions and to
establish many trained experts in NetDynamics' products.
SALES AND MARKETING
NetDynamics' objective is to achieve broad market penetration by employing
multiple distribution channels, including direct sales, OEMs, systems
integrators, ISVs and VARs. NetDynamics direct sales force focuses on large
strategic accounts and leverages strategic relationships to access target
accounts in vertical markets such as PeopleSoft, SAP and financial services.
NetDynamics' strategic relationships with hardware vendors, application
providers and database vendors are expected to provide NetDynamics with access
to a large installed base of potential customers, and NetDynamics engages in
joint marketing programs and targeted industry events with these vendors.
Indirect distribution channels are a key element of NetDynamics sales
strategy. NetDynamics has entered into agreements with many key systems
integrators, implementation partners and ISVs.
NetDynamics' marketing efforts are designed to promote general awareness of
its products and services and support its direct and indirect sales channels.
NetDynamics engages in a number of marketing activities, including public
relations and direct marketing, and participates in major industry events.
CUSTOMERS
NetDynamics' products are used by hundreds of major organizations worldwide
to create integrated applications for intranets, extranets and the Internet.
Target end-user customers include organizations that utilize sophisticated
high-end information systems with numerous users and diverse, heterogeneous
operating systems and databases. Major Global 2000 customers include AT&T,
Boeing, Cisco, Fidelity Investments, Goldman Sachs, Hewlett-Packard, JC Penney,
KeyCorp, Merrill Lynch, NationsBank, Service Merchandise,
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and Toys "R" Us. See Note 1 of Notes to NetDynamics' Consolidated Financial
Statements for information with respect to significant customers.
RESEARCH AND DEVELOPMENT
NetDynamics believes that its future success depends in large part on its
ability to enhance its product line, develop new products, maintain
technological leadership, and satisfy continually changing customer requirements
for network-based business application delivery. Its product management and
engineering groups are responsible for product architecture, functionality, and
quality assurance. These groups are also responsible for expanding NetDynamics
ability to integrate with emerging industry standards, third-party application
packages, and leading database management system as well as for new product
definition and development. See "Risk Factors -- Risks Related to NetDynamics
Business -- Risks Associated with New Versions and New Products; Rapid
Technological Change."
NetDynamics has made substantial investment in product development and
technology integration. Its product line has been developed primarily by an
internal development staff. Certain technologies have been licensed and
integrated into NetDynamics products.
COMPETITION
The market for high-end enterprise network application software is
intensely competitive and characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and rapidly changing
customer requirements. Internet applications that can be developed and deployed
using NetDynamics' products can in some cases also be implemented using a
combination of first generation application development tools and server
programming techniques such as stored procedures in relational databases, C or
C++ programming, and networking and database middleware to connect the various
components. As such, NetDynamics effectively experiences some competition from
potential customers' decisions to pursue this type of approach as opposed to
utilizing an application environment such as NetDynamics' products. As a result,
NetDynamics must continuously educate existing and prospective customers as to
the advantages of NetDynamics' products. There can be no assurance that these
customers or potential customers will perceive sufficient value in NetDynamics'
products to justify purchasing them. See "Risk Factors -- Risks Related to
NetDynamics Business -- Competition."
NetDynamics has experienced and expects to continue to experience increased
competition from current and future competitors, many of whom have significantly
greater financial, technical, marketing and other resources than NetDynamics.
The Company's current direct competitors, among others, include Bluestone
Software, HAHT, Netscape, SilverStream Software and Weblogic. NetDynamics
expects to compete increasingly with Oracle, IBM, Microsoft, BEA, Novell and
others. NetDynamics' competitors may be able to embed application server
technology in broader software platforms, respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than
NetDynamics. Also, many current and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to NetDynamics' detriment. NetDynamics expects to face
additional competition as other established and emerging companies enter the
enterprise network application software market and new products and technologies
are introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect NetDynamics' business, operating results and
financial condition. There can be no assurance that NetDynamics will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon NetDynamics' business, operating
results and financial condition.
PROPRIETARY TECHNOLOGY
NetDynamics relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. NetDynamics also believes that
factors such as the technological and creative skills of its personnel, new
product developments,
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frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technology leadership position.
See "Risk Factors -- Risks Related to NetDynamics Business -- Proprietary
Rights, Risks of Infringement and Source Code Release."
EMPLOYEES
As of June 30, 1998, NetDynamics had a total of 146 employees, not
including consultants, of which 56 were engaged in sales, marketing, and
alliance management, 33 in research and development, 12 in professional
services, 23 in technical support, and 22 in general and administration and
information technology.
FACILITIES
NetDynamics leases a total of approximately 28,000 square feet of office
space in Menlo Park, California under a five-year lease agreement which
commenced in August 1996.
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NETDYNAMICS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the NetDynamics
Consolidated Financial Statements and the Notes thereto and the other
information included elsewhere in this Proxy Statement/ Prospectus. Certain
statements in this "NetDynamics' Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended. The
forward looking statements contained herein are based on current expectations
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward looking statements. For a
more detailed discussion of these risks and other business risks, see "Risk
Factors -- Risks Related to NetDynamics' Business."
OVERVIEW
NetDynamics was founded in May 1995 and designs, develops and markets
high-end enterprise network application software. To date, all of NetDynamics'
revenues have been derived from licenses of its products and related support and
consulting services. NetDynamics began shipping Spider 1.0, a visual database
tool, in September 1995, Spider 1.5, an application server, in December 1995,
NetDynamics 2.0, a database web application platform in June 1996, NetDynamics
3.0, an enterprise web application platform in November 1996, NetDynamics 3.1, a
client side Java support product in April 1997 and NetDynamics 4.0, an
enterprise network application platform, in December 1997. NetDynamics currently
expects that revenues from enterprise network application software and related
support and consulting services will account for substantially all of its
revenues for the remainder of 1998 and the foreseeable future. As a result,
factors adversely affecting the pricing of or demand for enterprise network
application software would have a material adverse effect on NetDynamics'
business, operating results and financial condition. See "Risk Factors -- Risks
Related to NetDynamics Business -- Product Concentration; Dependence on Emerging
Market for Enterprise Network Application Software," "-- Competition" and
"-- Risk Associated with New Versions and New Products; Rapid Technological
Change."
Although NetDynamics' revenues have increased significantly since
inception, it has incurred net losses in each quarter since inception through
the quarter ended March 31, 1998 and had an accumulated deficit of $15.1 million
as of March 31, 1998. In addition, NetDynamics expects to incur a net loss for
each fiscal quarter at least through the balance of 1998. NetDynamics' limited
operating history makes the prediction of future operating results as a
stand-alone company difficult. Accordingly, there can be no assurance that
NetDynamics' revenues as a stand-alone company would continue to grow or that it
would ever be able to achieve profitability on a quarterly basis, or at all. See
"Risk Factors -- Risks Related to NetDynamics Business -- Limited Operating
History; History of Operating Losses" and "-- Potential Fluctuations in
Quarterly Results; Uncertainty of Future Operating Results."
NetDynamics licenses its software products through its direct sales force,
OEMs, systems integrators, ISVs, VARs, and distributors and alliance partners.
Revenues from its direct sales force accounted for approximately 57% and 43% of
NetDynamics' total revenues for 1997 and the three months ended March 31, 1998,
respectively. NetDynamics' ability to achieve significant revenue growth in the
future as a stand-alone company would depend in large part on its success in
recruiting and training sufficient direct sales personnel and in establishing
and maintaining relationships with third party distribution channels. See "Risk
Factors -- Risks Related to NetDynamics Business -- Risks Associated with
Expanding Distribution."
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from NetDynamics' Consolidated Statement of
Operations to total revenues.
<TABLE>
<CAPTION>
MAY 30,
1995
(INCEPTION) YEAR ENDED QUARTER ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, --------------- --------------
1995 1996 1997 1997 1998
------------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses.................................... 84.3% 76.3% 71.7% 71.0% 52.6%
Services.................................... 15.7 23.7 28.3 29.0 47.4
------ ------ ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
------ ------ ----- ----- -----
Cost of Revenues:
Licenses.................................... -- 3.4 2.7 3.6 2.1
Services.................................... -- 29.1 27.1 30.7 34.2
------ ------ ----- ----- -----
Total cost of revenues.............. -- 32.5 29.7 34.3 36.3
------ ------ ----- ----- -----
Gross profit................................ 100.0 67.5 70.3 65.7 63.7
------ ------ ----- ----- -----
Operating Expenses:
Research and development.................... 444.1 91.4 27.2 37.2 31.1
Sales and marketing......................... 272.5 145.3 75.7 103.1 79.6
General and administrative.................. 305.9 34.5 14.0 19.9 16.1
------ ------ ----- ----- -----
Total operating expenses............ 1022.5 271.2 116.9 160.2 126.8
------ ------ ----- ----- -----
Loss from operations.......................... (922.5) (203.7) (46.6) (94.4) (63.2)
Interest and other income (expense), net...... 26.5 2.3 (0.4) (0.7) (0.9)
------ ------ ----- ----- -----
Net loss................................. (896.1)% (201.4)% (47.0)% (95.1)% (64.1)%
====== ====== ===== ===== =====
</TABLE>
PERIODS ENDED DECEMBER 31, 1995, 1996 AND 1997
Total Revenues
NetDynamics' revenues are derived from software license sales and support
and consulting services. Annual support services are charged separately from
software licenses.
License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied.
Annual support revenues consist of ongoing support and product updates and
are recognized ratably over the term of the related contract. Payments received
in advance of revenue recognition are recorded as deferred revenue. Training and
consulting service revenue is recognized as the services are performed.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which NetDynamics has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides for guidance for
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition." In March 1998, the AIPCA issued Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of SOP 97-2 , Software
Revenue Recognition," which limits what is considered vendor-specific objective
evidence necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. NetDynamics will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three months ended March 31, 1998.
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During the first quarter of fiscal 1998, NetDynamics adopted SOP 97-2. The
provisions of SOP 97-2 have been applied to transactions entered into beginning
January 1, 1998. SOP 97-2 generally requires revenue earned on software licenses
involving multiple elements to be allocated to each element based on the
relative fair values of the elements using vendor-specific objective evidence of
such value. The revenue allocated to software licenses generally is recognized
upon delivery of the products. The revenue allocated to support is recognized
ratably over the term of the support and revenue allocated to service elements
is recognized as the services are performed. In connection with the adoption of
SOP 97-2, NetDynamics analyzed all of the elements included in its
multiple-element arrangements and determined that NetDynamics has sufficient
evidence to allocate revenue to the license and support components of certain of
its licenses.
NetDynamics' license revenues increased significantly from $86,000 in 1995
to $2.1 million in 1996 and increased an additional 357% from $2.1 million in
1996 to $9.6 million in 1997. License revenues increased primarily as a result
of an increase in the number of licenses sold, reflecting increased market
awareness and acceptance of NetDynamics' enterprise network application software
and expansion of its direct sales organization and indirect distribution
channels, and to a lesser extent as a result of increased product pricing.
Service revenues increased significantly from $16,000 in 1995 to $641,000 in
1996 and increased an additional 493% from $641,000 in 1996 to $3.8 million in
1997. These increases in services were primarily a result of the growing
installed base of NetDynamics' software products and the associated increase in
demand for maintenance, training and consulting services.
Export revenues include all revenues from sales outside the United States
and accounted for 0%, 9% and 11% of total revenues in 1995, 1996 and 1997.
NetDynamics expects that international license and related service revenues as a
stand-alone company would continue to account for a significant portion of its
total revenues in the future. NetDynamics believes that in order to increase
sales opportunities, it will be required to expand its international operations.
There can be no assurance, however, that NetDynamics will be able to maintain or
increase international market demand for its software products and services. See
"Risk Factors -- Risks Related to NetDynamics Business -- Risks Associated with
International Operations."
NetDynamics' license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of specified term, which may
be perpetual. Customers can terminate the license at any time but do not have a
right of refund for the fees for licenses. NetDynamics can terminate the license
agreement only upon a material breach by the other party, provided that the
breach is not cured within a specified period.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consist primarily of
royalties paid to third party vendors, product packaging, documentation and
production. There were no cost of license revenues in 1995. Cost of license
revenues increased 292% from $91,000 in 1996 to $357,000 in 1997, representing
4% of license revenues for the respective periods.
Cost of Service Revenues. Cost of service revenues consist primarily of
personnel-related and facilities costs incurred in providing customer support,
training and consulting services, as well as third-party costs incurred in
providing training and consulting services. There were no cost of service
revenues in 1995. Costs of services increased 358% from $786,000 in 1996 to $3.6
million in 1997, representing 123% and 96% of service revenues in their
respective periods. Cost of service revenues increased primarily due to an
increase in employees and non-employee consultants delivering services.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of salaries and benefits for NetDynamics' engineering and development
personnel and fees paid to consultants. To date all research and development
expenses have been expensed as incurred. Research and development expenses
increased 452% from $453,000 in 1995 to $2.5 million in 1996 and increased an
additional 44% from $2.5 million in 1996 to $3.6 million in 1997. The increase
was primarily related to increased headcount associated with product
development. NetDynamics expects that research and development expenses as a
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<PAGE> 59
stand-alone company would continue to increase in absolute dollars through
additional investments in developing enterprise network application software.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses. Sales and
marketing expenses increased significantly from $278,000 in 1995 to $3.9 million
in 1996 and by an additional 159% from $3.9 million in 1996 to $10.1 million in
1997. The significant increase in sales and marketing expenses in 1997 reflects
primarily the expansion of NetDynamics' direct sales force through the addition
of sales and marketing personnel and the expansion of direct marketing programs.
NetDynamics expects that sales and marketing expenses as a stand-alone company
would continue to increase in absolute dollars.
General and Administrative. NetDynamics' general and administrative
expenses consist primarily of salaries and benefits for NetDynamics' general
management and administrative personnel as well as fees paid for professional
services. These expenses increased by 198% from $312,000 in 1995 to $931,000 in
1996 and increased by an additional 104% from $931,000 in 1996 to $1.9 million
in 1997. The increase in general and administrative expenses resulted primarily
from the need for additional general and administrative personnel to support
expansion of NetDynamics' operations. NetDynamics expects that general and
administrative expenses as a stand-alone company would continue to increase in
absolute dollars.
QUARTERS ENDED MARCH 31, 1997 AND 1998
Total Revenues
License revenues increased by 54% from $1.3 million for the quarter ended
March 31, 1997 to $2.0 million for the quarter ended March 31, 1998. License
revenues increased primarily as a result of an increase in the number of
licenses sold, reflecting increased market awareness and acceptance of
NetDynamics' enterprise network application software and expansion of its direct
sales organization and indirect distribution channels, and to a lesser extent as
a result of increased product pricing. Service revenues increased by 245% from
$522,000 for the quarter ended March 31, 1997 to $1.8 million for the quarter
ended March 31, 1998. The increase in service revenues was primarily a result of
the growing installed base of NetDynamics' software products and the related
demand for maintenance, training and consulting services.
Cost of Revenues
Cost of License Revenues. Cost of license revenues increased by 23% from
$65,000 for the quarter ended March 31, 1997 to $80,000 for the quarter ended
March 31, 1998. Cost of license revenues increased primarily as a result of an
increase in the number of licenses sold.
Cost of Service Revenues. Cost of service revenues increased by 136% from
$552,000 for the quarter ended March 31, 1997 to $1.3 million for the quarter
ended March 31, 1998. Cost of service revenue increased primarily due to an
increase in employees and non-employee consultants delivering services.
Operating Expenses
Research and Development. Research and development expenses increased by
79% from $670,000 in the quarter ended March 31, 1997 to $1.2 million for the
quarter ended March 31, 1998. The increase was primarily related to increased
headcount associated with product development.
Sales and Marketing. Sales and marketing expenses increased by 58% from
$1.9 million for the quarter ended March 31, 1997 to $3.0 million for the
quarter ended March 31, 1998. The increase in sales and marketing expenses
resulted primarily from the addition of sales and marketing personnel and the
expansion of sales and marketing programs.
General and Administrative. General and administrative expenses increased
by 71% from $358,000 in the quarter ended March 31, 1997 to $613,000 in the
quarter ended March 31, 1998. The increase in general
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<PAGE> 60
and administrative expenses resulted primarily from the need for additional
general and administrative personnel to support expansion of NetDynamics'
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, NetDynamics has funded its operations primarily through
the private sale of equity securities, which totaled $15.4 million (net of
issuance costs) as of March 31, 1998, and through various types of debt
facilities. At March 31, 1998, the principle source of liquidity for NetDynamics
was $4.3 million in cash and cash equivalents and the unused borrowing capacity
under its debt facilities.
Net cash used in operating activities was $805,000, $4.4 million, $6.5
million and $1.7 million in 1995, 1996, 1997 and the quarter ended March 31,
1998, respectively. For such periods, net cash used in operating activities
resulted primarily from net losses and increases in accounts receivable
associated with increased revenue, partially offset by increases in accounts
payable, accrued liabilities and deferred revenue. Cash flows used in investing
activities was $280,000, $711,000, $1.6 million and $252,000 for 1995, 1996,
1997 and the quarter ended March 31, 1998, respectively. NetDynamics' investing
activities consisted primarily of purchases of property and equipment.
NetDynamics expects that its capital expenditures as a stand-alone company would
increase as its employee base grows and its operations expand. Net cash provided
by financing activities was $2.1 million, $5.9 million, $10.2 million and $2.5
million for 1995, 1996, 1997 and the quarter ended March 31, 1998, respectively.
Cash flows from financing activities consisted primarily of proceeds from the
private sale of equity securities and, to a lesser extent, proceeds from
borrowings, net of repayments.
At March 31, 1998, the Company had a $5 million line of credit. Total
borrowings under the line of credit are limited generally to 80% of eligible
accounts receivable with interest at 0.25% over the bank's prime rate and
aggregated $3.0 million as of March 31, 1998. On March 31, 1998, NetDynamics had
approximately $ 2.0 million of borrowing capacity under the line of credit. The
line of credit contains certain financial covenants and restrictions as to
various matters, including NetDynamics' ability to pay cash dividends and effect
mergers or acquisitions without the bank's prior approval. Although NetDynamics
is currently in compliance with the line of credit, NetDynamics anticipates that
it may not be in compliance with certain financial covenants as of August 31,
1998, the next compliance date, and must obtain the lender's consent to
consummate the Merger. At March 31, 1998, NetDynamics also had a $4.0 million
term loan with a bank for capital expenditures of which $2.0 million was
outstanding. The term loan bears interest at the bank's prime rate plus 0.50%.
At March 31, 1998, NetDynamics had $2.0 million of borrowing capacity under the
term loan. The term loan contained certain financial covenants and restrictions
as to various matters, including NetDynamics' ability to pay dividends and
effect mergers or acquisitions without the Bank's prior approval. Although
NetDynamics is currently in compliance with the term loan, NetDynamics
anticipates that it may not be in compliance with certain financial covenants as
of August 31, 1998, the next compliance date. It is a condition to the Merger
that amounts outstanding under the line of credit and term loans be repaid prior
to the Effective Time. See Notes 4 and 10 of Notes to NetDynamics' Consolidated
Financial Statements.
NetDynamics estimates that the proceeds from the Note (described below),
together with existing cash and cash equivalents, and borrowings available under
the line of credit and term loan, will be sufficient to fund its liquidity
requirements for at least the next six months. In the event that the Merger is
not consummated, or NetDynamics is not able to obtain a waiver of certain
financial covenants under the line of credit and term loan prior to August 31,
1998, NetDynamics anticipates that it may not be in compliance with such
covenants as of such date and, in the event of default, would be required to
repay all amounts outstanding under the line of credit and term loans. In such
event, NetDynamics' current sources of liquidity (excluding the line of credit
and term loans) would be estimated to be sufficient to fund its liquidity
requirements for at least the next three months. Thereafter, NetDynamics
anticipates that it will require additional funds to support its liquidity
requirements. There can be no assurance that additional financing will be
available at all or that, if available, such financing will be available on
terms favorable to NetDynamics.
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THE NOTE
The following is a brief summary of certain provisions of the Note, a form
of which is attached hereto as Annex C and incorporated herein by reference;
such summary is qualified in its entirety by reference to the form of the Note.
Concurrent with the execution of the Merger Agreement on June 30, 1998,
NetDynamics executed the Note evidencing a loan by Sun to NetDynamics in an
aggregate principal amount of $10 million. The Note bears interest, payable upon
default or maturity of the Note, at a rate of ten percent (10%) per annum. The
unpaid principal together with all accrued interest, shall be due and payable
one hundred eighty (180) days after certain events of termination specified in
the Merger Agreement.
In the event of such a termination of the Merger Agreement, NetDynamics may
within one hundred eighty (180) days after the date of such termination, either
(i) pay the unpaid principal and accrued interest due and owing on the Note or
(ii) convert such unpaid principal and accrued interest into stock of
NetDynamics. However, upon the occurrence of certain events of default,
including termination of the Merger Agreement as a result of NetDynamics'
failure to deliver to Sun proxies representing a majority of both the
NetDynamics Common Stock and the NetDynamics Preferred Stock upon the earlier to
occur of (i) ten (10) days after the mailing of this Proxy Statement/Prospectus
to shareholders of NetDynamics and (ii) twenty (20) days after the effectiveness
of the Registration Statement, the unpaid principal and accrued interest then
owing on the Note shall be immediately due and payable. The Note is convertible
into shares of the series of stock of NetDynamics which is the most favorable
of: (i) that series of preferred stock of NetDynamics outstanding on the date of
such conversion having the most favorable terms with respect to dividends,
liquidation preference, anti-dilution protection, conversion ratio, voting
rights, redemption and all other rights, privileges and preferences or (ii) such
other capital stock being offered to investors by NetDynamics on the date of
such conversion. The number of shares into which the Note shall convert is
determined by dividing (a) the unpaid aggregate principal amount plus accrued
interest by (b) the quotient of (x) $160 million and (y) the total number of
outstanding shares of capital stock of NetDynamics, treating all preferred
stock, options, warrants and other rights on an as-converted, fully-diluted
basis.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. Failure to accept four digit entries could result in system
failures or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. NetDynamics has not commenced an
audit of its internal operating systems to determine whether they are Year 2000
compliant. However, NetDynamics does not believe it will incur significant
incremental costs, if any, in order to bring its internal operating systems into
Year 2000 compliance. Based upon NetDynamics' design and testing of its software
products, NetDynamics believes that its software products are Year 2000
compliant. However, there can be no assurance that this is the case or that
NetDynamics products will integrate with the products in the Year 2000 in a
compliant manner and failure of NetDynamics' software products to operate
properly with regard to Year 2000 compliance could require NetDynamics to incur
significant unanticipated expenses to remedy any problems and could have a
material adverse effect on NetDynamics' business, financial condition and
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income (Loss)
Effective January 1, 1998, NetDynamics adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a company from
transactions, other events and circumstances excluding transactions resulting
from
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investments by owners and distributions to owners. The difference between net
loss and comprehensive loss for the company for all periods presented is
insignificant.
Business Segments
In June 1997, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 supercedes SFAS No. 14 and
requires segment information to be reported on the basis that is used internally
for evaluating segment performance and deciding how to allocate resources to
segments in quarterly and annual reports. SFAS No. 131 is effective for annual
reports for fiscal years beginning after December 15, 1997 and is applicable to
interim financial statements beginning with the second year of application.
NetDynamics has not yet determined the effect, if any, of adoption of this new
standard on its financial statements.
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NETDYNAMICS MANAGEMENT
The following table sets forth information regarding certain executive
officers and directors of NetDynamics as of July 21, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Zah Rinat............................. 39 President, Chief Executive Officer and
Director
A. Brooke Seawell..................... 50 Executive Vice President and Chief
Financial Officer
Catherine L. Cullen................... 52 Vice President, Sales -- Americas
Victor Morris......................... 46 Vice President, Marketing and Vice
President/General Manager, EMEA
Stephen Zocchi........................ 39 Vice President, Business Development
Russell R. Harris..................... 36 Vice President, Operations
Olivia V. Dillan...................... 40 Vice President, Engineering
Doron Sherman......................... 33 Chief Scientist
Mark Gorenberg........................ 44 Director
James A. Dorrian...................... 45 Director
Marc A. Friend........................ 34 Director
Ronald A. Abelmann.................... 60 Director
</TABLE>
Zah Rinat has served as President and Chief Executive Officer of
NetDynamics since its founding in May 1995. Prior to co-founding NetDynamics,
Mr. Rinat has held senior management positions in operations, marketing and
engineering at Silicon Graphics and Advanced Technology Israel. Mr. Rinat
received a B.S. in Computer Science from the Technion (Israel Institute of
Technology) and an M.B.A. from the Harvard Graduate School of Business
Administration.
A. Brooke Seawell has served as NetDynamics' Executive Vice President and
Chief Financial Officer of NetDynamics since January 1997. Prior to joining
NetDynamics, Mr. Seawell served as Senior Vice President of Finance and
Operations and Chief Financial Officer of Synopsys, Inc. since 1991. Prior to
joining Synopsys, Inc., Mr. Seawell served as Vice President of Finance for
several other public companies. Mr. Seawell started his business career as a
consultant with Touche Ross & Co. and McKinsey & Co. and served as an officer in
the U.S. Navy. Mr. Seawell serves on the boards of directors of several
privately held companies. Mr. Seawell holds a B.A. and an M.B.A. from Stanford
University.
Catherine L. Cullen has served as Vice President, Sales -- Americas of
NetDynamics since April 1997. Prior to joining NetDynamics, Ms. Cullen served as
Vice President and General Manager at BMC Software, Inc. Prior to serving at BMC
Software, Inc., Ms. Cullen worked at Oracle Corporation as Vice President,
Worldwide Interactive Multimedia and held management positions at Wang and
Computer Sciences Corporation. Ms. Cullen studied journalism at the University
of Oklahoma.
Victor Morris has served as Vice President, Marketing of NetDynamics since
February 1998. Prior to his present position at NetDynamics, Mr. Morris had
served as Vice President/General Manager - EMEA since November 1996. Prior to
joining NetDynamics, Mr. Morris served as Vice President of Europe, Middle East
and Africa for the Powersoft Group. In 1987, Mr. Morris founded Software
Generation and, in 1979, established the U.K. subsidiary of Cullinet and
subsequently served as its Senior Vice President of International Operations and
Worldwide Marketing. Mr. Morris has an honors degree in Physics from the
University of Bristol, and completed the Advanced Management Program at Harvard
Business School.
Stephen Zocchi has served as Vice President, Business Development of
NetDynamics since February 1996. Prior to joining NetDynamics, Mr. Zocchi held
management positions in marketing for Verity, Inc., Unify Corporation and Sun
Microsystems, Inc. Mr. Zocchi received a B.A. in Economics from Knox College and
a master's degree in International Management from the American Graduate School
of International Management.
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Russell R. Harris has served as NetDynamics' Vice President, Operations of
NetDynamics since May 1996. Prior to joining NetDynamics, Mr. Harris held
operations positions for Silicon Graphics, Unisys, and Convergent Technologies.
Mr. Harris received a B.S. and an M.S. in Industrial Engineering from Stanford
University.
Olivia V. Dillan has served as Vice President, Engineering of NetDynamics
since March 1998. Prior to joining NetDynamics, Ms. Dillan served as Vice
President, Product Development for Pretty Good Privacy. Previously, Ms. Dillan
served as Vice President, Product Development for Internet Profiles, Vice
President of the New Media Tools and Applications Division at Oracle, Vice
President, Engineering for RadioMail and Vice President, Core Product
Development for Ingres. Ms. Dillan received a B.A. in Computer Science from
Hunter College.
Doron Sherman has served as Chief Scientist of NetDynamics since its
inception in May 1995. Prior to co-founding NetDynamics, Mr. Sherman has held
various engineering and science positions in the Israel Defense Forces
Intelligence, EFI and Hewlett Packard. Mr. Sherman received a B.S. in
Mathematics and Physics and a B.S. and an M.S. in Computer Science from the
Hebrew University in Jerusalem.
Mark Gorenberg has served as a Director of NetDynamics since July 1995. Mr.
Gorenberg is currently a partner of Hummer Winblad Equity Partners II, L.P., the
general partner of Hummer Winblad Venture Partners II, L.P. Prior to joining
Hummer Winblad Equity Partners II, L.P., Mr. Gorenberg was a Senior Software
Manager for Advanced Product Development at Sun Microsystems. Mr. Gorenberg
received a B.S.E.E. from the Massachusetts Institute of Technology, an M.S.E.E.
from the University of Minnesota and an M.S. in Engineering Management from
Stanford University.
James A. Dorrian has served as a Director of NetDynamics since June 1996.
Mr. Dorrian co-founded Arbor Software and was previously its President and Chief
Executive Officer. Prior to co-founding Arbor, Mr. Dorrian was president of
Solutions Technology, Inc. Previously, he was Western States director at Thorn
EMI Computer Software. Mr. Dorrian holds a B.S. in Economics from Indiana
University.
Marc A. Friend has served as a Director of NetDynamics since May 1998. Mr.
Friend is currently a general partner of Presidio Management Group IV, L.P., the
general partner of U.S. Venture Partners IV, L.P. and USVP Entrepreneur Partners
II, L.P. Prior to joining U.S. Venture Partners, Mr. Friend held product
management positions at Microsoft and Channel Computing and was a research
associate at Charles River Ventures. Mr. Friend received a B.S. and an M.S. in
electrical engineering from the Massachusetts Institute of Technology and an
M.B.A. from Harvard Business School.
Ronald A. Abelmann has served as a Director of NetDynamics since May 1998.
Mr. Abelmann is currently the President and Chief Executive Officer of Wind
River Systems. Prior to joining Wind River Systems in 1994, Mr. Abelmann was the
founding Chief Executive Officer at Vantage Analysis Systems. Prior thereto, Mr.
Abelmann was Group Vice President and General Manager for the Instrument
Division of Varian Associates. Prior thereto, Mr. Abelmann was President of the
Conrac division of Conrac Corporation. Mr. Abelmann received a B.S. and an M.S.
degree in applied physics from the University of California at Los Angeles and
an M.B.A. from Stanford University.
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<PAGE> 65
NETDYNAMICS STOCK INFORMATION
NETDYNAMICS PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of NetDynamics
Capital Stock as of June 30, 1998, as to (i) each person who is known by
NetDynamics to own beneficially more than 5% of the outstanding shares of
NetDynamics Common Stock or more than 5% of the NetDynamics Preferred Stock on
an as-converted basis, (ii) each director of NetDynamics, (iii) the Chief
Executive Officer of NetDynamics, (iv) the four other most highly compensated
officers whose salary and bonus for the fiscal year ended December 31, 1997
exceeded $100,000, and (v) all directors and executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
---------------------------------- ----------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
SHARES BENEFICIALLY BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
SHAREHOLDERS OWNED(1) OWNED(1)(2) OWNED(1) OWNED(1)(2)
------------ ------------------- ------------ ------------------- ------------
<S> <C> <C> <C> <C>
Hummer Winblad Venture Partners
II(3)................................ -- -- 3,019,900 55.2%
2 South Park
Second Floor
San Francisco, CA 94107
U.S. Venture Partners IV, L.P.(4)...... -- -- 1,192,492 21.8%
U.S. Venture Partners
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Doron Sherman(5)....................... 630,200 11.6% --
3994 Sutherland Drive
Palo Alto, CA 94303
Ben-Shachar Family 1998 Trust(6)....... 2,520,200 46.3% --
3245 Bryant Street
Palo Alto, CA 94306
Zah Rinat(7)........................... 1,350,200 24.8%
3119 Stockton Place
Palo Alto, CA 94303
Catherine L. Cullen(8)................. 156,000 2.8%
Russell R. Harris(9)................... 127,700 2.3%
Stephen Zocchi(10)..................... 127,700 2.3%
Victor Morris(11)...................... 105,200 1.9%
Mark Gorenberg(12)..................... -- -- 3,034,900 55.5%
James A. Dorrian(13)................... 70,950 1.3% 22,500 0.4%
Marc A. Friend(14)..................... -- -- 1,192,492 21.8%
Ronald A. Abelmann(15)................. 70,950 1.3% -- --
All directors and executive officers as
a group (12 persons)(16)............. 3,016,300 49.5% 4,249,892 77.7%
</TABLE>
- ---------------
(1) Except as indicated in the other footnotes to this table, based on
information provided by such persons to NetDynamics. Subject to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all of the shares of NetDynamics
Capital Stock shown as beneficially owned by them. The number of shares of
NetDynamics Preferred Stock beneficially owned is presented as the number
of shares of NetDynamics Common Stock issuable upon conversion of such
preferred stock. Each share of NetDynamics Series A and Series B Preferred
Stock is convertible into one and one-half (1.5) shares of NetDynamics
Common Stock and each share of NetDynamics Series C Preferred Stock is
convertible into one (1) share of NetDynamics Common Stock.
(2) Percentage ownership is based on 5,445,771 shares of NetDynamics Common
Stock, and 5,467,366 shares of Preferred Stock on an as-converted basis,
outstanding on June 30, 1998. The number of shares of NetDynamics Common
Stock and Preferred Stock beneficially owned includes the shares issuable
pursuant to stock options and warrants that are exercisable within 60 days
of June 30, 1998 (including
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<PAGE> 66
options that will accelerate at the Effective Time). Shares of NetDynamics
Common Stock issuable upon the conversion of NetDynamics Preferred Stock
issuable upon exercise of warrants to purchase NetDynamics Preferred Stock
are not treated as exercisable within 60 day period. Shares issuable
pursuant to stock options or warrants are deemed outstanding for computing
the percentage owned by the person holding such options or warrants but are
not deemed outstanding for computing the percentage of any other person.
(3) Consists of shares held by Hummer Winblad Venture Partners II, L.P. and
Hummer Winblad Technology Fund II, L.P. Mr. Gorenberg, a Director of
NetDynamics, is a general partner of Hummer Winblad Equity Partners II,
L.P., the general partner of Hummer Winblad Venture Partners II, L.P. and
Hummer Winblad Technology Fund II. Mr. Gorenberg disclaims beneficial
ownership of the shares held by and Hummer Winblad Venture Partners II,
L.P. and Hummer Winblad Technology Fund II, L.P. except to the extent of
his pecuniary interests therein from his membership interest in Hummer
Winblad Venture Partners II, L.P. and Hummer Winblad Technology Fund II,
L.P.
(4) Consists of shares held by U.S. Venture Partners IV, L.P. and USVP
Entrepreneur Partners II, L.P., 2180 Associates Fund and Second Ventures
II, L.P. Mr. Friend, a Director of NetDynamics, is a general partner of
Presidio Management Group IV, L.P., the general partner of U.S. Venture
Partners IV, L.P. and USVP Entrepreneur Partners II, L.P. Mr. Friend
disclaims beneficial ownership of the shares held by U.S. Venture Partners
IV, L.P. and USVP Entrepreneur Partners II, L.P., except to the extent of
his pecuniary interests therein from his membership interest in U.S.
Venture Partners IV, L.P. and USVP Entrepreneur Partners II, L.P.
(5) Includes 200,000 shares held by Sherman Investment, L.P., of which Mr.
Sherman is a general partner. Also includes 430,200 shares held directly by
Mr. Sherman which includes options to purchase 200 shares of Common Stock
that is immediately exercisable.
(6) Includes 500,000 shares held by DTB Investment, LLC, of which Mr.
Ben-Shachar is the managing partner. Also includes 2,020,200 shares held by
the Ben-Shachar Family 1998 Trust, of which Mr. Ben-Shachar is the trustee,
and includes options to purchase 200 shares that are immediately
exercisable.
(7) Includes an option to purchase 200 shares that is immediately exercisable.
(8) Includes an option to purchase 126,000 shares that is exercisable within 60
days of June 30, 1998.
(9) Includes an option to purchase 77,700 shares that is exercisable within 60
days of June 30, 1998.
(10) Includes an option to purchase 45,200 shares that is exercisable within 60
days of June 30, 1998.
(11) Consists of an option to purchase 105,200 shares that is exercisable within
60 days of June 30, 1998.
(12) Consists of all shares held by Hummer Winblad Venture Partners II and
Hummer Winblad Technology Fund II. See Note (3). Also includes 15,000
shares of NetDynamics Preferred Stock directly held by Mr. Gorenberg.
(13) Includes an option to purchase 70,950 shares of Common Stock that are
exercisable within 60 days of June 30, 1998.
(14) Consists of shares held by U.S. Venture Partners IV, L.P., USVP
Entrepreneur Partners IV, L.P., 2180 Associates Fund and Second Ventures
II, L.P. See note (4).
(15) Consists of an option to purchase 70,950 shares that is exercisable within
60 days of June 30, 1998.
(16) Includes options to purchase 649,600 shares that are exercisable within 60
days of June 30, 1998.
NETDYNAMICS STOCK PRICE AND DIVIDEND INFORMATION
There is no established public trading market for NetDynamics Capital
Stock. NetDynamics has not declared or paid any cash dividends on its Common
Stock. NetDynamics presently intends to retain earnings for use in its business
on a stand-alone basis and therefore does not anticipate paying cash dividends
in the foreseeable future. In addition the terms of NetDynamics' Articles of
Incorporation and the terms of NetDynamics' credit line restrict the payment of
dividends by NetDynamics.
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COMPARISON OF RIGHTS OF HOLDERS OF SUN COMMON STOCK AND HOLDERS OF NETDYNAMICS
CAPITAL STOCK
The rights of Sun stockholders are governed by Sun's Certificate of
Incorporation, as amended (the "Sun Certificate"), its Bylaws (the "Sun Bylaws")
and the DGCL. The rights of NetDynamics shareholders are currently governed by
NetDynamics' Articles of Incorporation, as amended (the "NetDynamics Articles"),
its Bylaws (the "NetDynamics Bylaws") and the CGCL. Upon consummation of the
Merger, NetDynamics shareholders will become stockholders of Sun with their
rights as stockholders governed by the DGCL, the Sun Certificate and the Sun
Bylaws.
The following is a summary of certain similarities and differences between
the rights of Sun stockholders and NetDynamics 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 Sun and NetDynamics.
Capital Stock. The authorized capital stock of Sun consists of 940,000,000
shares of Sun Common Stock, $.00067 par value, of which 376,708,341 shares were
issued and outstanding as of June 20, 1998, and 10,000,000 shares of Preferred
Stock, issuable in such series and with such rights, powers and privileges as
the Sun Board shall determine. Sun currently has no shares of Preferred Stock
outstanding. The authorized capital stock of NetDynamics consists of 13,500,000
shares of Common Stock, no par value, of which 5,445,771 shares were issued and
outstanding on the NetDynamics Record Date, 1,906,371 shares of NetDynamics
Series A Preferred Stock, no par value, of which 1,891,371 shares were issued
and outstanding on the NetDynamics Record Date, 940,206 shares of NetDynamics
Series B Preferred Stock, no par value, all of which were issued and outstanding
on the NetDynamics Record Date, and 1,220,000 shares of NetDynamics Series C
Preferred Stock, no par value, all of which were issued and outstanding on the
NetDynamics Record Date.
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 Sun Certificate states that the Sun Bylaws may be amended by the Sun Board,
and the Sun Bylaws state that the Sun Bylaws may be amended by the Sun Board or,
except as otherwise required by law, by the affirmative vote of the holders of
seventy-five percent (75%) of the shares entitled to vote in the election of
directors. Under the CGCL and the NetDynamics Bylaws, the NetDynamics Bylaws may
be amended or repealed either by the NetDynamics Board or by the holders of a
majority in interest of the outstanding shares of NetDynamics Capital Stock,
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.
Also, the NetDynamics Articles provide that, in certain circumstances, amendment
of the NetDynamics Bylaws requires approval of holders of 66% of any series of
NetDynamics Preferred Stock for any amendment that would alter or change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, such series of NetDynamics Preferred Stock.
Amendment of Sun Certificate and NetDynamics 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 Sun Certificate provides
that an amendment of certain provisions must be approved by the affirmative vote
of at least 75% 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 of each class.
Protective Provisions of NetDynamics Articles of Incorporation. The
NetDynamics Articles provide that, in certain circumstances, the approval of
holders of 66% of the outstanding shares of a particular series of NetDynamics
Preferred Stock shall be required to: (i) amend or repeal the NetDynamics
Articles or NetDynamics Bylaws if such action would alter or change the
preferences, rights, privileges, or powers of, or
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the restrictions provided for the benefit of such series of NetDynamics
Preferred Stock, (ii) authorize, create or issue any class or series of stock
with rights senior to such series of NetDynamics Preferred Stock, (iii) increase
or decrease the number of authorized shares of NetDynamics Preferred Stock, (iv)
enter into certain material agreements or enter into certain material
transactions with any officer, director or five percent (5%) holder of
NetDynamics Capital Stock, or (v) amend such provisions of the NetDynamics
Articles Furthermore, the NetDynamics Articles provide that the approval of
holders of a majority of the total number of shares of NetDynamics Preferred
Stock then outstanding, voting as a single class, shall be required to: (i)
enter into transactions not in the ordinary course of business relating to the
sale or licensing of NetDynamics' technology, (ii) distribution of its capital
stock pursuant to Section 305 of the Code, (iii) consummate a sale of all or
substantially all of the assets of NetDynamics in any transaction which would
result in holders of NetDynamics Capital Stock prior to such transaction holding
less than fifty percent (50%) of the voting power of the surviving entity, or
(iv) amend such provisions of the NetDynamics Articles.
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 Sun Bylaws permit a special meeting to be called for any purpose or
purposes by (i) the Chairman of the Sun Board, (ii) any executive officer of
Sun, (iii) the Sun Board 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 NetDynamics 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 Sun 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.
Under the CGCL, shareholders may execute an action by written consent in
lieu of a shareholder meeting. The NetDynamics 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.
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 Sun Certificate states that the number of directors shall be
fixed by the Sun Bylaws. The number of directors may be changed by an amendment
to the Sun Bylaws approved by the Board of Directors or by the affirmative vote
of 75% of all the outstanding stock entitled to vote thereon; provided that an
amendment reducing the number of directors to less than five cannot be adopted
if the votes cast against such an Amendment exceed 16 2/3% of the outstanding
shares and no amendment may increase the maximum number of authorized directors
to a number greater than two times the stated number of directors minus one. The
number of directors of Sun is currently fixed at seven.
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 NetDynamics
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
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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
Sun Bylaws nor the NetDynamics Bylaws provide for a classified board.
Cumulative Voting. Under the DGCL, cumulative voting in the election of
directors is not available unless specifically provided for in the certificate
of incorporation. The Sun Certificate provides for cumulative voting. 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 NetDynamics
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 Sun Bylaws provide that any director may be
removed from office, with or without cause, by the affirmative vote of the
holders of the majority of the outstanding stock entitled to vote at an election
of directors; provided that as long as stockholders are entitled to cumulative
voting no director may be removed if the votes cast against such removal would
be sufficient to elect such director if voted cumulatively at an election of the
entire board of directors.
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
(10%) 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 Sun
Bylaws provide that any vacancies on the Sun 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.
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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 NetDynamics Bylaws provide that the shareholders may elect
a director at any time to fill any 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 Sun 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 NetDynamics Capital Stock may, by
complying with Chapter 13 of the CGCL, be entitled to dissenters' rights as set
forth therein, and the shares of NetDynamics Capital 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 Proxy Statement/Prospectus. For a more complete
description of such rights, see "Approval of the Merger and Related
Transactions -- California Appraisal 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
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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 damages for breach of the director's fiduciary
duty as a director. Under the DGCL, Sun 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 Sun Certificate eliminates the liability
of the Sun 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. The NetDynamics
Articles eliminate the liability of the NetDynamics Board to the fullest extent
permissible under the CGCL.
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 Sun Bylaws
provide that Sun will indemnify its directors and executive officers and may
indemnify other offices to the fullest extent permitted by law. Under the Sun
Bylaws, indemnified parties are entitled to indemnification of negligence, gross
negligence and otherwise to the fullest extent permitted by law. The Sun Bylaws
also require Sun 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. Sun also has indemnification
agreements with certain of its executive officers and directors.
In addition, under the Reorganization Agreement, Sun has agreed that, from
and after the consummation of the Merger, it will fulfill and honor in all
material respects the obligations of NetDynamics pursuant to (i) each
indemnification agreement in effect at such time between NetDynamics and each
person who is or was a director or officer of NetDynamics at or prior to the
Effective Time and (ii) any indemnification provisions under NetDynamics'
Articles or NetDynamics Bylaws. Pursuant to the Reorganization Agreement,
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Sun has also agreed that the Surviving Corporation's 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 three 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 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 NetDynamics Bylaws include a provision that provides
NetDynamics 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
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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 interested stockholder with the approval of the
corporation's board of directors; and (iii) is approved or not 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. See "NetDynamics Special
Meeting -- Vote Required; Quorum" for the vote of NetDynamics shareholders to
approve the Merger and the Merger Agreement.
Loans to Directors, Officers and Employees. The DGCL permits Sun 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 Sun. 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
NetDynamics has 100 or more shareholders of record and has adopted a bylaw
allowing the NetDynamics Board to do so, the NetDynamics 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
69
<PAGE> 74
NetDynamics 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 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.
Rights Plans. On April 26, 1989, the Sun Board adopted and approved a
stockholder rights plan (the "Sun Rights Plan") and declared a dividend of one
right (each a "Right") for each share of Sun Common Stock outstanding on May 26,
1989. The Rights have certain anti-takeover effects and are intended to
discourage coercive or unfair takeover tactics and to encourage any potential
acquiror to negotiate a price fair to all Sun stockholders. The Rights may cause
substantial dilution to an acquiring party that attempts to acquire Sun on terms
not approved by the Sun Board, but they will not interfere with any negotiated
merger or other business combination.
In the event that any person or group acquires beneficial ownership of ten
percent (10%) or more of the outstanding shares of Sun Common Stock other than
pursuant to a "qualifying offer" as defined in the Sun Rights Plan, each holder
of a Right, other than a Right beneficially owned by the acquiring person, will
thereafter have the right to receive upon exercise that number of shares of Sun
Common Stock having a
70
<PAGE> 75
market value of two times the exercise price of the Right. In addition, if at
any time following such acquisition of ten percent (10%) or more of the
outstanding Sun Common Stock, Sun is acquired in a merger or other business
combination or transaction of fifty percent (50%) or more of its consolidated
assets or earning power are sold, other than resulting from a qualifying offer,
each holder of a Right will receive, upon exercise of that Right at the
prevailing exercise price of the Right, that number of shares of common stock of
the acquiring company which, at the time of such transaction, will have a market
value of two times the exercise price of the Right.
NetDynamics has not adopted a rights plan.
EXPERTS
The consolidated financial statements of NetDynamics as of December 31,
1996 and 1997, and for the period from May 30, 1995 (inception) to December 31,
1995 and the years ended December 31, 1996 and 1997 included in this Proxy
Statement/Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Sun Microsystems, Inc.
incorporated by reference in Sun Microsystems, Inc.'s Annual Report (Form 10-K,
as amended on Form 10-K/A) for the year ended June 30, 1997, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Sun Common Stock issuable pursuant to the Merger will
be passed on by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
is acting as counsel for NetDynamics in connection with certain legal matters
relating to the Merger and the transactions contemplated thereby.
71
<PAGE> 76
NETDYNAMICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Deficit.......... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NetDynamics, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' deficit and of
cash flows present fairly, in all material respects, the financial position of
NetDynamics, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 and the period from May 30, 1995 (Inception) to December 31,
1995, 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.
PricewaterhouseCoopers LLP
San Jose, California
March 25, 1998, except for Note 10
which is as of July 6, 1998
F-2
<PAGE> 78
NETDYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 1,725,000 $ 3,777,000 $ 4,320,000
Accounts receivable, net of allowances of
$87,000, $473,000 and $472,000 (unaudited)... 1,213,000 4,431,000 3,358,000
Prepaid expenses and other current assets....... 44,000 511,000 771,000
----------- ------------ ------------
Total current assets.................... 2,982,000 8,719,000 8,449,000
Property and equipment, net....................... 780,000 1,868,000 1,916,000
Other assets...................................... 36,000 58,000 36,000
Restricted cash................................... 334,000 522,000 522,000
----------- ------------ ------------
$ 4,132,000 $ 11,167,000 $ 10,923,000
=========== ============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Line of credit.................................. $ 329,000 $ 1,000,000 $ 3,000,000
Accounts payable................................ 372,000 693,000 652,000
Accrued liabilities............................. 1,788,000 3,134,000 2,762,000
Deferred revenue................................ 381,000 1,804,000 1,907,000
Current portion of notes payable to a bank...... 100,000 515,000 637,000
----------- ------------ ------------
Total current liabilities............... 2,970,000 7,146,000 8,958,000
Notes payable to a bank, net of current portion... 625,000 1,059,000 1,401,000
----------- ------------ ------------
Mandatorily redeemable convertible preferred stock
(Note 6)........................................ 6,893,000 15,400,000 15,403,000
----------- ------------ ------------
Commitments (Note 7)
Shareholders' Deficit:
Common stock, no par value; 13,500,000 shares
authorized; 4,522,500, 5,234,759 and
5,332,086 (unaudited) shares issued and
outstanding.................................. 2,000 182,000 218,000
Accumulated deficit............................. (6,358,000) (12,620,000) (15,057,000)
----------- ------------ ------------
Total shareholders' deficit............. (6,356,000) (12,438,000) (14,839,000)
----------- ------------ ------------
$ 4,132,000 $ 11,167,000 $ 10,923,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 79
NETDYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MAY 30, 1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
DECEMBER 31, ------------------------- -----------------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses...................... $ 86,000 $ 2,059,000 $ 9,535,000 $ 1,278,000 $ 1,997,000
Services...................... 16,000 641,000 3,765,000 522,000 1,803,000
---------- ----------- ----------- ----------- -----------
Total revenues........ 102,000 2,700,000 13,300,000 1,800,000 3,800,000
---------- ----------- ----------- ----------- -----------
Cost of revenues:
Licenses...................... -- 91,000 357,000 65,000 80,000
Services...................... -- 786,000 3,598,000 552,000 1,301,000
---------- ----------- ----------- ----------- -----------
Total cost of
revenues............ -- 877,000 3,955,000 617,000 1,381,000
---------- ----------- ----------- ----------- -----------
Gross profit.................... 102,000 1,823,000 9,345,000 1,183,000 2,419,000
---------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development...... 453,000 2,469,000 3,613,000 670,000 1,180,000
Sales and marketing........... 278,000 3,923,000 10,068,000 1,855,000 3,026,000
General and administrative.... 312,000 931,000 1,864,000 358,000 613,000
---------- ----------- ----------- ----------- -----------
Total operating
expenses............ 1,043,000 7,323,000 15,545,000 2,883,000 4,819,000
---------- ----------- ----------- ----------- -----------
Loss from operations............ (941,000) (5,500,000) (6,200,000) (1,700,000) (2,400,000)
Interest and other income
(expense), net................ 27,000 62,000 (52,000) (12,000) (34,000)
---------- ----------- ----------- ----------- -----------
Net loss.............. (914,000) (5,438,000) (6,252,000) (1,712,000) (2,434,000)
Accretion of mandatorily
redeemable convertible
preferred stock............... -- (6,000) (10,000) (3,000) (3,000)
---------- ----------- ----------- ----------- -----------
Net loss attributable to common
stock......................... $ (914,000) $(5,444,000) $(6,262,000) $(1,715,000) $(2,437,000)
========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted............. $ (.73) $ (2.54) $ (1.79) $ (.60) $ (.54)
========== =========== =========== =========== ===========
Shares used to compute net
loss per share............. 1,252,206 2,141,189 3,502,534 2,881,678 4,492,155
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 80
NETDYNAMICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------ -------- ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Common Stock in connection with
the formation of the Company.............. 4,500,000 $ -- $ -- $ --
Net loss.................................... -- -- (914,000) (914,000)
--------- -------- ------------ ------------
Balance at December 31, 1995................ 4,500,000 -- (914,000) (914,000)
Exercise of common stock options............ 22,500 2,000 -- 2,000
Accretion of mandatorily redeemable
convertible preferred stock............... -- -- (6,000) (6,000)
Net loss.................................... -- -- (5,438,000) (5,438,000)
--------- -------- ------------ ------------
Balance at December 31, 1996................ 4,522,500 2,000 (6,358,000) (6,356,000)
Exercise of common stock options............ 712,259 180,000 -- 180,000
Accretion of mandatorily redeemable
convertible preferred stock............... -- -- (10,000) (10,000)
Net loss.................................... -- -- (6,252,000) (6,252,000)
--------- -------- ------------ ------------
Balance at December 31, 1997................ 5,234,759 182,000 (12,620,000) (12,438,000)
Exercise of common stock options
(unaudited)............................... 97,327 36,000 -- 36,000
Accretion of mandatorily redeemable
convertible preferred stock (unaudited)... -- -- (3,000) (3,000)
Net loss (unaudited)........................ -- -- (2,434,000) (2,434,000)
--------- -------- ------------ ------------
Balance at March 31, 1998 (unaudited)....... 5,332,086 $218,000 $(15,057,000) $(14,839,000)
========= ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 81
NETDYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 30, 1995
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (914,000) $(5,438,000) $(6,252,000) $(1,712,000) $(2,434,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation......................... 28,000 183,000 525,000 75,000 204,000
Changes in assets and liabilities:
Accounts receivable................ (75,000) (1,138,000) (3,218,000) (382,000) 1,073,000
Prepaid expenses and other
assets.......................... (64,000) (16,000) (489,000) (124,000) (238,000)
Restricted cash.................... -- (334,000) (188,000) -- --
Accounts payable................... 68,000 304,000 321,000 132,000 (41,000)
Accrued liabilities................ 132,000 1,656,000 1,346,000 460,000 (372,000)
Deferred revenue................... 20,000 361,000 1,423,000 196,000 103,000
---------- ----------- ----------- ----------- -----------
Net cash used in operating
activities.................... (805,000) (4,422,000) (6,532,000) (1,355,000) (1,705,000)
---------- ----------- ----------- ----------- -----------
Cash flows used in investing activities:
Purchases of property and
equipment.......................... (280,000) (711,000) (1,613,000) (233,000) (252,000)
---------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of mandatorily
redeemable convertible preferred
stock, net........................... 1,836,000 5,051,000 8,497,000 -- --
Proceeds from issuance of common
stock................................ -- 2,000 180,000 84,000 36,000
Proceeds from issuance of notes payable
to a bank............................ 251,000 549,000 1,574,000 205,000 561,000
Repayment of notes payable to a bank.... -- (75,000) (725,000) (46,000) (97,000)
Net borrowings from line of credit...... -- 329,000 671,000 503,000 2,000,000
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.................... 2,087,000 5,856,000 10,197,000 746,000 2,500,000
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. 1,002,000 723,000 2,052,000 (842,000) 543,000
Cash and cash equivalents at beginning of
period.................................. -- 1,002,000 1,725,000 1,725,000 3,777,000
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................. $1,002,000 $ 1,725,000 $ 3,777,000 $ 883,000 $ 4,320,000
========== =========== =========== =========== ===========
Supplemental cash flow disclosure:
Cash paid for interest.................. $ 2,000 $ 56,000 $ 124,000 $ 28,000 $ 54,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 82
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
NetDynamics, Inc. (the "Company") was incorporated in California on May 30,
1995. The Company designs, develops and markets high-end enterprise network
application software. On June 30, 1998, the Company entered into an agreement to
merge with Sun Microsystems, Inc. ("Sun"), as discussed in Note 10.
The Company has funded its operating losses since inception through the
sale of equity securities and the issuance of debt. The Company's existing debt
agreements require compliance with certain covenants including financial ratios
and profitability levels. Management believes additional financing will be
required to enable the Company to continue operations through December 31, 1998
There can be no assurance that additional financing will be available at all or
that, if available, such financing will be on terms favorable to the Company.
The Company's ability to raise sufficient capital and comply with its debt
covenants could impact the Company's ability to continue as a going concern.
Concurrent with the agreement to merge with Sun, the Company entered into a
financing arrangement with Sun, as discussed in Note 10.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue recognition
The Company's revenues are derived from software license sales and support
and consulting services. Annual support services are charged separately from
software licenses.
License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied.
Annual support revenues consist of ongoing support and product updates and
are recognized ratably over the term of the related contract. Payments received
in advance of revenue recognition are recorded as deferred revenue. Training and
consulting service revenue is recognized as the services are performed.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of a specified term, which may
be perpetual. Customers can terminate the license at any time but do not have a
right of refund for the license fees. The Company can terminate the license
agreement only upon a material breach by the other party, provided that the
breach is not cured within a specified period.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition," which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance on
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition." In March 1998, the AICPA issued Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of Provision of SOP 97-2,
Software Revenue Recognition." SOP 98-4 defers, for one year, the application of
certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three months ended March 31, 1998.
F-7
<PAGE> 83
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of fiscal 1998, the Company adopted SOP 97-2. The
provisions of SOP 97-2 have been applied to transactions entered into beginning
January 1, 1998. SOP 97-2 generally requires revenue earned on software licenses
involving multiple elements to be allocated to each element based on the
relative fair values of the elements using vendor specific objective evidence of
such value. The revenue allocated to software licenses generally is recognized
upon delivery of the products. The revenue allocated to support is recognized
ratably over the term of the support and revenue allocated to service elements
is recognized as the services are performed. In connection with the adoption of
SOP 97-2, the Company analyzed all of the elements included in its
multiple-element arrangements and determined that the Company has sufficient
evidence to allocate revenue to the license and support components of certain of
its licenses.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No.14 and requires segment information to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments in quarterly and annual reports. SFAS No. 131 is effective
for annual reports for fiscal years beginning after December 15, 1997, and is
applicable to interim financial statements beginning with the second year of
application. The Company has not yet determined the effect, if any, of adoption
of this new standard on its financial statements.
Cash equivalents
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. Cash equivalents
consist primarily of certificates of deposits and money-market accounts and
United States treasury bills that are stated at cost, which approximates fair
value.
Restricted cash
Long term restricted cash consists of certificates of deposits for $522,000
pledged as collateral on the Company's Corporate office leases in the US and UK.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the estimated useful life of the asset.
Software development costs
Software development costs are classified as research and development and
are expensed as incurred. Statement of Financial Accounting Standards No. 86,
"Computer Software Costs", ("SFAS 86") requires the capitalization of certain
software development costs once technological feasibility is established. The
capitalized costs are then amortized on a straight-line basis over the estimated
product life, or based on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility, which the Company has defined as the establishment of
a working model, and the general availability 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.
F-8
<PAGE> 84
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant customers and concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company deposits substantially all of its cash in a
single financial institution. The Company's cash equivalents consist primarily
of money market accounts and U.S. government agency securities with maturities
of less than three months at date of purchase and are recorded at cost which
approximates market. The Company sells its products directly to corporate
end-users and through distributors and value added resellers. The Company
performs ongoing credit evaluations of its customers and to date has not
experienced any material losses. The Company generally does not require
collateral for its accounts receivable and maintains reserves for potential
credit losses.
Sales to four customers accounted for approximately 17%, 17%, 10% and 10%
of revenues for the period ended December 31, 1995. At December 31, 1996,
approximately 60% of trade accounts receivable represented amounts due from
eight customers. Sales to one of the Company's customers accounted for 12% of
revenues for the year ended December 31, 1996. At December 31, 1997,
approximately 43% of trade accounts receivable represented amounts due from
three customers. Sales to one of the Company's customers accounted for 10% of
revenues for the year ended December 31, 1997.
Income taxes
The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the book and tax bases of the
Company's assets and liabilities.
Foreign currency translation
The functional currency of the United Kingdom subsidiary is the local
currency. Assets and liabilities are translated at year-end exchange rates,
except for non-current assets and liabilities, which are translated at
historical rates. Revenues, costs and expenses are translated into United States
dollars at average rates for the periods. Gains and losses resulting from
translation are accumulated as a component of stockholders' equity. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during any of the
periods presented.
Net loss per share
Basic net loss per share is computed by dividing net loss available to
Common Shareholders, including the accretion of preferred stock redemption
value, by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is calculated using the weighted average
number of outstanding shares of Common Stock plus dilutive Common Stock
equivalents. For all periods presented, Common Stock equivalents, consisting of
Preferred Stock, unvested Common Stock subject to repurchase, Common Stock
options and warrants using the treasury stock method based on the average stock
price for the period, were antidilutive.
During 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998,
antidilutive Common Stock equivalents aggregating 5,724,557, 7,798,611,
8,533,860, 8,573,799 (unaudited) and 8,436,176 (unaudited) shares, respectively,
were excluded from the dilutive net loss per share calculations.
Comprehensive income (loss)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a company from
transactions, other events and circumstances excluding transactions resulting
from
F-9
<PAGE> 85
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments by owners and distributions to owners. The difference between net
loss and comprehensive loss for the Company for all periods presented is de
minimus.
Interim financial information
The accompanying financial statements as of March 31, 1998 and for the
three months ended March 31, 1997 and 1998 are unaudited. In the opinion of the
management, these interim statements have been prepared on the same basis as the
annual financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The financial and other data disclosed in these notes to
the financial statements for these periods are also unaudited. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future periods.
Fair value of financial instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, trade accounts receivable and accounts payable, the carrying
amounts approximate fair value due to the relatively short maturity of these
instruments. The carrying amount of the line of credit, term loan and restricted
cash approximates fair value based on rates available to the Company for similar
maturities.
Stock-based compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock-based compensation plans, as permitted by Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). SFAS 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity instrument and encourages, but does not
require, entities to adopt that method of accounting for their employee stock
compensation plans. The Company has adopted, as required, the disclosure
provisions of SFAS 123. The pro forma disclosures of the difference between
compensation cost included in net loss under APB 25 and the related cost
measured by the fair value method of SFAS 123 are presented in Note 8.
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.
F-10
<PAGE> 86
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Computer equipment and software...... $ 771,000 $1,879,000 $2,066,000
Furniture, fixtures and leasehold
improvements...................... 220,000 725,000 790,000
---------- ---------- ----------
991,000 2,604,000 2,856,000
Less accumulated depreciation........ (211,000) (736,000) (940,000)
---------- ---------- ----------
$ 780,000 $1,868,000 $1,916,000
========== ========== ==========
Accrued liabilities:
Accrued compensation................. $ 332,000 $ 633,000 $ 828,000
Accrued consulting fees.............. 224,000 79,000 155,000
Other accrued expenses............... 1,232,000 2,422,000 1,779,000
---------- ---------- ----------
$1,788,000 $3,134,000 $2,762,000
========== ========== ==========
</TABLE>
NOTE 3 -- INCOME TAXES:
No provision for federal or state income taxes has been recorded for any
periods presented, respectively, due to net operating losses through December
1997. At December 31, 1997, the Company has net operating loss carryforwards and
research and development credit carryforwards of approximately $10,500,000 and
$750,000, respectively. The net operating loss carryforwards are available to
reduce future taxable income and begin to expire in the years 2011 and 2003 for
federal and state tax purposes, respectively. The research and development
credit carryforwards will begin to expire in the year 2000.
Under the Tax Reform Act of 1986, certain substantial changes in the
Company's ownership may result in an annual limitation on the amount of net
operating loss carryforwards which can be utilized. Such a change in ownership
occurred in June 1997, however, the cumulative losses incurred as of that date
are less than the amount of the annual limitation. Accordingly, there is no
effect on the Company's ability to utilize these losses.
Deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards......................... $ 2,100 $ 4,300
Research and development credit carryforwards............ 100 300
Reserves and allowances.................................. 100 400
------- -------
Total deferred tax assets...................... 2,300 5,000
Deferred tax asset valuation allowance................... (2,300) (5,000)
------- -------
$ -- $ --
======= =======
</TABLE>
The Company has incurred losses from inception though 1997. Management
believes that, based on the history of such losses and other factors, the weight
of available evidence indicates that it is more likely than not that the Company
will not be able to realize its deferred tax assets and thus a full valuation
reserve has been recorded at December 31, 1996 and 1997.
F-11
<PAGE> 87
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- DEBT:
Line of Credit
In March 1997, the Company entered into a line of credit agreement which
provided for borrowings up to the lesser of $2,000,000 or an amount equal to 80%
of "Eligible Accounts Receivable," as defined by the line of credit agreement.
The line of credit bore interest at the bank's prime rate plus 0.25% (8.75% at
December 31, 1997). Amounts borrowed under the line of credit together with all
accrued interest were due at March 9, 1998. The line of credit required the
Company to meet certain financial covenants including minimum quick and
liquidity ratios and profitability requirements. As of December 31, 1997, the
Company was not in compliance with certain of the covenants. In March 1998, the
Company entered into a new line of credit agreement (see Note 10).
Notes Payable
At December 31, 1996, the Company had $725,000 outstanding under two note
payable agreements with a bank. The first note bore interest at 10.6% and was
payable in equal monthly installments through December 1998. The second note
bore interest at the bank's prime rate plus 1.5% and was payable in equal
monthly installments through December 1999.
In connection with the first note, the Company granted the bank 15,000
warrants to purchase shares of Series A Mandatorily Redeemable Convertible
Preferred Stock ("Series A") for $1.25 per share. The warrants expire in 2000
and had a nominal value at the grant date.
Term Loan
In March 1997, the Company entered into a term loan with another bank and
with funds borrowed under this term loan, the Company paid off the two
outstanding notes payable. Additionally, the term loan provided for two
six-month draw periods during which the Company could finance $1,800,000 of
certain capital expenditures. The term loan bears interest at the bank's prime
rate plus 0.5% (9.00% at December 31, 1997). During the two six month draw
periods, only interest was payable. Following each draw period, the outstanding
balance, with interest, is due in 36 equal monthly installments. The term loan
is secured by all of the Company's tangible assets and requires the Company to
meet certain financial covenants including minimum quick and liquidity ratios
and profitability requirements. As of December 31, 1997, the Company was not in
compliance with certain of the covenants. In March 1998, the Company entered
into an additional term loan (see Note 10).
Future minimum payments under the term loan as of December 31, 1997 are as
follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<S> <C>
1998...................................................... $ 515,000
1999...................................................... 557,000
2000...................................................... 460,000
2001...................................................... 42,000
----------
$1,574,000
==========
</TABLE>
Interest expense pursuant to the debt agreements for the period from
inception through December 31, 1995 and for the years ended December 31, 1996
and 1997 totaled $2,000, $56,000 and $124,000, respectively.
F-12
<PAGE> 88
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- COMMON STOCK:
In June 1995, the Company issued 4,500,000 shares of common stock to its
founders upon formation of the Company. Under the terms of the stock purchase
agreements, the Company has the right to repurchase up to 3,543,750 shares of
such stock at the original issue price upon the founders' termination. The
repurchase rights expire ratably over periods varying from 36 months to 42
months with 637,500 shares of common stock being subject to the repurchase right
at December 31, 1997.
NOTE 6 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The following table sets forth the activity with respect to the Company's
Mandatorily Redeemable Convertible Preferred Stock:
<TABLE>
<CAPTION>
MANDATORILY
MANDATORILY REDEEMABLE REDEEMABLE MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK STOCK
SERIES A SERIES B SERIES C
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
--------- ---------- -------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A for cash, net of
issuance costs of $27,000.............. 1,891,371 $1,836,000 -- $ -- -- $ -- $ 1,836,000
--------- ---------- ------- ---------- --------- ---------- -----------
Balance at December 31, 1995............. 1,891,371 1,836,000 -- -- -- -- 1,836,000
Issuance of Series B for cash, net of
issuance costs of $31,000.............. -- -- 940,206 5,051,000 -- -- 5,051,000
Accretion of mandatorily redeemable
convertible preferred stock............ -- 3,000 -- 3,000 -- -- 6,000
--------- ---------- ------- ---------- --------- ---------- -----------
Balance at December 31, 1996............. 1,891,371 1,839,000 940,206 5,054,000 -- -- 6,893,000
Issuance of Series C for cash, net of
issuance costs of $43,000.............. -- -- -- -- 1,220,000 8,497,000 8,497,000
Accretion of mandatorily redeemable
convertible preferred stock............ -- 3,000 -- 4,000 -- 3,000 10,000
--------- ---------- ------- ---------- --------- ---------- -----------
Balance at December 31, 1997............. 1,891,371 1,842,000 940,206 5,058,000 1,220,000 8,500,000 15,400,000
Accretion of mandatorily redeemable
convertible preferred stock
(unaudited)............................ -- 1,000 -- 1,000 -- 1,000 3,000
--------- ---------- ------- ---------- --------- ---------- -----------
Balance at March 31, 1998 (unaudited).... 1,891,371 $1,843,000 940,206 $5,059,000 1,220,000 $8,501,000 $15,403,000
========= ========== ======= ========== ========= ========== ===========
</TABLE>
At December 31, 1997, the Company has authorized 4,066,577 shares of
Preferred Stock, 1,906,371 of which has been designated Series A, 940,206 has
been designated Series B Mandatorily Redeemable Convertible Preferred Stock
("Series B"), and 1,220,000 has been designated Series C Mandatorily Redeemable
Convertible Preferred Stock ("Series C").
At December 31, 1997, the Company had reserved approximately 5,467,366
shares of its common stock for future issuance upon conversion of outstanding
mandatorily redeemable preferred stock.
The holders of Series A, Series B and Series C, have certain rights as
follows:
Voting
Each share of Series A and Series B has voting rights equal to 1.5 shares
of common stock on an "as-if" converted basis. Each share of Series C has voting
rights equal to one share of common stock, on an "as-if" converted basis.
Liquidation
In the event of any liquidation or winding up of the Company (which
includes an acquisition or merger of the Company in which a change in
controlling ownership occurs), the holders of Series A, Series B and Series C
are entitled to receive a liquidation preference of $0.985, $5.4042, and $7.00
per share, respectively, plus all declared but unpaid dividends. Any amounts
remaining after such distribution will be distributed among the holders of
Series A, Series B and common stock on an as-converted and pro-rata basis.
Provided, however, that the holders of Series A and Series B will be entitled to
total distributions of no more than $3.94
F-13
<PAGE> 89
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and $21.6168 per share, respectively. Thereafter, all remaining amounts will be
distributed to the holders of the common stock on a pro rata basis.
Dividends
Holders of the Series A, Series B and Series C are entitled to receive
annual dividends of $0.05, $0.54 and $0.70 per share, respectively, when and if
declared by the Company's Board of Directors. Such dividends are not cumulative.
No dividends have been declared from inception through December 31, 1997.
Conversion
Each share of Series A and Series B is convertible at any time into 1.5
shares of common stock and Series C is convertible into one share of common
stock at any time, subject to adjustment for antidilution. Each share of Series
A and Series B will be automatically converted into 1.5 shares of common stock
and Series C will be converted into one share of common stock at the closing of
an initial public offering with net proceeds of more than $15,000,000 and a
price per share of not less than $12.00. The Company has reserved sufficient
shares of common stock for issuance upon conversion of the Series A, Series B
and Series C.
Redemption
Holders of two-thirds of Series A, Series B and Series C (voting together
as a single class) may require the Company to redeem the Series A, Series B and
Series C in three equal annual installments beginning in June 2004. The
redemption price for Series A, Series B and Series C will be $0.985, $5.4042 and
$7.00 per share, respectively, plus any declared but unpaid dividends.
NOTE 7 -- COMMITMENTS:
Operating leases
The Company leases its facilities under noncancelable operating lease
agreements. In August 1996, the Company entered into a sublease agreement for a
portion of its primary office facility with a third party which was terminated
in July 1997.
Future minimum commitments under the Company's noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
YEAR ENDING DECEMBER 31, ----------
<S> <C>
1998................................................... $ 693,000
1999................................................... 620,000
2000................................................... 590,000
2001................................................... 358,000
2002................................................... 60,000
----------
$2,321,000
==========
</TABLE>
Rent expense for the period ended 1995 and years ended December 31, 1996,
1997 were $24,000, $142,000, and $701,000, respectively. Rent expense for 1996
and 1997 includes reductions of $69,000 and $98,000, respectively, received
under the sublease agreement.
NOTE 8 -- EMPLOYEE STOCK OPTION PLAN:
In February 1996, the Company adopted a stock option plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the Plan may be either incentive stock
options ("ISO") or nonqualified stock options ("NSO"). Incentive stock options
F-14
<PAGE> 90
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
may be granted only to employees (including officers and directors who are also
employees) of the Company. Nonqualified stock options may be granted to
employees and consultants of the Company. At December 31, 1997, a total of
3,510,134 shares of common stock have been reserved for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO shall not be less than 100% of the estimated fair value
of the shares on the date of grant and (ii) the exercise price of an ISO granted
to a 10% or greater shareholder shall not be less than 110% of the estimated
fair value of the shares on the date of grant and are for periods not to exceed
five years. Options become exercisable at such times and under such conditions
as determined by the Board of Directors. The options generally vest over four
years. The Plan provides that certain options may be exercised prior to the
options becoming vested. If the optionee's employment is terminated for any
reason, the Company has the right to repurchase any unvested shares at their
original purchase price.
Plan activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT OPTIONS PRICE
---------- --------- --------
<S> <C> <C> <C>
Shares authorized......................... 2,475,000 -- $ --
Options granted........................... (1,920,370) 1,920,370 0.19
Options canceled.......................... 124,125 (124,125) 0.10
Options exercised......................... -- (22,500) 0.07
---------- ---------
Balance at December 31, 1996.............. 678,755 1,773,745 0.20
Shares authorized......................... 1,035,134 -- --
Options granted........................... (1,408,668) 1,408,668 2.78
Options canceled.......................... 331,528 (331,528) 0.62
Options exercised......................... -- (712,259) 0.24
---------- ---------
Balance at December 31, 1997.............. 636,749 2,138,626 1.70
Shares authorized (unaudited)............. -- -- --
Options granted (unaudited)............... (414,150) 414,150 5.50
Options canceled (unaudited).............. 192,212 (192,212) 1.30
Options exercised (unaudited)............. -- (97,327) .47
---------- ---------
Balance at March 31, 1998 (unaudited)..... 414,811 2,263,237 2.60
========== =========
</TABLE>
At December 31, 1997, options to purchase 540,917 shares were vested and
exercisable, and 299,314 shares were subject to repurchase. At March 31, 1998,
options to purchase 514,475 (unaudited) shares were vested and exercisable, and
198,832 (unaudited) shares were subject to repurchase.
F-15
<PAGE> 91
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about employee and consultant
stock options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------- ------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1997 LIFE 1997
--------------- -------------- ----------- ------------
<S> <C> <C> <C>
$ 0.07 601,163 8.26 294,624
0.36 562,450 8.94 135,252
0.67 52,125 8.17 52,125
1.00 200 9.25 100
1.20 175,125 9.33 3,125
1.80 126,225 9.43 35,898
3.50 56,688 9.50 4,688
5.00 334,650 9.75 15,105
5.50 230,000 9.90 --
--------- -------
2,138,626 9.03 540,917
========= =======
</TABLE>
Pro forma disclosures
Had compensation cost for the Plan been determined based on the fair value
of each stock option grant on its grant date, as prescribed in SFAS 123, the
Company's net loss and net loss per common share would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 1995)
TO YEARS ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net loss attributable to common
stock:
As reported....................... $(914,000) $(5,444,000) $(6,262,000)
Pro forma......................... (914,000) (5,452,000) (6,343,000)
Net loss per common share -- as
reported....................... (.73) (2.54) (1.79)
Net loss per common share -- pro
forma.......................... (.73) (2.55) (1.81)
</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 respective years:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected life (in years).................................... 4 4
Risk-free interest rate..................................... 6.04% 6.16%
Volatility.................................................. 0% 0%
Dividend yield.............................................. 0% 0%
</TABLE>
The weighted average fair value of options granted was $0.04 and $0.60 per
share for the years ended December 31, 1996 and 1997, respectively.
F-16
<PAGE> 92
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of the pro forma effects on
option grants on reported net income for future years.
NOTE 9 -- EXPORT SALES:
The Company's areas of operation outside of the United States principally
include Europe and the Pacific Rim. Revenue generated from export sales was less
than 10% of total revenues in 1995 and 1996. In 1997 and the quarter ending
March 31, 1998, the Company had revenues from export sales of $1,450,000 and
$764,000, respectively, principally from Europe and the Pacific Rim.
NOTE 10 -- SUBSEQUENT EVENTS:
Financing Agreement
On March 25, 1998, the Company entered into a financing agreement (the
"Agreement") with its existing bank which replaced its line of credit facility
executed in March 1997 and provides for an additional term loan.
Line of credit -- The line of credit facility provides for borrowings of up
to $5,000,000 through June 30, 1998, and thereafter through its March 24, 1999
maturity date provides for borrowings up to the lesser of $5,000,000 or an
amount equal to 80% of "Eligible Accounts Receivable" as defined by the
Agreement. The line of credit bears interest at the bank's prime rate plus 0.25%
(8.75% at March 25, 1998). The outstanding principal balance of the line of
credit at March 31, 1998 was $3,000,000.
Term loan -- The term loan provides two six month draw periods during which
the Company can finance an additional $2,200,000 of capital expenditures. The
term loan bears interest at the bank's prime rate plus 0.5% (9.0% at March 25,
1998). During the two six month draw periods, concluding in September 1998 and
March 1999, respectively, only interest is payable. Following each draw period,
the outstanding balance, with interest, is due in 36 equal monthly installments.
The outstanding principal balance of the term loans at March 31, 1998 was
$2,038,000.
In connection with the Agreement, the Company issued the bank warrants to
purchase 3,000 shares of Series C. The warrants have an exercise price of $7.00
and expire in March 2003. The warrants had a nominal value at the grant date.
The line of credit facility and term loan requires the Company to meet
certain financial covenants including quick, liquidity, debt service and, debt
to tangible net worth ratios, and tangible net worth and profitability
requirements. The Agreement provides for certain negative covenants, including
mergers exceeding a value of $500,000. At March 31, 1998, the Company was in
compliance with the covenants. On July 6, 1998, the bank amended the Agreement
to modify certain covenant requirements, which would have been in effect as of
June 30, 1998, to become effective August 31, 1998.
Merger with Sun Microsystems, Inc.
On June 30, 1998, the Company entered into an Agreement and Plan of
Reorganization ("Merger Agreement") with Sun. Upon the effectiveness of the
Merger Agreement, the Company's shareholders will exchange all of their shares
of common stock and preferred stock for shares of common stock of Sun in a
business combination intended to be accounted for as a purchase. Options under
the Plan will be assumed by Sun and will become options to acquire Sun common
stock.
Concurrent with the execution of the Merger Agreement, the Company executed
a promissory note (the "Note") evidencing a loan of $10.0 million by Sun to the
Company. The Note bears interest, payable upon default or maturity of the Note,
at a rate of 10% per annum. The principal amount of the Note, together with all
accrued interest, shall be due and payable 180 days after certain events of
termination under the Merger Agreement. In the event of such a termination of
the Merger Agreement, the Company may within 180 days after the date of such
termination, either (i) pay the unpaid principal and accrued interest due and
owing on
F-17
<PAGE> 93
NETDYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Note or (ii) convert such unpaid principal and accrued interest into stock
of the Company. However, upon the occurrence of certain events of default,
including termination of the Merger Agreement as a result of the Company's
failure to deliver to Sun proxies representing a majority of both the Company's
common stock and the Company's preferred stock upon the earlier to occur of (i)
ten days after the mailing of the Proxy Statement/Prospectus to shareholders of
the Company and (ii) twenty days after the effectiveness of the registration
statement, the unpaid principal and accrued interest then owing on the Note
shall be immediately due and payable. The Note is convertible into shares of the
series of the Company's capital stock which are the most favorable of: (i) that
series of preferred stock of the Company outstanding on the date of such
conversion having the most favorable terms with respect to dividends,
liquidation preference, anti-dilution protection, conversion ratio, voting
rights, redemption and all other rights, privileges and preferences or (ii) such
other capital stock being offered to investors by the Company on the date of
such conversion. The number of shares into which the Note shall convert is
determined by dividing (a) the unpaid aggregate principal amount plus accrued
interest by (b) the quotient of (x) $160.0 million and (y) the total number of
outstanding shares of capital stock of the Company, treating all preferred
stock, options, warrants and other rights on an as-converted, fully-diluted
basis.
F-18
<PAGE> 94
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SUN MICROSYSTEMS, INC.,
APOLLO ACQUISITION CORP.,
NETDYNAMICS, INC.
AND
THE SHAREHOLDERS NAMED HEREIN
DATED AS OF JUNE 30, 1998
<PAGE> 95
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I -- THE MERGER.................................................. A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time.............................................. A-1
1.3 Effect of the Merger........................................ A-2
1.4 Articles of Incorporation; Bylaws........................... A-2
1.5 Directors and Officers...................................... A-2
1.6 Effect of Merger on the Capital Stock of the Constituent A-2
Corporations................................................
1.7 Dissenting Shares........................................... A-6
1.8 Surrender of Certificates................................... A-6
1.9 No Further Ownership Rights in Company Capital Stock........ A-7
1.10 Lost, Stolen or Destroyed Certificates...................... A-8
1.11 Taking of Necessary Action; Further Action.................. A-8
1.12 Tax Consequences............................................ A-8
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE A-8
FOUNDERS....................................................
2.1 Organization of the Company................................. A-8
2.2 Subsidiaries................................................ A-8
2.3 Company Capital Structure................................... A-9
2.4 Authority................................................... A-10
2.5 No Conflict................................................. A-10
2.6 Consents.................................................... A-10
2.7 Company Financial Statements................................ A-10
2.8 No Undisclosed Liabilities.................................. A-11
2.9 No Changes.................................................. A-11
2.10 Tax Matters................................................. A-12
2.11 Restrictions on Business Activities......................... A-14
2.12 Title of Properties; Absence of Liens and Encumbrances; A-14
Condition of Equipment......................................
2.13 Intellectual Property....................................... A-15
2.14 Agreements, Contracts and Commitments....................... A-18
2.15 Interested Party Transactions............................... A-19
2.16 Governmental Authorization.................................. A-19
2.17 Litigation.................................................. A-19
2.18 Accounts Receivable; Inventory.............................. A-19
2.19 Minute Books................................................ A-19
2.20 Environmental Matters....................................... A-20
2.21 Brokers' and Finders' Fees; Third Party Expenses............ A-20
2.22 Employee Benefit Plans and Compensation..................... A-21
2.23 Insurance................................................... A-23
2.24 Compliance with Laws........................................ A-23
2.25 Warranties; Indemnities..................................... A-23
2.26 Complete Copies of Materials................................ A-23
2.27 Statements; Proxy Statement................................. A-23
2.28 Representations Complete.................................... A-24
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB............ A-24
III --
3.1 Organization, Standing and Power............................ A-24
3.2 Authority................................................... A-24
3.3 No Conflict................................................. A-24
3.4 Consents.................................................... A-25
3.5 Capital Structure........................................... A-25
3.6 SEC Documents; Parent Financial Statements.................. A-25
3.7 Litigation.................................................. A-26
3.8 Brokers' and Finders' Fees.................................. A-26
3.9 Statements; Proxy Statement................................. A-26
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME......................... A-26
4.1 Conduct of Business of the Company.......................... A-26
4.2 No Solicitation............................................. A-28
ARTICLE V -- ADDITIONAL AGREEMENTS....................................... A-29
5.1 Registration Statement; Shareholder Approval................ A-29
5.2 Access to Information....................................... A-29
5.3 Confidentiality............................................. A-30
5.4 Expenses.................................................... A-30
5.5 Public Disclosure........................................... A-30
5.6 Consents.................................................... A-30
5.7 FIRPTA Compliance........................................... A-30
5.8 Reasonable Efforts.......................................... A-30
5.9 Notification of Certain Matters; Financial Statements....... A-31
5.10 Additional Documents and Further Assurances................. A-31
5.11 Employee Plans.............................................. A-31
5.12 Employee Compensation....................................... A-31
5.13 Rule 145 Affiliate Agreements............................... A-32
5.14 No Actions Inconsistent With Tax-Free Reorganization........ A-32
5.15 Nasdaq Listing.............................................. A-32
5.16 Form S-8.................................................... A-32
5.17 Termination of Obligations.................................. A-32
5.18 Directors' and Officers' Indemnification.................... A-32
5.19 Restricted Stock Purchase Agreement......................... A-33
ARTICLE VI -- CONDITIONS TO THE MERGER.................................... A-33
6.1 Conditions to Obligations of Each Party to Effect the A-33
Merger......................................................
6.2 Conditions to Obligations of Company and the Founders....... A-33
6.3 Conditions to the Obligations of Parent and Sub............. A-34
ARTICLE VII-- SURVIVAL OF REPRESENTATIONS AND WARRANTIES; A-35
INDEMNIFICATION.............................................
7.1 Survival of Representations and Warranties.................. A-35
7.2 Indemnification............................................. A-35
7.3 Escrow Arrangements......................................... A-36
7.4 Maximum Payments; Remedy.................................... A-41
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE TERMINATION, AMENDMENT AND WAIVER........................... A-41
VIII --
8.1 Termination................................................. A-41
8.2 Effect of Termination....................................... A-42
8.3 Amendment................................................... A-42
8.4 Extension; Waiver........................................... A-42
ARTICLE IX -- GENERAL PROVISIONS.......................................... A-43
9.1 Notices..................................................... A-43
9.2 Interpretation.............................................. A-44
9.3 Counterparts................................................ A-44
9.4 Entire Agreement; Assignment................................ A-44
9.5 Severability................................................ A-44
9.6 Other Remedies.............................................. A-44
9.7 Governing Law............................................... A-44
9.8 Rules of Construction....................................... A-44
9.9 Attorneys Fees.............................................. A-44
</TABLE>
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<PAGE> 98
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of June 30, 1998 among Sun Microsystems, Inc., a Delaware
corporation ("Parent"), Apollo Acquisition Corp., a California corporation and a
wholly-owned subsidiary of Parent ("Sub"), NetDynamics, Inc., a California
corporation (the "Company"), Ofer Ben-Shachar, Zah Rinat, A. Brooke Seawell, and
Doron Sherman (collectively the "Founders") and, as to Article VII hereof, John
Hummer, as Securityholder Agent, and U.S. Bank Trust, N.A., as Escrow Agent.
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe
it is in the best interests of each company and their respective stockholders
that Parent acquire the Company through the statutory merger of Sub with and
into the Company (the "Merger") and, in furtherance thereof, have approved the
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding securities of the Company shall be converted into the right to
receive Parent Common Stock (as defined herein). Parent will assume all
outstanding stock options of the Company, and all outstanding warrants of the
Company that are not exercised on or prior to the Closing Date shall be
terminated.
C. The Company and the Founders, on the one hand, and Parent and Sub, on
the other hand, desire to make certain representations, warranties, covenants
and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
E. Concurrent with the execution of this Agreement, as a material
inducement to Parent and Sub to enter into this Agreement, the Founders as well
as USVP Entrepreneur Partners II, L.P., U.S. Venture Partners IV, L.P., Second
Ventures Limited Partnership and 2180 Associates Fund are entering into Voting
Agreements in the form of Exhibit A hereto with Parent (the "Voting
Agreements"), and the Founders and Key Employees (as defined in Section 1.6(a))
are entering into agreements not to compete with Parent (the "Noncompetition
Agreements") in the form of Exhibit D hereto.
F. Concurrent with the execution of this Agreement, as a material
inducement to the Company to enter into this Agreement, Parent shall extend to
the Company a loan of $10,000,000 and the Company shall execute a Convertible
Promissory Note (the "Note"), dated as of the date of such Note, in the form of
Exhibit G hereto.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California Corporations Code ("California Law"),
Sub shall be merged with and into the Company, the separate corporate existence
of Sub shall cease and the Company shall continue as the surviving corporation
and as a wholly-owned subsidiary of Parent. The surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill
Road, Palo Alto, California, unless another place
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or time is agreed to in writing by Parent and the Company. The date upon which
the Closing actually occurs is herein referred to as the "Closing Date." On the
Closing Date, the parties hereto shall cause the Merger to be consummated by
filing an Agreement of Merger (or like instrument) in the form attached hereto
as Exhibit B with the Secretary of State of the State of California (the "Merger
Agreement"), in accordance with the applicable provisions of California Law (the
time of acceptance by the Secretary of State of the State of California of such
filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Articles of Incorporation of Sub shall be the
Articles of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Articles of Incorporation; provided,
however, that Section I of the Articles of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the
corporation is NetDynamics, Inc."
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter
amended.
1.5 Directors and Officers. The directors of the Surviving Corporation
immediately after the Effective Time shall be the directors of Sub immediately
prior to the Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of California Law and
the Articles of Incorporation and Bylaws of the Surviving Corporation until
their successors are duly qualified and elected. The officers of the Surviving
Corporation immediately after the Effective Time shall be the officers of Sub
immediately prior to the Effective Time, each to hold office in accordance with
the provisions of the Bylaws of the Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
(a) Certain Definitions. For all purposes of this Agreement, the
following terms shall have the following meanings:
"Company Capital Stock" shall mean shares of Company Common Stock,
Company Series A Preferred, Company Series B Preferred, Company Series C
Preferred and shares of any other capital stock of the Company.
"Company Common Stock" shall mean shares of common stock of the
Company.
"Company Preferred Stock" shall mean, collectively, shares of
Company Series A Preferred, Company Series B Preferred and Company
Series C Preferred.
"Company Series A Preferred" shall mean shares of Series A
Preferred Stock of the Company.
"Company Series B Preferred" shall mean shares of Series B
Preferred Stock of the Company.
"Company Series C Preferred" shall mean shares of Series C
Preferred Stock of the Company.
"Estimated Third Party Expenses" shall mean Third Party Expenses
(as defined in Section 5.4) of the Company on the Closing Date as
estimated by the Company and the Founders in good faith and based on
reasonable assumptions.
"Exchange Ratio" shall mean a number equal to the quotient obtained
by dividing (i) the Common Participating Consideration (as defined
below) by (ii) the Total Outstanding Shares.
"GAAP" shall mean U.S. generally accepted accounting principles.
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"Key Employees" shall mean those employees of the Company
identified as such in Section 1.6(a) of the Disclosure Schedule.
"Knowledge" shall mean what would be within the actual knowledge of
a prudent person; provided, however, that Knowledge with respect to the
Company shall mean the actual knowledge of the Company's Chief Executive
Officer, Chief Financial Officer and any Vice-President.
"Merger Shares" shall mean that number of shares of Parent Common
Stock equal to the quotient obtained by dividing the Total Consideration
by the Trading Price.
"Parent Common Stock" shall mean shares of the common stock, par
value $.00067, of Parent.
"SEC" shall mean the Securities and Exchange Commission.
"Shareholder" shall mean each holder of any Company Capital Stock
immediately prior to the Effective Time.
"Total Consideration" shall mean an amount equal to $160,000,000
minus the amount by which Estimated Third Party Expenses exceed
$2,500,000.
"Total Outstanding Shares" shall mean the aggregate number of
shares of Company Common Stock outstanding immediately prior to the
Effective Time plus the aggregate number of shares of Company Common
Stock issuable, with or without the passage of time or satisfaction of
other conditions, upon exercise or conversion of all options, warrants
and other rights (other than the Company Preferred Stock) to acquire or
receive shares of Company Common Stock outstanding immediately prior to
the Effective Time.
"Total Participating Shares" shall mean the number equal to the
Total Outstanding Shares plus the total number of shares of Company
Common Stock issuable upon conversion of the shares of Company Series A
Preferred and Company Series B Preferred issued and outstanding
immediately prior to the Effective Time pursuant to the Articles of
Incorporation of the Company as then in effect minus the total number of
Section 1.6(b)(ii)(C) Shares (as defined below) on an as converted basis
into Company Common Stock.
"Trading Price" shall mean the average closing sales price of the
Parent Common Stock as reported on the Nasdaq National Market for the
ten (10) consecutive trading days ending three (3) business days prior
to the Closing Date.
(b) Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Sub, the Company or the
holders of any shares of the Company Capital Stock, each share of Company
Common Stock, Company Series A Preferred, Company Series B Preferred and
Company Series C Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Article
1.7) will be canceled and extinguished and be converted automatically into
the right to receive, upon surrender of the certificate representing such
share of Company Common Stock, Company Series A Preferred, Company Series B
Preferred or Company Series C Preferred and upon the terms and subject to
conditions set forth below and throughout this Agreement, including,
without limitation, Sections 1.6(e) and (f) hereof and the escrow
provisions set forth in Article VII and/or described in Section 1.8(b)
hereof, as follows:
(i) Preferred Stock Consideration. Prior and in preference to any
delivery of Parent Common Stock to holders of Company Common Stock, the
holders of Company Series A Preferred, Company Series B Preferred and
Company Series C Preferred will be entitled to receive the following;
provided that, if the Total Consideration is insufficient to permit the
receipt of such Parent Common Stock, then holders of Company Series A
Preferred, Company Series B Preferred and Company Series C Preferred
will be entitled to their pro rata share of the Parent Common Stock
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available in proportion to the respective amounts which would be
received by them if the respective amounts were paid in full:
(A) Each share of Company Series C Preferred issued and
outstanding immediately prior to the Effective Time, shall be
entitled to receive that number of shares of Parent Common Stock
equal to $7.00 divided by the Trading Price. Such number ($7.00
divided by the Trading Price) multiplied by the number of shares of
Company Series C Preferred issued and outstanding immediately prior
to the Effective Time is herein referred to as the "Series C
Consideration".
(B) Each share of Company Series B Preferred issued and
outstanding immediately prior to the Effective Time, shall be
entitled to receive that number of Shares of Parent Common Stock
equal to $5.4042 divided by the Trading Price. Such number ($5.4042
divided by the Trading Price) multiplied by the number of shares of
Company Series B Preferred issued and outstanding immediately prior
to the Effective Time is herein referred to as the "Series B
Consideration".
(C) Each share of Company Series A Preferred issued and
outstanding immediately prior to the Effective Time, shall be
entitled to receive that number of Shares of Parent Common Stock
equal to $0.985 divided by the Trading Price. Such number ($0.985
divided by the Trading Price) multiplied by the number of shares of
Company Series A Preferred issued and outstanding immediately prior
to the Effective Time is herein referred to as "Series A
Consideration," and collectively with the Series B Consideration and
the Series C Consideration, the "Preferred Stock Consideration."
(ii) Participating Consideration. After payment of amounts pursuant
to Section 1.6(b)(i), the remaining shares of Parent Common Stock shall
be distributed as follows:
(A) Each holder of shares of Company Common Stock, issued and
outstanding immediately prior to the Effective Time, shall be
entitled to receive the number of shares of Parent Common Stock equal
to (x) the Merger Shares minus the Preferred Stock Consideration
minus the Section 1.6(b)(ii)(C) Consideration multiplied by (y) a
fraction, the numerator of which shall be the number of shares of
Company Common Stock held by such holder immediately prior to the
Effective Time, and the denominator of which shall be the Total
Participating Shares, rounded to the nearest whole number. Such
number of shares of Parent Common Stock per share of Company Common
Stock multiplied by the Total Outstanding Shares is herein referred
to as the "Common Participating Consideration".
(B) Subject to the limitations in Section 1.6(b)(ii)(C), each
holder of shares of Company Series A Preferred and Company Series B
Preferred, issued and outstanding immediately prior to the Effective
Time shall be entitled to receive the number of shares of Parent
Common Stock equal to the Merger Shares minus the Preferred Stock
Consideration minus the Section 1.6(b)(ii)(C) Consideration
multiplied by a fraction, the numerator of which shall be the number
of shares of Company Common Stock issuable upon conversion of the
shares of Company Series A Preferred and Company Series B Preferred
held by such holder immediately prior to the Effective Time pursuant
to the Articles of Incorporation of the Company as then in effect,
and the denominator of which shall be the Total Participating Shares,
rounded to the nearest whole number.
(C) Notwithstanding anything to the contrary contained in
Section 1.6(b)(ii)(B), and in accordance with the Articles of
Incorporation of the Company, (1) under no circumstances shall the
holder of any share of Company Series A Preferred be entitled
pursuant to this Section 1.6(b)(ii) to receive a number of shares of
Parent Common Stock equal to a value in excess of $2.955 divided by
the Trading Price in respect of any such share, and (2) under no
circumstances shall the holder of any share of Company Series B
Preferred be entitled pursuant to this Section 1.6(b)(ii) to receive
a number of shares of Parent Common Stock equal to a
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value in excess of $16.2126 divided by the Trading Price in respect
of any such share. Any shares of Company Series A Preferred and
Company Series B Preferred held by a holder who, pursuant to this
Section 1.6(b)(ii)(C) becomes entitled to a lesser share of the Total
Consideration than such holder would otherwise be entitled are
referred to herein as "Section 1.6(b)(ii)(C) Shares", and the number
of the Merger Shares paid in respect of Section 1.6(b)(ii)(C) Shares
pursuant to Section 1.6(b)(ii), subject to this Section
1.6(b)(ii)(C), is referred to herein as the "Section 1.6(b)(ii)(C)
Consideration".
(c) Company Stock Options and Warrants to Purchase Company Capital
Stock.
(i) At the Effective Time, each outstanding option to purchase
shares of Company Common Stock issued pursuant to the Company's 1995
Stock Option Plan (the "Stock Option Plan") or otherwise (each a
"Company Option"), whether or not exercisable, will be assumed by
Parent. Each Company Option so assumed by Parent under this Agreement
will continue to have, and be subject to, the same terms and conditions
governing such Company Option immediately prior to the Effective Time
(including, without limitation, any vesting schedule or repurchase
rights), except that (i) each Company Option will be exercisable (or
will become exercisable in accordance with its terms) for that number of
whole shares of Parent Common Stock equal to the product of the number
of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied
by the Exchange Ratio, rounded down to the nearest whole number of
shares of Parent Common Stock, and (ii) the per share exercise price for
the shares of Parent Common Stock issuable upon exercise of such assumed
Company Option will be equal to the quotient determined by dividing the
exercise price per share of Company Common Stock at which such Company
Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. It is the
intention of the parties that Company Options assumed by Parent
following the Closing will, to the extent permitted by applicable law,
qualify as incentive stock options as defined in Section 422 of the
Code, to the extent Company Options qualified as incentive stock options
immediately prior to the Closing. After the Effective Time, Parent will
issue to each holder of an outstanding Company Option a notice
describing the foregoing assumption of such Company Options.
(ii) At the Effective Time, each outstanding warrant to purchase
Company Capital Stock (a "Company Warrant") shall not be assumed by
Parent and shall be canceled and extinguished.
(iii) Prior to the Effective Time, the Company shall take all
action necessary to effect the transactions anticipated by this Section
1.6(c) under all Company Option agreements and any outstanding Company
Warrants and any other plan or arrangement of the Company.
(d) Capital Stock of Sub. Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each stock certificate of Sub
evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(e) Withholding Taxes. Any number of shares of Parent Common Stock
issuable pursuant to Section 1.6(b) and any cash amount payable to any
Shareholder pursuant to Section 1.6(g) shall be subject to, and reduced by,
the amount of any state, federal and foreign withholding taxes incurred
(and not previously paid by or on behalf of such Shareholder or the
Company) in connection with the acquisition of Company Capital Stock upon
the exercise of Company Options or Company Warrants, any Company Capital
Stock that had its vesting accelerated or the payment of a bonus in the
form of Company Capital Stock, if any, by such Shareholder.
(f) Shareholder Loans. In the event that any Shareholder has
outstanding loans from the Company as of the Effective Time, the number of
shares of Parent Common Stock issuable pursuant to Section 1.6(b) and any
cash amounts payable to such person pursuant to Section 1.6(g) shall be
reduced
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by an amount equal to the outstanding principal plus accrued interest of
such Shareholder's loans as of the Effective Time.
(g) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof, each holder of shares of Company
Capital Stock (including Company Capital Stock issuable upon exercise of
outstanding Company Options or Company Warrants at the Effective Time) who
would otherwise be entitled to a fraction of a share of Parent Common Stock
(after aggregating all fractional shares of Parent Common Stock to be
received by such holder) shall be entitled to receive from Parent an amount
of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction and (ii) the Trading Price.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder who has exercised and
perfected appraisal rights for such shares in accordance with California
Law and who, as of the Effective Time, has not effectively withdrawn or
lost such appraisal rights ("Dissenting Shares"), shall not be converted
into or represent a right to receive the consideration for Company Capital
Stock pursuant to Section 1.6, but the holder thereof shall only be
entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of
the Effective Time and the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to
receive the consideration for Company Capital Stock as provided in Section
1.6, without interest thereon, upon surrender of the certificate
representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company prior to the Closing Date
pursuant to the applicable provisions of California Law and (ii) the
opportunity to participate in all negotiations and proceedings with respect
to such demands. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any such
demands or offer to settle or settle any such demands. To the extent that
Parent or the Company makes any payment or payments in respect of any
Dissenting Shares, Parent shall be entitled to recover under the terms of
Article VII hereof the aggregate amount by which such payment or payments
exceed the aggregate consideration that otherwise would have been payable
in respect of such shares.
1.8 Surrender of Certificates.
(a) Exchange Agent. The Corporate Secretary of Parent or an
institution selected by Parent and reasonably satisfactory to the Company
shall serve as exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Shares and Cash. Within ten (10) days after the
Effective Time, Parent shall make available to the Exchange Agent for
exchange in accordance with this Article I, Certificates representing the
shares of Parent Common Stock and the cash issuable pursuant to Section
1.6(g) and any dividends or distributions to which Shareholders may be
entitled pursuant to Section 1.8(d) in exchange for all of the outstanding
shares of Company Capital Stock provided, however, that on behalf of the
Shareholders, pursuant to Section 7.3 hereof, Parent shall deposit into an
escrow account ten percent (10%) of the Merger Shares issued in respect of
outstanding Company Capital Stock pursuant to Section 1.6(b) on behalf of
the Shareholders (the "Escrow Amount"). The portion of the Escrow Amount
contributed on behalf of each Shareholder shall be in proportion to the
aggregate number of Merger Shares which such Shareholder would otherwise be
entitled to receive in the Merger by virtue of ownership of outstanding
shares of Company Capital Stock.
(c) Exchange Procedures. Within ten (10) days after the Effective
Time, Parent shall cause the Exchange Agent to mail to each holder of
record (as of the Effective Time) of a certificate or certificates (the
"Certificates") which immediately prior to the Effective Time represented
outstanding shares of
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Company Capital Stock whose shares were converted into the right to receive
shares of Parent Common Stock pursuant to Section 1.6, cash in lieu of any
fractional shares pursuant to Section 1.6(g) and any dividends or other
distributions payable pursuant to Section 1.8(d), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk
of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Parent Common Stock, cash in lieu of
any fractional shares pursuant to Section 1.6(g) and any dividends or other
distributions payable pursuant to Section 1.8(d). Upon surrender of
Certificates for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holders of such Certificates shall be entitled to
receive in exchange therefor certificates representing the number of whole
shares of Parent Common Stock, payment in lieu of fractional shares which
such holders have the right to receive pursuant to Section 1.6(g) and any
dividends or distributions payable pursuant to Section 1.8(d), and the
Certificates so surrendered shall forthwith be canceled. Until so
surrendered, outstanding Certificates will be deemed from and after the
Effective Time, for all corporate purposes, subject to Section 1.8(d) as to
the payment of dividends, to evidence the ownership of the number of full
shares of Parent Common Stock into which such shares of Company Capital
Stock shall have been so converted and the right to receive an amount in
cash in lieu of the issuance of any fractional shares in accordance with
Section 1.6(g) and any dividends or distributions payable pursuant to
Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time
will be paid to the holders of any unsurrendered Certificates with respect
to the shares of Parent Common Stock represented thereby until the holders
of record of such Certificates shall surrender such Certificates. Subject
to applicable law, following surrender of any such Certificates, the
Exchange Agent shall deliver to the record holders thereof, without
interest, certificates representing whole shares of Parent Common Stock
issued in exchange therefor along with payment in lieu of fractional shares
pursuant to Section 1.6(g) hereof and the amount of any such dividends or
other distributions with a record date after the Effective Time payable
with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates for shares of Parent
Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
persons requesting such exchange will have paid to Parent or any agent
designated by it any transfer or other taxes required by reason of the
issuance of certificates for shares of Parent Common Stock in any name
other than that of the registered holder of the Certificates surrendered,
or established to the satisfaction of Parent or any agent designated by it
that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Company Capital Stock
for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Capital Stock. All
consideration paid in respect of the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof, shall be deemed to be full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
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1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock and other amounts, if any, as
may be required pursuant to Section 1.6(g) and Section 1.8(d); provided,
however, that Parent may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct against
any claim that may be made against Parent or the Exchange Agent with respect to
the certificates alleged to have been lost, stolen or destroyed.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company, Parent and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
1.12 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE FOUNDERS
The Company and each of the Founders hereby represents and warrants to
Parent and Sub, subject to such exceptions as are specifically disclosed in the
disclosure schedule (referencing the appropriate Section and paragraph numbers)
separately supplied by the Company and the Founders to Parent (the "Disclosure
Schedule"), that on the date hereof and as of the Effective Time as though made
at the Effective Time; provided that, the representations and warranties as of a
specified date will be true and correct as of such date, as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified could have a Company Material Adverse
Effect. For all purposes of this Agreement, the term "Company Material Adverse
Effect" means any change, event or effect that is materially adverse to the
business, assets (including intangible assets), condition (financial or
otherwise), or results of operations of the Company. The Company has delivered a
true and correct copy of its Articles of Incorporation and Bylaws, each as
amended to date, to Parent. Section 2.1 of the Disclosure Schedule lists the
directors and officers of the Company. The operations now being conducted by the
Company have not been conducted under any other name.
2.2 Subsidiaries. Except for NetDynamics Europe Limited, a corporation
organized under the laws of the United Kingdom and NetDynamics International,
Inc., a California corporation, (each a "Subsidiary"), the Company does not
have, and has never had, any subsidiaries or affiliated companies and does not
otherwise own, and has not otherwise owned, any shares in the capital of or any
interest in, or control, directly or indirectly, any corporation, partnership,
association, joint venture or other business entity. Section 2.2 of the
Disclosure Schedule sets forth the capitalization of each Subsidiary. The
Company is the record and beneficial owner of all the outstanding capital stock
of each Subsidiary. Section 2.2 of the Disclosure Schedule also sets forth the
names of the directors and officers of each Subsidiary, and each jurisdiction
where each Subsidiary is qualified to do business. The Company has provided
Parent complete and correct copies of each Subsidiary's Articles of
Incorporation, Bylaws or other applicable charter documents. There are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which either the Company or any Subsidiary is a party or by
which it is bound obligating any Subsidiary to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of any Subsidiary or obligating any Subsidiary to grant,
extend, accelerate the vesting of, change the price of,
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otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or other similar rights with respect to any
Subsidiary.
2.3 Company Capital Structure.
(a) The authorized Company Capital Stock consists of Thirteen Million,
Five Hundred Thousand (13,500,000) shares of authorized Company Common
Stock of which 5,445,771 shares are issued and outstanding as of the date
hereof, and Four Million, Sixty-Six Thousand, Five Hundred Seventy-Seven
(4,066,577) shares of Preferred Stock, of which 1,906,371 shares are
designated Series A Preferred Stock of which 1,891,371 are issued and
outstanding as of the date hereof, 940,206 shares are designated Series B
Preferred Stock, all of which are issued and outstanding as of the date
hereof, and 1,220,000 shares are designated Series C Preferred Stock, all
of which are issued and outstanding as of the date hereof. The Company
Capital Stock is held by the persons, with the domicile addresses and in
the amounts set forth in Section 2.3(a) of the Disclosure Schedule. All
outstanding shares of Company Capital Stock are duly authorized, validly
issued, fully paid and non-assessable and not subject to preemptive rights
created by statute, the Articles of Incorporation or Bylaws of the Company
or any agreement to which the Company is a party or by which it is bound
and have been issued in compliance with federal and state securities laws.
There are no declared or accrued unpaid dividends with respect to any
shares of the Company's Capital Stock. The Company has no other capital
stock authorized, issued or outstanding.
(b) Except for the Stock Option Plan, the Company has never adopted or
maintained any stock option plan or other plan providing for equity
compensation of any person. The Company has reserved 3,510,134 shares of
Company Common Stock for issuance to employees and consultants pursuant to
the Stock Option Plan, and 2,400,471 shares are subject to outstanding
unexercised options as of the date hereof. Except as set forth on Section
2.3(b) of the Disclosure Schedule, there is no outstanding Company Capital
Stock which is subject to vesting. Section 2.3(b) of the Disclosure
Schedule sets forth for each outstanding Company Option, the name and the
domicile address of the holder, the number of shares of Company Common
Stock subject to such Company Option, the exercise price of such Company
Option, the vesting schedule of such Company Option including the extent to
which such Company Option has vested to the date hereof and whether the
vesting of such Company Option will be accelerated by reason of the
transactions contemplated by this Agreement, and whether such Company
Option is intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code. Other than as specifically noted in
Section 2.3(b) of the Disclosure Schedule with respect to the four
individuals named therein, each holder of a Company Option or Company
Common Stock subject to vesting (which vesting is subject to acceleration
upon the occurrence of certain events) has entered into an agreement with
Parent in the form included in Section 2.3(b) of the Disclosure Schedule
limiting the circumstances under which the vesting of such employees'
outstanding options or outstanding common stock will accelerate. Section
2.3(b) of the Disclosure Schedule also sets forth the name of the holder of
any Company Capital Stock subject to vesting, the number of shares of
Company Capital Stock subject to vesting and the vesting schedule for such
Company Capital Stock, including the extent vested to date. Section 2.3(b)
of the Disclosure Schedule sets forth for each outstanding Company Warrant,
the name and the domicile address of the holder, the number of shares of
Company Capital Stock subject to such Company Warrant, the exercise price
of such Company Warrant, the vesting schedule of such Company Warrant, if
any, including the extent to which such Company Warrant has vested to the
date hereof and whether the vesting of such Company Warrant will be
accelerated by reason of the transactions \contemplated by this Agreement.
There are no options, warrants, calls, rights, commitments or agreements of
any character, written or oral, to which the Company is a party or by which
it is bound obligating the Company to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed,
any shares of the capital stock of the Company or obligating the Company to
grant, extend, accelerate the vesting of, change the price of, otherwise
amend or enter into any such option, warrant, call, right, commitment or
agreement. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or other similar rights with respect
to the Company.
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There are no voting trusts, proxies, or other agreements or understandings
with respect to the voting stock of the Company. As a result of the Merger,
Parent will be the sole record and beneficial owner of all outstanding
Company Capital Stock and all rights to acquire or receive any Company
Capital Stock, whether or not such Company Capital Stock is outstanding.
2.4 Authority. Each of the Company and the Founders has all requisite
power and authority to enter into this Agreement and any Related Agreements (as
hereinafter defined) to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and any Related Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, and no further action is
required on the part of the Company or the Founders to authorize the Agreement,
any Related Agreements to which it is a party and the transactions contemplated
hereby and thereby, subject in each case only to the approval of this Agreement
by the Shareholders. This Agreement and the Merger have been unanimously
approved by the Board of Directors of the Company. This Agreement and any
Related Agreements to which the Company or the Founders is a party have been
duly executed and delivered by the Company or the Founders, as the case may be,
and, assuming the due authorization, execution and delivery by the other parties
hereto and thereto, constitute the valid and binding obligation of the Company
and the Founders, as the case may be, enforceable in accordance with their
respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies. The
"Related Agreements" shall mean the Noncompetition Agreements, the Rule 145
Affiliate Agreements (as defined in Section 5.13), the Note and the Voting
Agreements.
2.5 No Conflict. The execution and delivery of this Agreement and any
Related Agreements to which the Company or the Founders are a party by either
the Company or the Founders do not, and, the consummation of the transactions
contemplated hereby and thereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation, modification or
acceleration of any obligation or loss of any benefit under (any such event, a
"Conflict") (i) any provision of the Articles of Incorporation and Bylaws of the
Company or any Subsidiary, (ii) any mortgage, indenture, lease, contract or
other agreement or instrument, permit, concession, franchise or license to which
the Company, any Subsidiary or the Founders or any of their respective
properties or assets (including intangible assets) are subject, or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to the Company, any Subsidiary or the Founders or their respective properties or
assets.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party, including a party to any agreement with the Company or any
Subsidiary (so as not to trigger any Conflict), is required by or with respect
to the Company, any Subsidiary or the Founders in connection with the execution
and delivery of this Agreement and any Related Agreements to which the Company,
any Subsidiary or the Founders is a party or the consummation of the
transactions contemplated hereby and thereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable securities laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
and (ii) the filing of the Merger Agreement with the Secretary of State of the
State of California.
2.7 Company Financial Statements. Section 2.7 of the Disclosure Schedule
sets forth the Company's audited consolidated balance sheets as of December 31,
1997 and December 31, 1996 and the related audited consolidated statements of
income and cash flow for the twelve-month periods ended December 31, 1997 and
December 31, 1996 (the "Year-End Financials") and the Company's unaudited
balance sheets as of March 31, 1998 and May 31, 1998, and the related unaudited
statement of income for the three months ended March 31, 1998 and the two months
ended May 31, 1998 (the "Interim Financials"). The Year-End Financials and the
Interim Financials have been prepared in accordance with GAAP applied on a basis
consistent throughout the periods indicated and consistent with each other
(except that the Interim Financials
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do not contain the footnotes required by GAAP). The Year-End Financials and
Interim Financials present fairly the consolidated financial condition and
consolidated operating results of the Company and any consolidated subsidiaries
as of the dates and during the periods indicated therein, subject in the case of
the Interim Financials, to normal year-end adjustments, which will not be
material in amount or significance. The Company's unaudited Balance Sheet as of
May 31, 1998 shall be hereinafter referred to as the "Current Balance Sheet."
2.8 No Undisclosed Liabilities. Neither the Company nor any Subsidiary has
any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, in excess of $100,000 individually or in the aggregate,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet or the Year-End Financials or (ii) has not arisen in the ordinary
course of business consistent with past practices since December 31, 1997.
2.9 No Changes. Between May 31, 1998 and the date hereof, there has not
been, occurred or arisen any:
(a) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(b) other than payments under leases disclosed in the Company's
Year-End Financials or Section 2.9(b) of the Disclosure Schedule, capital
expenditures or capital commitments by the Company, exceeding $25,000
individually or $100,000 in the aggregate;
(c) destruction of, damage to or loss of any material assets, business
or customer of the Company or any Subsidiary (whether or not covered by
insurance);
(d) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(e) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company or any
Subsidiary;
(f) revaluation by the Company or any Subsidiary of any of its assets;
(g) declaration, setting aside or payment of a dividend or other
distribution (whether in cash, stock or property) with respect to the
capital stock of the Company or any Subsidiary, or any split, combination
or reclassification with respect to the capital stock of the Company or any
Subsidiary, or any issuance or authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of
capital stock of the Company or any Subsidiary or any direct or indirect
redemption, repurchase or other acquisition by the Company or any
Subsidiary of its capital stock (or options, warrants or other rights
exercisable therefor);
(h) except as set forth in Section 2.9(h) of the Disclosure Schedule,
increase in the salary or other compensation payable or to become payable
by the Company or any Subsidiary to any of its officers, directors,
employees or advisors, or the declaration, payment or commitment or
obligation of any kind for the payment, by the Company or any Subsidiary of
a bonus or other additional salary or compensation to any such person;
(i) other than non-exclusive licenses pursuant to the Company's
standard end-user and distribution agreements in substantially the form
included in Section 2.13(g) of the Disclosure Schedule, agreement,
contract, covenant, instrument, lease, license or commitment to which the
Company or any Subsidiary is a party or by which they or any of its assets
(including intangible assets) are bound or any termination, extension,
amendment or modification the terms of any agreement, contract, covenant,
instrument, lease, license or commitment to which the Company or any
Subsidiary is a party or by which it or any of its assets are bound;
(j) other than non-exclusive licenses pursuant to the Company's
standard end-user and distribution agreements in substantially the form
included in Section 2.13(g) of the Disclosure Schedule, sale, lease,
license or other disposition of any of the assets or properties of the
Company or any Subsidiary or any creation of any security interest in such
assets or properties;
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(k) loan by the Company or any Subsidiary to any person or entity,
incurring by the Company or any Subsidiary of any indebtedness,
guaranteeing by the Company or any Subsidiary of any indebtedness, issuance
or sale of any debt securities of the Company or any Subsidiary or
guaranteeing of any debt securities of others, except for advances to
employees for travel and business expenses in the ordinary course of
business, consistent with past practice;
(l) except as set forth in Section 2.9(l) of the Disclosure Schedule,
waiver or release of any right or claim of the Company or any Subsidiary
including any write-off or other compromise of any account receivable of
the Company or any Subsidiary;
(m) the commencement or notice or threat or reasonable basis therefor
of any lawsuit or, to the Company's or the Founders' Knowledge, proceeding
or investigation against the Company or its affairs;
(n) Knowledge of any claim or potential claim of ownership by any
person other than the Company of the Company Intellectual Property (as
defined in Section 2.13) or of infringement by the Company or any
Subsidiary of any other person's Intellectual Property (as defined in
Section 2.13);
(o) (i) other than non-exclusive licenses pursuant to the Company's
standard end-user and distribution agreements in substantially the form
included in Section 2.13(g) of the Disclosure Schedule, sale or license of
any Company Intellectual Property or entering into of any agreement with
respect to the Company Intellectual Property with any person or entity or
with respect to the Intellectual Property of any person or entity or (ii)
purchase or license of any Intellectual Property or entering into of any
agreement with respect to the Intellectual Property of any person or entity
or (iii) entering into any agreement with respect to development of any
Intellectual Property with a third party or (iv) change in pricing or
royalties set forth in the Company's current price list and associated
discount schedules included in the Disclosure Schedule as Appendix 2.9(o)
or charged by the Company to its customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property
to the Company;
(p) event or condition of any character that has had or would have a
Company Material Adverse Effect as of the date hereof;
(q) other than a transaction of the types described in Sections 2.9(a)
through (p) above, transaction by the Company or any Subsidiary except in
the ordinary course of business as conducted on that date and consistent
with past practices; or
(r) agreement by the Company or any Subsidiary or any officer or
employee thereof, in his or her capacity as such, to do any of the things
described in the preceding clauses (a) through (q) (other than negotiations
with Parent and its representatives regarding the transactions contemplated
by this Agreement).
2.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes", means (i) any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and liabilities, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value
added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest,
penalties and additions imposed with respect to such amounts; (ii) any
liability for the payment of any amounts of the type described in clause
(i) as a result of being a member of an affiliated, consolidated, combined
or unitary group for any period; and (iii) any liability for the payment of
any amounts of the type described in clause (i) or (ii) as a result of any
express or implied obligation to indemnify any other person or as a result
of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes
of a predecessor entity.
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(b) Tax Returns and Audits.
(i) As of the Effective Time, each of the Company and each
Subsidiary will have prepared and timely filed all required federal,
state, local and foreign returns, estimates, information statements and
reports ("Returns") relating to any and all Taxes concerning or
attributable to the Company or its operations and such Returns are true
and correct and have been completed in accordance with applicable law.
(ii) As of the Effective Time, each of the Company and each
Subsidiary (A) will have paid all Taxes it is required to pay and will
have withheld with respect to its employees all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld, and (B) will
have accrued on the Current Balance Sheet all Taxes attributable to the
periods covered by the Current Balance Sheet and will not have incurred
any liability for Taxes for the period commencing after the date of the
Current Balance Sheet and ending immediately prior to the Effective Time
other than in the ordinary course of business.
(iii) Neither the Company nor any Subsidiary has been delinquent in
the payment of any Tax nor is there any Tax deficiency outstanding,
assessed or proposed against the Company or any Subsidiary, nor has the
Company or any Subsidiary executed any waiver of any statute of
limitations on or extending the period for the assessment or collection
of any Tax.
(iv) No audit or other examination of any Return of the Company or
any Subsidiary is presently in progress, nor has the Company or any
Subsidiary been notified of any request for such an audit or other
examination.
(v) Neither the Company nor any Subsidiary has liabilities for
unpaid federal, state, local and foreign Taxes which have not been
accrued or reserved against on the Current Balance Sheet and set forth
in Section 2.10(b)(v) of the Disclosure Schedule, whether asserted or
unasserted, contingent or otherwise except for liabilities incurred
since the Current Balance Sheet in the ordinary course of business.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and
use Returns for the Company and each Subsidiary filed for all periods
since its inception.
(vii) There are (and immediately following the Effective Time there
will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort
(collectively, "Liens") on the assets of the Company or any Subsidiary
relating to or attributable to Taxes other than Liens for Taxes not yet
due and payable.
(viii) Assuming that all Taxes due after the Effective Time are
paid when due and that all Taxes accrued or reserved on the Current
Balance Sheet will be paid when due, neither the Company nor the
Founders has Knowledge of any basis for the assertion of any claim
relating or attributable to Taxes which, if adversely determined, would
result in any Lien on the assets of the Company or any Subsidiary.
(ix) None of the Company's or any Subsidiary's assets are treated
as "tax-exempt use property", within the meaning of Section 168(h) of
the Code.
(x) Neither the Company nor any Subsidiary has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section
341(f)(4) of the Code apply to any disposition of a subsection (f) asset
(as defined in Section 341(f)(4) of the Code) owned by the Company or
any Subsidiary.
(xi) Other than in the case of the Company as required by law with
respect to its Subsidiaries, neither the Company nor any Subsidiary is a
party to any tax sharing, indemnification or allocation agreement nor
does the Company or any Subsidiary owe any amount under any such
agreement, other than this Agreement.
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(xii) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on the Company's tax books
and records.
(xiii) Neither the Company nor any Subsidiary is and neither has
been at any time, a "United States Real Property Holding Corporation"
within the meaning of Section 897(c)(2) of the Code.
(xiv) No adjustment relating to any Return filed by the Company has
been proposed formally or, to the knowledge of the Company or the
Founders, informally by any tax authority to the Company or any
representative thereof.
(c) Executive Compensation Tax. There is no contract, agreement, plan
or arrangement to which the Company or any Subsidiary is a party as of the
date of this Agreement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of Company,
individually or collectively, that could give rise to the payment of any
amount that would not be deductible pursuant to Sections 280G, 404 or
162(m) of the Code.
2.11 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Subsidiary is a party or which is otherwise binding
upon the Company or any Subsidiary which has or may have the effect of
prohibiting or impairing any business practice of the Company or any Subsidiary
(as presently conducted by the Company or any Subsidiary or as currently
contemplated by the Company to be conducted), any acquisition of property
(tangible or intangible) by the Company or any Subsidiary or the conduct of
business by the Company or any Subsidiary (as presently conducted by the Company
or any Subsidiary or as currently contemplated by the Company to be conducted).
Without limiting the foregoing, neither the Company nor any Subsidiary has
entered into any agreement under which either of them is restricted from
selling, licensing or otherwise distributing any of its technology or products
to or providing services to, customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
(a) Neither the Company nor any Subsidiary owns any real property, nor
has either ever owned any real property. Section 2.12(a) of the Disclosure
Schedule sets forth a list of all real property currently leased by the
Company and any Subsidiary, the name of the lessor, the date of the lease
and each amendment thereto and, with respect to any current lease, the
aggregate annual rental payment payable under any such lease. All such
current leases are in full force and effect, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default).
(b) Each of the Company and each Subsidiary has good and valid title
to, or, in the case of leased properties and assets, valid leasehold
interests in, all of their respective tangible properties and assets, real,
personal and mixed, used or held for use in its business, free and clear of
any Liens, except as reflected in the Current Balance Sheet and except for
Liens for Taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or interfere
with the present use, of the property subject thereto or affected thereby.
(c) Section 2.12(c) of the Disclosure Schedule lists all material
items or classes of items of equipment (the "Equipment") owned or leased by
the Company or any Subsidiary and such Equipment is, (i) adequate for the
conduct of the business of the Company and each Subsidiary as currently
conducted and (ii) in good operating condition, regularly and properly
maintained, subject to normal wear and tear.
(d) Except as otherwise described in Section 2.12(d) of the Disclosure
Schedule, each of the Company and each Subsidiary has sole and exclusive
ownership, free and clear of any Liens, of all customer lists, customer
contact information, customer correspondence and customer licensing and
purchasing histories relating to the Company's current and former customers
(the "Customer Informa-
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tion"). No person other than the Company possesses any claims or rights
with respect to use of the Customer Information.
2.13 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following (i)
works of authorship including, without limitation, computer programs,
source code and executable code, whether embodied in software, firmware
or otherwise, documentation, designs, files, records, data and mask
works, (ii) inventions (whether or not patentable), improvements, and
technology, (iii) proprietary and confidential information, trade
secrets and know how, (iv) databases, data compilations and collections
and technical data, (v) logos, trade names, trade dress, trademarks and
service marks, (vi) domain names, web addresses and sites, (vii) tools,
methods and processes, and (viii) all instantiations of the foregoing in
any form and embodied in any media.
"Intellectual Property Rights" shall mean worldwide common law and
statutory rights associated with (i) patents and patent applications,
(ii) copyrights, copyrights registrations and copyrights applications
and "moral" rights, (iii) the protection of trade and industrial secrets
and confidential information, (iv) other proprietary rights relating to
intangible intellectual property, (v) trademarks, trade names and
service marks, (vi) analogous rights to those set forth above, and (vii)
divisions, continuations, renewals, reissuances and extensions of the
foregoing (as applicable).
"Company Intellectual Property" shall mean any Intellectual
Property and Intellectual Property Rights that are owned by or
exclusively licensed to the Company or any Subsidiary.
"Registered Intellectual Property Rights" shall mean Intellectual
Property Rights that have been registered, filed, certified or otherwise
perfected by recordation with any state, government or other public
legal authority.
(b) Section 2.13(b) of the Disclosure Schedule lists all Registered
Intellectual Property owned by, or filed in the name of, the Company or any
Subsidiary (the "Company Registered Intellectual Property") and lists any
proceedings or actions before any court, tribunal (including the United
States Patent and Trademark Office (the "PTO") or equivalent authority
anywhere in the world) related to any of the Company Registered
Intellectual Property Rights.
(c) Each item of Company Intellectual Property, including all Company
Registered Intellectual Property listed in Section 2.13(b) of the
Disclosure Schedule and all Intellectual Property licensed to the Company
or any Subsidiary, is free and clear of any Liens against the Company's
rights or interests or other encumbrances, except that, with respect to
Intellectual Property or Intellectual Property Rights licensed to the
Company that such Intellectual Property or Intellectual Property Rights are
subject to the terms of the licenses of such Intellectual Property or
Intellectual Property Rights listed in Section 2.13(g) of the Disclosure
Schedule or not required to be listed in Section 2.13(g) of the Disclosure
Schedule. The Company or a Subsidiary is the exclusive owner or exclusive
licensee of all Company Intellectual Property.
(d) To the extent that any Intellectual Property has been developed or
created independently or jointly by any person other than the Company or
any Subsidiary for which the Company or any Subsidiary has, directly paid
the cost and expense of development, either the Company or such Subsidiary
has a written agreement with such person with respect thereto, and the
Company or such Subsidiary thereby has obtained ownership of, and is the
exclusive owner of, all such Intellectual Property and associated
Intellectual Property Rights therein by operation of law or by valid
assignment to the extent legally permissible.
(e) Neither the Company nor any Subsidiary has transferred ownership
of or granted any exclusive license of or exclusive right to use or
authorized the retention of any exclusive rights to use or joint ownership
in any Intellectual Property or Intellectual Property Rights that is or was
Company Intellectual Property, to any other person.
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(f) Other than Intellectual Property Rights acquired pursuant to
"shrink-wrap" and similar widely available commercial end-user licenses (in
each case which is not included in the Company's products or technology
including products and technology currently available or under
development), the Company has listed all Intellectual Property and
Intellectual Property Rights which are not Company Intellectual Property or
Intellectual Property Rights of the Company used in and necessary to the
conduct of the business of the Company or each Subsidiary as it currently
is conducted or used in and/or believed to be necessary to the conduct of
the business of the Company and each Subsidiary as currently proposed by
the Company to be conducted, including, in each case, without limitation,
the design, development, manufacture, use, import and sale of products,
technology and services (including products, technology or services
currently under development).
(g) Other than (i) "shrink-wrap" and similar widely available
commercial end-user licenses and (ii) other licenses and related agreements
with respect thereto of the Company's products to end-users pursuant to
written agreements that have been entered into in the ordinary course of
business that (A) do not materially differ in substance from the Company's
standard forms of end-user license including attachments (which are
included in Section 2.13(g) of the Disclosure Schedule) and (B) do not
involve payments to the Company in excess of $50,000, the contracts,
licenses and agreements listed in Section 2.13(g) of the Disclosure
Schedule include all contracts, licenses and agreements to which the
Company or any Subsidiary is a party with respect to any Intellectual
Property and Intellectual Property Rights. No person who has licensed
Intellectual Property or Intellectual Property Rights to the Company or any
Subsidiary has ownership rights or license rights to improvements made by
the Company in such Intellectual Property which has been licensed to the
Company.
(h) Other than (i) "shrink-wrap" and similar widely available
commercial end-user licenses and (ii) other licenses and related agreements
with respect thereto of the Company's products to end-users pursuant to
written agreements that have been entered into in the ordinary course of
business that (A) do not materially differ in substance from the Company's
standard forms of end-user license including attachments (which are
included in Section 2.13(g) of the Disclosure Schedule) and (B) do not
involve payments to the Company in excess of $50,000, Section 2.13(h) of
the Disclosure Schedule lists all contracts, licenses and agreements
between the Company or any Subsidiary and any other person wherein or
whereby the Company or any Subsidiary has agreed to, or assumed, any
obligation or duty to warrant, indemnify, reimburse, hold harmless,
guaranty or otherwise assume or incur any obligation or liability or
provide a right of rescission with respect to the infringement or
misappropriation by the Company or any Subsidiary or such other person of
the Intellectual Property Rights of any person other than the Company or
any Subsidiary.
(i) The operation of the business of the Company and each Subsidiary
as it currently is conducted or is currently contemplated by the Company to
be conducted, including but not limited to the design, development, use,
import, manufacture and sale of the products, technology or services
(including products, technology or services currently under development) of
the Company or any Subsidiary, does not and there is no reason to know that
it will infringe or misappropriate the Intellectual Property Rights of any
person, violate the rights of any person (including rights to privacy or
publicity), or constitute unfair competition or trade practices under the
laws of any jurisdiction, and neither the Company nor any Subsidiary has
received notice from any person claiming that such operation or any act,
product, technology or service (including products, technology or services
currently under development) of the Company infringes or misappropriates
the Intellectual Property Rights of any person or constitutes unfair
competition or trade practices under the laws of any jurisdiction (nor is
the Company or the Founders aware of any reasonable basis therefor).
(j) Each item of Company Registered Intellectual Property is valid and
subsisting, and all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been
paid and all reasonably necessary documents and certificates in connection
with such Company Registered Intellectual Property have been filed with the
relevant patent, copyright, trademark or other authorities in the United
States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property. There are no actions
that must be taken by the
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Company or any Subsidiary within sixty (60) days of the Closing Date,
including the payment of any registration, maintenance or renewal fees or
the filing of any documents, applications or certificates for the purposes
of maintaining, perfecting or preserving or renewing any Registered
Intellectual Property. In each case in which the Company or any Subsidiary
has acquired any Intellectual Property rights from any person, the Company
or such Subsidiary has obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
and the associated Intellectual Property Rights (including the right to
seek past and future damages with respect thereto) to the Company and, to
the maximum extent provided for by, and in accordance with, applicable laws
and regulations, the Company has recorded each such assignment with the
relevant governmental authorities, including the PTO, the U.S. Copyright
Office, or their respective equivalents in any relevant foreign
jurisdiction, as the case may be.
(k) There are no contracts, licenses or agreements between the Company
or any Subsidiary and any other person with respect to Company Intellectual
Property under which there is any dispute known to the Company or the
Founders regarding the scope of such agreement, or performance under such
agreement including with respect to any payments to be made or received by
the Company thereunder.
(l) To the Knowledge of the Company and the Founders, no person is
infringing or misappropriating any Company Intellectual Property.
(m) Each of the Company and each Subsidiary has taken all steps that
are reasonably required to protect the Company's and each Subsidiary's
rights in confidential information and trade secrets of the Company and
each Subsidiary or provided by any other person to the Company. Without
limiting the foregoing, each of the Company and each Subsidiary has, and
enforces, a policy requiring each employee, consultant and contractor to
execute proprietary information, confidentiality and assignment agreements
substantially in the Company's standard forms, and, except as noted in
Section 2.13(m) of the Disclosure Schedule, all current and former
employees, consultants and contractors of the Company and each Subsidiary
have executed such an agreement in substantially the Company's standard
form.
(n) No Company Intellectual Property or any Subsidiary is subject to
any proceeding or outstanding decree, order, judgment or settlement
agreement that restricts in any manner the use, transfer or licensing
thereof by the Company or any Subsidiary or may affect the validity, use or
enforceability of such Company Intellectual Property.
(o) To the Company's Knowledge, no (i) product, technology, service or
publication of the Company or any Subsidiary, (ii) material published or
distributed by the Company or any Subsidiary or (iii) conduct or statement
of Company or any Subsidiary constitutes obscene material or a defamatory
statement or material.
(p) All of the Company's products (including products currently under
development) will record, store, process, calculate and present calendar
dates falling on and after (and if applicable, spans of time including)
January 1, 2000 in the same manner, and with the same functionality, data
integrity and performance, as the products record, store, process,
calculate and present calendar dates on or before December 31, 1999
(collectively, "Year 2000 Complaint"). All of the Company's products will
lose no functionality with respect to the introduction of records solely
because they contain properly formatted dates falling on or after January
1, 2000. All of the Company's products which are interoperable with
products used and distributed by Parent (so long as such products of Parent
are Year 2000 Compliant) and such compliance is achieved in a manner
compatible with the Company's products. All of the Company's internal
computer and technology products and systems are Year 2000 Compliant. The
Company hereby reaffirms the accuracy of the representations and warranties
of the Company made in the document referenced in Section 2.13(p) of the
Disclosure Schedule as if such representations and warranties were set
forth in this Section 2.13(p).
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2.14 Agreements, Contracts and Commitments.
(a) Except as set forth in or excepted from (by virtue the specific
exclusions contained in Sections 2.13(g) or 2.13(h) hereof) Sections
2.13(g), and 2.13(h) of the Disclosure Schedule or as set forth in 2.14(a)
of the Disclosure Schedule, neither the Company nor any Subsidiary is a
party to nor is either bound by:
(i) other than contracts for administrative services involving
annual payments of less than $100,000 and which are terminable within
sixty (60) days without penalty, any employment or consulting agreement,
contract or commitment with an employee or individual consultant or
salesperson or consulting or sales agreement, contract or commitment
with a firm or other organization,
(ii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement,
(iii) any fidelity or surety bond or completion bond,
(iv) any lease of personal property having an annual rental rate
individually in excess of $50,000 or $200,000 in the aggregate,
(v) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company or any Subsidiary to engage in any
line of business or to compete with any person,
(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $50,000
individually or $200,000 in the aggregate,
(vii) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
(viii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the
borrowing of money or extension of credit,
(ix) any purchase order or contract for the purchase of materials
involving in excess of $50,000 individually or $200,000 in the
aggregate,
(x) any construction contracts,
(xi) any dealer, distribution, joint marketing or development
agreement,
(xii) any sales representative, original equipment manufacturer,
value added, remarketer, reseller or independent software vendor or
other agreement for use or distribution of the Company's products,
technology or services, or
(xiii) any other agreement, contract or commitment that involves a
current or future obligation of $50,000 individually or $200,000 in the
aggregate or more and is not cancelable without penalty within sixty
(60) days.
(b) Each of the Company and each Subsidiary is in compliance with and
neither has breached, violated or defaulted under, or received notice that
either of them has breached, violated or defaulted under, any of the terms
or conditions of any agreement, contract, covenant, instrument, lease,
license or commitment to which either of them is a party or by which either
of them is bound (collectively a "Contract"), nor is the Company or the
Founders aware of any event that would constitute such a breach, violation
or default with the lapse of time, giving of notice or both. Each Contract
is in full force and effect and is not subject to any default thereunder by
any party obligated to the Company or any Subsidiary pursuant thereto. Each
of the Company and each Subsidiary has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties
to any Contract as are
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required thereunder in connection with the Merger or for such Contracts to
remain in effect without modification after the Closing. Following the
Effective Time, each of the Company and each Subsidiary will be permitted
to exercise all of their rights under the Contracts without the payment of
any additional amounts or consideration other than amounts or consideration
which the Company and each Subsidiary would otherwise be required to pay
had the transactions contemplated by this Agreement not occurred.
2.15 Interested Party Transactions. No officer, director or, to the
Knowledge of the Company or any Founder, Shareholder who holds greater than five
percent (5%) of the Company Capital Stock has or has had, directly or
indirectly, (i) any material interest in any entity which furnished or sold, or
furnishes or sells, services, products or technology that the Company or any
Subsidiary furnishes or sells, or proposes to furnish or sell, or (ii) any
interest in any entity that purchases from or sells or furnishes to the Company
or any Subsidiary any goods or services or (iii) a beneficial interest in any
Contract; provided, that ownership of no more than five percent (5%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed an
"interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. "Company Authorizations" means each
consent, license, permit, grant or other authorization (i) issued to the Company
or any Subsidiary by a Governmental Entity pursuant to which the Company or any
Subsidiary currently operates or holds any interest in any of their properties
or (ii) of a Governmental Entity which is required for the operation of its
business of the Company or any of the Subsidiaries or the holding by any such
entity of any such interest. The Company Authorizations are in full force and
effect and constitute all Company Authorizations required to permit the Company
or any Subsidiary to operate or conduct its business or hold any interest in its
properties or assets.
2.17 Litigation. There is no action, suit, claim or proceeding of any
nature pending, or, to the Company's or the Founders' Knowledge, threatened,
against the Company or any Subsidiary, their properties (tangible or intangible)
or any of their officers or directors, nor, to the Knowledge of the Company or
the Founders, is there any reasonable basis therefor. To the Company's or the
Founders' Knowledge, there is no investigation pending or threatened against the
Company or any Subsidiary, their properties or any of their officers or
directors (nor, to the best Knowledge of the Company or the Founders, is there
any reasonable basis therefor) by or before any Governmental Entity. No
Governmental Entity has at any time challenged or questioned the legal right of
the Company or any Subsidiary to conduct its operations as presently or
previously conducted.
2.18 Accounts Receivable; Inventory.
(a) The Company has made available to Parent a list of all accounts
receivable (or classes of accounts receivable) of the Company and any
Subsidiary as of May 31, 1998 along with a range of days elapsed since
invoice.
(b) All accounts receivable arose in the ordinary course of business,
are carried at values determined in accordance with GAAP consistently
applied, including the amount of the reserves therefor set forth in Section
2.18(b) of the Disclosure Schedule. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount
has been made with respect to any of such Accounts Receivable.
(c) All of the inventories of the Company or any Subsidiary reflected
on the Company Financials and the Company's books and records were
purchased, acquired or produced in the ordinary and regular course of
business and in a manner consistent with the Company's regular inventory
practices and are set forth on the Company's books and records in
accordance with the practices and principles of the Company consistent with
the method of treating said items in prior periods. The presentation of
inventory on the Company Financials conforms to GAAP and such inventory is
stated at the lower of cost (determined using the first-in, first-out
method) or net realizable value.
2.19 Minute Books. The minutes of the Company and each Subsidiary made
available to counsel for Parent are the only minutes of the Company and each
Subsidiary and contain a reasonably accurate summary of all meetings of the
Board of Directors (or committees thereof) of the Company and each Subsidiary
and
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their respective shareholders or actions by written consent since the time of
incorporation of the Company or each Subsidiary.
2.20 Environmental Matters.
(a) Hazardous Material. Neither the Company nor any Subsidiary has:
(i) operated any underground storage tanks at any property that the Company
or any Subsidiary has at any time owned, operated, occupied or leased; or
(ii) illegally released any material amount of any substance that has been
designated by any Governmental Entity or by applicable federal, state or
local law to be radioactive, toxic, hazardous or otherwise a danger to
health or the environment, including, without limitation, PCBs, asbestos,
petroleum, and urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and
Recovery Act of 1976, as amended, and the regulations promulgated pursuant
to said laws (a "Hazardous Material"), but excluding office and janitorial
supplies properly and safely maintained. No Hazardous Materials are present
as a result of the deliberate actions of the Company or any Subsidiary or,
to the Company's or the Founders' Knowledge, as a result of any actions of
any other person or otherwise, in, on or under any property, including the
land and the improvements, ground water and surface water thereof, that the
Company or any Subsidiary has at any time owned, operated, occupied or
leased.
(b) Hazardous Materials Activities. Neither the Company nor any
Subsidiary has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Effective Time, nor has
either of them disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (any or all of the foregoing being
collectively referred to as "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company and each Subsidiary currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct of the Company's and
each Subsidiary's Hazardous Material Activities, respectively, and other
businesses of the Company and each Subsidiary's as such activities and
businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or
to the Company's or the Founders' Knowledge, threatened concerning any
Environmental Permit, Hazardous Material or any Hazardous Materials
Activity of the Company or any Subsidiary. Neither the Company nor the
Founders has Knowledge of any fact or circumstance which is more likely
than not to involve the Company or any Subsidiary in any environmental
litigation or impose upon the Company or any Subsidiary any environmental
liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Neither the Company
nor any Subsidiary has incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
Section 2.21 of the Disclosure Schedule sets forth the principal terms and
conditions of any agreement, written or oral, with respect to such fees. Section
2.21 of the Disclosure Schedule sets forth the Company's current reasonable
estimate of all Third Party Expenses (as defined in Section 5.4) expected to be
incurred by the Company in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions contemplated
hereby. The Company's Third Party Expenses shall not exceed the greater of (i)
$2,250,000, or $2,500,000 if prior to the Effective Time, Parent shall have
agreed pursuant to Section 5.4 to increase the amount of Third Party Expenses it
shall assume from $2,250,000 to $2,500,000, and (ii) Estimated Third Party
Expenses.
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2.22 Employee Benefit Plans and Compensation.
(a) The following terms shall have the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations issued thereunder;
(ii) "Employee Plan" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, deferred compensation,
performance awards, stock or stock-related awards, fringe benefits or
other employee benefits or remuneration of any kind, whether written,
unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section
3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by the Company or any Affiliate for the
benefit of any Employee, or with respect to which the Company or any
Affiliate has or may have any liability or obligation;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "Employee" shall mean any current or former employee,
consultant or director of the Company or any Affiliate;
(vi) "Employee Agreement" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visa,
work permit or other agreement, contract or understanding between the
Company or any Affiliate and any Employee;
(vii) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "IRS" shall mean the Internal Revenue Service;
(x) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xi) "Pension Plan" shall mean each Employee Plan which is an
"employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) Schedule. Schedule 2.22(b) contains an accurate and complete list
of each Employee Plan and each Employee Agreement. Neither the Company or
any Subsidiary has any plan or commitment to establish any new Employee
Plan or Employee Agreement, to modify any Employee Plan or Employee
Agreement (except to the extent required by law or to conform any such
Employee Plan or Employee Agreement to the requirements of any applicable
law, in each case as previously disclosed to Parent in writing, or as
required by this Agreement), or to enter into any Employee Plan or Employee
Agreement.
(c) Documents. The Company has provided to Parent: (i) correct and
complete copies of all documents embodying each Employee Plan and each
Employee Agreement including (without limitation) all amendments thereto
and all related trust documents; (ii) the three (3) most recent annual
reports (Form Series 5500 and all schedules and financial statements
attached thereto), if any, required under ERISA or the Code in connection
with each Employee Plan; (iii) if the Employee Plan is funded, the most
recent annual and periodic accounting of Employee Plan assets; (iv) the
most recent summary plan description together with the summary(ies) of
material modifications thereto, if any, required under ERISA with respect
to each Employee Plan; (v) all material written agreements and contracts
relating to each Employee Plan, including, but not limited to,
administrative service agreements and group insurance contracts; (vi) all
communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to
any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other
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events which would result in any liability to the Company or any
Subsidiary; (vii) all correspondence to or from any governmental agency
relating to any Employee Plan; (viii) all COBRA forms and related notices;
(ix) all policies pertaining to fiduciary liability insurance covering the
fiduciaries for each Employee Plan; (x) all discrimination tests for each
Employee Plan for the most recent plan year; and (xi) all registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with each Employee Plan.
(d) Employee Plan Compliance. (i) Each of the Company and each
Subsidiary has performed all obligations required to be performed by it
under, is not in default or violation of, and has no knowledge of any
default or violation by any other party to each Employee Plan, and each
Employee Plan has been established and maintained in accordance with its
terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) no
"prohibited transaction," within the meaning of Section 4975 of the Code or
Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408
of ERISA, has occurred with respect to any Employee Plan; (iii) there are
no actions, suits or claims pending, or, to the knowledge of the Company or
the Founders, threatened or reasonably anticipated (other than routine
claims for benefits) against any Employee Plan or against the assets of any
Employee Plan; (iv) each Employee Plan can be amended, terminated or
otherwise discontinued after the Effective Time in accordance with its
terms, without liability to Parent, the Company or any Affiliate (other
than ordinary administration expenses); (v) there are no audits, inquiries
or proceedings pending or, to the knowledge of the Company or the Founders
or any Affiliates, threatened by the IRS or DOL with respect to any
Employee Plan; and (vi) neither the Company nor any Affiliate is subject to
any penalty or tax with respect to any Employee Plan under Section 502(i)
of ERISA or Sections 4975 through 4980 of the Code.
(e) No Pension Plans. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan.
(f) No Post-Employment Obligations. No Employee Plan provides, or
reflects or represents any liability to provide, retiree life insurance,
retiree health or other retiree employee welfare benefits to any person for
any reason, except as may be required by COBRA or other applicable statute,
and neither the Company nor any Subsidiary has ever represented, promised
or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) or any other person that such
Employee(s) or other person would be provided with retiree life insurance,
retiree health or other retiree employee welfare benefit, except to the
extent required by statute.
(g) COBRA. Neither the Company nor any Affiliate has, prior to the
Effective Time, violated any of the health care continuation requirements
of COBRA, the requirements of FMLA or any similar provisions of state law
applicable to its Employees.
(h) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone
or upon the occurrence of any additional or subsequent events) constitute
an event under any Employee Plan, Employee Agreement, trust or loan that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase
in benefits or obligation to fund benefits with respect to any Employee.
(i) Employment Matters. Each of the Company and each Subsidiary: (i)
is in compliance with all applicable foreign, federal, state and local
laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours, in each case, with
respect to Employees; (ii) has withheld and reported all amounts required
by law or by agreement to be withheld and reported with respect to wages,
salaries and other payments to Employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any
of the foregoing; and (iv) is not liable for any payment to any trust or
other fund governed by or maintained by or on behalf of any governmental
authority, with respect to unemployment compensation benefits, social
security or other benefits or obligations for Employees (other than routine
payments to be made in the normal course of business and consistent with
past practice). There are no pending or, to the knowledge of the Company or
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the Founders, threatened or reasonably anticipated claims or actions
against the Company under any worker's compensation policy or long-term
disability policy.
(j) Labor. No work stoppage or labor strike against the Company or any
Subsidiary is pending, or to the knowledge of the Company or the Founders,
threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees.
There are no actions, suits, claims, labor disputes or grievances pending,
or, to the knowledge of the Company or the Founders, threatened or
reasonably anticipated relating to any labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of
unfair labor practices or discrimination complaints. Neither the Company
nor any Subsidiary has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act. Neither the Company nor any
Subsidiary is presently, nor has either been in the past, a party to, or
bound by, any collective bargaining agreement or union contract with
respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
(k) No Interference or Conflict. To the Knowledge of the Company and
the Founders, no shareholder, officer, employee or consultant of the
Company or any Subsidiary is obligated under any contract or agreement
subject to any judgment, decree or order of any court or administrative
agency that would interfere with such person's efforts to promote the
interests of the Company or any Subsidiary or that would interfere with the
Company's or any Subsidiary's business. Neither the execution nor delivery
of this Agreement, nor the carrying on of the Company's or any Subsidiary's
business as presently conducted or presently proposed to be conducted nor
any activity of such officers, directors, employees or consultants in
connection with the carrying on of the Company's or any Subsidiary's
business as presently conducted or presently proposed to be conducted by
the Company, will, to the Company's and the Founders' knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract or agreement under which any of
such officers, directors, employees or consultants is now bound.
2.23 Insurance. Section 2.23 of the Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company or each
Subsidiary. There is no claim by the Company or any Subsidiary pending under any
of such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
each Subsidiary are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). Neither the Company nor the Founders has Knowledge of any threatened
termination of, or premium increase with respect to, any of such policies.
2.24 Compliance with Laws. Each of the Company and each Subsidiary has
complied with, is not in violation of, and has not received any notices of
violation with respect to, any material foreign, federal, state or local
statute, law or regulation.
2.25 Warranties; Indemnities. Except for the warranties and indemnities
contained in (i) those contracts and agreements set forth in Section 2.13(g) of
the Disclosure Schedule and (ii) the Company's shrink wrap license agreements
substantially in the form set forth in Section 2.13(d) of the Disclosure
Schedule, neither the Company nor any Subsidiary has given any warranties or
indemnities relating to products or technology sold or licensed or services
rendered by the Company.
2.26 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.27 Statements; Proxy Statement. The information supplied by the Company
for inclusion in the Registration Statement (as defined in Section 5.1(a)) shall
not at the time the Registration Statement is filed with the SEC and at the time
it becomes effective under the Securities Act of 1933, as amended (the
"Securities Act"), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by the
Company for inclusion in the Proxy Statement (as defined in Section 5.1(a)) to
be sent to the
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Shareholders shall not, on the date the Proxy Statement is first mailed to the
Shareholders and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies or consents for
approval of the this Agreement which has become false or misleading. If at any
time prior to the Effective Time, any event relating to the Company or any of
its affiliates, officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Parent.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by Parent or Merger Sub which is
contained in any of the foregoing documents.
2.28 Representations Complete. None of the representations or warranties
made by the Company or the Founders (as modified by the Disclosure Schedule),
nor any statement made in any Schedule or certificate furnished by the Company
or the Founders pursuant to this Agreement or furnished in or in connection with
documents mailed or delivered to the Shareholders for use in soliciting their
consent to this Agreement and the Merger contains or will contain at the
Effective Time, any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Merger Sub represent and warrant to the Company that on the date
hereof, and as of the Effective Time as though made on the date hereof, as
follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Each of Parent and Sub has
the corporate power to own its properties and to carry on its business as now
being conducted and 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 the ability of Parent and Sub to consummate the transactions
contemplated hereby. Parent has made available a true and correct copy of the
Certificate of Incorporation and Bylaws of Parent and the Articles of
Incorporation and Bylaws of Sub, as amended to date, to counsel for the Company.
For all purposes of this Agreement, the term "Parent Material Adverse Effect"
means any change, event or effect that is materially adverse to the business,
assets (including intangible assets), financial condition or results of
operations of Parent and its subsidiaries taken as a whole.
3.2 Authority. Each of Parent and Sub has all requisite corporate power
and authority to enter into this Agreement and any Related Agreements to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Sub (including any necessary stockholder approval),
and no further action is required on the part of Parent or Sub to authorize this
Agreement, any Related Agreement to which it is a party or the transactions
contemplated hereby and thereby. This Agreement and the Merger have been
unanimously approved by the Boards of Directors of Parent and Sub. This
Agreement and any Related Agreements to which Parent and Sub are parties have
been duly executed and delivered by Parent and Sub and constitutes the valid and
binding obligations of Parent and Sub, enforceable in accordance with their
terms, except as such enforceability may be limited by principles of public
policy and subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.
3.3 No Conflict. The execution and delivery of this Agreement and any
Related Agreements to which Parent or Sub is a party do not, and, the
consummation of the transactions contemplated hereby will not, and
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the consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a Conflict under (i) any
provision of the Certificate of Incorporation, as amended, and Bylaws of Parent
or Sub, (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to which Parent or any of
its respective properties or assets are subject and which has been filed as an
exhibit to Parent's filings under the Securities Act or the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Parent
or Sub or their respective properties or assets, except in each case where such
Conflict will not have a Parent Material Adverse Effect.
3.4 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, or any third
party is required by or with respect to Parent or Sub in connection with the
execution and delivery of this Agreement and any Related Agreements to which
Parent or Sub is a party or the consummation of the transactions contemplated
hereby and thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable securities laws and the HSR Act and such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings
which, if not obtained or made, would not have a Parent Material Adverse Effect,
(ii) the filing of the Merger Agreement with the Secretary of State of the State
of California, (iii) the filing of the Registration Statement (as defined in
Section 5.1) with the SEC, and (iv) the filing of an application to list the
shares of Parent Common Stock issued in connection with the Merger with the
Nasdaq National Market.
3.5 Capital Structure.
(a) The authorized stock of Parent consists of 940,000,000 shares of
Common Stock, $.00067 par value, of which 376,708,341 shares were issued
and outstanding as of June 20, 1998, and 10,000,000 shares of undesignated
Preferred Stock, $.001 par value. No shares of Preferred Stock are issued
or outstanding. The authorized capital stock of Sub consists of 1,000
shares of Common Stock, $.001 par value, 1,000 shares of which, as of the
date hereof, are issued and outstanding and are held by Parent. All such
shares of Parent and Sub have been duly authorized, and all such issued and
outstanding shares have been validly issued, are fully paid and
nonassessable, are free of any liens or encumbrances other than any liens
or encumbrances created by or imposed upon the holders thereof, are not
subject to preemptive rights created by statute, the charter documents or
Bylaws of Parent as currently in effect or any agreement to which Parent is
a party or by which it is bound, and have been issued in compliance with
federal and state securities laws. Parent has reserved 290,935,298 shares
of Common Stock for issuance pursuant to its employee and director stock
and option plans. There are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed,
any shares of the capital stock of Parent or obligating Parent to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, non-assessable,
free of any liens or encumbrances and not subject to any preemptive rights
or rights of first refusal created by statute or the charter documents or
Bylaws of Parent or Sub or any agreement to which Parent or Sub is a party
or is bound and will be issued in compliance with federal and state
securities laws.
3.6 SEC Documents; Parent Financial Statements. Parent has furnished to
the Company a true and complete copy of each annual, quarterly and other
reports, registration statements (without exhibits) and definitive proxy
statement filed by Parent with the SEC since July 1, 1997 (the "Parent SEC
Documents"). As of their respective filing dates, the Parent SEC Documents
complied in all material respects with the requirements of the Securities Act
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the
case may be, and the rules and regulations of the SEC promulgated thereunder
applicable to such Parent SEC Documents, and none of the Parent SEC Documents
contained on their filing dates any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
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to make the statements therein, in light of the circumstances under which they
were made, not misleading, except to the extent corrected by a subsequently
filed Parent SEC Document. The financial statements of Parent included in the
Parent SEC Documents (the "Parent Financial Statements") complied as to form in
all material respects with the published rules and regulations of the SEC with
respect thereto, were prepared in accordance with GAAP applied on a consistent
basis throughout the periods indicated (except as may be indicated in the notes
thereto or, in the case of unaudited financial statements, as permitted under
Form 10-Q under the Exchange Act) and fairly presented the consolidated
financial position of Parent and its consolidated subsidiaries as of the
respective dates thereof and the consolidated results of Parent's operations and
cash flows for the periods indicated (subject to, in the case of unaudited
statements, to normal and recurring year-end audit adjustments). There has been
no change in Parent's accounting policies or estimates, except as described in
the notes to the Parent Financial Statements or as required by GAAP. Since the
date of the most recent balance sheet included in a Parent SEC Document to the
date hereof, there has been no Parent Material Adverse Effect.
3.7 Litigation. There is no action, suit, claim or proceeding of any
nature pending, nor, to Parent's knowledge, threatened against Parent or any of
its subsidiaries, their properties (tangible or intangible) or any of their
officers or directors, which would have a Parent Material Adverse Effect, nor,
to Parent's Knowledge, is there any reasonable basis therefor.
3.8 Brokers' and Finders' Fees. Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.9 Statements; Proxy Statement. The information supplied by Parent for
inclusion in the Registration Statement (as defined in Section 5.1(a)) shall not
at the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
information supplied by Parent for inclusion in the Proxy Statement (as defined
in Section 5.1(a)) to be sent to the Shareholders shall not, on the date the
Proxy Statement is first mailed to the Shareholders and at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies or consents for approval of the this Agreement which has become false or
misleading. If at any time prior to the Effective Time, any event relating to
Parent or any of its affiliates, officers or directors should be discovered by
Parent which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Parent shall promptly inform the
Company. Notwithstanding the foregoing, Parent makes no representation or
warranty with respect to any information supplied by the Company which is
contained in any of the foregoing documents.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of the Company and the Founders agree
(except to the extent that Parent shall otherwise consent in writing), to carry
on the Company's and each Subsidiary's business in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted, to pay
the debts and Taxes of the Company and each Subsidiary when due, to pay or
perform other obligations when due, and, to the extent consistent with such
business, use their reasonable best efforts consistent with past practice and
policies to preserve intact the Company's and each Subsidiary's present business
organizations, keep available the services of the Company's present officers and
key employees and preserve the Company's and each Subsidiary's relationships
with customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired the
Company's and each Subsidiary's goodwill and ongoing businesses at the Effective
Time. The
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Company shall promptly notify Parent of any event or occurrence or emergency not
in the ordinary course of business of the Company and each Subsidiary and any
material event involving the Company or each Subsidiary. Except as expressly
contemplated by this Agreement or as set forth in Section 4.1 of the Disclosure
Schedule, neither the Company nor any Subsidiary shall, without the prior
written consent of Parent:
(a) Except as contemplated by this Agreement, make any expenditures or
enter into any commitment or transaction exceeding $50,000 individually or
$200,000 in the aggregate;
(b) (i) Sell, license or transfer to any person or entity any rights
to any Company Intellectual Property or enter into any agreement with
respect to the Company Intellectual Property with any person or entity or
with respect to the Intellectual Property of any person or entity other
than non-exclusive licenses pursuant to the Company's standard end-user and
distribution agreements in substantially the form included in Section
2.13(g) of the Disclosure Schedule, (ii) other than Intellectual Property
Rights acquired pursuant to "shrink-wrap" and similar widely available
commercial end-user licenses (in each case which is not included in the
Company's products or technology including products and technology
currently available or under development), buy or license any Intellectual
Property or enter into any agreement with respect to the Intellectual
Property of any person or entity, (iii) enter into any agreement with
respect to development of any Intellectual Property with a third party or
(iv) change the pricing or royalties set forth in the Company's current
price list and associated discount schedules included in the Disclosure
Schedule as Appendix 2.9(o) or charged by the Company to its customers or
licensees or the pricing or royalties set or charged by persons who have
licensed Intellectual Property to the Company;
(c) Enter into or amend any Contract pursuant to which any other party
is granted marketing, distribution, development or similar rights of any
type or scope with respect to any products or technology of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the Contracts
set forth or described in the Disclosure Schedule;
(e) Commence or settle any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock of the Company, or
repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of the capital stock of the Company (or options, warrants or other rights
exercisable therefor);
(g) Other than in the ordinary course and, in the case of options to
acquire Company Capital Stock, in the ordinary course with an exercise
price equal to the fair market value of such Company Capital Stock as of
the date of grant, issue, grant, deliver or sell or authorize or propose
the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue or
purchase any such shares or other convertible securities.
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to the
Company's business;
(j) Other than non-exclusive licenses of the Company's products in
accordance with Section 4.1(b)(i), sell, lease, license or otherwise
dispose of any of its properties or assets;
(k) Other than pursuant to the Note, incur any indebtedness for
borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
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(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement;
(m) Grant any severance or termination pay (i) to any director or
officer of the Company or any Subsidiary or (ii) to any other employee of
the Company or any Subsidiary except payments made pursuant to standard
written agreements outstanding on the date hereof or as disclosed in the
Disclosure Schedule;
(n) Adopt any employee benefit plan, or enter into any employment
contract, pay or agree to pay any special bonus or special remuneration to
any director or employee, or increase the salaries or wage rates of its
employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(p) Pay, discharge or satisfy, in an amount in excess of $50,000 in
any one case or $200,000 in the aggregate, any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business of liabilities reflected or reserved against in
the Current Balance Sheet;
(q) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent
to any extension or waiver of the limitation period applicable to any claim
or assessment in respect of Taxes;
(r) Enter into any strategic alliance or joint marketing arrangement
or agreement;
(s) Other than as specifically requested in writing by Parent or as
contemplated by this Agreement, accelerate the vesting schedule of any of
the outstanding Company Options or Company Capital Stock;
(t) Hire or terminate employees or encourage employees to resign; or
(u) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (t) above, or any other action that
would prevent the Company from performing or cause the Company not to
perform its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the date
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Founders (nor will the Company nor
any of the Founders permit any of its officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, encourage, initiate or participate in any negotiations or discussions
or enter into any agreement with respect to, any offer or proposal to acquire
all, substantially all or a significant portion of the Company's business,
properties or technologies or any portion of the Company's capital stock
(whether or not outstanding) whether by merger, purchase of assets, tender offer
or otherwise, or effect any such transaction, (b) disclose any information not
customarily disclosed to any person concerning the Company's business,
technologies or properties or afford to any person or entity access to its
properties, technologies, books or records or (c) assist or cooperate with any
person to make any proposal to purchase all or any part of the Company's capital
stock or assets. In addition to the foregoing, if the Company or any of the
Founders receives, prior to the Effective Time or the termination of this
Agreement, any offer, proposal, or request relating to any of the above, the
Company or the Founders, as applicable, shall immediately notify Parent thereof,
including information as to the identity of the offeror or the party making any
such offer or proposal and the specific terms of such offer or proposal, as the
case may be, and such other information related thereto as Parent may reasonably
request. The parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 4.2 were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
by the parties that Parent shall be entitled to seek an injunction or
injunctions to prevent breaches of the provisions of this Section 4.2 and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which Parent may be entitled at law or in equity.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Shareholder Approval. (a) Within fifteen (15)
days after the execution of this Agreement, the Company shall prepare, with the
cooperation of Parent, a proxy statement (the "Proxy Statement"), and Parent
will prepare and file with the SEC a registration statement on Form S-4 (the
"Registration Statement") in which the Proxy Statement will be included as a
prospectus. Each of Parent and the Company shall provide promptly to the other
such information concerning its business and financial statements and affairs
as, in the reasonable judgment of the providing party or its counsel, may be
required or appropriate for inclusion in the Proxy Statement and the
Registration Statement, or in any amendments or supplements thereto, and to
cause its counsel and auditors to cooperate with the other's counsel and
auditors in the preparation of the Proxy Statement and the Registration
Statement. Each of the Company and Parent shall use its respective reasonable
best efforts to respond to any comments of the SEC and have the Registration
Statement declared effective under the Securities Act as promptly as practicable
after such filing. The Company will cause the Proxy Statement to be mailed to
the Shareholders, at the earliest practicable time and in no event later than 10
days after the Registration Statement is declared effective by the SEC, subject
to Parent approval, which approval shall not be unreasonably withheld; provided
that Parent shall not be required to give such approval prior to Parent's
issuance of its earnings release for the fourth quarter of Parent's current
fiscal year which issuance is currently anticipated to be made on or prior to
July 23, 1998. As promptly as practicable after the date of this Agreement, the
Company and Parent will prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal, foreign or Blue Sky laws
relating to the Merger and the transactions contemplated by this Agreement (the
"Other Filings"). Each of the Company and Parent will notify the other promptly
upon the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff or any other government officials for amendments or
supplements to the Registration Statement, the Proxy Statement or any Other
Filing or for additional information and will supply the other with copies of
all correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the other
hand, with respect to the Registration Statement, the Proxy Statement, the
Merger or any Other Filing. The Proxy Statement, the Registration Statement and
the Other Filings will comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement, the Registration Statement or any Other
Filing, the Company or Parent, as the case may be, will promptly inform the
other of such occurrence and cooperate in filing with the SEC or its staff or
any other government officials, and/or mailing to the Shareholders, such
amendment or supplement.
(b) Promptly after the date hereof, the Company will take all action
necessary in accordance with California Law and its Articles of
Incorporation and Bylaws to convene a special meeting of its shareholders
to be held on the twenty-first business day after the mailing of the Proxy
Statement to the Shareholders for the purpose of voting upon this Agreement
and the Merger. The Company will use its best efforts to solicit from its
shareholders proxies in favor of the adoption and approval of this
Agreement and the approval of the Merger and will take all other action
necessary or advisable to secure the vote or consent of its shareholders
required by California Law to obtain such approvals. The materials
submitted to the Company's Shareholders shall have been subject to review
and approval by Parent and include information regarding the Company, the
terms of the Merger and this Agreement and the unanimous recommendation of
the Board of Directors of the Company in favor of the Merger and this
Agreement.
5.2 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request and (c) all key employees of the Company as identified by Parent. The
Company agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements (including by returns
and supporting documentation) promptly upon request. Parent shall provide the
Company with copies of such publicly available information about Parent as the
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Company may request. No information or knowledge obtained in any investigation
pursuant to this Section 5.2 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Merger.
5.3 Confidentiality. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to Section 5.2, or pursuant
to the negotiation and execution of this Agreement or the effectuation of the
transaction contemplated hereby shall be governed by the terms of the
Confidential Disclosure Agreement effective as of on or about February 10, 1998
between the Company and Parent.
5.4 Expenses.
(a) Except as set forth in Section 5.4(b), whether or not the Merger
is consummated, all fees and expenses incurred in connection with the
Merger including, without limitation, all legal, accounting, financial
advisory, consulting and all other fees and expenses of third parties
("Third Party Expenses") incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement
and the transactions contemplated hereby, shall be the obligation of the
respective party incurring such fees and expenses.
(b) In the event that the Merger is consummated, Parent agrees to pay
up to $2,250,000 of those Third Party Expenses incurred by the Company;
provided that Parent may, in its reasonable discretion, elect to pay up to
$2,500,000 of such Third Party Expenses, and the Company and the Founders
agree that Parent shall have full recourse to the Escrow Fund (as defined
herein) for payment of all Third Party Expenses of the Company that exceed
the greater of Estimated Third Party Expenses, $2,250,000 and such larger
amount as Parent reasonably elects, not to exceed $2,500,000. Parent shall
pay all Third Party Expenses required to be paid by it within thirty (30)
days of Parent's receipt of an invoice therefor.
5.5 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) shall
be made by any party hereto regarding the subject matter of this Agreement
unless approved by Parent prior to release. Any public announcement by Parent
regarding the subject matter of this Agreement shall be delivered to the Company
prior to release.
5.6 Consents. The Company and Parent shall use commercially reasonable
efforts to obtain the consents, waivers, assignments and approvals under any of
the Contracts as may be required in connection with the Merger so as to preserve
all rights of, and benefits to, the Company thereunder.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or of the Company, its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
As soon as may be reasonably practicable, the Company and Parent each shall file
with the United States Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice ("DOJ") Notification and
Report Forms relating to the transactions contemplated herein as required by the
HSR Act, as well as comparable pre-merger notification forms required by the
merger notification or control laws and regulations of any applicable
jurisdiction, as agreed to by the parties. The Company and Parent each shall
promptly (a) supply the other with any information which may be required in
order to effectuate such filings and (b) supply any additional information which
reasonably
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may be required by the FTC, the DOJ or the competition or merger control
authorities of any other jurisdiction and which the parties may reasonably deem
appropriate.
5.9 Notification of Certain Matters; Financial Statements.
(a) The Company and the Founders shall give prompt notice to Parent of
(i) the occurrence or non-occurrence of any event, the occurrence or
non-occurrence of which is likely to cause any representation or warranty
of the Company or the Founders, respectively, contained in this Agreement
to be untrue or inaccurate at or prior to the Effective Time and (ii) any
failure of the Company or the Founders, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder in each case such that the conditions contained
in Section 6.3(a) would not be satisfied; provided, however, that the
delivery of any notice pursuant to this Section 5.9 shall not (x) limit or
otherwise affect any remedies available to the party receiving such notice
or (y) constitute an acknowledgment or admission of a breach of this
Agreement by the Company or the Founders. No disclosure by the Company or
the Founders pursuant to this Section 5.9, however, shall be deemed to
amend or supplement the Disclosure Schedule or prevent or cure any
misrepresentations, breach of warranty or breach of covenant.
(b) The Company shall deliver to Parent as soon as practicable but in
any event within fifteen (15) calendar days after the end of each monthly
accounting period beginning with the month ended June 30, 1998 and ending
with the monthly accounting period occurring before the earlier of the
Closing Date or the termination of this Agreement in accordance with its
terms, an unaudited consolidated balance sheet and a statement of
operations for the Company, which financial statements shall be prepared in
the ordinary course of business, in accordance with the Company's books and
records and GAAP (except that such financial statements need not contain
the footnotes required by GAAP) and shall fairly present the consolidated
financial position of the Company as of their respective dates and the
results of the Company's operations for the periods then ended.
5.10 Additional Documents and Further Assurances. Each party hereto, at
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.11 Employee Plans. The Company shall cause its 401(k) plan to terminate
effective as of the day immediately preceding the Closing Date.
5.12 Employee Compensation. Except as set forth in Section 5.15(a) of the
Disclosure Schedule, each person who was an employee of the Company immediately
prior to the Effective Time, shall be, at the Effective Time, upon proof of the
right to work in the United States (or such other country in which such
employee's principal place of employment is located), an at-will employee of
Parent or the Surviving Corporation. Parent shall notify all employees of the
Company of the terms of their employment with Parent or the Surviving
Corporation within thirty (30) days after the Closing Date which such
descriptions shall (i) not provide for a reduction in annual salary and total on
target bonus cash compensation from that applicable to any such employee of the
Company as set forth in Section 5.12(b) of the Disclosure Schedule with such
changes as Parent shall approve in writing, (ii) in the case of sales
representatives and sales engineers, shall specify the sales compensation plan
and (iii) in the case of engineers, describe project bonus opportunities, in
each case, consistent with Parent's existing human resources policies. Each
employee of the Company who remains an employee of Parent or the Surviving
Corporation after the Effective Time shall be eligible, upon completion of
Parent's standard employee background and reference check, to receive salary and
benefits (such as medical benefits, bonuses, 401(k) and stock options)
consistent with Parent's standard human resource policies and shall receive
credit under such policies for prior service at the Company. Any employee of the
Company who remains an employee of Parent or the Surviving Corporation after the
Effective Time who is terminated without cause within twelve (12) months after
the Closing Date shall be entitled to receive, upon execution of a severance
release in Parent's standard form, notification and severance benefits in an
amount provided for by Parent's standard notification and severance policies
plus an additional amount (if applicable) by which Parent's standard
notification and severance policies provide, in the
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aggregate, for less than six month's base salary from the date of notification
(plus any other benefits and transition assistance provided for in Parent's
standard severance policies). For purposes of this Section 5.12, the term
"terminated without cause" shall include voluntary termination following the
assignment of such employee to a principal place of employment with Parent or
the Surviving Corporation greater than fifty (50) miles from such employee's
principal place of employment with the Company prior to the Effective Time and
"constructive termination" as such term is defined in Parent's standard policy
effective as of July 1, 1998.
5.13 Rule 145 Affiliate Agreements. Schedule 5.13 sets forth those persons
who, in the Company's reasonable judgment, are or may be "affiliates" of the
Company within the meaning of Rule 145 (each such person a "Rule 145 Affiliate")
promulgated under the Securities Act ("Rule 145"). The Company shall provide
Parent such information and documents as Parent shall reasonably request for
purposes of reviewing such list. The Company shall deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
any case prior to the Effective Time) from each of the Rule 145 Affiliates of
the Company, an executed agreement ("Rule 145 Affiliate Agreement") in the form
attached hereto as Exhibit E. Parent and Sub shall be entitled to place
appropriate legends on the certificates evidencing any Parent Common Stock to be
received pursuant to the terms of this Agreement by such Rule 145 Affiliates who
own greater than 1% of the outstanding Parent Common Stock after the Effective
Time, and to issue appropriate stop transfer instructions to the transfer agent
for Parent Common Stock, consistent with the terms of such Rule 145 Affiliate
Agreements.
5.14 No Actions Inconsistent With Tax-Free Reorganization. Parent and
Merger Sub shall (and, following the Effective Time, Parent shall cause the
Company to) take no action with respect to the Capital Stock, assets or
liabilities of the Company that could reasonably be expected to cause the Merger
to fail to qualify as a "reorganization" within the meaning of Section
368(a)(1)(A) of the Code.
5.15 Nasdaq Listing. Parent agrees to authorize for listing on the Nasdaq
National Market the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, upon official notice
of issuance.
5.16 Form S-8. Parent shall file a registration statement on Form S-8 to
register shares of Parent Common Stock issuable upon exercise of assumed Company
Options within forty-five (45) days after the Closing Date.
5.17 Termination of Obligations. Prior to the Effective Time, the Company
shall use such portion of the Principal Amount (as defined in the Note), so long
as such amount is sufficient for such purpose, necessary to satisfy all
outstanding obligations of indebtedness of the Company at or prior to the
Effective Time and shall maintain sufficient cash reserves from the Principal
Amount equal to the amount of any guaranties granted by the Company with respect
to any indebtedness of third parties.
5.18 Directors' and Officers' Indemnification.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the
Company pursuant to any indemnification agreements between the Company and
its directors and officers existing prior to the date hereof.
(b) The Articles of Incorporation and Bylaws of the Surviving
Corporation will contain the provisions set forth in Article Fifth of the
Company's Articles of Incorporation, as currently in effect, and Article
Sixth of the Bylaws of the Company, as currently in effect, which
provisions will not be amended, repealed or otherwise modified for a period
of three years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who, immediately prior to the
Effective Time, were directors, officers, employees or agents of the
Company, unless such modification is required by law.
(c) Parent shall (i) assume, as of the Effective time, all obligations
of the Company under Article Fifth of the Company's Articles of
Incorporation, as currently in effect, and Article Sixth of the Bylaws of
the Company, as currently in effect, and (ii) to pay all amounts that
become due and payable under such provisions.
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(d) This Section 5.18 shall survive the consummation of the Merger, is
intended to benefit the Company, the Surviving Company and each indemnified
party, shall be binding, jointly and severally, on all successors and
assigns of the Surviving Corporation and Parent, and shall be enforceable
by the indemnified parties.
(e) Notwithstanding anything to the contrary in this Section 5.18,
Parent and the Surviving Corporation shall not be liable for any amounts
payable resulting from any claim or action brought by any officer or
director of the Company or any of their affiliates.
(f) Parent shall have full recourse to the Escrow Fund (during the
Escrow Period) to recover any amounts payable by Parent or the Surviving
Corporation pursuant to this Section 5.18.
5.19 Restricted Stock Purchase Agreement. Prior to the Closing Date,
Parent shall execute and deliver Restricted Stock Purchase Agreements, each in
the form attached hereto as Exhibit F, to allocate a number of shares of
restricted stock of Parent equal to $1,800,000 divided by the Trading Price to
such employees of the Company chosen by Parent in its sole discretion with the
input of the Company's president.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of the Company and Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
initiated or threatened in writing by the SEC.
(b) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger. All waiting periods under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(c) Tax Opinions. The Company and Parent shall each have received
written opinions from their respective counsel, Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian and Wilson Sonsini Goodrich & Rosati,
Professional Corporation, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; provided,
however, that if the counsel to either the Company or Parent does not
render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided that
Parent, Sub and the Company have used reasonable efforts to remove such
injunction, order, restraint or prohibition; nor shall any proceeding
brought by an administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, seeking any of the
foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable
to the Merger, which makes the consummation of the Merger illegal.
6.2 Conditions to Obligations of Company and the Founders. The obligations
of the Company and the Founders to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject
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to the satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of Parent and Sub in this Agreement (other than the
representations and warranties of Parent and Sub as of a specified date,
which will be true and correct as of such date) shall be true and correct
on and as of the Effective Time as though such representations and
warranties were made on and as of such time, except where any inaccuracies
or breaches in any such representations and warranties have not,
individually or in the aggregate, had and would not, individually or in the
aggregate, have a Parent Material Adverse Effect, and (ii) each of Parent
and Sub shall have performed and complied in all material respects with all
covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by an authorized officer to the
effect that, as of the Effective Time:
(i) all representations and warranties made by Parent and Sub in
this Agreement (other than the representations and warranties of Parent
and Sub as of a specified date, which will be true and correct as of
such date) are true and correct on and as of the Effective Time as
though such representations and warranties were made on and as of such
time, except where any inaccuracies or breaches in any such
representations and warranties has not, individually or in the
aggregate, had and would not, individually or in the aggregate, have a
Company Material Adverse Effect; and
(ii) all covenants and obligations of this Agreement to be
performed by Parent on or before such date have been so performed in all
material respects.
6.3 Conditions to the Obligations of Parent and Sub. The obligations of
Parent and Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. (i) The representations
and warranties of the Company and the Founders in this Agreement (other
than those contained in Section 2.18 and other than the representations and
warranties of the Company and the Founders as of a specified date, which
will be true and correct as of such date) shall be true and correct on and
as of the Effective Time as though such representations and warranties were
made on and as of the Effective Time, except where any inaccuracies or
breaches in any such representations and warranties has not, individually
or in the aggregate, had and would not, individually or in the aggregate,
have a Company Material Adverse Effect, and (ii) each of the Company and
the Founders shall have performed and complied in all material respects
with all covenants and obligations of this Agreement required to be
performed and complied with by them as of the Effective Time.
(b) Third Party Consents. The consents, waivers, assignments and
approvals listed in Section 6.3 of the Disclosure Schedule shall have been
obtained.
(c) Legal Opinion. Parent shall have received a legal opinion from
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, legal counsel to
the Company, substantially in the form of Exhibit C hereto.
(d) Company Employees. No more than (i) thirty (30) employees
(excluding interns) of the Company or any of its Subsidiaries listed on
Section 5.12(b) of the Disclosure Schedule nor (ii) fifteen (15) of the
employees listed in Section 6.3(d) of the Disclosure Schedule shall have
voluntarily or involuntarily (without, for purposes of clauses (i) and
(ii), the consent of Parent, which consent was not unreasonably withheld)
terminated their employment with the Company or any of its Subsidiaries
since the date of this Agreement, and each of the Key Employees shall be
employed by the Company immediately prior to the Effective Time.
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(e) Shareholder Approval; Dissenters. Shareholders holding at least
ninety percent (90%) of the Company's Capital Stock, including not less
than a majority of the outstanding Company Common Stock and a majority of
the outstanding Company Preferred Stock shall have approved this Agreement,
the Merger and the transactions contemplated hereby and thereby.
Shareholders holding no more than (10%) shall have exercised or given
notice of their intent to exercise appraisal rights in accordance with
California Law. Shareholders shall have approved by the requisite vote any
payments of cash in exchange for Company Capital Stock that may be deemed
to constitute "parachute payments" pursuant to Section 280G of the Code,
such that all such payments, sales and purchases resulting from the
transactions contemplated hereby shall not be deemed to be "parachute
payments" pursuant to Section 280G of the Code or shall be exempt from such
treatment under such Section.
(f) Release of Liens. The Company shall have provided Parent with
evidence reasonably satisfactory to Parent of the release of the Liens
listed in Section 6.3(f) of the Disclosure Schedule.
(g) Resignation of Directors. Each director of the Company and each
director of each Subsidiary shall have resigned from such position
effective as of the Effective Time.
(h) Certificate of the Company and Founders. Parent shall have been
provided with a certificate executed by the Founders and executed on behalf
of the Company by its Chief Executive Officer to the effect that, as of the
Effective Time:
(i) all representations and warranties made by the Company and the
Founders in this Agreement (other than those contained in Section 2.18
and other than the representations and warranties of the Company and the
Founders as of a specified date, which will be true and correct as of
such date) are true and correct on and as of the Effective Time as
though such representations and warranties were made on and as of such
time, except where any inaccuracies or breaches in any such
representations and warranties has not, individually or in the
aggregate, had and would not, individually or in the aggregate, have a
Company Material Adverse Effect;
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed
in all material respects; and
(iii) the provisions set forth in Sections 6.3(b), (d), (e) and (f)
have been satisfied.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
7.1 Survival of Representations and Warranties. The Company's and each of
the Founders' representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall terminate on the first
anniversary of the Closing Date. All of Parent's and Sub's representations and
warranties contained in this Agreement or in any instrument delivered pursuant
to this Agreement shall terminate at the Effective Time.
7.2 Indemnification. The Company and the Shareholders, including the
Founders, agree to indemnify and hold Parent and its officers, directors and
affiliates (the "Indemnified Parties") harmless against all claims, losses,
liabilities, damages, deficiencies, costs and expenses, including reasonable
attorneys' fees and expenses of investigation and defense (hereinafter
individually a "Loss" and collectively "Losses") incurred by Parent, its
officers, directors, or affiliates (including the Surviving Corporation)
directly or indirectly as a result of (i) any inaccuracy or breach of a
representation or warranty of the Company or the Founders contained in this
Agreement, (ii) any failure by the Company or the Founders to perform or comply
with any covenant contained in this Agreement or (iii) Parent's or the Surviving
Corporation's obligations pursuant to Section 5.18. The Shareholders shall not
have any right of contribution from the Company with respect to any Loss claimed
by an Indemnified Party after the Effective Time.
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7.3 Escrow Arrangements.
(a) Escrow Fund. As security for the indemnity provided for in Section
7.2 hereof and by virtue of this Agreement and the Merger Agreement, the
Company and the Shareholders will be deemed to have received and deposited
with the Escrow Agent (as defined below) the Escrow Amount (as defined
below) (plus any additional shares as may be issued upon any stock split,
stock dividend or recapitalization effected by Parent after the Effective
Time with respect to the Escrow Amount) without any act of the Company or
any Shareholders. As soon as practicable after the Effective Time, the
Escrow Amount, without any act of any Shareholders, will be deposited with
U.S. Bank Trust, N.A. (or other institution acceptable to Parent and the
Securityholder Agent (as defined in Section 7.3(g) below)) as Escrow Agent
(the "Escrow Agent"), such deposit to constitute an escrow fund (the
"Escrow Fund") to be governed by the terms set forth herein. The Escrow
Agent may execute this Agreement following the date hereof and prior to the
Effective Time, and such latter execution shall not affect the binding
nature of this Agreement as of the date hereof among the signatories
hereto. Nothing herein shall limit the liability of Parent or the Company
for any breach of any representation, warranty, or covenant contained in
this Agreement if the Merger does not close. If the Merger does not close,
no Founder shall have any liability under this Agreement except for
breaches of covenants of such Founder contained in this Agreement and in
any Related Agreement to which the Founder is a party. Parent may not
receive any shares from the Escrow Fund unless and until Officer's
Certificates (as defined in paragraph (d)(i) below) identifying Losses, in
excess of $500,000 (the "Basket Amount") have been delivered to the Escrow
Agent as provided in paragraph (d) below, in which case Parent shall be
entitled to recover all Losses including the Basket Amount; provided,
however, with respect to (i) Third Party Expenses in excess of the greater
of (A) Estimated Third Party Expenses or (B) $2,250,000 (or such greater
amount not to exceed $2,500,000 approved by Parent pursuant to Section 5.4
hereof), (ii) any amounts in excess of Total Consideration required to be
paid to holders of Company Capital Stock in respect of their exercise of
appraisal rights, and (iii) any amounts required to be paid by Parent or
the Surviving Corporation pursuant to Section 5.18, the aforementioned
$500,000 Basket Amount shall not be applicable for purposes of claims of
Losses against the Escrow Amount; provided, further, that, in no event
shall the Company or the Shareholders be liable to Parent for any
individual Loss of less than $50,000 incurred or suffered by Parent unless
and until the aggregate amount of all individual Losses less than $50,000
exceeds $500,000 in which case the Shareholders shall be liable for all
amounts in excess of $500,000.
(b) Escrow Period; Distribution upon Termination of Escrow
Periods. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at
5:00 p.m., P.S.T., on the 30th day following the one-year anniversary of
the Closing Date (the "Escrow Period"); provided that the Escrow Period
shall not terminate with respect to such remaining portion of the Escrow
Fund (or some portion thereof) that in the reasonable judgement of Parent,
subject to the objection of the Securityholder Agent (as defined below) and
the subsequent arbitration of the matter in the manner provided in Section
7.3(f) hereof, is necessary to satisfy (x) any then pending unsatisfied
claims specified in any Officer's Certificate delivered to the Escrow Agent
prior to the termination of the Escrow Period and (y) any unsatisfied
claims specified in any Officer's Certificate delivered to the Escrow Agent
prior to termination of the Escrow Period with respect to facts and
circumstances existing prior to the termination of such Escrow Period. As
soon as all such claims have been resolved and all Third Party Expenses
have been paid pursuant to Section 5.4 hereof, the Escrow Agent shall
deliver to the Shareholders the remaining portion of the Escrow Fund not
required to satisfy such claims and Third Party Expenses and Net
Liabilities. Deliveries of Escrow Amounts to the Shareholders pursuant to
this Section 7.3(b) shall be made in proportion to their respective
original contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and not as the
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property of Parent and shall hold and dispose of the Escrow Fund only in
accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow
Fund which have not been released from the Escrow Fund shall be added to
the Escrow Fund and become a part thereof. New Shares issued in respect
of shares of Parent Common Stock which have been released from the
Escrow Fund shall not be added to the Escrow Fund but shall be
distributed to the record holders thereof. Cash dividends on Parent
Common Stock shall not be added to the Escrow Fund but shall be
distributed to the record holders thereof.
(iii) Each Shareholder shall have voting rights and the right to
distributions of dividends with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Shareholders (and on any
voting securities added to the Escrow Fund in respect of such shares of
Parent Common Stock). As the record holder of such shares, the Escrow
Agent shall vote such shares in accordance with the instructions of the
Shareholders having the beneficial interest therein and shall promptly
deliver copies of all proxy solicitation materials to such Shareholders.
Parent shall show the Parent Common Stock contributed to the Escrow Fund
as issued and outstanding on its balance sheet.
(d) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of
Parent (an "Officer's Certificate"): (A) stating that Parent has paid or
properly accrued or reasonably anticipates that it will have to pay or
accrue Losses, and (B) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such
item was paid or properly accrued, or the basis for such anticipated
liability, and the nature of the misrepresentations, breach of warranty
or covenant to which such items is related, the Escrow Agent shall,
subject to the provisions of Section 7.3(e), deliver to Parent out of
the Escrow Fund as promptly as practicable, shares of Parent Common
Stock held in the Escrow Fund in an amount equal to such Losses.
(ii) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to Section 7.3(b) and 7.3(d)(i) hereof, the shares of
Parent Common Stock shall be valued at the average closing sales price
of Parent Common Stock as reported on the Nasdaq National Market for the
ten (10) consecutive trading days ending three (3) business days before
such shares of Parent Common Stock are delivered to Parent.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall
be delivered to the Securityholder Agent and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Parent
of any Escrow Amounts pursuant to Section 7.3(d) hereof unless the Escrow
Agent shall have received written authorization from the Securityholder
Agent to make such delivery. After the expiration of such thirty (30) day
period, the Escrow Agent shall make delivery of shares of Parent Common
Stock from the Escrow Fund in accordance with Section 7.3(d) hereof,
provided that no such payment or delivery may be made if the Securityholder
Agent shall object in a written statement to the claim made in the
Officer's Certificate, and such statement shall have been delivered to the
Escrow Agent prior to the expiration of such thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Securityholder Agent shall so object in writing to
any claim or claims made in any Officer's Certificate, the
Securityholder Agent and Parent shall attempt in good faith to agree
upon the rights of the respective parties with respect to each of such
claims. If the Securityholder Agent and Parent should so agree, a
memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow
Agent shall be
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entitled to rely on any such memorandum and distribute shares of Parent
Common Stock from the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Securityholder Agent may demand
arbitration of the matter unless the amount of the damage or loss is at
issue in pending litigation with a third party, in which event
arbitration shall not be commenced until such amount is ascertained or
both parties agree to arbitration; and in either such event the matter
shall be settled by arbitration conducted by one arbitrator mutually
agreeable to Parent and the Securityholder Representative. In the event
that within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Securityholder Representative cannot
mutually agree on one arbitrator, Parent and the Securityholder
Representative shall each select one arbitrator, and the two arbitrators
so selected shall select a third arbitrator. The arbitrator or
arbitrators, as the case may be, shall set a limited time period and
establish procedures designed to reduce the cost and time for discovery
while allowing the parties an opportunity, adequate in the sole
judgement of the arbitrator or majority of the three arbitrators, as the
case may be, to discover relevant information from the opposing parties
about the subject matter of the dispute. The arbitrator or a majority of
the three arbitrators, as the case may be, shall rule upon motions to
compel or limit discovery and shall have the authority to impose
sanctions, including attorneys' fees and costs, to the extent as a court
of competent law or equity, should the arbitrator or a majority of the
three arbitrators, as the case may be, determine that discovery was
sought without substantial justification or that discovery was refused
or objected to without substantial justification. The decision of a the
arbitrator or a majority of the three arbitrators, as the case may be,
as to the validity and amount of any claim in such Officer's Certificate
shall be binding and conclusive upon the parties to this Agreement, and
notwithstanding anything in Section 7.3(e) hereof, the Escrow Agent
shall be entitled to act in accordance with such decision and make or
withhold payments out of the Escrow Fund in accordance therewith. Such
decision shall be written and shall be supported by written findings of
fact and conclusions which shall set forth the award, judgment, decree
or order awarded by the arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Any such arbitration shall be
held in Santa Clara County, California under the rules then in effect of
the American Arbitration Association. The arbitrator(s) shall determine
how all expenses relating to the arbitration shall be paid, including
without limitation, the respective expenses of each party, the fees of
each arbitrator and the administrative fee of the American Arbitration
Association.
(g) Securityholder Agent of the Shareholders; Power of Attorney.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any Shareholders, John Hummer shall be
appointed as agent and attorney-in-fact (the "Securityholder Agent") for
each Shareholder of the Company, for and on behalf of Shareholders, to
give and receive notices and communications, to authorize delivery to
Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree
to, negotiate, enter into settlements and compromises of, and demand
arbitration and comply with orders of courts and awards of arbitrators
with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agent for the
accomplishment of the foregoing. Such agency may be changed by the
Shareholders from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Securityholder Agent may not
be removed unless holders of a majority interest of the Escrow Fund
agree to such removal and to the identity of the substituted agent. No
bond shall be required of the Securityholder Agent, and the
Securityholder Agent shall not receive compensation for his or her
services. Notices or communications to or from the Securityholder Agent
shall constitute notice to or from each of the Shareholders.
(ii) The Securityholder Agent shall not be liable for any act done
or omitted hereunder as Securityholder Agent while acting in good faith
and in the exercise of reasonable judgment. The
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Shareholders on whose behalf the Escrow Amount was contributed to the
Escrow Fund shall severally indemnify the Securityholder Agent and hold
the Securityholder Agent harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the
Securityholder Agent and arising out of or in connection with the
acceptance or administration of the Securityholder Agent's duties
hereunder, including the reasonable fees and expenses of any legal
counsel retained by the Securityholder Agent.
(h) Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all
the Shareholders for whom a portion of the Escrow Amount otherwise issuable
to them are deposited in the Escrow Fund and shall be final, binding and
conclusive upon each of such Shareholders, and the Escrow Agent and Parent
may rely upon any such decision, act, consent or instruction of the
Securityholder Agent as being the decision, act, consent or instruction of
each and every such Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the
Securityholder Agent.
(i) Third-Party Claims. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Securityholder Agent of such claim,
and the Securityholder Agent and the Shareholders of the Company shall be
entitled, at their expense, to participate in any defense of such claim.
Parent shall have the right in its sole discretion to settle any such
claim; provided, however, that except with the consent of the
Securityholder Agent, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim against the
Escrow Fund. In the event that the Securityholder Agent has consented to
any such settlement, the Securityholder Agent shall have no power or
authority to object under any provision of this Article VII to the amount
of any claim by Parent against the Escrow Fund with respect to such
settlement.
(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in
any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer
of Parent and the Securityholder Agent, and may rely and shall be
protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented
by the proper party or parties. The Escrow Agent shall not be liable for
any act done or omitted hereunder as Escrow Agent while acting in good
faith and in the exercise of reasonable judgment, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence
of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other
person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or
decrees of any court. In case the Escrow Agent obeys or complies with
any such order, judgment or decree of any court, the Escrow Agent shall
not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any
documents or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement
or any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses,
except for negligence or willful misconduct on the part of the Escrow
Agent. The Escrow Agent shall not incur any such liability for (A) any
act or failure to act
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made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement of
affidavit provided for in this Agreement that the Escrow Agent shall in
good faith believe to be genuine, nor will the Escrow Agent be liable or
responsible for forgeries, fraud, impersonations, or determining the
scope of any representative authority. In addition, the Escrow Agent may
consult with the legal counsel in connection with Escrow Agent's duties
under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by him/her in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining
and verifying the authority of any person acting or purporting to act on
behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of
this Agreement, its terms or conditions, the Escrow Agent will not be
required to determine the controversy or to take any action regarding
it. The Escrow Agent may hold all documents and shares of Parent Common
Stock and may wait for settlement of any such controversy by final
appropriate legal proceedings or other means as, in the Escrow Agent's
discretion, the Escrow Agent may be required, despite what may be set
forth elsewhere in this Agreement. In such event, the Escrow Agent will
not be liable for damages.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader requiring the parties to answer and litigate any claims and
rights among themselves. The Escrow Agent is authorized to deposit with
the clerk of the court all documents and shares of Parent Common Stock
held in escrow, except all cost, expenses, charges and reasonable
attorney fees incurred by the Escrow Agent due to the interpleader
action and which the parties jointly and severally agree to pay. Upon
initiating such action, the Escrow Agent shall be fully released and
discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and expenses,
including reasonable costs of investigation, counsel fees, including
allocated costs of in-house counsel and disbursements that may be
imposed on Escrow Agent or incurred by Escrow Agent in connection with
the performance of his/her duties under this Agreement, including but
not limited to any litigation arising from this Agreement or involving
its subject matter other than arising out of its negligence or willful
misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to Parent and the Securityholder Agent;
provided, however, that no such resignation shall become effective until
the appointment of a successor escrow agent which shall be accomplished
as follows: the parties shall use their best efforts to mutually agree
on a successor escrow agent within thirty (30) days after receiving such
notice. If the parties fail to agree upon a successor escrow agent
within such time, the Escrow Agent shall have the right to appoint a
successor escrow agent authorized to do business in the state of
California. The successor escrow agent shall execute and deliver an
instrument accepting such appointment and it shall, without further
acts, be vested with all the estates, properties, rights, powers, and
duties of the predecessor escrow agent as if originally named as escrow
agent. Upon appointment of a successor escrow agent, the Escrow Agent
shall be discharged from any further duties and liability under this
Agreement.
(k) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent in accordance with the standard fee
schedule of the Escrow Agent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In
the event that the conditions of this Agreement are not promptly fulfilled,
or if the Escrow Agent renders any service not provided for in this
Agreement, or if the parties request a substantial modification of its
terms, or if any controversy arises, or if the Escrow Agent is made a party
to, or intervenes in, any litigation pertaining to the Escrow Fund or its
subject matter, the Escrow Agent shall be reasonably compensated for such
extraordinary services and reimbursed for all costs, attorney's fees,
including allocated costs of in-house counsel, and expenses
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occasioned by such default, delay, controversy or litigation. Parent
promises to pay these sums upon demand.
7.4 Maximum Payments; Remedy. If the Merger closes, the Escrow Fund shall
be the exclusive remedy of Parent for breaches or inaccuracies of the
representations and warranties or breaches of covenants of the Company or the
Founders contained in this Agreement, except to the extent set forth in this
Section 7.4 with respect to any such breach or inaccuracy of such
representations and warranties and any such breach of such covenants resulting
from fraud by a Founder or the Company (a "Fraudulent Breach"). Each Founder
hereby agrees to indemnify each Indemnified Party for Losses suffered by such
Indemnified Party resulting from a Fraudulent Breach by such Founder; provided
that (i) no Founder shall be required to indemnify an Indemnified Party with
respect to Losses resulting from a Fraudulent Breach by any other Founder unless
such Founder also committed such Fraudulent Breach and (ii) the maximum amount
that a Founder shall be required to indemnify for Losses resulting from a
Fraudulent Breach by such Founder shall not exceed that portion of the Total
Consideration, valued as of the Effective Time, received by such Founder
pursuant to Section 1.6(b) of this Agreement (less the amount of such
consideration received by Founder and deposited in the Escrow Fund pursuant to
such Section 1.8(b)) assuming for purposes of calculating the portion of the
Total Consideration so received by each such Founder that the number and type of
shares of Company Capital Stock with respect to which each such Founder receives
shares of Parent Common Stock pursuant to Section 1.6(b) of this Agreement is
the number and type of shares of Company Capital Stock indicated as beneficially
owned by such Founder and/or an entity related to such Founder on the signature
page of the respective Voting Agreement, dated as of the date hereof, executed
and delivered by each such Founder or an entity related to such Founder to
Parent as of the date hereof, in each case, as listed in Section 7.4 of the
Disclosure Schedule. For purposes of this Agreement and this Section 7.4, a
Founder shall not be deemed to have Knowledge of the existence or the
nonexistence of any facts or circumstances with respect to a representation or
warranty set forth in Article II and not expressly qualified as to Knowledge
which is subsequently determined to be untrue or otherwise breached solely by
virtue of having made such a representation or warranty set forth in Article II
without qualification as to Knowledge.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by November 30, 1998, provided, however, that the right to
terminate this Agreement under this Section 8.1(b)(i) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement; (ii) there shall be a final nonappealable order of a federal or
state court in effect preventing consummation of the Merger; or (iii) there
shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any Governmental Entity that
would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i)
prohibit Parent's or Sub's ownership or operation of a material portion of
the business of the Company, (ii) compel Parent or the Company to dispose
of or hold separate all or a material portion of the business or assets of
the Company or (iii) compel Parent to dispose or hold separate all or a
portion of the business or assets of Parent;
(d) by Parent if it is not in material breach of its obligations under
this Agreement, upon a breach of any representation, warranty, covenant or
agreement of the Company or the Founders contained in this Agreement such
that the conditions set forth in Section 6.3(a) would not be satisfied and
such breach has
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not been cured within thirty (30) calendar days after written notice to the
Company; provided, however, that, no cure period shall be required for a
breach which by its nature cannot be cured; or
(e) by the Company if neither it nor any Founder is in material breach
of their respective obligations under this Agreement, upon a breach of any
representation, warranty, covenant or agreement of Parent or Sub contained
in this Agreement such that the conditions set forth in Section 6.2(a)
would not be satisfied and such breach has not been cured within thirty
(30) calendar days after written notice to Parent; provided, however, that
no cure period shall be required for a breach which by its nature cannot be
cured.
(f) by Parent, if on or prior to the earlier to occur of ten (10) days
after the mailing of the Proxy Statement to the Shareholders, or twenty
(20) days after the Registration Statement is declared effective by the
SEC, the Company has not delivered to Parent irrevocable proxies
authorizing Parent (or such person or persons designated by Parent prior to
the mailing of the Proxy Statement) to vote such number of shares of
Company Capital Stock in favor of the adoption and approval of this
Agreement, the approval of the Merger and such other matters as are
included in the Voting Agreements such that the number of shares subject to
such proxies when added to the number of shares which parties to the Voting
Agreements have agreed to vote equal a majority of the outstanding Company
Common Stock and a majority of the outstanding Company Preferred Stock
eligible to vote on such matters.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub or the Company,
or their respective officers, directors or Shareholders, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.3, 5.4(a) and
5.5, Article IX and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of Parent, Sub,
the Company and the Founders.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company and the Founders, on the other hand, may,
to the extent legally allowed, (i) extend the time for the performance of any of
the obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), provided, however,
that notices sent by mail will not be deemed given until received:
(a) if to Parent or Sub, to:
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, California 94303
Attention: General Counsel
Telephone No.: (650) 960-1300
Facsimile No.: (650) 336-0530
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: David J. Segre, Esq.
Daniel R. Mitz, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(b) if to the Company, to
NetDynamics, Inc.
185 Constitution Avenue
Menlo Park, California 94025
Attention: Zah Rinat
Telephone No.: (650) 462-7620
Facsimile No.: (650) 463-2853
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
155 Constitution Drive
Menlo Park, California 94025
Attention: Robert V. Gunderson, Jr., Esq.
Telephone No.: (650) 321-2400
Facsimile No.: (650) 321-2800
(c) if to the Founders, to:
NetDynamics, Inc.
185 Constitution Avenue
Menlo Park, California 94025
Attention: Zah Rinat
Telephone No.: (650) 462-7620
Facsimile No.: (650) 463-2853
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(d) If to the Escrow Agent, to:
U.S. Bank Trust, N.A.
One California Street, 4th Floor
San Francisco, California 94111
Telephone No.: (415) 273-4532
Facsimile No.: (415) 273-4593
Attention: Barbara Wise
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, the
Confidential Disclosure Agreement, dated February 10, 1998, between the Company
and Parent and the documents and instruments and other agreements among the
parties hereto referenced herein: (a) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings both written and oral, among the parties with
respect to the subject matter hereof; (b) are not intended to confer upon any
other person any rights or remedies hereunder; and (c) shall not be assigned
(other than by operation of law), except that Parent and Sub may assign their
respective rights and delegate their respective obligations hereunder to their
respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 Other Remedies. Any and all remedies herein expressly conferred upon a
party will be deemed cumulative with and not exclusive of any other remedy
conferred hereby, or by law or equity upon such party, and the exercise by a
party of any one remedy will not preclude the exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 Attorneys Fees. If any action or other proceeding relating to the
enforcement of any provision of this Agreement is brought by 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).
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<PAGE> 142
IN WITNESS WHEREOF, Parent, Sub, the Company and the Founders have caused
this Agreement to be signed, all as of the date first written above.
<TABLE>
<S> <C>
SUN MICROSYSTEMS, INC. NETDYNAMICS, INC.
By: /s/ ALAN E. BARATZ By: /s/ ZACK RINAT
Name: Alan E. Baratz Name: Zack Rinat
Title: Authorized Officer Title: President and Chief Executive Officer
APOLLO ACQUISITION CORP. FOUNDERS:
By: /s/ MICHAEL LEHMAN /s/ OFER BEN-SHACHAR
Name: Michael Lehman Ofer Ben-Shachar
Title: President
/s/ ZACK RINAT
Zack Rinat
ESCROW AGENT: /s/ A. BROOKE SEAWELL
A. Brooke Seawell
U.S. Bank Trust, N.A.
/s/ DORON SHERMAN
Doron Sherman
By: /s/ BARBARA WISE
Name: Barbara Wise
Title: Vice President
SECURITYHOLDER REPRESENTATIVE:
By: /s/ JOHN R. HUMMER
Name: John R. Hummer
</TABLE>
[SIGNATURE PAGE TO REORGANIZATION AGREEMENT]
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ANNEX B
FORM OF
VOTING AGREEMENT
This Voting Agreement (the "Agreement") is made and entered into as of June
30, 1998 by and among Sun Microsystems, Inc., a Delaware corporation ("Parent"),
NetDynamics, Inc., a California corporation (the "Company"), and
, the undersigned shareholder (the "Shareholder") of the
Company.
WHEREAS, concurrently with the execution of this Agreement, Parent, Apollo
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Parent ("Sub"), the Company and certain shareholders of the Company have entered
into an Agreement and Plan of Reorganization (the "Merger Agreement"), which
provides for the merger (the "Merger") of Sub with and into the Company;
WHEREAS, pursuant to the Merger, all of the issued and outstanding shares
of capital stock of the Company will be converted into the right to receive
shares of common stock of Parent pursuant to the terms of the Merger Agreement;
WHEREAS, Shareholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
the number of shares of outstanding capital stock of the Company set forth on
the signature page of this Agreement (collectively, the "Shares"); and
WHEREAS, in consideration of the execution of the Merger Agreement by
Parent, Shareholder desires to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of the Company acquired by
Shareholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), and desires to vote the Shares and any other such shares of capital
stock of the Company so as to facilitate consummation of the Merger.
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. Shareholder agrees, during the period
beginning on the date hereof and ending on the Expiration Date, not to transfer,
sell, exchange, pledge or otherwise dispose of or encumber (collectively,
"Transfer") any of the Shares or any New Shares (as defined in Section 1.2
below) or to discuss, negotiate, or make any offer or agreement relating thereto
other than to or with Parent. Shareholder acknowledges that the intent of the
foregoing sentence is to ensure that Parent retains the right under the Proxy
(as defined in Section 3 below) to vote the Shares and any New Shares in
accordance with the terms of the Proxy. As used herein, the term "Expiration
Date" shall mean the earlier to occur of (i) such date and time as the Merger
shall become effective in accordance with the terms and provisions of the Merger
Agreement or (ii) the termination of the Merger Agreement in accordance with its
terms.
1.2 New Shares. Shareholder agrees that any shares of capital stock of
the Company that Shareholder purchases or with respect to which Shareholder
otherwise acquires beneficial ownership after the date of this Agreement and
prior to the Expiration Date ("New Shares") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted Shares.
2. Agreement to Vote Shares. At every meeting of shareholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of shareholders of
the Company with respect to any of the following, Shareholder shall vote the
Shares and any New Shares:
(i) in favor of approval of the Merger, the execution and delivery by
the Company of the Merger Agreement and the adoption and approval of the terms
thereof and in favor of each of the other actions contemplated by the Merger
Agreement and any action required in furtherance thereof;
(ii) against approval of any proposal made in opposition to or in
competition with consummation of the Merger and the Merger Agreement;
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<PAGE> 144
(iii) against any of the following actions (other than those actions
that relate to the Merger and the transactions contemplated by the Merger
Agreement): (A) any merger, consolidation, business combination, sale of assets,
merger or recapitalization of the Company with any party, (B) any sale, lease or
transfer of any significant part of the assets of the Company or any of its
subsidiaries, (C) any reorganization, recapitalization, dissolution, liquidation
or winding up of the Company or any of its subsidiaries, (D) any material change
in the capitalization of the Company or the Company's corporate structure, or
(E) any other action that 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 Merger Agreement;
(iv) in favor of approval of John Hummer as Shareholder Representative
for and on behalf of Shareholder purposes of Article VII of the Merger
Agreement; and
(v) in favor of approval of any payments or purchases, sales or
accelerations of capital stock of the Company in connection with the Merger that
may be deemed to constitute "parachute payments" pursuant to Section 280G of the
Internal Revenue Code of 1986, as amended, such that all such payments or
purchases, sales or accelerations resulting from transactions contemplated by
the Merger shall not be deemed to be "parachute payments" pursuant to such
Section 280G.
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 this Section.
3. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent an irrevocable proxy in the form
attached as Exhibit A (the "Proxy"), which shall be irrevocable to the fullest
extent permitted by law, covering the total number of Shares and New Shares of
capital stock of the Company beneficially owned (as such term is defined in Rule
13d-3 under the Exchange Act) by Shareholder set forth therein.
4. Appointment of Securityholder Agent. Shareholder agrees to appoint John
Hummer as agent and attorney-in-fact for and on behalf of Shareholder for
purposes of Article VII of the Merger Agreement. Shareholder further agrees to
any decision, act, consent or instruction of the Securityholder Agent shall
constitute a decision of Shareholder for the purposes of Article VII and that
such decision, act, consent or instruction shall be final, binding and
conclusive upon Shareholder.
5. Representations, Warranties and Covenants of Shareholder. Shareholder
represents, warrants and covenants to Parent as follows: Shareholder: (i) is the
sole beneficial owner of the Shares, which at the date of this Agreement and at
all times up until the Expiration Date will be free and clear of any rights of
first refusal, co-sale rights, security interests, liens, pledges, claims,
options, charges or other encumbrances, (ii) does not beneficially own any
shares of capital stock of the Company other than the Shares, and (iii) has full
power and authority to make, enter into and carry out the terms of this
Agreement, the Proxy, the Merger Agreement and any Related Agreements (as
defined in the Merger Agreement) to which Shareholder is a party.
6. Additional Documents. Shareholder and the Company hereby covenant and
agree to execute and deliver any additional documents reasonably necessary or
desirable to carry out the purpose and intent of this Agreement.
7. Consents and Waivers. Shareholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Shareholder is a party or pursuant to any rights
Shareholder may have.
8. Termination. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect on the
Expiration Date.
9. Legending of Shares. If so requested by Parent, Shareholder agrees that
the Shares and any New Shares shall bear a legend stating that they are subject
to this Agreement and to an irrevocable proxy. Shareholder agrees that he shall
not Transfer the Shares or any New Shares without first having the
aforementioned legend affixed to the certificates representing the Shares or any
New Shares.
B-2
<PAGE> 145
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by any of
the parties without the prior written consent of the other parties.
10.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
10.4 Waiver. No waiver by any party hereto of any condition or of any
breach of any provision of this Voting Agreement shall be effective unless in
writing.
10.5 Specific Performance; Injunctive Relief. The parties acknowledge
that Parent will be irreparably harmed and that there will be no adequate remedy
at law for a violation of any of the covenants or agreements of Shareholder set
forth herein. Therefore, it is agreed that, in addition to any other remedies
that may be available to Parent upon any such violation, Parent shall have the
right to enforce such covenants and agreements by specific performance,
injunctive relief or by any other means available to Parent at law or in equity.
10.6 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
If to Parent, to:
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, CA 94303
Attn: General Counsel
Telephone No.: (650) 960-1300
Facsimile No.: (650) 336-0530
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: David J. Segre, Esq.
Attn: Daniel R. Mitz, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
If to Shareholder:
To the address for notice set forth on the signature page
hereof.
10.7 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of California, without giving
effect to any choice or conflict of law provision or rule (whether of the State
of California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.
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<PAGE> 146
10.8 Attorneys' Fees and Expenses. If any action or other proceeding
relating to the enforcement of any provision of this Agreement is brought by
either party, 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).
10.9 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
10.10 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
10.11 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
<TABLE>
<S> <C>
SUN MICROSYSTEMS, INC. SHAREHOLDER
- -------------------------------------------- --------------------------------------------
Signature of Authorized Signatory Signature
- -------------------------------------------- --------------------------------------------
Print Name and Title Print Name
NETDYNAMICS, INC. --------------------------------------------
- -------------------------------------------- --------------------------------------------
Signature of Authorized Signatory Print Address
- -------------------------------------------- Shares beneficially owned:
Print Name and Title --------- shares of the Company Capital
Stock, including:
--------- shares of Series A Preferred Stock
--------- shares of Series B Preferred Stock
--------- shares of Series C Preferred Stock
--------- shares of the Company Capital
Stock
issuable upon exercise of
outstanding options
</TABLE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
B-4
<PAGE> 147
IRREVOCABLE PROXY
, the undersigned shareholder (the "Shareholder") of
Net Dynamics, Inc., a California corporation (the "Company"), hereby irrevocably
(to the fullest extent permitted by law) appoints Michael Lehman and Michael
Morris, each officers of Sun Microsystems, Inc., a Delaware corporation
("Parent"), and each of them, as the sole and exclusive attorneys and proxies of
the undersigned, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights (to the full extent that the undersigned
is entitled to do so) with respect to all of the shares of capital stock of the
Company that now are or hereafter may be beneficially owned by the undersigned,
and any and all other shares or securities of the Company issued or issuable in
respect thereof on or after the date hereof (collectively, the "Shares") in
accordance with the terms of this Proxy. The Shares beneficially owned by the
undersigned shareholder of the Company as of the date of this Proxy are listed
on the final page of this Proxy, along with the number(s) of the share
certificate(s) which represent such Shares. Upon the undersigned's execution of
this Proxy, any and all prior proxies given by each undersigned with respect to
any Shares are hereby revoked and the undersigned agrees not to grant any
subsequent proxies with respect to the Shares until after the Expiration Date
(as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement dated as of June , 1998 by and among Parent, the Company and the
Shareholder (the "Voting Agreement"), and is granted in consideration of Parent
entering into that certain Agreement and Plan of Reorganization dated as of June
, 1998 (the "Merger Agreement"), among Parent, Apollo Acquisition Corp., a
California corporation and a wholly owned subsidiary of Parent ("Sub"), the
Company and certain shareholders of the Company. The Merger Agreement provides
for the merger of Sub with and into the Company in accordance with its terms
(the "Merger") and Shareholder is receiving a portion of the proceeds of the
Merger. As used herein, the term "Expiration Date" shall mean the earlier to
occur of (i) such date and time as the Merger shall become effective in
accordance with the terms and provisions of the Merger Agreement or (ii) the
termination of the Merger Agreement in accordance with its terms.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special or adjourned meeting of shareholders
of the Company and in every written consent in lieu of such meeting:
(i) in favor of approval of the Merger, the execution and delivery by
the Company of the Merger Agreement and the adoption and approval of the
terms thereof and in favor of each of the other actions contemplated by the
Merger Agreement and any action required in furtherance thereof;
(ii) against approval of any proposal made in opposition to or in
competition with consummation of the Merger and the Merger Agreement;
(iii) against any of the following actions (other than those actions
that relate to the Merger and the transactions contemplated by the Merger
Agreement): (A) any merger, consolidation, business combination, sale of
assets, reorganization or recapitalization of the Company with any party,
(B) any sale, lease or transfer of any significant part of the assets of
the Company or any of its subsidiaries, (C) any reorganization,
recapitalization, dissolution, liquidation or winding up of the Company or
any of its subsidiaries, (D) any material change in the capitalization of
the Company or the Company's corporate structure, or (E) any other action
that 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 Merger Agreement;
(iv) in favor of approval of John Hummer as Shareholder Representative
for and on behalf of Shareholder purposes of Article VII of the Merger
Agreement; and
(v) in favor of approval of any payments or purchases, sales or
accelerations of capital stock of the Company in connection with the Merger
that may be deemed to constitute "parachute payments"
<PAGE> 148
pursuant to Section 280G of the Internal Revenue Code of 1986, as amended,
such that all such payments or purchases, sales or accelerations resulting
from transactions contemplated by the Merger shall not be deemed to be
"parachute payments" pursuant to such Section 280G.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided in clauses (i), (ii), (iii), (iv) or (v) above.
The Shareholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy shall terminate, and be of no further force and effect,
automatically upon the Expiration Date (as defined in the Voting Agreement).
Dated:
- ------------------, 1998 Signature of Shareholder:
Print Name of Shareholder:
Shares beneficially owned:
----------------------------------------- shares
of the
Company
Capital
Stock,
including:
----------------------------------------- shares
of
Series
A
Preferred
Stock
----------------------------------------- shares
of
Series
B
Preferred
Stock
----------------------------------------- shares
of
Series
C
Preferred
Stock
----------------------------------------- shares
of the
Company
Capital
Stock
issuable
upon
exercise
of
outstanding
options
[SIGNATURE PAGE TO PROXY]
<PAGE> 149
ANNEX C
FORM OF
CONVERTIBLE PROMISSORY NOTE
("NOTE")
U.S. $10,000,000.00 June 30, 1998
Menlo Park, California
FOR VALUE RECEIVED, NetDynamics, Inc., a California corporation
("Company"), promises to pay to Sun Microsystems, Inc., a Delaware corporation
("Holder"), its successors and assigns, in lawful money of the United States of
America, the principal sum of Ten Million Dollars ($10,000,000.00) (the
"Principal Amount"), or such lesser amount as shall equal the outstanding
principal amount hereof, together with interest from the date of this Note on
the unpaid principal balance at a rate equal to 10% per annum, computed on the
basis of the actual number of days elapsed and a year of 365 days. All unpaid
Principal Amount, together with any then unpaid and accrued interest and other
amounts payable hereunder, shall be due and payable (i) when, upon or after the
occurrence of an Event of Default (as defined below), such amounts are declared
due and payable by Holder or made automatically due and payable in accordance
with the terms hereof or (ii) the Maturity Date (as defined below). Any accrued
interest not paid when due shall bear interest at the same rate as the Principal
Amount hereunder.
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which Holder, by the acceptance of this Note,
agrees:
1. DEFINITIONS. As used in this Note, the following capitalized terms have
the following meanings:
(a) "End Date" shall mean the date the Merger Agreement is terminated
pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(d) or 8.1(e) thereof.
(b) "Event of Default" has the meaning given in Section 4 hereof.
(c) "Holder" shall mean the Person specified in the introductory
paragraph of this Note or any Person who shall at the time be the
registered holder of this Note.
(d) "Indebtedness" shall mean and include the aggregate amount of,
without duplication (a) all obligations for borrowed money, (b) all
obligations evidenced by bonds, debentures, notes or other similar
instruments, (c) all obligations to pay the deferred purchase price of
property or services (other than accounts payable incurred in the ordinary
course of business determined in accordance with generally accepted
accounting principles), (d) all obligations with respect to capital leases,
(e) all guaranty obligations, (f) all obligations created or arising under
any conditional sale or other title retention agreement with respect to
property acquired by such Person and (g) all reimbursement and other
payment obligations, contingent or otherwise, in respect of letters of
credit.
(e) "Maturity Date" shall mean the earlier to occur of (i) one hundred
eighty (180) days following the termination of the Merger Agreement
pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(d) or 8.1(e) thereof and
(ii) November 30, 1999.
(f) "Merger Agreement" shall mean that certain Agreement and Plan of
Reorganization dated of even date herewith among Company, Holder, Apollo
Acquisition Corp., a California corporation and a wholly-owned subsidiary
of Holder, and certain shareholders of Company named therein.
(g) "Obligations" shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Company to Holder
of every kind and description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), now existing or
hereafter arising under or pursuant to the terms of this Note, including
all interest, fees, charges, expenses, attorneys' fees and costs and
accountants' fees and costs chargeable to and payable by Company hereunder,
whether direct or indirect, absolute or contingent, due or to become due,
and whether or not arising after the commencement of a proceeding under
Title 11 of the United States Code (11 U.S.C.
C-1
<PAGE> 150
Section 101 et seq.), as amended from time to time (including post-petition
interest), and whether or not allowed or allowable as a claim in any such
proceeding.
(h) "Total Outstanding Shares" shall be an amount equal to the total
number of outstanding shares of capital stock of Company (on an
as-converted into common stock basis), plus the total number of shares of
capital stock of Company (on an as-converted into common stock basis)
issuable upon conversion of all outstanding options, warrants and other
rights, plus the total number of shares of capital stock of Company (on an
as-converted into common stock basis) issuable upon the exercise or
conversion of all outstanding convertible Indebtedness (other than this
Note).
2. INTEREST. Accrued interest on this Note shall be payable as provided
herein.
3. PREPAYMENT. Upon two (2) days prior written notice to Holder, Company
may prepay this Note in whole or in part; provided that any such prepayment will
be applied first to the payment of expenses due under this Note, second to
interest accrued on this Note and third, if the amount of prepayment exceeds the
amount of all such expenses and accrued interest, to the payment of Principal
Amount.
4. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Note:
(a) Failure to Pay. Company shall fail to pay when due (i) any payment
of Principal Amount on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due; or
(b) Termination of Merger Agreement by Holder. Holder terminates the
Merger Agreement pursuant to Section 8.1(f) thereof; or
(c) Voluntary Bankruptcy or Insolvency Proceedings. Company shall (i)
apply for or consent to the appointment of a receiver, trustee, liquidator
or custodian of itself or of all or a substantial part of its property,
(ii) be unable, or admit in writing its inability, to pay its debts
generally as they mature, (iii) make a general assignment for the benefit
of its or any of its creditors, (iv) be dissolved or liquidated, (v) become
insolvent (as such term may be defined or interpreted under any applicable
statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its
debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or consent to any such relief or to the appointment of
or taking possession of its property by any official in an involuntary case
or other proceeding commenced against it, or (vii) take any action for the
purpose of effecting any of the foregoing; or
(d) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of Company
or of all or a substantial part of the property thereof, or an involuntary
case or other proceedings seeking liquidation, reorganization or other
relief with respect to Company or the debts thereof under any bankruptcy,
insolvency or other similar law now or hereafter in effect shall be
commenced and an order for relief entered or such proceeding shall not be
dismissed or discharged within thirty (30) days of commencement.
5. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of
any Event of Default (other than an Event of Default described in Sections
4(c) and 4(d)) and at any time thereafter during the continuance of such
Event of Default, Holder may declare all outstanding Obligations payable by
Company hereunder to be immediately due and payable without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived, anything contained herein to the contrary
notwithstanding. Upon the occurrence or existence of any Event of Default
described in Sections 4(c) and 4(d), immediately and without notice, all
outstanding Obligations payable by Company hereunder shall automatically
become immediately due and payable, without presentment, demand, protest or
any other notice of any kind, all of which are hereby expressly waived,
anything contained herein to the contrary notwithstanding. In addition to
the foregoing remedies, upon the occurrence or existence of any Event of
Default, Holder may exercise any other right, power or remedy
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<PAGE> 151
granted to it by the Merger Agreement or otherwise permitted to it by law,
either by suit in equity or by action at law, or both.
6. REPAYMENT AND CONVERSION.
(a) Voluntary Conversion. After the End Date and prior to the Maturity
Date, Company shall have the right, in its option, to convert this Note
(including all accrued and unpaid interest), in accordance with the provisions
of this Section 6 hereof, in whole or in part, into fully paid and nonassessable
shares of capital stock of Company (the "Conversion Stock") on the same terms
and conditions as (A) the most favorable series of preferred stock of Company
outstanding on the date of such conversion in terms of dividends, liquidation
preference, anti-dilution protection, conversion ratio, voting rights,
redemption and all other rights, privileges and preferences or (B) that being
offered to new investors as of the date of such conversion, whichever of (A) or
(B) has terms and conditions most favorable to Holder in terms of dividends,
liquidation preference, anti-dilution protection, conversion ratio, voting
rights, redemption and all other rights, privileges and preferences; provided,
however, that the aggregate liquidation preference of such shares of Conversion
Stock (prior to participation with the Company Common Stock in payments upon a
liquidation) shall not exceed the amount of Principal Amount of this Note
converted into such Conversion Stock; provided, further, that the per share
price for purposes of dividends, liquidation preference and anti-dilution
protection of such Conversion Stock into which this Note is converted shall be
based on the greater of (1) the Conversion Price (as defined below) and (2) the
per share price for purposes of dividends, liquidation preferences,
anti-dilution protection and conversion ratio of the more favorable of (A) or
(B). The number of shares of Conversion Stock into which this Note shall be
converted ("Conversion Shares") shall be determined by dividing the aggregate
principal amount plus any accrued and unpaid interest by the Conversion Price
(as defined below); provided that such number of shares of Conversion Stock
shall be proportionately adjusted to the extent that the Conversion Stock (as of
the date of conversion of this Note into such Conversion Stock) converts into
Company Common Stock at a ratio other than 1:1. The term "Conversion Price"
shall be the quotient obtained by dividing (x) $160,000,000 by (y) the Total
Outstanding Shares.
(b) Conversion Procedure.
(i) Conversion Pursuant to Section 6(a). Upon exercise of Company's
option to convert this Note into Conversion Stock, Company shall give written
notice by registered or certified mail, postage prepaid, to Holder at its
principal corporate office of such election and shall state therein the amount
of the unpaid Principal Amount of this Note to be converted. Company shall, as
soon as practicable thereafter and in no event later than ten (10) days
thereafter, issue and deliver at such office to Holder of this Note a
certificate or certificates for the number of shares of fully paid and
non-assessable Conversion Stock to which Holder shall be entitled upon
conversion (bearing such legends as are required by applicable state and federal
securities laws) and any other securities and property to which Holder is
entitled upon such conversion under the terms of this Note, including a check
payable to Holder for any cash amounts payable as described in Section 6(e).
(c) Repayment Obligation upon Partial Conversion. In the event that
Company elects to convert less than the full principal amount plus any accrued
and unpaid interest, such remaining unconverted amount of principal and interest
shall automatically become immediately due and payable without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived, anything contained herein to the contrary notwithstanding.
(d) Repayment Obligation if No Conversion. In the event that (i) Company
has not elected to convert this Note prior to the Maturity Date or (ii) Company
elects to repay to the Holder the outstanding Principal Amount and all accrued
and unpaid interest prior to the Maturity Date, all outstanding Obligations
payable hereunder shall automatically become immediately due and payable without
presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived, anything contained herein to the contrary
notwithstanding.
(e) Fractional Shares; Interest; Effect of Conversion. No fractional
shares shall be issued upon conversion of this Note. In lieu of Company issuing
any fractional shares to Holder upon the conversion of this
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<PAGE> 152
Note, Company shall pay to Holder an amount equal to the product obtained by
multiplying the Conversion Price by the fraction of a share not issued pursuant
to the previous sentence. Upon conversion of this Note in full and the payment
of the amounts specified in this Section 6(e), Company shall be forever released
from all its obligations and liabilities under this Note.
7. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
described in Sections 10 and 11 below, the rights and obligations of Company and
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
8. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived
or modified only upon the written consent of Company and Holder.
9. REGISTRATION RIGHTS. The Conversion Stock issuable upon conversion of
this Note shall be entitled to (i) the registration rights set forth in that
certain Second Amended and Restated Investors' Rights Agreement dated June 6,
1997 between Company and the investors named therein (the "Rights Agreement") or
(ii) such registration rights as are being offered to new investors as of the
date of conversion of this Note, whichever rights are most favorable to Holder.
Holder and Company hereby agree to be bound by all provisions of the Rights
Agreement which relate to registration rights, as if Holder were a "Holder" of
"Registrable Securities" as those terms are defined in the Rights Agreement.
10. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION HEREOF. With
respect to any offer, sale or other disposition of this Note or securities into
which such Note may be converted, Holder will give written notice to Company
prior thereto, describing briefly the manner thereof, together with a written
opinion of Holder's counsel to the effect that such offer, sale or other
distribution may be effected without registration or qualification (under any
federal or state law then in effect). Upon receiving such written notice and
reasonably satisfactory opinion, if so requested, Company, as promptly as
practicable, shall notify Holder that Holder may sell or otherwise dispose of
this Note or such securities, all in accordance with the terms of the notice
delivered to Company. If a determination has been made pursuant to this Section
9 that the opinion of counsel for Holder is not reasonably satisfactory to
Company, Company shall so notify Holder promptly after such determination has
been made. The Note thus transferred and each certificate representing the
securities thus transferred shall bear a legend as to the applicable
restrictions on transferability in order to ensure compliance with the Act,
unless in the opinion of counsel for Company such legend is not required in
order to ensure compliance with the Act. Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions. Subject
to the foregoing, transfers of this Note shall be registered upon registration
books maintained for such purpose by or on behalf of Company. Prior to
presentation of this Note for registration of transfer, Company shall treat the
registered holder hereof as the owner and holder of this Note for the purpose of
receiving all payments of principal and interest hereon and for all other
purposes whatsoever, whether or not this Note shall be overdue and Company shall
not be affected by notice to the contrary.
11. ASSIGNMENT BY COMPANY. Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by Company without the prior written consent of
Holder.
12. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Merger Agreement or on
the register maintained by Company. Any party hereto may by notice so given
change its address for future notice hereunder. Notice shall conclusively be
deemed to have been given when received.
13. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
14. EXPENSES; WAIVERS. If action is instituted to collect this Note,
Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with
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<PAGE> 153
such action. Company hereby waives notice of default, presentment or demand for
payment, protest or notice of nonpayment or dishonor and all other notices or
demands relative to this instrument.
15. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE> 154
IN WITNESS WHEREOF, Company has caused this Note to be issued as of the
date first written above.
NETDYNAMICS, INC.
a California corporation
By:
--------------------------------------
Title:
--------------------------------------
[SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE]
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<PAGE> 155
ANNEX D
CHAPTER 13. DISSENTERS' RIGHTS
1300 RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DENIED.
(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 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) of 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
where 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 DEMAND FOR PURCHASE.
(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 subdivision (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
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dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(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 described 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 short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302 ENDORSEMENT OF SHARES.
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 AGREED PRICE -- 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 the 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 DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value 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.
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(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' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per 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 value 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
uncertificated 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 Sections 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' STATUS AS CREDITOR.
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 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
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 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
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.
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1309 TERMINATION OF DISSENTING SHAREHOLDER 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
subdivision (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.
1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311 EXEMPT 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 ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(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 at 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.
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(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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware, as
amended, provides that under certain circumstances a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a director, officer, employee or agent of the Registrant or is or was
serving at its request in such capacity in another corporation or business
association, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Registrant and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Section 11 of the Restated Certificate of Incorporation of the Registrant
provides in effect that, subject to certain limited exceptions, the Registrant
shall indemnify its directors and officers to the extent authorized or permitted
by the General Corporation Law of the State of Delaware. The directors and
officers of the Registrant are insured under policies of insurance maintained by
the Registrant, subject to the limits of the policies, against certain losses
arising from any claims made against them by reason of being or having been such
directors or officers. In addition, the Registrant has entered into contracts
with certain of its directors providing for indemnification of such persons by
the Registrant to the full extent authorized or permitted by law, subject to
certain limited exceptions.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of June 30, 1998,
among the Registrant, Apollo Acquisition Corp. and
NetDynamics, Inc. ("NetDynamics"), as amended (included as
Annex I to the Proxy Statement/Prospectus which is a part of
this Registration Statement on Form S-4).
3.1(24) Registrant's Restated Certificate of Incorporation, as
amended February 11, 1998.
3.2(24) Registrant's Bylaws, as amended February 11, 1998.
3.3(8) Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant.
3.3(19) Registrant's Amended and Restated Certificate of
Incorporation (as amended to date).
4.3(25) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998.
4.4(11) Amendment dated as of October 28, 1991 to the First Amended
and Restated Common Shares Rights Agreement dated December
14, 1990.
4.5(12) Second Amendment dated as of August 5, 1992 to the First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990.
4.6(17) Third Amendment dated as of November 2, 1994 to First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990.
4.7(17) Fourth Amendment dated as of November 1, 1995 to First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding the legality of the securities being
issued.
8.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian regarding certain tax matters.
8.2 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding certain tax matters.
10.1(1) Technology Transfer Agreement dated February 27, 1982, for
the purchase by the Registrant of certain technology for
cash, and related Assumption Agreement dated February 27,
1982.
10.3(1) Form of Founders' Restricted Stock Purchase Agreement.
10.8(1) Registration Rights Agreement dated as of November 26, 1984.
10.8A(1) Amendment to Registration Rights Agreement.
10.9(3) Registrant's 1982 Stock Option Plan, as amended, and
representative forms of Stock Option Agreement.
10.10(3) Registrant's Restricted Stock Plan, as amended, and
representative form of Stock Purchase Agreement.
10.11(10) Registrant's 1984 Employee Stock Purchase Plan, as amended.
10.21(1) License Agreement dated July 26, 1983, by and between
Registrant and The Regents of the University of California.
10.22(1) Software Agreement effective as of April 1, 1982 by and
between Registrant and American Telephone and Telegraph
Company, and Supplemental Agreement dated effective as of
May 28, 1983.
10.48(3) Registrant's 1987 Stock Option Plan and representative form
of Stock Option Agreement.
10.56(4) Building Loan Agreement dated May 11, 1989, between Sun
Microsystems Properties, Inc. and the Toyo Trust and Banking
Company Limited, New York Branch and the related Promissory
Note; First Deed of Trust, Assignment of Leases, Rents and
Other Income and Security Agreement; Guaranty of Payment;
Guaranty of Completion (Sun Microsystems Properties, Inc.);
Guaranty of Completion (Sun Microsystems, Inc.; Shortfall
Agreement and Indemnity.
10.64(22) 1988 Directors' Stock Option Plan, as amended on August 13,
1997.
10.65(22) 1990 Employee Stock Purchase Plan, as amended on August 13,
1997.
10.64(8) Registrant's 1988 Directors' Stock Option Plan and
representative form of Stock Option Agreement.
10.65(16) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 9, 1995.
10.66(15) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 15, 1996.
10.66A(10) Representative form of agreement to Registrant's 1990
Long-Term Equity Incentive Plan.
10.73(10) Representative form of letter dated June 25, 1991 between
the Registrant and the insurance companies who are parties
to the Note and Warrant Purchase Agreements dated September
16, 1986 and December 15, 1989.
10.74(10) Software Distribution Agreement dated January 28, 1991 by
and between the Registrant and UNIX Systems Laboratories,
Inc.
10.77(14) Lease Agreement between BNP Leasing Corporation and
Registrant, effective as of September 25, 1992.
</TABLE>
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<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.82(20) Restated Revolving Credit Agreement dated August 27, 1997,
between the Registrant; Citicorp USA, Inc.; Bank of America
National Trust and Savings Association; ABN AMRO Bank N.V.;
The First National Bank of Boston; Barclays Bank PLC; Morgan
Guaranty Trust Company of New York; The Fuji Bank Limited,
San Francisco Agency: The Toyo Trust and Banking Co. Ltd.:
The Sumitomo Bank, Limited; The Sakura Bank Limited, San
Francisco Agency; Banque Nationale de Paris; Bayerische
Vereinsbank AG, Los Angeles Agency; The Industrial Bank of
Japan, Limited, San Francisco Agency; The Bank of New York;
Cariplo -- Cassa Di-Risparmio Delle Provincie Lombade SPA;
Corestes Bank NA; The Northern Trust Company, Royal Bank Of
Canada, Union Bank of California.
10.84(20) Registrant's Non-Qualified Deferred Compensation Plan dated
July 1, 1995, as amended and restated effective October 1,
1997.
10.85(16) Registrant's Section 162 (m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995.
10.86(15) First Amendment to Lease Agreement between BNP Leasing
Corporation and Registrant, effective as of September 23,
1994.
10.87(20) The Sun Microsystems, Inc. Equity Compensation Acquisition
Plan, as amended.
10.89(18) Form of Change of Control Agreement executed by each
corporate executive officer of Registrant.
10.90(18) Form of Change of Control Agreement executed by Chief
Executive Officer of Registrant.
10.91(18) Form of Vice President Change of Control Severance Plan.
10.92(18) Form of Director -- Level Change of Control Severance Plan.
10.93(21) Integrity Arts, Inc. 1996 Stock Option Plan.
10.94(23) 1997 French Stock Option Plan.
11(20) Statement of Computation of Earnings per Share.
13.0(20) 1997 Annual Report to Stockholders (to be deemed filed only
to the extent required by the instructions to exhibits for
reports on Form 10-K).
22.0(20) Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.4 Consent of Gunderson Dettmer Stough Franklin Villeneuve &
Hachigian (included in Exhibit 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 8.2).
24.1* Power of Attorney
99.1* Form of Proxy for Special Meeting of Stockholders of
NetDynamics.
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-2897), which became effective March 4, 1986.
(2) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1987.
(3) Incorporated by reference to Exhibits 19.1, 19.3 or 19.4, filed as Exhibits
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 25, 1987.
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<PAGE> 163
(4) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989.
(5) Not used.
(6) Not used.
(7) Not used.
(8) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1990.
(9) Not used.
(10) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1991.
(11) Incorporated by reference to Exhibit 4.0 filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
27, 1991.
(12) Incorporated by reference to Exhibit 3 filed as an exhibit to the
Registrant's Form 8 Amendment No. 3 to Registration Statement on Form 8-A
filed on September 16, 1992.
(13) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992.
(14) Not used.
(15) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
(16) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
(17) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 1, 1995.
(18) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 29, 1996.
(19) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 29, 1996.
(20) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
(21) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (file no. 333-38163) filed
with the Securities and Exchange Commission on October 17, 1997.
(22) Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed as
exhibits to the Registrant's Registration Statement on Form S-8, file no.
333-40677, filed with the Securities and Exchange Commission on November
20, 1997.
(23) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8, file no. 333-40675, filed
with the Securities and Exchange Commission on November 20, 1997.
(24) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998.
(25) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 6 filed on February 13, 1998.
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
None
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<PAGE> 164
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) 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 SEC 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;
(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.
(2) 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.
(3) 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.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(5) The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange
Act; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim
financial information.
(6) 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.
(7) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (6) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the
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<PAGE> 165
Securities 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
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.
(8) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospective 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.
(9) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
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<PAGE> 166
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 Palo Alto,
State of California, on the 26th day of July, 1998.
SUN MICROSYSTEMS, INC.
By: /s/ SCOTT G. MCNEALY
------------------------------------
Scott G. McNealy
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SCOTT G. MCNEALY Chairman of the Board of July 26, 1998
- ----------------------------------------------------- Directors, President and Chief
Scott G. McNealy Executive Officer(Principal
Executive Officer)
* Vice President Corporate July 26, 1998
- ----------------------------------------------------- Resources and Chief Financial
Michael E. Lehman Officer (Principal Financial
Officer)
* Vice President and Corporate July 26, 1998
- ----------------------------------------------------- Controller (Principal Accounting
George Reyes Officer)
Director
- -----------------------------------------------------
L. John Doerr
* Director July 26, 1998
- -----------------------------------------------------
Robert J. Fisher
* Director July 26, 1998
- -----------------------------------------------------
Judith L. Estrin
Director
- -----------------------------------------------------
Robert L. Long
* Director July 26, 1998
- -----------------------------------------------------
M. Kenneth Oshman
* Director July 26, 1998
- -----------------------------------------------------
A. Michael Spence
*By: /s/ SCOTT G. MCNEALY
------------------------------------------------
Scott G. McNealy,
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 167
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGES
------- ----------- ------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization dated as of June 30,
1998, among the Registrant, Apollo Acquisition Corp. and
NetDynamics, Inc. ("NetDynamics"), as amended (included as
Annex I to the Proxy Statement/Prospectus which is a part of
this Registration Statement on Form S-4)....................
3.1(24) Registrant's Restated Certificate of Incorporation, as
amended February 11, 1998...................................
3.2(24) Registrant's Bylaws, as amended February 11, 1998...........
3.3(8) Certificate of Amendment of the Restated Certificate of
Incorporation of Registrant.................................
3.3(19) Registrant's Amended and Restated Certificate of
Incorporation (as amended to date)..........................
4.3(25) Second Amended and Restated Shares Rights Agreement dated as
of February 11, 1998........................................
4.4(11) Amendment dated as of October 28, 1991 to the First Amended
and Restated Common Shares Rights Agreement dated December
14, 1990....................................................
4.5(12) Second Amendment dated as of August 5, 1992 to the First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990...........................................
4.6(17) Third Amendment dated as of November 2, 1994 to First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990...........................................
4.7(17) Fourth Amendment dated as of November 1, 1995 to First
Amended and Restated Common Shares Rights Agreement dated
December 14, 1990...........................................
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding the legality of the securities being
issued......................................................
8.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian regarding certain tax matters.....................
8.2 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding certain tax matters...................
10.1(1) Technology Transfer Agreement dated February 27, 1982, for
the purchase by the Registrant of certain technology for
cash, and related Assumption Agreement dated February 27,
1982........................................................
10.3(1) Form of Founders' Restricted Stock Purchase Agreement.......
10.8(1) Registration Rights Agreement dated as of November 26,
1984........................................................
10.8A(1) Amendment to Registration Rights Agreement..................
10.9(3) Registrant's 1982 Stock Option Plan, as amended, and
representative forms of Stock Option Agreement..............
10.10(3) Registrant's Restricted Stock Plan, as amended, and
representative form of Stock Purchase Agreement.............
10.11(10) Registrant's 1984 Employee Stock Purchase Plan, as
amended.....................................................
10.21(1) License Agreement dated July 26, 1983, by and between
Registrant and The Regents of the University of
California..................................................
</TABLE>
<PAGE> 168
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGES
------- ----------- ------------
<S> <C> <C>
10.22(1) Software Agreement effective as of April 1, 1982 by and
between Registrant and American Telephone and Telegraph
Company, and Supplemental Agreement dated effective as of
May 28, 1983................................................
10.48(3) Registrant's 1987 Stock Option Plan and representative form
of Stock Option Agreement...................................
10.56(4) Building Loan Agreement dated May 11, 1989, between Sun
Microsystems Properties, Inc. and the Toyo Trust and Banking
Company Limited, New York Branch and the related Promissory
Note; First Deed of Trust, Assignment of Leases, Rents and
Other Income and Security Agreement; Guaranty of Payment;
Guaranty of Completion (Sun Microsystems Properties, Inc.);
Guaranty of Completion (Sun Microsystems, Inc.; Shortfall
Agreement and Indemnity.....................................
10.64(22) 1988 Directors' Stock Option Plan, as amended on August 13,
1997........................................................
10.65(22) 1990 Employee Stock Purchase Plan, as amended on August 13,
1997........................................................
10.64(8) Registrant's 1988 Directors' Stock Option Plan and
representative form of Stock Option Agreement...............
10.65(16) Registrant's 1990 Employee Stock Purchase Plan, as amended
on August 9, 1995...........................................
10.66(15) Registrant's 1990 Long-Term Equity Incentive Plan, as
amended on August 15, 1996..................................
10.66A(10) Representative form of agreement to Registrant's 1990
Long-Term Equity Incentive Plan.............................
10.73(10) Representative form of letter dated June 25, 1991 between
the Registrant and the insurance companies who are parties
to the Note and Warrant Purchase Agreements dated September
16, 1986 and December 15, 1989..............................
10.74(10) Software Distribution Agreement dated January 28, 1991 by
and between the Registrant and UNIX Systems Laboratories,
Inc. .......................................................
10.77(14) Lease Agreement between BNP Leasing Corporation and
Registrant, effective as of September 25, 1992..............
10.82(20) Restated Revolving Credit Agreement dated August 27, 1997,
between the Registrant; Citicorp USA, Inc.; Bank of America
National Trust and Savings Association; ABN AMRO Bank N.V.;
The First National Bank of Boston; Barclays Bank PLC; Morgan
Guaranty Trust Company of New York; The Fuji Bank Limited,
San Francisco Agency: The Toyo Trust and Banking Co. Ltd.:
The Sumitomo Bank, Limited; The Sakura Bank Limited, San
Francisco Agency; Banque Nationale de Paris; Bayerische
Vereinsbank AG, Los Angeles Agency; The Industrial Bank of
Japan, Limited, San Francisco Agency; The Bank of New York;
Cariplo -- Cassa Di-Risparmio Delle Provincie Lombade SPA;
Corestes Bank NA; The Northern Trust Company, Royal Bank Of
Canada, Union Bank of California............................
10.84(20) Registrant's Non-Qualified Deferred Compensation Plan dated
July 1, 1995, as amended and restated effective October 1,
1997........................................................
10.85(16) Registrant's Section 162 (m) Executive Officer
Performance-Based Bonus Plan dated August 9, 1995...........
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGES
------- ----------- ------------
<S> <C> <C>
10.86(15) First Amendment to Lease Agreement between BNP Leasing
Corporation and Registrant, effective as of September 23,
1994........................................................
10.87(20) The Sun Microsystems, Inc. Equity Compensation Acquisition
Plan, as amended............................................
10.89(18) Form of Change of Control Agreement executed by each
corporate executive officer of Registrant...................
10.90(18) Form of Change of Control Agreement executed by Chief
Executive Officer of Registrant.............................
10.91(18) Form of Vice President Change of Control Severance Plan.....
10.92(18) Form of Director -- Level Change of Control Severance
Plan........................................................
10.93(21) Integrity Arts, Inc. 1996 Stock Option Plan.................
10.94(23) 1997 French Stock Option Plan...............................
11(20) Statement of Computation of Earnings per Share..............
13.0(20) 1997 Annual Report to Stockholders (to be deemed filed only
to the extent required by the instructions to exhibits for
reports on
Form 10-K)..................................................
22.0(20) Subsidiaries of Registrant..................................
23.1 Consent of PricewaterhouseCoopers LLP.......................
23.2 Consent of Ernst & Young LLP, independent auditors..........
23.3* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.................................................
23.4 Consent of Gunderson Dettmer Stough Franklin Villeneuve &
Hachigian (included in Exhibit 8.1).........................
23.5 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 8.2).......................
24.1* Power of Attorney...........................................
99.1* Form of Proxy for Special Meeting of Stockholders of
NetDynamics.................................................
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 33-2897), which became effective March 4, 1986.
(2) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1987.
(3) Incorporated by reference to Exhibits 19.1, 19.3 or 19.4, filed as Exhibits
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 25, 1987.
(4) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989.
(5) Not used.
(6) Not used.
(7) Not used.
(8) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1990.
(9) Not used
(10) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1991.
<PAGE> 170
(11) Incorporated by reference to Exhibit 4.0 filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
27, 1991.
(12) Incorporated by reference to Exhibit 3 filed as an exhibit to the
Registrant's Form 8 Amendment No. 3 to Registration Statement on Form 8-A
filed on September 16, 1992.
(13) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1992.
(14) Not used.
(15) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
(16) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995.
(17) Incorporated by reference to identically numbered exhibits filed as
exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 1, 1995.
(18) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 29, 1996.
(19) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 29, 1996.
(20) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
(21) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8 (file no. 333-38163) filed
with the Securities and Exchange Commission on October 17, 1997.
(22) Incorporated by reference to Exhibits 4.2 and 4.1, respectively, filed as
exhibits to the Registrant's Registration Statement on Form S-8, file no.
333-40677, filed with the Securities and Exchange Commission on November
20, 1997.
(23) Incorporated by reference to Exhibit 4.1 filed as an exhibit to the
Registrant's Registration Statement on Form S-8, file no. 333-40675, filed
with the Securities and Exchange Commission on November 20, 1997.
(24) Incorporated by reference to identically numbered exhibits filed as
exhibits to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 29, 1998.
(25) Incorporated herein by reference to the Registrant's Registration Statement
on Form 8-A/A Amendment No. 6 filed on February 13, 1998.
* Previously Filed.
<PAGE> 1
EXHIBIT 8.1
July 29, 1998
NetDynamics, Inc.
185 Constitution Avenue
Menlo Park, CA 94025
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Securities
and Exchange Commission Registration Statement on Form S-4 and related Exhibits
thereto (the "Registration Statement") relating to the Agreement and Plan of
Merger, dated as of June 30, 1998 (the "Merger Agreement") among Sun
Microsystems, Inc., a Delaware corporation ("Sun"), its wholly-owned subsidiary,
Apollo Acquisition Corp., a Delaware corporation ("Merger Sub"), NetDynamics,
Inc., a California corporation ("NetDynamics") and certain shareholders of
NetDynamics (the "Founders"). Pursuant to the Merger Agreement, Merger Sub will
merge with and into NetDynamics (the "Merger"), and NetDynamics will become a
wholly-owned subsidiary of Sun.
Except as otherwise provided, capitalized terms referred to herein have the
meanings set forth in the Merger Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to NetDynamics in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have examined
and are relying (or will rely) 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 schedules and exhibits thereto):
1. The Merger Agreement (including Exhibits);
2. Representations made to us by NetDynamics in a letter of even date;
3. Representations made to us by Sun and Merger Sub in a letter of even
date;
5. The Registration Statement; and
6. Such other instruments and documents related to the formation,
organization and operation of Sun, NetDynamics and Merger Sub or to the
consummation of the Merger and the transactions contemplated thereby as we have
deemed necessary or appropriate.
<PAGE> 2
NetDynamics, Inc.
July 29, 1998
Page 2
In connection with rendering this opinion, we have assumed 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 of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. Any representation or statement made "to the knowledge of" or otherwise
similarly qualified is correct without such qualification and all statements and
representations, whether or not qualified, will remain true through the
Effective Time. As to all matters in which a person or entity making a
representation has represented that such person or entity either is not a party
to, does not have, or is not aware of any plan, intention, understanding or
agreement to take an action, there is in fact no plan, intention, understanding
or agreement and such action will not be taken;
3. The Merger will be consummated pursuant to the Merger Agreement and will
be effective under the laws of the state of Delaware and California;
4. No NetDynamics shareholder has guaranteed or will guarantee any
NetDynamics indebtedness outstanding during the period immediately prior to the
Merger, and at all relevant times, including as of the Effective Time of the
Merger, (i) no outstanding indebtedness of NetDynamics, Sun or Merger Sub has or
will represent equity for tax purposes; (ii) no outstanding equity of
NetDynamics, Sun or Merger Sub has or will represent indebtedness for tax
purposes; and (iii) no outstanding security, instrument, agreement or
arrangement that provides for, contains, or represents either a right to acquire
NetDynamics stock or to share in the appreciation thereof constitutes or will
constitute "stock" for purposes of Section 368(c) of the Code; and
5. Counsel for Sun and NetDynamics will, pursuant to Section 6.1(c) of the
Agreement, each deliver an opinion to the effect that, for federal income tax
purposes, the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code.
6. After the Merger, NetDynamics will hold "substantially all" of its and
Merger Sub's properties within the meaning of Section 368(a)(2)(E)(i) of the
Code and the regulations promulgated thereunder and will continue its historic
business or use a significant portion of its historic assets in a business; and
7. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg. ss.1.368-1(c) with respect to
the Merger) are funded directly or indirectly by a party other than the
incurring party, such expenses will be within the guidelines established in
Revenue Ruling 73-54, 1973-1 C.B. 187; any expenses paid
<PAGE> 3
NetDynamics, Inc.
July 29, 1998
Page 3
on behalf of NetDynamics shareholders will not exceed one percent (1%) of the
total consideration that will be issued in the Merger to NetDynamics
shareholders in exchange for their shares of NetDynamics.
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
provisions of the Merger Agreement (and without any waiver, breach or amendment
of any provisions thereof), for federal income tax purposes the Merger will
constitute a "reorganization" within the meaning of Section 368(a) of the Code.
In addition to the assumptions set forth above, this opinion is subject to
the exceptions, limitations and qualifications set forth below.
1. 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.
2. This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, 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). We express no opinion regarding the tax
consequences of the Merger to shareholders of NetDynamics that are subject
special tax rules, and we express no opinion regarding the tax consequences of
the Merger arising in connection with the ownership of options or warrants for
NetDynamics stock.
3. No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger 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 through the Effective Time and at all relevant times
thereafter. 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.
<PAGE> 4
NetDynamics, Inc.
July 29, 1998
Page 4
4. This opinion has been delivered to you solely for the purpose of being
included as an exhibit to the Registration Statement; it may not be relied upon
for any other purpose (including, without limitation, satisfying any conditions
in the Agreement) 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 filing of this opinion as an exhibit to the Registration
Statement and to the reference to our name under the captions "Legal Matters"
and "Certain Federal Income Tax Considerations." This consent is not to be
construed as an admission that we are a person whose consent is required to be
filed with the Registration Statement under the provisions of the Securities Act
of 1933.
Very truly yours,
GUNDERSON DETTMER STOUGH
VILLENEUVE FRANKLIN & HACHIGIAN, LLP
<PAGE> 1
Exhibit 8.2
[WSGR Letterhead]
July 29, 1998
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, California 94303
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 6.1(c) of
the Agreement and Plan of Reorganization (the "Agreement"), dated as of June 30,
1998, among Sun Microsystems, Inc., a Delaware corporation ("Sun"), Apollo
Acquisition Corp., a Delaware corporation and a direct, wholly owned subsidiary
of Sun ("Merger Sub"), and NetDynamics, Inc., a California corporation
("NetDynamics"). Pursuant to the Agreement, Merger Sub will merge with and into
NetDynamics (the "Merger"), and NetDynamics will become a wholly-owned
subsidiary of Sun. Except as otherwise provided, capitalized terms used but not
defined herein shall have the meanings set forth in the 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 Sun 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):
1. the Agreement;
2. those certain tax representation letters delivered to us by Sun,
Merger Sub and NetDynamics containing certain representations of
Sun, Merger Sub and NetDynamics (the "Tax Representation
Letters"); and
3. such other instruments and documents related to the formation,
organization and operation of Sun, Merger Sub and NetDynamics and
related to the consummation of the Merger and the other
transactions contemplated by the Agreement as we have deemed
necessary or appropriate.
<PAGE> 2
Sun Microsystems, Inc.
July 29, 1998
Page 2
In connection with rendering this opinion, we have assumed (without
any independent investigation or review thereof) that:
a. 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;
b. All representations, warranties and statements made or agreed to
by Sun, Merger Sub and NetDynamics, their managements, employees,
officers, directors and shareholders in connection with the
Merger, including, but not limited to, those set forth in the
Agreement (including the exhibits thereto) and the Tax
Representation Letters are true and accurate at all relevant
times;
c. All covenants contained in the Agreement (including exhibits
thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
d. The Merger will be reported by Sun and NetDynamics on their
respective federal income tax returns in a manner consistent with
the opinion set forth below; and
e. 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, if the Merger is consummated in accordance with the Agreement
(and without any waiver, breach or amendment of any of the provisions thereof)
and the statements set forth in the Tax Representation Letters are true and
correct as of the Effective Time, then for federal income tax purposes, the
Merger will be a reorganization within the meaning of Section 368(a) of the
Code.
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 Agreement. In addition, no opinion is expressed as to any
federal income tax consequence of the Merger or the other transactions
contemplated by the Agreement except as specifically set forth herein, and this
opinion may not be relied upon except with respect to the consequences
specifically discussed herein.
<PAGE> 3
Sun Microsystems, Inc.
July 29, 1998
Page 3
No opinion is expressed as to any transaction other than the Merger as
described in the Agreement, or as to any other transaction whatsoever, including
the Merger, if all of the transactions described in the Agreement are not
consummated in accordance with the terms of the 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, administrative 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.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, however, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended. This opinion is intended for the benefit of
Sun 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.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Sun Microsystems, Inc. of our report dated
March 25, 1998, except for Note 10 which is as of July 6, relating to the
consolidated financial statements of NetDynamics, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
in such Prospectus.
PricewaterhouseCoopers LLP
San Jose, California
July 28, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-4 No. 333-59555) and
related Prospectus of Sun Microsystems, Inc. for the registration of
$160,000,000 of common stock and to the incorporation by reference therein of
our reports dated July 16, 1997, with respect to the consolidated financial
statements of Sun Microsystems, Inc. incorporated by reference in its Annual
Report (Form 10-K, as amended on Form 10-K/A) for the year ended June 30, 1997
and the related financial statement schedule included therein, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Palo Alto, California
July 28, 1998
